ANNALY CAPITAL MANAGEMENT INC

The first quarter of 2026 (“Q1 2026”) was shaped by significant geopolitical uncertainty, as the war between the United States, Israel, and Iran led to a substantial energy price shock, potentially posing challenges to U.S. economic resilience. Although the U.S. remains better insulated from rising commodity prices than economies in Europe and Asia, the increase in oil and food prices has placed additional pressure on consumers who are already experiencing slower income growth, a labor market characterized by limited turnover, and persistent affordability constraints. Despite the positive income effects from last year’s tax reform, U.S. consumers appear more exposed to energy price shocks than they were in 2022.

Fixed income markets responded strongly to the geopolitical turmoil and higher commodity prices, resulting in a notable sell-off in Treasury yields during March. Investors adjusted for higher near-term inflation and sought increased term premia, with short-term yields leading the interest rate sell-off. Although volatility subsided in April following a ceasefire announcement, yield levels remain above their averages from earlier in 2026. Expectations for Federal Reserve (the “Fed”) monetary policy have also shifted, with markets now pricing in a limited chance of an interest rate cut in 2026, compared to the expectation of multiple cuts before the start of the conflict in Iran at the end of February. Fed officials appear inclined to wait for clearer economic signals before making further adjustments to the Federal Funds Target Rate.

Agency mortgage-backed securities (“Agency MBS”) experienced an eventful quarter, with spreads tightening sharply following the January 8, 2026 announcement that the Government Sponsored Enterprises (“GSEs”) would purchase $200 billion in Agency MBS, and widening later in the quarter due to increased rate volatility following the onset of the armed conflict in Iran. Nonetheless, the quarter underscored strong demand for Agency MBS. Additionally, U.S. banking regulators released reproposed regulatory capital rules in March, which are more market-friendly than previous proposals and current standards. These changes are expected to support bank lending in the residential mortgage sector, potentially boosting prime loan growth and reducing Agency MBS securitization rates. Overall, this regulatory shift provides a favorable tailwind for housing finance.

During the quarter, Annaly generated an economic return of +1.5%, marking the tenth consecutive quarter in which we were able to deliver a positive economic return. Economic leverage remained at conservative levels of 5.7x, and earnings per share available for distribution reached $0.76, once again surpassing the dividend, as it has for every quarter since it was increased a year ago. The capital markets environment was supportive, enabling the raising of over $500 million in common equity through our at-the-market sales program. Most of this capital was deployed into the Residential Credit and MSR businesses, increasing their combined allocation by six percentage points to 44% as our investment strategy focused on dynamic capital allocation across various business lines as relative value opportunities emerged. Early in the quarter, Agency MBS became notably more expensive as the market absorbed the impact of the $200 billion GSE Agency MBS purchase announcement. This prompted a strategic redeployment of capital away from Agency MBS towards the credit businesses, which offered more attractive risk-adjusted returns. As the quarter progressed, Agency MBS spreads returned to more appealing valuations, supported by robust technical factors, resulting in a more balanced investing landscape moving forward.

By quarter-end, the Agency MBS portfolio stood at $92 billion in market value, a slight decrease from year-end, with Agency MBS assets representing 56% of the firm’s capital. MBS richened in January, softened in February as investors diversified away from arguably tight spreads, and widened in March due to heightened volatility and risk-off sentiment linked to geopolitical events. Despite wide fluctuations, the overall widening for the quarter was modest, with lower coupon securities outperforming. Notably, the relative outperformance of Agency MBS during periods of geopolitical volatility is encouraging for the sector. Compared to last year’s tariff-driven spread widening in April 2025, Q1 2026 valuations started higher, and implied interest rate volatility increased by more, but the magnitude of the widening was less than half of what was experienced last year, highlighting diversified demand. Strong weekly flows to fixed income funds and collateralized mortgage obligation (“CMO”) issuance, absorbing over 30% of gross supply, further bolstered the sector, as banks increased purchases of CMO floaters. The proposed changes to bank capital requirements should encourage banks to retain more loans, which could lower securitization rates and slow organic growth in Agency MBS.

Portfolio activity included marginal additions to Agency commercial mortgage-backed security holdings and repositioning within the MBS portfolio by rotating down in coupon from 6.0% to 4.5% TBA securities during the late quarter sell-off in rates. These adjustments aimed to secure more durable cashflows and enhance portfolio convexity in the event of further rate declines. Consequently, the portfolio’s weighted average coupon decreased by six basis points to 5.06%. Interest rate exposure remained conservative, with disciplined hedging to protect book value and manage risk. Heightened volatility prompted more active hedge adjustments, though overall hedge levels changed only slightly by quarter-end. The portfolio maintains exposure in swap spreads, benefiting from clearer bank capital regulation, while Treasuries remain an essential hedge during sharp volatility episodes.

The Residential Credit portfolio concluded the quarter at $10.3 billion in market value, marking a substantial 30% increase compared to the previous quarter. This growth was primarily driven by continued expansion in the whole loan correspondent channel. In tandem with the portfolio’s growth, capital allocation to Residential Credit rose to 23% of the firm’s capital, representing a four-percentage point increase quarter-over-quarter. Whole loan acquisitions were a key driver of portfolio expansion, with $6.7 billion settled during the quarter, approximately 80% of which was sourced through the correspondent channel. Loan-Lock volumes were also strong, reaching $7.4 billion in Q1 2026, which reflects a 16% increase quarter-over-quarter and a 41% increase year-over-year (“yoy”).

Residential credit spreads tightened early in the year in tandem with the spread movement in Agency MBS basis. However, similar to Agency MBS, residential credit spreads reversed some of their tightening in late February and March, with AAA-rated Non-QM spreads ending the quarter 10 to 15 basis points wider. Despite this volatility, capital markets remained robust, as evidenced by Q1 2026 residential credit gross issuance totaling $79 billion, nearly 50% higher than volumes seen in Q1 2025.

The OBX securitization platform demonstrated significant activity, settling eight securitizations totaling $4.7 billion in the quarter and generating $570 million of high-quality proprietary assets for both Annaly’s balance sheet and its joint venture. Following quarter-end, an additional four securitizations were priced, bringing the year-to-date total to twelve securitizations and $6.6 billion. Onslow Bay continues to be the largest non-bank securitizer of residential credit and is well positioned to benefit from the ongoing growth in the private label securitization market as well as private asset-backed finance. The firm’s credit standards remain rigorous, with the quarter-end locked pipeline featuring a weighted average FICO score of 762, a combined loan-to-value ratio of 67%, and approximately 3% of the portfolio exceeding 80% combined LTV.

The MSR portfolio, including unsettled commitments as of quarter-end, ended Q1 2026 at $4.2 billion in market value, reflecting an increase of over $300 million quarter-over-quarter. Capital allocation to MSR grew to 21%, from 19% at the start of the year. During the quarter, commitments were made to purchase $24 billion in unpaid principal balance, or roughly $388 million in market value of MSR, with a weighted average note rate of 3.4%. These acquisitions were spread across four bulk packages and our flow channels. The firm remained the second largest buyer of conventional MSR in Q1 2026, as measured by transfers, and is now ranked as the fifth largest non-bank Agency MBS servicer.

Bulk supply in Q1 2026 exceeded that of Q1 2025, with expectations for healthy supply levels continuing throughout the year. Annaly has expanded its flow MSR capabilities to acquire current coupon MSR when attractive, with active flow sellers more than tripling quarter-over-quarter. Purchases via flow channels totaled $1.9 billion in UPB, nearly double the Q4 figure, though this remains a small portion of overall acquisitions. Underlying portfolio fundamentals are solid, with low prepay speeds at 4.2% and a high-quality credit profile, evidenced by serious delinquencies below 50 basis points. The portfolio’s weighted average note rate of 3.3% provides strong prepayment protection and is the lowest among the top 20 largest Agency MSR holders. As a result, the MSR valuation multiple increased modestly to 5.94x during the quarter, primarily due to rising interest rates.