ANNALY CAPITAL MANAGEMENT INC (NLY) stock intrinsic value fair value estimate & owner earnings analysis

Annaly Capital Management is one of the largest mortgage REITs in the United States. It borrows short-term, mainly through repurchase agreements ($81.9 billion at the end of 2025, at an average cost of 4.02% and an average of 35 days to maturity), and invests in a leveraged portfolio of three businesses: Agency mortgage-backed securities (62% of capital at year-end 2025, with $92.9 billion of assets), residential credit (19%, built around its Onslow Bay loan-securitization platform, which priced 29 securitizations totalling $15.2 billion in 2025 and is the largest non-bank issuer of prime jumbo mortgage bonds), and mortgage servicing rights (19%, $3.8 billion). Shareholders earn the spread between what the portfolio yields and what the borrowing costs, plus or minus whatever the portfolio and its hedges gain or lose in market value. How we measure earnings, and why our estimate fell sharply. Our previous estimate treated the losses Annaly takes when it sells securities or settles hedges as if they were accounting entries rather than real cash. For a company whose securities portfolio is the business, they are real: that is money gone. The old measure showed $4 to $7 a share of annual earning power while book value per share (adjusted for the 2022 one-for-four reverse split) fell from $46.92 at the end of 2015 to $20.21 at the end of 2025. It also counted the dividends owed to preferred shareholders as if they belonged to common shareholders. We now measure what common shareholders actually earned each year: every gain and loss on the portfolio, realised or not, after preferred dividends. That figure lines up with the change in book value plus dividends that Annaly reports each year. Over 2016-2025 it ran from a loss of $7.42 a share (2022) to a gain of $5.33 (2017). As a return on starting book value, the ten years were 5.4%, 12.4%, -6.6%, 14.0%, 1.8%, -0.8%, -23.8%, 6.0%, 11.9% and 20.2%. The median is 5.7% and the average is 4.0%. Measured from book value at the end of 2015 to the end of 2025, the return was about 3.2% a year. We use the full ten years because this is a cyclical, rate-driven business. The last three years (2023-2025) show only the recovery after the 2022 rate shock, and judging the business on them alone would overstate it. Debt. For a lender like Annaly, borrowing is the raw material of the business, not a way of financing it. Interest on the repurchase agreements is an operating cost that has already been paid before the earnings above, so we do not also subtract the $81.9 billion of borrowings. That would count it twice. The $1.8 billion of preferred stock ranks ahead of the common. We account for it by deducting its dividends from earnings every year, which the earlier estimate did not do. Leverage (economic leverage of 5.6 times equity at the end of 2025) shows up in how bad the bad years are. Its main risk is that short-term repo funding has to roll every few weeks, so a sharp fall in bond prices can force sales at the worst moment, as in 2020 and 2022. That risk sits in the bear case below. In each case the business value below is what is left for common shareholders after lenders and preferred holders. The cases. All three start from book value of $20.15 a common share at June 30, 2026. The base case assumes the business earns its ten-year median return of 5.7% on that book value, about $1.15 a share a year, and pays it out, with book value holding flat. The most recent full year (2025) was strong, up 68% from $2.23 to $3.74 a share, and the first half of 2026 added about $1.30 a share. We deliberately do not project that pace forward: it came from spreads that were unusually wide and then tightened, and the record shows shocks such as 2018 and 2022 follow good stretches. So year one of the base case ($1.15) sits below the latest year's result. No growth is credited. As a REIT, Annaly must pay out nearly all of its taxable income, and its per-share book value has shrunk rather than grown over the decade. Share sales above book value (it raised $2.6 billion in 2025) have helped existing holders at times, but they depend on the share price and are not something we can count on. The business keeps going after year ten because it keeps rolling its portfolio, as it has since 1997. Even so, about 56% of the base value comes after year ten, which is a real dependency. Base value: $19.14 a share, with no debt left to deduct because the borrowings are already paid for inside the earnings. The bull case assumes returns in normal years like those Annaly has actually earned (about 10% a year on book) and only one moderate shock per decade, on the scale of 2018 (-6.6%), rather than a 2022-sized loss. That works out to 8.5% a year. The named reasons this could happen: mortgage servicing rights are now 19% of capital and tend to rise in value when rates rise, as they did in 2022. Onslow Bay creates its own credit assets rather than buying them. And the government-sponsored enterprises were directed in early 2026 to buy $200 billion of Agency MBS, which supports the bonds Annaly holds. Bull value: $28.54 a share. The bear case assumes a 2022-style shock happens now, with mortgage spreads widening while funding costs jump. That cuts book value by 23.8%, to about $15.35 a share, as it did in 2022. After that the business earns its ten-year average of 4.0% a year, which includes further shocks at the rate seen historically. Bear value: $9.66 a share. The bear case stays positive because even a 2022-type loss leaves equity in place, and the company kept operating and paying dividends through 2020 and 2022. What would make this wrong. On the upside: if Annaly can hold returns near its 2024-2025 level of 12-20% on book through the next rate shock, because the servicing and credit businesses offset Agency losses in a way they have not yet shown at their current size, the shares are worth more than the base case. On the downside: a shock bigger than 2022, or a repo-funding squeeze that forces sales, would put value below the bear case. Because our estimates are tied to book value, a fall in reported book value lowers every case one-for-one. Margin-of-safety price. A leveraged, cyclical business that has lost more than half its per-share book value in ten years calls for a wide margin of safety. The margin-of-safety price is $11.50, about 40% below the base case and about 57% of current book value, and it applies only while reported book value holds at $18 a share or better. At that price, base-case earnings of about $1.15 paid out as dividends imply a yield of about 10%.