ANNALY CAPITAL MANAGEMENT, INC.
2013 ANNUAL REPORT
Annaly Capital Management, Inc. 2013 Annual Report
DEAR FELLOW SHAREHOLDERS,
The market environment during 2013 was filled with challenges, including concerns about how the Federal Reserve would
orchestrate an orderly exit from its Quantitative Easing policy that began in late 2008. The markets centered on the timing and
magnitude of changes to this policy tool and its potential impact on signs of a strengthening economy. Concerns surrounding the
durability of economic fundamentals, primarily labor market conditions and the viability of the housing market absent policy
stimulus, will remain an ongoing theme. The lack of clarity of these fundamentals resulted in heightened volatility in the U.S.
Treasury market. The ten-year Treasury, which began the year at 1.84%, dipped to a low yield of 1.61% in May before nearly
doubling to 3.00% by year end. These swings, in the largest, most liquid market of any asset class in the world, have not been
witnessed in 40 years.
Further, regulatory reforms continue to evolve and influence the behavior of market participants. These range from Dodd-
Frank requirements working their way through the markets to pending Basel reforms and the potential impacts upon banking
institutions and their clients. And of course, housing finance reform remains under open debate with numerous legislative
proposals presented with no clear outcome in sight.
2013 A YEAR OF CHALLENGE AND OPPORTUNITY: During 2013, we expanded our ability to
capitalize on a greater array of investment opportunities. With the completion of the CreXus acquisition in May 2013, we firmly
entered the commercial mortgage market, allowing our shareholders to directly benefit from the commercial investment team
we have had in place for over four years. The relatively stable returns of our commercial assets coupled with the liquidity of
our government agency assets should strengthen the durability of our income producing portfolio. In our 17 year history, we
have encountered numerous turbulent interest rate markets. We believe the complimentary combination of our agency and
commercial strategies could allow for a smoother journey.
This past year we enhanced our disclosure through the issuance of quarterly earnings supplements to better highlight our
operations and results. We continue to explore avenues to enhance the information we provide with an eye toward usefulness,
not just volume. We also strengthened our governance practices and overall risk framework. We formalized our Board Risk
Committee last year, which was previously embedded in our Audit Committee. We redesigned our Form 10-K to not only
provide enhanced disclosures but to make the information more user friendly. We hope you find these improvements helpful.
2014 THE YEAR AHEAD: We enter 2014 confident in our diversified operating platform, which is stronger than ever.
Our strategy offers the ability to generate attractive risk-adjusted returns for our shareholders, and the balance sheet strength to
capitalize on opportunities as they arise.
The regulatory environment remains opaque and ever evolving but visibility in our markets has improved and certain risks
have dissipated. With our expanded platform and enhanced liquidity, we are uniquely positioned to capitalize on numerous
opportunities as the U.S. economy shows signs of promise, the employment picture stabilizes, the housing market improves and
the Federal Reserve taper has finally begun.
In closing, I want to thank our Board of Directors and all our dedicated employees for their ongoing commitment to our shared
vision of delivering sustained value to our shareholders.
Sincerely,
Annaly Capital Management, Inc. 2013 Annual Report
1
Wellington J. Denahan
Chairman and Chief Executive Officer
March 17, 2014
Since inception, Annaly has paid over $11 billion in dividends to shareholders.
$12,000
$10,000
$8,000
$6,000
)
s
n
o
i
l
l
i
m
$
(
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$4,000
$2,000
$3
$15
$18
$17
$0
$220
$79
$1,494
$2,043
$2,109
$1,589
$1,414
$1,109
$361
$142
$122
$246
$179
1
9
9
7
1
9
9
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9
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2
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3
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9
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0
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0
2
0
1
1
2
0
1
2
2
0
1
3
Dividends Declared by Year
Cumulative Dividends Declared
2
Annaly Capital Management, Inc. 2013 Annual Report
our business model
We are a leading mortgage real estate investment trust (REIT) that is externally managed by Annaly Management Company LLC (our
Manager). Our common stock is listed on the New York Stock Exchange under the ticker symbol “NLY”. Since our founding in 1997, we
have strived to generate net income for distribution to our shareholders through the prudent selection and management of our investments.
Over this 17 year period, we have paid cumulative dividends of $11 billion. As a requirement for maintaining REIT status, we distribute to
shareholders aggregate dividends equaling at least 90% of our REIT taxable income for each taxable year.
We own a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations
(CMOs), Agency callable debentures, other securities representing interests in or obligations backed by pools of mortgage loans and
commercial real estate assets. We use our capital coupled with borrowed funds to invest in real estate related investments, earning the spread
between the yield on our assets and the cost of our borrowings and hedging.
Our operating income is primarily comprised of the following:
»
»
Economic net interest income(1): represents interest income earned on our portfolio investments, less interest expense paid for
borrowings and hedging
Other income: primarily represents gains and losses on assets and other instruments
Within the confines of our acceptable risk parameters, we target real estate related investments consistent with REIT requirements. Our
objective is to generate attractive risk-adjusted returns on capital invested, after consideration of the following:
»
»
»
The amount, nature and variability of anticipated cash flows from the asset across a variety of interest rate, yield spread, financing
cost, credit loss and prepayment scenarios;
The liquidity of the asset;
The ability to pledge the asset to secure collateralized borrowings;
» When applicable, the credit of the underlying borrower;
»
»
»
The costs of financing, hedging and managing the asset;
The impact of the asset and related income to REIT and Investment Company Act of 1940, as amended (or Investment Company
Act), compliance; and
The capital requirements associated with the purchase and financing of the asset.
We believe that our business objectives are supported by our size and conservative financial posture, the extensive experience of our
Manager’s employees, a comprehensive risk management approach, the availability and diversification of financing sources, our corporate
structure and our cost efficiencies.
(1) Economic net interest income is a non-GAAP measure and represents net interest income calculated in accordance with U.S. Generally Accepted Accounting Principles
(GAAP), reduced by interest expense on interest rate swaps.
Annaly Capital Management, Inc. 2013 Annual Report
3
CORPORATE GOVERNANCE
A primary corporate objective is to create long term value for our shareholders while striving to foster a culture that values and rewards
high ethical standards and integrity. Our Board of Directors (Board) is charged with the active guidance and oversight of our corporate
governance system, including selection of an effective management team, overseeing our business strategy and related performance, and
ensuring shareholder value is both created, through business performance, and protected, through adequate internal controls.
Our Board is largely comprised of independent directors (six independent directors and one non-management director), accompanied by two
executive directors. Each of our Board committees is solely comprised of independent directors, and responsible for the activities summarized
below.
Annaly Board of Directors
Audit Committee
Risk Committee
Nominating & Corporate
Governance Committee
Compensation Committee
for
oversight
of
Responsible
the quality and integrity of our
internal
accounting,
auditing,
reporting
control and financial
independent
practices,
auditor selection, evaluation and
review, and oversight of our internal
audit function.
including
Responsible for oversight of our
risk governance structure,
risk
management and risk assessment
guidelines
risk
tolerance and our capital, liquidity
and funding.
policies,
and
for
recommending
developing
Responsible
and
corporate
governance principles, the selection
criteria
for new directors, and
oversight of the evaluation of the
Board and management.
for
evaluating
the
Responsible
performance of our officers and
the Manager,
reviewing
compensation and fees payable to
the Manager under the management
agreement.
and
OUR RISK FRAMEWORK
Risk is at the core of our business activities, and the effective management of risk is critical to our success. Risk management starts with our
Board of Directors and executive management team, and is supported through a comprehensive governance framework including both
Board and management risk committees. The objective of our risk management framework is to measure, monitor and manage the keys risk
to which we are subject. Our risk management is comprehensive in approach and designed to have a holistic view of risk. We have created
a strong and collaborative risk culture focused on awareness to ensure that key risks are understood and managed.
We maintain a firm-wide risk appetite statement which defines the level and types of risk we are willing to take in order to achieve our
business objectives, and reflects our risk management philosophy. Fundamentally, we will only engage in risk activities based on our core
expertise that enhance value for our shareholders. Our activities focus on capital preservation and income generation through proactive
portfolio management, supported by a conservative liquidity and leverage posture. The responsibilities of our management risk committees
and the risks they manage are described below.
Operating Committee
Enterprise Risk Committee
Asset/Liability Committee
Financial Reporting & Disclosure
Committee
Responsibilities include:
» Establish our overall risk governance
» Establish our overall asset/liability
» Ensure all public disclosures we make are accurate
management framework
and timely in accordance with applicable laws
framework, including risk appetite statement,
risk limits and tolerances
» Institute and monitor the ongoing
effectiveness of the risk governance
framework and its related execution
» Monitor and develop strategies to manage
market, liquidity and counterparty risks
consistent with risk appetite statement
» Review and approve investment and funding
» Monitor enterprise wide risks
strategies
» Monitor the internal control environment and
ensure the presence of appropriate safeguards
to manage enterprise wide risks
» Oversee capital management practices
Managed Risks:
» Evaluate and monitor the effectiveness of the
internal financial control environment
» Ongoing research and interpretation of new and
existing regulations governing financial reporting
requirements and the impact upon our reporting
obligations
» Monitor and review our REIT compliance and
Investment Company Act exemption
» Liquidity, investment/market, credit,
» Liquidity, investment/market, credit,
» Financial reporting, internal financial controls
operating, regulatory, compliance, capital/
funding
counterparty, capital/funding
4
Annaly Capital Management, Inc. 2013 Annual Report
WE ARE SUBJECT TO A VARIETY OF RISKS DUE TO THE BUSINESSES WE OPERATE
INCLUDING:
Liquidity Risk: Risk to earnings, capital or business arising from our inability to meet our obligations when they come due without incurring material
losses due to the inability to liquidate assets or obtain adequate funding.
Investment/Market Risk: Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused
from changes in market variables, such as interest rates, which affect the values of invested securities and other investment instruments.
Credit and Counterparty Risk: Risk to earnings, capital or business, resulting from an obligor’s or counterparty’s failure to meet the terms of any
contract or otherwise failure to perform as agreed. This risk is present in lending, investing, funding and hedging activities.
Operational Risk: Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems, human factors or
external events. Model risk, the risk of potential errors with a model’s results due to, uncertainty in model parameters and inappropriate methodologies used,
is included in operational risk.
Compliance, Regulatory and Legal Risk: Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance
with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment
that may impact our business model.
KEY RISK PARAMETERS TO GUIDE OUR RISK MANAGEMENT ACTIVITIES:
Portfolio Composition: We will maintain a high quality, diversified asset portfolio.
Leverage: We will operate at a debt-to-equity ratio no greater than 12:1.
Capital Buffer: We will maintain an excess capital buffer of unencumbered assets, of which at least 25% will be invested in AAA rated or better investments.
Interest Rate Risk: We seek to manage interest rate risk to protect the portfolio from adverse rate movements.
Hedging: We seek to hedge our risks targeting both income and capital preservation.
Capital Preservation: Protection of capital is paramount, even if short term earnings may suffer.
Compliance: We will comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment
Company Act.
Annaly Capital Management, Inc. 2013 Annual Report
5
Kevin P. Brady* (1-C,2,4)
Chief Executive Officer
ARMtech, LLC
John H. Schaefer* (1,3,4)
Former President and Chief Operating Officer
Morgan Stanley Global Wealth Management
Donnell A. Segalas* (2,3-C)
Chief Executive Officer and Managing Partner
Pinnacle Asset Management, L.P.
E. Wayne Nordberg* (2-C,3)
Chairman
Hollow Brook Wealth Management, LLC
OUR BOARD OF DIRECTORS
Wellington J. Denahan
Chairman and Chief Executive Officer
Kevin G. Keyes
President
Michael E. Haylon* (1,4)
Managing Director
Conning Asset Management
Jonathan D. Green* (1,3,4-C)
Former Vice Chairman
The Rockefeller Group
John A. Lambiase
Former Managing Director
Salomon Brothers, Inc.
(1) Audit Committee
(2) Nominating and Governance Committee
(3) Compensation Committee
(4) Risk Committee
(C) Committee Chair
* Independent Director
SAFE HARBOR NOTICE
Certain statements contained in this annual report may not be based on historical facts and are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on various assumptions (some
of which are beyond our control), may be identified by reference to a future period or periods or by the use of forward-looking terminology,
such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those
terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors.
No forward-looking statements can be guaranteed and actual future results may vary materially and we caution you not to place undue
reliance on these forward-looking statements. For a discussion of the risks and uncertainties which could cause actual results to differ from
those contained in the forward-looking statements, please see the information within the section titled “Risk Factors” of Item 1A described in
our annual report on Form 10-K. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions
which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after
the date of such statements except as required by law.
6
Annaly Capital Management, Inc. 2013 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2013
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-13447
ANNALY CAPITAL MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation of organization)
(I.R.S. Employer Identification Number)
MARYLAND
22-3479661
1211 Avenue of the Americas, Suite 2902
New York, New York
(Address of Principal Executive Offices)
10036
(Zip Code)
(212) 696-0100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
New York Stock Exchange
7.875% Series A Cumulative Redeemable Preferred Stock
New York Stock Exchange
7.625% Series C Cumulative Redeemable Preferred Stock
New York Stock Exchange
7.50% Series D Cumulative Redeemable Preferred Stock
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes No (cid:31)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:31) No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes No (cid:31)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files).
Yes No (cid:31)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:31)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer
or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer (cid:31) Non-accelerated filer (cid:31) Smaller reporting company (cid:31)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes (cid:31) No
At June 30, 2013, the aggregate market value of the voting stock held by non-affiliates of the Registrant was
approximately $11.9 billion.
The number of shares of the Registrant’s Common Stock outstanding on February 10, 2014 was 947,463,924.
Documents Incorporated by Reference
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the
fiscal year ended December 31, 2013. Portions of such proxy statement are incorporated by reference into Part III of
this Form 10-K.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC.
2013 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
FINANCIAL STATEMENTS
SIGNATURES
PAGE
1
11
36
36
36
36
37
40
41
77
77
77
77
80
81
81
81
81
81
82
82
85
II-1
i
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
ITEM 1. BUSINESS
PART I
“Annaly,” “we,” “us,” or “our” refers to Annaly
Capital Management, Inc. and all entities owned by
us, except where it is made clear that the term means
only the parent company.
Refer to the Glossary of Terms for definitions of
certain of the commonly used terms in this annual
report on Form 10-K.
INDEX TO ITEM 1. BUSINESS
Page
Business Overview……………………………………………………………………………………… 2
Investment Strategy………………………………………………………..…………………………… 2
Target Assets…………………………………………………………………………………………… 4
Our Portfolio………………………………………………….………………………………………… 5
Capital Structure………………………………………………….…………………………………… 6
Risk Management………………………………………………….…………………………………… 6
Management Agreement………………………………………………….…………………………… 7
Executive Officers………………………………………………….…………………………………… 7
Employees………………………………………………….…………………………………………… 9
Regulatory Requirements………………………………………………….…………………………… 9
Competition………………………………………………….…………………………………………… 9
Distributions………………………………………………….………………………………………… 9
Available Information………………………………………………….……………………………… 10
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come Discoun
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Funding LLC
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
interests
securities
real estate
related
We own a portfolio of
investments,
including mortgage pass-through
certificates, CMOs, Agency callable debentures,
other
in or
representing
obligations backed by pools of mortgage loans,
commercial real estate assets and corporate debt.
Our principal business objective is to generate net
income for distribution to our stockholders from our
investments. Under our investment policy, at least
75% of our total assets are comprised of high-
quality mortgage-backed securities and short-term
investments. High quality securities are:
rated within one of the two highest rating
categories by at least one of the nationally
recognized rating agencies;
unrated but are guaranteed by the United
States government or by an agency of the
United States government; or
unrated but we determine them to be of
comparable quality to high-quality rated
mortgage-backed securities.
The remainder of our assets may generally consist
of other qualified REIT real estate assets. In
addition, we may directly or indirectly invest part of
our assets in other types of securities, including,
unrated debt and equity securities and derivative
instruments, to the extent consistent with our REIT
qualification requirements.
We may acquire Agency mortgage-backed securities
backed by single-family residential mortgage loans
as well as securities backed by loans on multi-
family, commercial or other real estate related
properties. As part of our current diversification
strategy, we may allocate up to 25% of our
stockholders’ equity to real estate assets other than
Agency mortgage-backed securities.
reflects our
We maintain a firm-wide risk appetite statement
which defines the level and types of risk that we are
willing to take in order to achieve our business
objectives and
risk management
philosophy. Fundamentally, we will only engage in
risk activities that are expected to enhance value for
our stockholders based on our core expertise. Our
activities focus on capital preservation and income
generation through proactive portfolio management,
supported by a conservative liquidity and leverage
posture.
Our risk appetite statement asserts the following key
investment
to
parameters
risk
management activities:
guide
our
Leverage
Capital buffer
Portfolio composition We will maintain a high quality asset portfolio with (1) at least 75% of the portfolio to
be high quality mortgage-backed securities and short term investments (equivalency
rating of AA+ or better) and (2) an aggregate weighted average equivalency rating of
single “A” or better.
We will operate at a debt-to-equity ratio no greater than 12:1.
We will maintain an excess capital buffer, of which at least 25% will be invested in
AAA rated mortgage-backed securities (or assets of similar or better liquidity
characteristics), to meet the liquidity needs of the firm.
We will manage interest rate risk to protect the portfolio from adverse rate movements.
We will use swaps and other derivatives to hedge market risk, targeting both income
and capital preservation.
Interest rate risk
Hedging
Capital preservation We will seek to protect our capital base through disciplined risk management practices.
We will comply with regulatory requirements needed to maintain our REIT status and
Compliance
our exemption from registration under the Investment Company Act of 1940, as
amended (or Investment Company Act).
Our board of directors has reviewed and approved the
investment and operating policies and strategies
established by our Manager and set forth in this Form
10-K. The board of directors has the power to modify
or waive these policies and strategies without the
consent of the stockholders to the extent that the board
of directors determines that the modification or waiver
is in the best interests of our stockholders. Among
other factors, developments in the market which affect
our policies and strategies or which change our
assessment of the market may cause our board of
directors to revise our policies and strategies.
We may seek to expand our capital base in order to
further increase our ability to acquire new and
different types of assets when the potential returns
from new investments appear attractive relative to the
targeted risk-adjusted returns. We may in the future
3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
acquire assets by offering our debt or equity securities
in exchange for the assets.
The capital requirements associated with the
purchase and financing of the asset.
Target Assets
Within the confines of the risk appetite statement, we
seek to generate the highest risk-adjusted returns on
capital invested, after consideration of the following:
We target the purchase and sale of the following
assets as part of our investment strategy. Our targeted
assets and asset acquisition strategy may change over
time as market conditions change and as our business
evolves.
The amount, nature and variability of
anticipated cash flows from the asset across a
variety of
rate, yield spread,
financing cost, credit loss and prepayment
scenarios;
interest
The liquidity of the asset;
The ability to pledge the asset to secure
collateralized borrowings;
When applicable, the credit of the underlying
borrower;
The costs of
financing, hedging and
managing the asset;
The
impact of
to our REIT
the asset
compliance and our exemption from the
Investment Company Act of 1940; and
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
Targeted Asset Class
Description
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Agency mortgage-backed securities
To-be-announced forward contracts (or TBAs)
Agency debentures
Commercial real estate
Other mortgage related investments
Corporate debt
We generally hold assets we acquire until maturity.
We believe that future interest rates and mortgage
prepayment rates are very difficult
to predict.
Therefore, we seek to acquire assets which we believe
will provide attractive returns over a broad range of
interest rate and prepayment scenarios.
Our primary investments consist of Agency pass-
through certificates, CMOs issued or guaranteed by
Freddie Mac, Fannie Mae or Ginnie Mae, interest-only
securities and inverse floaters. These securities are
backed by single-family or multi-family residences
with loans typically ranging from 15 to 40 years and
may have fixed or floating coupons.
We purchase and sell TBAs which are forward
contracts for Agency mortgage-backed securities.
These have specified principal and interest terms and
specify certain types of collateral, but the particular
Agency mortgage-backed securities to be delivered are
not identified until shortly before the TBA settlement
date.
We invest in debt issued by Freddie Mac, Fannie Mae
or the Federal Home Loan Banks. These debentures are
not backed by collateral, but by the creditworthiness of
the issuer.
real estate debt
Through our subsidiary ACREG, we originate and
including
acquire commercial
commercial mortgage loans, commercial mortgage-
backed securities, B-notes, mezzanine loans, preferred
equity and other commercial real estate-related debt
investments. We also invest in commercial real estate
property directly or as a result of a loan workout and
the exercise of our remedies under the mortgage
documents.
On a limited basis we may invest in other mortgage
related investments including: investments in individual
residential loans, pools of loans, single-family and
multi-family privately-issued certificates that are not
issued by one of the Agencies.
Through our subsidiary MML, we invest a small
percentage of our assets directly in the ownership of
corporate loans for middle market companies.
Our Portfolio
Our portfolio composition as of December 31, 2013
and 2012 was as follows:
5
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
Asset Portfolio (using balance sheet values)
Category
Agency mortgage-backed securities(1)
Agency debentures
Commercial real estate debt and equity investments(2)
Other mortgage-backed-securities
Corporate debt, held for investment
(1)
Includes TBAs held for delivery.
(2) Net of unamortized origination fees.
Capital Structure
liquidity
Our capital structure is designed to offer an efficient
compliment of funding sources to generate positive
risk-adjusted returns for our stockholders while
maintaining appropriate
to support our
business and meet our financial obligations under
periods of market stress. We utilize a mix of debt and
equity funding. Debt funding may include the use of
securitizations,
repurchase
participations sold, lines of credit, asset backed
commercial paper conduits, corporate bond issuance,
or other liabilities. Equity capital primarily consists
of common and preferred stock.
agreements,
loans,
We enter
repurchase agreements.
We finance our Agency mortgage-backed securities
with
into
repurchase agreements primarily with national broker-
dealers, commercial banks and other lenders that
typically offer this type of financing. We enter into
collateralized borrowings with financial institutions
meeting internal credit standards and we monitor the
financial condition of these institutions on a regular
basis. We seek to diversify our exposure and limit
concentrations by entering into repurchase agreements
with multiple counterparties. At December 31, 2013,
we had $61.8 billion of repurchase agreements
outstanding.
Our borrowings pursuant to repurchase transactions
have maturities that range from overnight to greater
than five years. While shorter term agreements
generally have lower interest rates, they increase
liquidity risk. To reduce our liquidity risk we maintain
a laddered approach to our repurchase agreements and
a conservative weighted average days to maturity. As
of December 31, 2013, the weighted average days to
maturity was 204 days.
Equity capital is made up primarily of common stock.
It also consists of preferred stock and may in the
future include the use of other equity capital issuance.
6
2013
93.7%
4.0%
2.1%
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2012
97.5%
2.4%
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levels
We generally expect to maintain a ratio of debt-to-
equity of no greater than 12:1. This ratio varies from
time to time based upon various factors, including our
management’s opinion of the level of risk of our
assets and liabilities, our liquidity position, our level
of unused borrowing capacity, the availability of
credit, over-collateralization
required by
lenders when we pledge assets to secure borrowings
and our assessment of domestic and international
market conditions. Since the financial crisis beginning
in 2007, we have maintained a debt-to-equity ratio of
below 8:1, which is generally lower than our debt-to-
equity ratio had been prior to 2007. For purposes of
calculating this ratio, our debt is equal to our
repurchase agreements, convertible senior notes, loan
participation sold and mortgages payable as presented
on our Consolidated Statements of Financial
Condition.
Our target debt-to-equity ratio is determined under our
capital management policy. Should our actual debt-to-
equity ratio increase above the target level due to asset
acquisition or market value fluctuations in assets, we
would cease to acquire new assets. Our management
would, at that time, present a plan to our board of
directors to return to our target debt-to-equity ratio.
The following table presents our debt-to-equity,
capital and net capital ratios at December 31, 2013
and 2012.
2013
5.0:1
15.1%
15.9%
2012
6.5:1
11.9%
12.3%
Debt-to-equity
ratio
Capital ratio
Net capital ratio
Risk Management
Risk is a natural element of the business and related
activities that we conduct. Effective risk management
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
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is of critical importance to the success of the firm. The
objective of our risk management framework is to
measure, monitor and manage the key risks to which
we are subject. Our approach to risk management is
comprehensive and has been designed to foster a
holistic view of risk. For a full discussion of our risk
management process and policies please refer to the
section
Item 7.
titled “Risk Management” of
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
Management Agreement
the Manager
the management agreement,
At our annual stockholders meeting on May 23, 2013,
our stockholders approved the entry by us into a
management agreement, between us and our Manager
and the externalization of our company’s management
function effective as of July 1, 2013. Under the terms
of
is
responsible for administering our business activities
and day-to-day operations, subject to the supervision
is
and oversight of our board. The Manager
supervised and directed by our board and
is
responsible for (i) the selection, purchase and sale of
our investment portfolio; (ii) our financing and
hedging activities; and (iii) providing us with
management services. The Manager performs such
other services and activities relating to our assets and
operations as may be appropriate. In exchange for
these services, the Manager receives a management
fee paid monthly in arrears in an amount equal to one-
twelfth of 1.05% of our stockholders’ equity (as
defined in the management agreement).
Effective July 1, 2013, a majority of our employees
were terminated by us and were hired by the Manager.
We have a limited number of employees following the
externalization of management, all of whom are
employees of our subsidiaries for regulatory or
corporate efficiency
reasons. All compensation
expenses associated with such retained employees
reduce the management fee. We pay directly, or
reimburse the Manager, for all of our expenses and all
the Manager’s documented expenses incurred on our
behalf, other than compensation and benefits related
to any and all personnel of the Manager and costs of
certain insurance with respect to such personnel.
The management agreement provides
the
Manager is prohibited from managing, operating,
joining, controlling, participating in, or advising any
real estate investment trust whose principal business
that
7
strategy is based on or engaged in the trading, sales or
management of mortgage-backed securities in any
geographical region in which we engage in such
business.
The management agreement may be amended or
modified by agreement between us and the Manager.
The initial term of the management agreement expires
on December 31, 2014 and will be automatically
renewed for a one year term each anniversary date
thereafter unless previously terminated as described
below. There is no termination fee for a termination of
the management agreement by either us or the
Manager.
Two-thirds of our independent directors or the holders
of a majority of the outstanding shares of common
stock may terminate the management agreement for
any or no reason, at any time upon one hundred eighty
(180) days prior written notice. The Manager may
also terminate the management agreement upon one
hundred eighty (180) days prior written notice.
terminate
We may
the management agreement
effective immediately upon written notice from us to
the Manager for cause. These events include fraud,
embezzlement, gross negligence, material breach of
the management agreement not cured within a
specified time period and the Manager’s bankruptcy
or dissolution. In addition, the management agreement
provides for automatic termination upon a sale of the
Manager without the prior consent of the independent
members of our board of directors.
terminate
The Manager may
the management
agreement effective immediately upon written notice
in the event of a material breach of the management
agreement by us that is not cured within a specified
time period. The Manager may also terminate the
management agreement in the event we become
required to register as an “investment company” under
the Investment Company Act, with such termination
deemed to have occurred immediately prior to such
event.
Executive Officers
Our executive officers are provided and compensated
by our Manager. The following table sets forth certain
information as of February 25, 2014 concerning our
executive officers:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
Name
Age
Title
Wellington J. Denahan
Kevin G. Keyes
Glenn A. Votek
James P. Fortescue
R. Nicholas Singh
Rose-Marie Lyght
Kristopher R. Konrad
50
46
55
40
55
40
39
Chairman of the Board and Chief Executive Officer
President and Director
Chief Financial Officer
Chief Operating Officer
Chief Legal Officer and Secretary
Co-Chief Investment Officer
Co-Chief Investment Officer
Wellington J. Denahan is Chairman of the Board and
Chief Executive Officer of Annaly. Ms. Denahan was
appointed Chairman of the Board and Chief Executive
Officer of Annaly in November 2012. Previously, Ms.
to serve as Co-Chief
Denahan was appointed
Executive Officer of Annaly in October 2012. Ms.
Denahan was elected in December 1996 to serve as
Vice Chairman of the Board. Ms. Denahan was
Annaly’s Chief Operating Officer from January 2006
to October 2012 and Chief Investment Officer from
2000 to November 2012. She was a co-founder of
Annaly. Ms. Denahan has a B.A. in Finance from
Florida State University. She currently chairs the
mortgage REIT council at National Association of
Real Estate Investment Trusts (NAREIT).
Kevin G. Keyes is President of Annaly and a member
of the Board of Directors. Prior to being named to his
current role, Mr. Keyes served as Chief Strategy
Officer and Head of Capital Markets at Annaly. Mr.
Keyes has over 20 years of Capital Markets and
Investment Banking experience. He joined Annaly in
2009 from Bank of America Merrill Lynch where he
served in various senior management and business
origination roles since 2005. Prior to that, Mr. Keyes
also worked at Credit Suisse First Boston from 1997
until 2005 in various capital markets roles and
Morgan Stanley Dean Witter from 1990 until 1997 in
various investment banking positions. Mr. Keyes has
a B.A. in Economics and a B.S. in Business
Administration (ALPA Program) from the University
of Notre Dame.
Glenn A. Votek was appointed to serve as Chief
Financial Officer of Annaly and FIDAC in August
2013. Mr. Votek joined Annaly in May 2013 from
CIT Group where he was an Executive Vice President
and Treasurer since 1999 and President of Consumer
Finance since 2012. Prior to that, Mr. Votek worked
at AT&T and its finance subsidiary from 1986 until
1999 in various financial management roles. Mr.
Votek has a B.S. in Finance and Economics from the
University of Arizona/Kean College and a M.B.A. in
Finance from Rutgers University.
James P. Fortescue was appointed to serve as Chief
Operating Officer of Annaly and FIDAC in October
2012. Mr. Fortescue was previously Chief of Staff,
Head of Liabilities and Managing Director of Annaly.
Mr. Fortescue joined FIDAC in June of 1995. Mr.
Fortescue has been in charge of liability management
for Annaly since its inception, and continues to
oversee all financing activities for FIDAC. Mr.
Fortescue has a B.S. in Finance from Siena College.
R. Nicholas Singh is Chief Legal Officer and
Secretary of Annaly and FIDAC. Mr. Singh was
employed by Annaly in February 2005. From 2001
until he joined Annaly, he was a partner in the law
firm of McKee Nelson LLP. Mr. Singh has a B.A.
from Carleton College, a M.A. from Columbia
University and a J.D. from American University.
Rose-Marie Lyght was appointed to serve as Co-Chief
Investment Officer of Annaly and FIDAC
in
November 2012. Ms. Lyght was previously a
Managing Director of Annaly and Chief Investment
Officer of FIDAC. She has been involved in the asset
selection and financing for the investment vehicles
managed by FIDAC. Ms. Lyght was employed by
Annaly in April 1999. Ms. Lyght has a B.S. in
Finance and a M.B.A. from Villanova University.
Kristopher R. Konrad was appointed to serve as Co-
Chief Investment Officer of Annaly and FIDAC in
November 2012. Mr. Konrad was previously a
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
Managing Director and Head Portfolio Manager of
Annaly. Mr. Konrad joined in October 1997 and
became a Portfolio Manager for Annaly in December
of 2000. Mr. Konrad has a B.S. in Business from
Ithaca College and has attended the New York
Institute of Finance for intensive mortgage-backed
securities studies.
Employees
Effective July 1, 2013, all of Annaly’s employees
were terminated by us and were hired by the Manager.
However, a limited number of employees of our
subsidiaries remain as employees of our subsidiaries
for regulatory or corporate efficiency reasons. As of
December 31, 2013, our subsidiaries employed 48
employees. All compensation expenses associated
with the employees of our subsidiaries reduce the
management fee.
institutions have been subject to increasing regulation
and supervision in the U.S. In particular, the Dodd-
Frank Act, which was enacted
in July 2010,
significantly altered the financial regulatory regime
within which financial
institutions operate. The
implications of the Dodd-Frank Act for our business
will depend to a large extent on the rules that will be
adopted by the Federal Reserve Board, the FDIC, the
Securities and Exchange Commission (or SEC), the
Commodity and Futures Trading Commission (or
CFTC) and other agencies
the
legislation, as well as the development of market
practices and structures under the regime established
by the legislation and the implementation of the rules.
Other reforms have been adopted or are being
considered by other regulators and policy makers
worldwide. We will continue to assess our business,
risk management, and compliance practices
to
regulatory
conform
environment.
to developments
implement
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Regulatory Requirements
Competition
We have elected and believe that we are organized
and have operated in a manner that qualifies us to be
taxed as a REIT under the Internal Revenue Code of
1986, as amended and regulations promulgated
thereunder (or the Code). If we qualify for taxation as
a REIT, we generally will not be subject to federal
income tax on our taxable income that is distributed to
our stockholders. Furthermore, substantially all of our
assets, other than our taxable REIT subsidiaries,
consist of qualified REIT real estate assets (of the type
described in Section 856(c)(5) of the Code).
We regularly monitor our investments and the income
from these investments and, to the extent we enter
into hedging transactions, we monitor income from
our hedging transactions as well, so as to ensure at all
times that we maintain our qualification as a REIT
and our exemption from registration under
the
Investment Company Act.
and
funds
RCap is a member of FINRA and is subject to
regulations of the securities business that include but
are not limited to trade practices, use and safekeeping
of
structure,
securities,
recordkeeping and conduct of directors, officers and
employees. As a self-clearing, registered broker
dealer, RCap is required to maintain minimum net
capital by FINRA. RCap consistently operates with
capital in excess of its regulatory capital requirements
as defined by SEC Rule 15c3-1.
capital
The financial services industry has been the subject of
intense regulatory scrutiny in recent years. Financial
9
We operate in a highly competitive environment. Our
principal competition in the acquisition and holding of
types of assets we purchase are financial
the
institutions such as banks, savings and loans, life
insurance companies, institutional investors such as
mutual funds and pension funds, other lenders,
government entities and certain other mortgage
REITs. Some of these entities may not be subject to
the same regulatory constraints (i.e., REIT compliance
or maintaining an exemption under the Investment
Company Act) as us. Some of our competitors have
greater financial resources and access to capital than
we do. Our competitors, as well as additional
competitors which may emerge in the future, may
increase the competition for the acquisition of our
target assets, which in turn may result in higher prices
and lower yields on such assets.
Distributions
to
As a requirement for maintaining REIT status, we will
distribute
stockholders aggregate dividends
equaling at least 90% of our REIT taxable income for
each taxable year. We may make additional returns of
capital when the potential risk-adjusted returns from
new investments fail to exceed our cost of capital.
Subject to the limitations of applicable securities and
state corporation laws, we can return capital by
making purchases of our own capital stock or through
payment of dividends.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Business
Available Information
Our website is www.annaly.com. We make available
on this website under “Investor Relations - SEC
Filings,” free of charge, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports
as
reasonably practicable after we
electronically file or furnish such materials to the
SEC.
soon as
Risk
Committee,
Also posted on our website, and available in print
upon request of any stockholder to our Investor
Relations Department, are charters for our Audit
Committee,
Compensation
Committee, and Nominating/Corporate Governance
Committee, our Corporate Governance Guidelines
and our Code of Business Conduct and Ethics
governing our directors and officers as well as the
employees of our subsidiaries and our Manager.
Within the time period required by the SEC, we will
post on our website any amendment to the Code of
Business Conduct and Ethics and any waiver
applicable to any executive officer, director or senior
financial officer.
Our Investor Relations Department can be contacted
at:
Annaly Capital Management, Inc.
1211 Avenue of the Americas, Suite 2902
New York, New York 10036
Attn: Investor Relations
Telephone: 888-8ANNALY
E-mail: investor@annaly.com.
The SEC also maintains a website that contains
reports, proxy and information statements and other
information we file with the SEC at www.sec.gov.
Copies of these reports, proxy and information
statements and other
information may also be
obtained, after paying a duplicating fee, by electronic
request at publicinfo@sec.gov, or by writing the
SEC’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-0102. Information on the
operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
ITEM 1A. RISK FACTORS
An investment in our stock involves a number of
risks. Before making an investment decision, you
should carefully consider all of the risks described in
this Form 10-K. If any of the risks discussed in this
Form 10-K actually occur, our business, financial
condition and results of operations could be materially
adversely affected. If this were to occur, the trading
price of our stock could decline significantly and you
may lose all or part of your investment. Readers
should not consider any descriptions of these factors
to be a complete set of all potential risks that could
affect us.
INDEX TO ITEM 1A. RISK FACTORS
Page
Risks Related to Our Investing, Portfolio Management and Financing Activities…………………………………………… 11
Risks Related to Commercial Real Estate Debt, Preferred Equity Investments and Net Lease Real Estate Assets……………19
Risks Related to Our Relationship with Our Manager………………………………………………….……………………26
Risks Related to Our Taxation as a REIT………………………………………………….……………………………… 27
Risks of Ownership of Our Common Stock………………………………………………….…………………………… 32
Regulatory Risks………………………………………………….……………………………………………………… 34
Risks Related to Our Investing, Portfolio
Management and Financing Activities
assets expose us to other sorts of risk, including credit
risk.
We may change our policies without stockholder
approval.
Our Manager is authorized to follow very broad
investment guidelines that may be amended from time
to time. Our board of directors and management
determine all of our significant policies, including our
investment, financing and distribution policies. They
may amend or revise these policies at any time
without a vote of our stockholders. Policy changes
could adversely affect our financial condition, results
of operations, the market price of our common stock
or our ability to pay dividends or distributions.
Our ongoing investment in new business strategies
and new assets is inherently risky, and could disrupt
our ongoing businesses.
To date our total assets have consisted primarily of
Agency mortgage-backed securities and Agency
debentures which carry an implied or actual “AAA”
rating. Nevertheless, pursuant to our investment
policy, we have the ability to acquire assets of lower
credit quality.
Such endeavors may involve significant risks and
including credit risk, diversion of
uncertainties,
management
from current operations, expenses
associated with these new investments, inadequate
return of capital on our investments, and unidentified
issues not discovered in our due diligence of such
strategies and assets. Because these new ventures are
inherently risky, no assurance can be given that such
strategies will be successful and will not materially
adversely affect our reputation, financial condition,
and operating results.
Our strategy involves the use of leverage, which
increases the risk that we may incur substantial
losses.
leverage
to vary with market
We expect our
conditions and our assessment of risk/return on
investments. We incur this leverage by borrowing
against a substantial portion of the market value of our
assets. By incurring this leverage, we could enhance
our
is
fundamental to our investment strategy, also creates
significant risks.
returns. Nevertheless,
leverage, which
While we remain committed to the Agency market,
given the current environment, we believe it is
prudent to diversify a portion of our investment
portfolio. We have begun investing in new business
strategies and assets and expect to continue to do so in
the future. We currently may allocate up to 25% of
our stockholders’ equity to real estate assets other
than Agency mortgage-backed securities. These other
Because of our leverage, we may incur substantial
losses if our borrowing costs increase. Our borrowing
costs may increase for any of the following reasons:
short-term interest rates increase;
the market value of our investments decreases;
the "haircut" applied to our assets under the
repurchase agreements we are party to increases;
11
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
interest rate volatility increases; or
the availability of financing in the market
decreases.
us at acceptable rates; or
our
that we provide
additional collateral to cover our borrowings.
lenders
require
Our leverage may cause margin calls and defaults
and force us to sell assets under adverse market
conditions.
Failure to procure or renew funding on favorable
terms, or at all, would adversely affect our results
and financial condition.
Because of our leverage, a decline in the value of our
interest earning assets may result in our lenders
initiating margin calls. A margin call means that the
lender requires us to pledge additional collateral to re-
establish the ratio of the value of the collateral to the
amount of the borrowing. Our fixed-rate mortgage-
backed securities generally are more susceptible to
margin calls as increases in interest rates tend to more
negatively affect the market value of fixed-rate
securities.
in
If we are unable to satisfy margin calls, our lenders
may foreclose on our collateral. This could force us to
sell our interest earning assets under adverse market
the event of our
conditions. Additionally,
bankruptcy, our borrowings, which are generally
made under repurchase agreements, may qualify for
special treatment under the Bankruptcy Code. This
special treatment would allow the lenders under these
agreements to avoid the automatic stay provisions of
the Bankruptcy Code and to liquidate the collateral
under these agreements without delay.
We may exceed our target leverage ratios.
We generally expect to maintain a ratio of debt-to-
equity of less than 12:1. However, we are not required
to stay below this leverage ratio. We may exceed this
ratio by incurring additional debt without increasing
the amount of equity we have. For example, if we
increase the amount of borrowings under our master
repurchase agreements with our existing or new
counterparties, our leverage ratio would increase. If
we increase our debt-to-equity ratio, the adverse
impact on our financial condition and results of
operations from the types of risks associated with the
use of leverage would likely be more severe.
We may not be able to achieve our optimal leverage.
We use leverage as a strategy to increase the return to
our investors. However, we may not be able to
achieve our desired leverage for any of the following
reasons:
we determine that the leverage would expose
us to excessive risk;
our lenders do not make funding available to
One or more of our lenders could be unwilling or
unable to provide us with financing. This could
potentially increase our financing costs and reduce our
liquidity. If one or more major market participants
fails or otherwise experiences a major liquidity crisis
it could negatively impact the marketability of all
fixed income securities, including Agency mortgage-
backed securities, and this could negatively impact the
value of the securities we acquire, thus reducing our
net book value. Furthermore, if any of our potential
lenders or existing lenders is unwilling or unable to
provide us with financing or if we are not able to
renew or replace maturing borrowings, we could be
forced to sell our assets at an inopportune time when
prices are depressed.
Purchases and sales of Agency mortgage-backed
securities by the Federal Reserve may adversely
affect the price and return associated with Agency
mortgage-backed securities.
On September 13, 2012,
the Federal Reserve
announced their third quantitative easing program,
their
commonly known as QE3, and extended
guidance to keep the federal funds rate at “exceptional
low levels” through at least mid-2015. QE3 entails
large-scale purchases of Agency mortgage-backed
securities at the pace of $40 billion per month in
addition to the Federal Reserve's existing policy of
reinvesting principal payments from its holdings of
Agency mortgage-backed securities into new Agency
mortgage-backed securities purchases. While we
cannot predict the impact of this program or any
future actions by the Federal Reserve on the prices
and liquidity of Agency mortgage-backed securities,
we expect that during periods in which the Federal
Reserve purchases significant volumes of Agency
securities, yields on Agency
mortgage-backed
mortgage-backed securities will be
lower and
refinancing volumes will be higher than would have
been absent their large scale purchases. As a result,
returns on Agency mortgage-backed securities may be
adversely affected. There is also a risk that as the
Federal Reserve reduces their purchases of Agency
mortgage-backed securities or if they decide to sell
some or all of their holdings of Agency mortgage-
the pricing of our Agency
backed securities,
mortgage-backed
securities portfolio may be
adversely affected. On December 18, 2013, the
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
Federal Reserve announced that beginning in January
2014 it will add to its holdings of Agency mortgage-
backed securities at a pace of $35 billion per month
rather than $40 billion per month, and will add to its
holdings of longer-term Treasury securities at a pace
of $40 billion per month rather than $45 billion per
month. On January 29, 2014, the Federal Reserve
announced that beginning in February, it will add to
its holdings of Agency mortgage-backed securities at
a pace of $30 billion per month rather than $35 billion
per month, and will add to its holdings of longer-term
Treasury securities at a pace of $35 billion per month
rather than $40 billion per month. These actions,
commonly referred to as the “tapering” of the Federal
Reserve’s purchase program, may adversely impact
our book value.
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New laws may be passed affecting the relationship
between Fannie Mae and Freddie Mac, on the one
hand, and the federal government, on the other,
which could adversely affect the price of Agency
mortgage-backed securities.
The interest and principal payments we expect to
receive on the Agency mortgage-backed securities in
which we invest will be guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae. Principal and interest
payments on Ginnie Mae certificates are directly
guaranteed by the U.S. government. Principal and
interest payments relating to the securities issued by
Fannie Mae and Freddie Mac are only guaranteed by
each respective Agency.
to withstand future credit
Since September 2008, there have been increased
market concerns about the ability of Fannie Mae and
losses
Freddie Mac
associated with securities held in their investment
portfolios, and on which they provide guarantees,
without the direct support of the federal government.
Fannie Mae and Freddie Mac were placed into the
conservatorship of the Federal Housing Finance
Agency, or FHFA, their federal regulator, pursuant to
its powers under The Federal Housing Finance
Regulatory Reform Act of 2008, a part of the Housing
and Economic Recovery Act of 2008.
In addition to FHFA becoming the conservator of
Fannie Mae and Freddie Mac, the U.S. Department of
the Treasury has taken various actions intended to
provide Fannie Mae and Freddie Mac with additional
liquidity and ensure their financial stability.
Shortly after Fannie Mae and Freddie Mac were
placed in federal conservatorship, the Secretary of the
U.S. Treasury suggested that the guarantee payment
structure of Fannie Mae and Freddie Mac should be
re-examined. The future roles of Fannie Mae and
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Freddie Mac could be significantly reduced and the
nature of their guarantees could be eliminated or
considerably
historical
measurements. The U.S. Treasury could also stop
providing credit support to Fannie Mae and Freddie
Mac in the future. Any changes to the nature of the
guarantees provided by Fannie Mae and Freddie Mac
could redefine what constitutes an Agency mortgage-
backed security and could have broad adverse market
implications. On June 25, 2013, a bipartisan group of
U.S. Senators introduced a draft bill titled, “Housing
Finance Reform and Taxpayer Protection Act of
2013,” which may
for
congressional discussion on the reform of Fannie Mae
and Freddie Mac, to the U.S. Senate. Also, on July 11,
2013, members of the House Committee on Financial
Services introduced a draft bill titled, “Protecting
American Taxpayers and Homeowners Act” to the
U.S. House of Representatives. Both bills call for the
winding down of Fannie Mae and Freddie Mac and
seek to increase the opportunities for private capital to
participate in, and consequently bear the risk of loss in
connection with, government-guaranteed mortgage-
backed securities. If Fannie Mae or Freddie Mac were
eliminated, or
to change
radically, we would not be able to acquire Agency
mortgage-backed securities from these entities, which
could adversely affect our business operations.
their structures were
The U.S. Government's efforts
to encourage
refinancing of certain loans may affect prepayment
in mortgage-backed
loans
rates
securities.
for mortgage
In addition to the increased pressure upon residential
mortgage loan investors and servicers to engage in
loss mitigation activities, the U.S. Government is
pressing for refinancing of certain loans, and this
action may affect prepayment rates for mortgage loans
in Agency mortgage-backed securities. To the extent
these and other economic stabilization or stimulus
efforts are successful in increasing prepayment speeds
for residential mortgage loans, such as those in
Agency mortgage-backed securities, such efforts
could potentially have a negative impact on our
income and operating
in
connection with loans or Agency mortgage-backed
securities purchased at a premium or our interest-only
securities.
results, particularly
Volatile market conditions for mortgages and
mortgage-related assets as well as the broader
in a significant
financial markets can result
contraction in liquidity for mortgages and mortgage-
related assets, which may adversely affect the value
of the assets in which we invest.
13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
in
the markets
Our results of operations are materially affected by
conditions
for mortgages and
mortgage-related assets, including Agency mortgage-
backed securities, as well as the broader financial
markets and the economy generally.
Significant adverse changes
in financial market
conditions can result in a deleveraging of the global
financial system and the forced sale of large quantities
of mortgage-related and other
financial assets.
Concerns over economic
recession, geopolitical
issues, unemployment, the availability and cost of
financing, the mortgage market and a declining real
estate market may contribute to increased volatility
and diminished expectations for the economy and
markets.
For example, as a result of the financial market
conditions beginning in the summer of 2007, many
traditional mortgage investors suffered severe losses
in their residential mortgage portfolios and several
major market participants failed or have been
impaired, resulting in a significant contraction in
market liquidity for mortgage-related assets. This
illiquidity negatively affected both the terms and
availability of financing for all mortgage-related
assets. Further increased volatility and deterioration
in the markets for mortgages and mortgage-related
assets as well as the broader financial markets may
adversely affect the performance and market value of
our Agency mortgage-backed securities. If these
conditions persist, institutions from which we seek
financing for our investments may tighten their
lending standards or become insolvent, which could
make it more difficult for us to obtain financing on
favorable terms or at all. Our profitability and
financial condition may be adversely affected if we
are unable to obtain cost-effective financing for our
investments.
We operate in a highly competitive market for
investment opportunities and competition may limit
our ability to acquire desirable investments in our
target assets and could also affect the pricing of
these securities.
We operate in a highly competitive market for
investment opportunities. Our profitability depends,
in large part, on our ability to acquire our target assets
at attractive prices. In acquiring our target assets, we
will compete with a variety of institutional investors,
including other REITs (as well as another REIT
externally managed by our wholly owned subsidiary,
FIDAC), specialty finance companies, public and
private funds, government entities, commercial and
investment banks, commercial finance and insurance
companies and other financial institutions. Many of
our competitors are substantially larger and have
considerably greater financial, technical, marketing
and other resources than we do. Several other REITs
have recently raised, or are expected to raise,
significant amounts of capital, and may have
investment objectives that overlap with ours, which
may create additional competition for investment
opportunities. Some competitors may have a lower
cost of funds and access to funding sources that may
not be available to us, such as funding from the U.S.
Government. Many of our competitors are not subject
to the operating constraints associated with REIT tax
compliance or maintenance of an exemption from the
Investment Company Act. In addition, some of our
competitors may have higher risk tolerances or
different risk assessments, which could allow them to
consider a wider variety of investments and establish
more relationships than us. Furthermore, competition
for investments in our target assets may lead to the
price of such assets increasing, which may further
limit our ability to generate desired returns. We
cannot provide assurance
the competitive
pressures we face will not have a material adverse
effect on our business, financial condition and results
of operations. Also, as a result of this competition,
desirable investments in our target assets may be
limited in the future and we may not be able to take
advantage of attractive investment opportunities from
time to time, as we can provide no assurance that we
will be able to identify and make investments that are
consistent with our investment objectives.
that
An increase in the interest payments on our
borrowings relative to the interest we earn on our
interest earning assets may adversely affect our
profitability.
We earn money based upon the spread between the
interest payments we earn on our interest earning
assets and the interest payments we must make on our
interest payments on our
borrowings.
borrowings increase relative to the interest we earn on
our interest earning assets, our profitability may be
adversely affected.
the
If
Differences in timing of interest rate adjustments on
our interest earning assets and our borrowings may
adversely affect our profitability.
We rely primarily on short-term borrowings to acquire
interest earning assets with long-term maturities.
Some of the interest earning assets we acquire are
adjustable-rate interest earning assets. This means
14
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
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that their interest rates may vary over time based upon
changes in an objective index, such as:
LIBOR. The interest rate that banks in London
offer for deposits in London of U.S. dollars.
Treasury Rate. A monthly or weekly average
yield of benchmark U.S. Treasury securities, as
published by the Federal Reserve Board.
changes
an objective
These indices generally reflect short-term interest
rates. The interest rates on our borrowings similarly
vary with
index.
in
Nevertheless, the interest rates on our borrowings
generally adjust more frequently than the interest rates
on our adjustable-rate interest earning assets, which
are also typically subject to periodic and lifetime
interest rate caps. Accordingly, in a period of rising
interest rates, we could experience a decrease in net
income or a net loss because the interest rates on our
borrowings adjust faster than the interest rates on our
adjustable-rate interest earning assets.
An increase in interest rates may adversely affect the
market value of our interest earning assets and,
therefore, also our book value.
Increases in interest rates may negatively affect the
market value of our interest earning assets because in
a period of rising interest rates, the value of certain
interest earning assets may fall and reduce our book
value. In addition, our fixed-rate interest earning
assets are generally more negatively affected by
increases in interest rates because in a period of rising
rates, the coupon we earn on our fixed-rate interest
earning assets would not change. Our book value
would be reduced by the amount of decreases in the
market value of our interest earning assets.
We may experience declines in the market value of
our assets resulting in us recording impairments,
which may have an adverse effect on our results of
operations and financial condition.
A decline in the market value of our mortgage-backed
securities or other assets may require us to recognize
an “other-than-temporary” impairment (OTTI) against
such assets under GAAP. When the fair value of our
mortgage-backed securities is less than its amortized
cost, the security is considered impaired. We assess
our impaired securities on at least a quarterly basis
and designate such impairments as either “temporary”
or “other-than-temporary.” If we intend to sell an
impaired security, or it is more likely than not that we
will be required to sell the impaired security before its
anticipated recovery, then we must recognize an
other-than-temporary impairment through earnings
income/(loss) do not
equal to the entire difference between the mortgage-
backed security’s amortized cost and its fair value at
the balance sheet date. If we do not expect to sell an
other-than-temporarily impaired security, only the
portion of
impairment
the other-than-temporary
related to credit losses is recognized through earnings
with the remainder recognized as a component of
other comprehensive income/(loss) on our balance
through other
sheet. Impairments we recognize
impact our
comprehensive
earnings. Following the recognition of an other-than-
temporary impairment through earnings, a new cost
basis is established for the mortgage-backed security
and may not be adjusted for subsequent recoveries in
fair value through earnings. However, other-than-
temporary impairments recognized through earnings
may be accreted back to the amortized cost basis of
the security on a prospective basis through interest
income upon a subsequent recovery of expected cash
flows. The determination as to whether an other-than-
temporary impairment exists and, if so, the amount we
consider
is
subjective, as such determinations are based on both
factual and subjective information available at the
time of assessment. As a result, the timing and amount
of other-than-temporary
constitute
material estimates that are susceptible to significant
change.
other-than-temporarily
impairments
impaired
We are subject to reinvestment risk.
We also are subject to reinvestment risk as a result of
changes in interest rates. Declines in interest rates are
generally accompanied by increased prepayments of
mortgage loans, which in turn results in a prepayment
of the related mortgage-backed securities. An increase
in prepayments could result in the reinvestment of the
proceeds we receive from such prepayments into
lower yielding assets.
An increase in prepayment rates may adversely
affect our profitability.
The Agency mortgage-backed securities we acquire
are backed by pools of mortgage loans. We receive
payments, generally, from the payments that are made
on these underlying mortgage loans. We often
purchase mortgage-backed securities that have a
higher coupon rate than the prevailing market interest
rates. In exchange for a higher coupon rate, we
typically pay a premium over par value to acquire
these mortgage-backed securities. In accordance with
U.S. generally accepted accounting principles
(GAAP), we amortize the premiums on our mortgage-
backed securities over the life of the related mortgage-
backed securities. If the mortgage loans securing
15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
these mortgage-backed securities prepay at a more
rapid rate than anticipated, we will have to amortize
our premiums on an accelerated basis that may
adversely affect our profitability.
Defaults on
mortgage loans underlying Agency mortgage-backed
same effect as
securities
prepayments because of
the underlying Agency
guarantee.
typically have
the
Prepayment rates generally increase when interest
rates fall and decrease when interest rates rise, but
changes in prepayment rates are difficult to predict.
Prepayment rates also may be affected by conditions
the housing and financial markets, general
in
economic conditions and the relative interest rates on
fixed-rate and adjustable-rate mortgage loans.
While we seek to minimize prepayment risk to the
extent practical, in selecting investments we must
balance prepayment risk against other risks and the
potential returns of each investment. No strategy can
completely insulate us from prepayment risk.
The viability of other financial institutions could
adversely affect us.
Financial services institutions are interrelated as a
result of trading, clearing, counterparty, or other
relationships. We have exposure to many different
counterparties, and routinely execute transactions with
counterparties in the financial services industry,
including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other
institutional clients. Many of
transactions
expose us to credit risk in the event of default of our
our
counterparty
counterparty’s customers. There is no assurance that
any such losses would not materially and adversely
impact our revenues, financial condition and earnings.
instances,
certain
these
or,
in
in other types of mortgage derivatives, such as
interest-only securities. No hedging strategy can
protect us completely. Entering into interest rate
hedging may fail to protect or could adversely affect
us because, among other things: interest rate hedging
can be expensive, particularly during periods of
volatile interest rates. Available hedges may not
correspond directly with the risk for which protection
is sought; and the duration of the hedge may not
match the duration of the related asset or liability.
Our use of derivatives may expose us to counterparty
risks.
receive payments due under
We enter into interest rate swap, swaption and cap
agreements to hedge risks associated with movements
in interest rates. If a swap counterparty cannot
perform under the terms of an interest rate swap, we
that
would not
agreement, we may
lose any unrealized gain
associated with the interest rate swap, and the hedged
liability would cease to be hedged by the interest rate
swap. We may also be at risk for any collateral we
have pledged to secure our obligations under the
interest rate swap
the counterparty becomes
insolvent or files for bankruptcy. Similarly, if a
swaption or cap counterparty fails to perform under
the terms of the agreement, in addition to not
receiving payments due under that agreement that
would offset our interest expense, we would also incur
a loss for all remaining unamortized premium paid for
that agreement.
if
concerns,
The characteristics of hedging instruments present
various
illiquidity,
enforceability, and counterparty risks, which could
adversely affect our business and results of
operations.
including
Our hedging strategies may be costly, and may not
hedge our risks as intended.
Our policies permit us to enter into interest rate
swaps, caps and floors, interest rate swaptions,
Treasury futures and other derivative transactions to
help us mitigate our interest rate and prepayment risks
described above. We have used interest rate swaps to
provide a level of protection against interest rate risks
as well as options to enter into interest rate swaps
(commonly referred to as interest rate swaptions). We
may also purchase or sell to-be-announced forward
contracts on Agency mortgage-backed securities
(commonly referred to as TBAs) and specified
Agency securities on a forward basis, purchase or
write put or call options on TBA securities and invest
From time to time, we enter into interest rate swap
agreements to hedge risks associated with movements
in interest rates. Entities entering into interest rate
swap agreements are exposed to credit losses in the
event of non-performance by counterparties to these
transactions.
Effective October 12, 2012, the CFTC issued new
rules regarding swaps under the authority granted to it
pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act, or the Dodd-Frank Act.
Although the new rules do not directly affect the
negotiations and terms of individual swap transactions
between counterparties, they do require that by no
later than September 9, 2013, the clearing of all swap
transactions through registered derivatives clearing
organizations, or swap execution facilities, through
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and
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centralizing
is designed
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standardized documents under which each swap
counterparty transfers its position to another entity
whereby the centralized clearinghouse effectively
becomes the counterparty to each side of the swap. It
is the intent of the Dodd-Frank Act that the clearing of
swaps
to avoid
concentration of swap risk in any single entity by
spreading
the
clearinghouse and its members. In addition to greater
initial and periodic margin (collateral) requirements
and additional transaction fees both by the swap
execution facility and the clearinghouse, the swap
transactions are now subjected to greater regulation by
both the CFTC and the SEC. These additional fees,
costs, margin
documentation
requirements,
requirements and regulations could adversely affect
our business and results of operations. Additionally,
for all swaps we entered into prior to September 9,
2013, we are not required to clear them through the
central clearinghouse and these swaps are still subject
to the risks of nonperformance by any of the
individual counterparties with whom we entered into
these transactions. If the swap counterparty cannot
perform under the terms of an interest rate swap, we
would not
that
lose any unrealized gain
agreement, we may
associated with the interest rate swap, and the hedged
liability would cease to be hedged by the interest rate
swap. We may also be at risk for any collateral we
have pledged to secure our obligation under the
interest rate swap
the counterparty becomes
insolvent or files for bankruptcy. Default by a party
with whom we enter into a hedging transaction may
result
to cover our
loss and force us
commitments, if any, at the then-current market price.
Although generally we will seek to reserve the right to
terminate our hedging positions, it may not always be
possible to dispose of or close out a hedging position
without the consent of the hedging counterparty and
we may not be able to enter into an offsetting contract
in order to cover our risk. There may not always be a
liquid secondary market that will exist for hedging
instruments purchased or sold and we may be required
to maintain a position until exercise or expiration,
which could result in losses.
receive payments due under
in a
if
We use analytical models and data in connection
with the valuation of our assets, and any incorrect,
misleading or
in
connection therewith would subject us to potential
risks.
information used
incomplete
Given our strategies and the complexity of the
valuation of our assets, we must rely heavily on
analytical models (both proprietary models developed
by us and those supplied by third parties) and
information and data supplied by our third party
vendors and servicers. Models and data are used to
value assets or potential asset purchases and also in
connection with hedging our assets. When models and
data prove to be incorrect, misleading or incomplete,
any decisions made in reliance thereon expose us to
potential risks. For example, by relying on models and
data, especially valuation models, we may be induced
to buy certain assets at prices that are too high, to sell
certain other assets at prices that are too low or to
miss favorable opportunities altogether. Similarly, any
hedging based on faulty models and data may prove to
be unsuccessful. Furthermore, any valuations of our
assets that are based on valuation models may prove
to be incorrect.
Some of the risks of relying on analytical models and
third-party data are particular to analyzing tranches
from securitizations, such as commercial mortgage-
backed securities or residential mortgage-backed
securities. These risks include, but are not limited to,
the following: (i) collateral cash flows and/or liability
structures may be incorrectly modeled in all or only
certain scenarios, or may be modeled based on
simplifying assumptions that lead to errors; (ii)
information about collateral may be
incorrect,
incomplete, or misleading; (iii) collateral or bond
historical
historical
prepayments, defaults, cash flows, etc.) may be
incorrectly reported, or subject to interpretation (e.g.,
different issuers may report delinquency statistics
based on different definitions of what constitutes a
delinquent loan); or (iv) collateral or bond information
may be outdated, in which case the models may
contain incorrect assumptions as to what has occurred
since the date information was last updated.
performance
(such
as
Some of the analytical models used by us, such as
mortgage prepayment models or mortgage default
models, are predictive in nature. The use of predictive
models has inherent risks. For example, such models
may incorrectly forecast future behavior, leading to
potential losses on a cash flow and/or a mark-to-
market basis. In addition, the predictive models used
by us may differ substantially from those models used
by other market participants, with the result that
valuations based on these predictive models may be
substantially higher or lower for certain assets than
actual market prices. Furthermore, since predictive
models are usually constructed based on historical
data supplied by third parties, the success of relying
on such models may depend heavily on the accuracy
and reliability of the supplied historical data and the
ability of these historical models to accurately reflect
future periods.
17
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
All valuation models rely on correct market data
inputs. If incorrect market data is entered into even a
well-founded
resulting
valuation model,
valuations will be incorrect. However, even if market
data is inputted correctly, “model prices” will often
differ substantially from market prices, especially for
securities with complex characteristics, such as
derivative instruments or structured notes.
the
We are highly dependent on information systems
and
third parties, and systems failures could
significantly disrupt our business, which may, in
turn, negatively affect the market price of our
common stock and our ability to pay dividends to our
stockholders.
Our business is highly dependent on communications
and information systems. Any failure or interruption
of our systems or cyber-attacks or security breaches of
our networks or systems could cause delays or other
problems in our securities trading activities, including
mortgage-backed securities trading activities, which
could have a material adverse effect on our operating
results and negatively affect the market price of our
common stock and our ability to pay dividends to our
stockholders. In addition, we also face the risk of
operational failure, termination or capacity constraints
of any of the third parties with which we do business
or that facilitate our business activities, including
clearing agents or other financial intermediaries we
use to facilitate our securities transactions.
Computer malware, viruses, and computer hacking
and phishing attacks have become more prevalent in
our industry and may occur on our systems in the
future. We rely heavily on our financial, accounting
and other data processing systems. It is difficult to
determine what, if any, negative impact may directly
result from any specific interruption or cyber-attacks
or security breaches of our networks or systems or any
failure
to maintain performance, reliability and
security of our technical infrastructure. As a result,
any such computer malware, viruses, and computer
hacking and phishing attacks may negatively affect
our operations.
Our use of non-recourse securitizations may expose
us to risks which could result in losses to us.
We may utilize non-recourse securitizations of our
assets in mortgage loans, especially loan originations,
when they are available. Prior to any such financing,
we may seek to finance assets with relatively short-
term
is
accumulated. As a result, we would be subject to the
risk that we would not be able to acquire, during the
sufficient portfolio
facilities until a
sufficient eligible assets
period that any short-term facilities are available,
sufficient eligible assets to maximize the efficiency of
a securitization. We also would bear the risk that we
would not be able to obtain a new short-term facility
or would not be able to renew any short-term facilities
after they expire should we need more time to seek
and acquire
for a
securitization. In addition, conditions in the capital
markets, including the recent unprecedented volatility
and disruption in the capital and credit markets, may
not permit a non-recourse securitization at any
particular time or may make the issuance of any such
securitization less attractive to us even when we do
have sufficient eligible assets. While we would intend
to retain
tranches of
securitizations and, therefore, still have exposure to
any assets included in such securitizations, our
inability to enter into such securitizations would
increase our overall exposure to risks associated with
direct ownership of such assets, including the risk of
default. Our inability to refinance any short-term
facilities would also
increase our risk because
borrowings thereunder would likely be recourse to us
as an entity. If we are unable to obtain and renew
short-term facilities or to consummate securitizations
to finance our assets on a long-term basis, we may be
required to seek other forms of potentially less
attractive financing or to liquidate assets at an
inopportune time or price.
the non-investment grade
Securitizations expose us to additional risks.
the
interests of
In a securitization structure, we convey a pool of
assets to a special purpose vehicle, the issuing entity,
and the issuing entity would issue one or more classes
of non-recourse notes pursuant to the terms of an
indenture. The notes are secured by the pool of assets.
In exchange for the transfer of assets to the issuing
entity, we receive the cash proceeds of the sale of
non-recourse notes and a 100% interest in the
subordinate
issuing entity. The
securitization of all or a portion of our commercial
mortgage loan portfolio might magnify our exposure
to losses because any subordinate interest we retain in
the issuing entity would be subordinate to the notes
issued to investors and we would, therefore, absorb all
of the losses sustained with respect to a securitized
pool of assets before the owners of the notes
experience any losses. Moreover, we cannot be
assured
the
securitization market or be able to do so at favorable
rates. The inability to securitize our portfolio could
adversely affect our performance and our ability to
grow our business.
that we will be able
to access
Lenders may require us to enter into restrictive
18
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
covenants relating to our operations that may inhibit
our ability to grow our business and increase
revenues.
certain
liens and enter
impact our flexibility
lenders
If or when we obtain debt financing,
(especially in the case of credit facilities) may impose
restrictions on us that would affect our ability to incur
additional debt, make
allocations or
acquisitions, reduce liquidity below certain levels,
make distributions to our stockholders, redeem debt or
equity securities and
to
determine our operating policies and strategies. For
example, our loan documents may contain negative
covenants that limit, among other things, our ability to
repurchase our common shares, distribute more than a
certain amount of our net income or funds from
operations to our stockholders, employ leverage
beyond certain amounts, sell assets, engage in mergers
into
or consolidations, grant
transactions with affiliates. If we fail to meet or
satisfy any of these covenants, we would be in default
under these agreements, and our lenders could elect to
declare outstanding amounts due and payable,
terminate their commitments, require the posting of
additional collateral and enforce their interests against
existing collateral. We may also be subject to cross-
default and acceleration rights and, with respect to
collateralized debt, the posting of additional collateral
and foreclosure rights upon default. Furthermore, this
could also make it difficult for us to satisfy the
qualification requirements necessary to maintain our
status as a REIT for U.S. federal income tax purposes.
A default and resulting repayment acceleration could
significantly reduce our liquidity, which could require
us to sell our assets to repay amounts due and
outstanding. This could also significantly harm our
business, financial condition, results of operations and
ability to make distributions, which could cause our
share price
to decline. A default could also
significantly limit our financing alternatives such that
we would be unable to pursue our leverage strategy,
which could adversely affect our returns.
Risks Related To Commercial Real Estate
Debt, Preferred Equity Investments and Net
Lease Real Estate Assets
The real estate assets we acquire are subject to risks
particular to real property, which may adversely
affect our returns from certain assets and our ability
to make distributions to our stockholders.
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We own assets secured by real estate and own real
estate directly through direct purchases or upon a
default of mortgage loans. Real estate assets are
subject to various risks, including:
including
of God,
in national and
acts
earthquakes,
hurricanes, floods and other natural disasters,
which may result in uninsured losses;
acts of war or terrorism, including the
consequences of terrorist attacks, such as
those that occurred on September 11, 2001;
adverse changes
economic and market conditions;
and
changes
fiscal policies and zoning
regulations,
ordinances
costs of
related
and
the
compliance with laws and regulations, fiscal
policies and ordinances;
the potential for uninsured or under-insured
property losses; and
environmental conditions of the real estate.
governmental
local
laws
in
federal,
state and
Under various U.S.
local
environmental laws, ordinances and regulations, a
current or previous owner of real estate (including, in
certain circumstances, a secured lender that succeeds
to ownership or control of a property) may become
liable for the costs of removal or remediation of
certain hazardous or toxic substances at, on, under or
in its property.
If any of these or similar events occurs, it may reduce
our return from an affected property or investment
and reduce or eliminate our ability
to make
distributions to stockholders.
A prolonged economic slowdown or declining real
estate values could impair the assets we may own
and adversely affect our operating results.
Many of the commercial real estate debt, preferred
equity, and real estate assets we may own may be
susceptible to economic slowdowns or recessions,
which could lead to financial losses in our assets and a
decrease in revenues, net income and asset values.
Unfavorable economic conditions also could increase
our funding costs, limit our access to the capital
markets or result in a decision by lenders not to
extend credit to us. These events could result in
significant diminution in the value of our assets,
prevent us from acquiring additional assets and have
an adverse effect on our operating results.
The commercial assets we originate and/or acquire
depend on the ability of the property owner to
19
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
generate net income from operating the property.
Failure to do so may result in delinquency and/or
foreclosure.
Commercial loans are secured by property and are
subject to risks of delinquency and foreclosure, and
risks of loss that may be greater than similar risks
associated with loans made on the security of single-
family residential property. The ability of a borrower
to repay a loan secured by an income-producing
property typically is dependent primarily upon the
successful operation of such property rather than upon
the existence of independent income or assets of the
borrower. If the income of the property is reduced, the
borrower’s ability to repay the loan may be impaired.
The income of an income-producing property can be
adversely affected by, among other things,
the
credit
regional or
in national,
in regional or
local rental or
from comparable
changes
local
economic conditions or specific industry
segments,
and
including
securitization markets;
declines in regional or local real estate
values;
declines
occupancy rates;
increases in interest rates, real estate tax rates
and other operating expenses;
tenant mix;
success of tenant businesses and the tenant’s
ability to meet their lease obligations;
property management decisions;
property location, condition and design;
competition
properties;
changes in laws that increase operating
expenses or limit rents that may be charged;
costs of remediation and liabilities associated
with environmental conditions;
the potential for uninsured or underinsured
property losses;
changes
and
governmental
regulations, including fiscal policies, zoning
ordinances and environmental legislation and
the related costs of compliance;
acts of God, terrorist attacks, social unrest
and civil disturbances;
the nonrecourse nature of the mortgage
loans;
litigation and condemnation proceedings
regarding the properties; and
bankruptcy proceedings.
types of
laws
in
In the event of any default under a mortgage loan held
directly by us, we will bear a risk of loss of principal
to the extent of any deficiency between the value of
the collateral and the principal and accrued interest of
the mortgage loan, which could have a material
adverse effect on our cash flow from operations and
limit amounts available for distribution
to our
stockholders. In the event of the bankruptcy of a
mortgage loan borrower, the mortgage loan to such
borrower will be deemed to be secured only to the
extent of the value of the underlying collateral at the
time of bankruptcy (as determined by the bankruptcy
court), and the lien securing the mortgage loan will be
subject to the avoidance powers of the bankruptcy
trustee or debtor-in-possession to the extent the lien is
unenforceable under state law. Foreclosure of a
mortgage loan can be an expensive and lengthy
process, which could have a substantial negative
effect on our anticipated return on the foreclosed
mortgage loan.
Borrowers May Be Unable To Repay the Remaining
Principal Balance on the Maturity Date.
Many commercial loans are non-amortizing balloon
loans
that provide for substantial payments of
principal due at their stated maturities. Commercial
loans with substantial remaining principal balances at
their stated maturity date involve greater risk than
fully-amortizing loans. This is because the borrower
may be unable to repay the loan at that time.
A borrower’s ability to repay a mortgage loan on its
stated maturity date typically will depend upon its
ability either to refinance the mortgage loan or to sell
the mortgaged property at a price sufficient to permit
repayment. A borrower’s ability to achieve either of
these goals will be affected by a number of factors,
including:
the
related
fair market value of
the availability of, and competition for, credit
for commercial real estate projects, which
fluctuate over time;
the prevailing interest rates;
the net operating income generated by the
mortgaged properties;
the
mortgaged properties;
the borrower’s equity
mortgaged properties;
significant tenant rollover at the related
mortgaged properties;
the borrower’s financial condition;
the operating history and occupancy level of
the related mortgaged property;
reductions
in
assistance/rent subsidy programs;
changes in zoning or tax laws;
government
applicable
related
the
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
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the relevant
in competition
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changes
location;
changes
location;
changes in government regulation and fiscal
policy;
the state of fixed income and mortgage
markets;
the availability of credit for multi-family and
commercial properties;
prevailing general and regional economic
conditions; and
the availability of funds in the credit markets
which fluctuates over time.
Whether or not losses are ultimately sustained, any
delay in the collection of a balloon payment on the
maturity date will likely extend the weighted average
life of our investment.
Commercial mortgage-backed securities we acquire
may be subject to losses.
In general, losses on a mortgaged property securing a
mortgage loan included in a securitization will be
borne first by the equity holder of the property, then
by the holder of a mezzanine loan or B-Note, if any,
then by the “first loss” subordinated security holder
generally, the “B-Piece” buyer, and then by the holder
of a higher-rated security. In the event of default and
the exhaustion of any equity support, mezzanine loans
or B-Notes, and any classes of securities junior to
those that we acquire, we may not be able to recover
all of our capital in the securities we purchase. In
addition, if the underlying mortgage portfolio has
been overvalued by the originator, or if the values
subsequently decline, less collateral is available to
satisfy interest and principal payments due on the
related mortgage-backed securities. The prices of
lower credit quality commercial mortgage-backed
securities are generally less sensitive to interest rate
changes
rated commercial
mortgage-backed securities, but more sensitive to
adverse economic downturns or individual issuer
developments. The projection of an economic
downturn, for example, could cause a decline in the
price of lower credit quality commercial mortgage-
backed securities because the ability of obligors of
mortgages underlying commercial mortgage-backed
securities to make principal and interest payments
may be impaired. In such event, existing credit
the securitization structure may be
support
insufficient to protect us against loss of our principal
on these securities.
than more highly
in
The B-Notes that we acquire may be subject to
additional risks related to the privately negotiated
structure and terms of the transaction, which may
result in losses to us.
We may acquire B-Notes. A B-Note is a mortgage
loan typically (1) secured by a first mortgage on a
single large commercial property or group of related
properties and (2) subordinated to an A-Note secured
by the same first mortgage on the same collateral. As
a result, if a borrower defaults, there may not be
sufficient funds remaining for B-Note holders after
payment to the A-Note holders. However, because
each transaction is privately negotiated, B-Notes can
vary in their structural characteristics and risks. For
example, the rights of holders of B-Notes to control
the process following a borrower default may vary
from transaction to transaction. Further, B-Notes
typically are secured by a single property and so
reflect
significant
concentration. Significant losses related to our B-
Notes would result in operating losses for us and may
to our
limit our ability
stockholders.
to make distributions
associated with
risks
the
The mezzanine loan assets that we acquire involve
greater risks of loss than senior loans.
We acquire mezzanine loans, which take the form of
subordinated loans secured by a pledge of the
ownership interests of the entity that owns the interest
in the entity owning the property. These types of
assets involve a higher degree of risk than senior
mortgage lending secured by income-producing real
property, because the loan may become unsecured as
a result of foreclosure by the senior lender. In the
event of a bankruptcy of the entity providing the
pledge of its ownership interests as security, we may
not have full recourse to the assets of such entity, or
the assets of the entity may not be sufficient to satisfy
our mezzanine loan. If a borrower defaults on our
mezzanine loan or debt senior to our loan, or in the
event of a borrower bankruptcy, our mezzanine loan
will be satisfied only after the senior debt. As a result,
we may not recover some or all of our initial
investment. In addition, mezzanine loans may have
higher
conventional
ratios
mortgage loans, resulting in less equity in the property
and increasing the risk of loss of principal. Significant
losses related to our mezzanine loans would result in
operating losses for us and may limit our ability to
make distributions to our stockholders.
loan-to-value
than
We are subject to additional risks associated with
loan participations.
21
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
to amendment of
Some of our loans may be participation interests or
co-lender arrangements in which we share the rights,
obligations and benefits of the loan with other lenders.
We may need the consent of these parties to exercise
our rights under such loans, including rights with
loan documentation,
respect
enforcement proceedings upon a default and the
institution of,
foreclosure
proceedings. Similarly, certain participants may be
able to take actions to which we object but to which
we will be bound
interest
represents a minority interest. We may be adversely
affected by this lack of control.
if our participation
control over,
and
Construction loans involve an increased risk of loss.
We may acquire and/or originate construction loans.
If we fail to fund our entire commitment on a
construction loan or if a borrower otherwise fails to
complete the construction of a project, there could be
adverse consequences associated with
loan,
including: a loss of the value of the property securing
the loan, especially if the borrower is unable to raise
funds to complete it from other sources; a borrower
claim against us for failure to perform under the loan
documents; increased costs to the borrower that the
borrower is unable to pay; a bankruptcy filing by the
borrower; and abandonment by the borrower of the
collateral for the loan.
the
If we do not have an adequate completion guarantee,
risks of cost overruns and non-completion of
renovation of the properties underlying rehabilitation
loans may result in significant losses. The renovation,
refurbishment or expansion by a borrower under a
mortgaged property involves risks of cost overruns
and non-completion. Estimates of
the costs of
improvements to bring an acquired property up to
standards established for the market position intended
for that property may prove inaccurate. Other risks
may include rehabilitation costs exceeding original
estimates, possibly making a project uneconomical,
environmental risks and rehabilitation and subsequent
leasing of the property not being completed on
schedule. If such renovation is not completed in a
timely manner, or if it costs more than expected, the
borrower may experience a prolonged impairment of
net operating income and may not be able to make
payments on our investment, which could result in
significant losses.
Geographic concentration exposes
greater risk of default and loss.
investors
to
Repayments by borrowers and the market value of the
related assets could be affected by economic
22
conditions generally or specific to geographic areas or
regions of the United States, and concentrations of
mortgaged properties in particular geographic areas
may increase the risk that adverse economic or other
developments or natural or man-made disasters
affecting a particular region of the country could
increase the frequency and severity of losses on
mortgage loans secured by those properties. In recent
periods, several regions of the United States have
experienced significant real estate downturns when
others have not. Regional economic declines or
conditions in regional real estate markets could
adversely affect the income from, and market value
of, the mortgaged properties. In addition, local or
regional economies may be adversely affected to a
greater degree than other areas of the country by
developments affecting industries concentrated in
such area. A decline in the general economic
condition in the region in which mortgaged properties
securing the related mortgage loans are located would
result in a decrease in consumer demand in the region,
and the income from and market value of the
mortgaged properties may be adversely affected.
Other regional factors – e.g., earthquakes, floods,
forest fires or hurricanes or changes in governmental
rules or fiscal policies – also may adversely affect the
mortgaged properties. Assets in certain regional areas
may be more susceptible to certain hazards (such as
earthquakes, widespread fires, floods or hurricanes)
than properties in other parts of the country and
mortgaged properties located in coastal states may be
more susceptible to hurricanes than properties in other
parts of the country. As a result, areas affected by
such events often experience disruptions in travel,
transportation and tourism, loss of jobs and an overall
decrease in consumer activity, and often a decline in
real estate-related investments. There can be no
assurance that the economies in such impacted areas
will recover sufficiently to support income producing
real estate at pre-event levels or that the costs of the
related clean-up will not have a material adverse
effect on the local or national economy.
Inadequate property insurance coverage could have
an adverse impact on our operating results.
Assets may suffer casualty losses due to risks
(including acts of terrorism) that are not covered by
insurance or for which insurance coverage is not
adequate or available at commercially reasonable
rates or has otherwise been contractually limited by
the related mortgage loan documents. Moreover, if
reconstruction or major repairs are required following
a casualty, changes in laws that have occurred since
the time of original construction may materially
such
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Risk Factors
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reconstruction or major repairs or may materially
increase the cost thereof.
There is no assurance that borrowers have maintained
or will maintain the insurance required under the
mortgage loan documents or that such insurance will
be adequate. In addition, since the mortgage loans
generally do not require maintenance of terrorism
insurance, we cannot assure you that any property will
Therefore,
be covered by terrorism insurance.
damage to a mortgaged property caused by acts of
terror may not be covered by insurance and result in
substantial losses to us.
We may incur losses when a borrower defaults on a
loan and the underlying collateral value is less than
the amount due.
If a borrower defaults on a non-recourse loan, we will
only have recourse to the real estate-related assets
collateralizing the loan. If the underlying collateral
value is less than the loan amount, we will suffer a
loss. Conversely, some of our loans may be unsecured
or are secured only by equity interests in the
borrowing entities. These loans are subject to the risk
that other lenders in the capital stack may be directly
secured by the real estate assets of the borrower or
may otherwise have a superior right to repayment.
Upon a default, those collateralized lenders would
have priority over us with respect to the proceeds of a
sale of the underlying real estate. In cases described
above, we may lack control over the underlying asset
collateralizing our loan or the underlying assets of the
borrower before a default, and, as a result, the value of
the collateral may be reduced by acts or omissions by
owners or managers of the assets. In addition, the
value of the underlying real estate may be adversely
affected by some or all of the risks referenced above
with respect to our owned real estate.
Some of our loans may be backed by individual or
corporate guarantees from borrowers or their affiliates
that are not secured. If the guarantees are not fully or
partially secured, we typically rely on financial
covenants from borrowers and guarantors that are
designed to require the borrower or guarantor to
maintain certain levels of creditworthiness. Where we
do not have recourse to specific collateral pledged to
satisfy such guarantees or recourse loans, we will only
have recourse as an unsecured creditor to the general
assets of the borrower or guarantor, some or all of
which may be pledged as collateral for other lenders.
There can be no assurance that a borrower or
guarantor will comply with its financial covenants, or
that sufficient assets will be available to pay amounts
owed to us under our loans and guarantees. As a result
of these factors, we may suffer additional losses that
could have a material adverse effect on our financial
performance.
Upon a borrower bankruptcy, we may not have full
recourse to the assets of the borrower to satisfy our
loan. In addition, certain of our loans are subordinate
to other debt of certain borrowers. If a borrower
defaults on our loan or on debt senior to our loan, or
upon a borrower bankruptcy, our loan will be satisfied
only after the senior debt receives payment. Where
debt senior to our loan exists, the presence of
intercreditor arrangements may limit our ability to
amend our loan documents, assign our loans, accept
prepayments,
(through
“standstill” periods) and control decisions made in
bankruptcy proceedings. Bankruptcy and borrower
litigation can significantly increase collection costs
and the time needed for us to acquire title to the
underlying collateral (if applicable), during which
time the collateral and/or a borrower’s financial
condition may decline in value, causing us to suffer
additional losses.
exercise our
remedies
to repay our
loan at maturity
If the value of collateral underlying a loan declines or
interest rates increase during the term of a loan, a
borrower may not be able to obtain the necessary
funds
through
refinancing because the underlying property revenue
cannot satisfy the debt service coverage requirements
necessary to obtain new financing. If a borrower is
unable to repay our loan at maturity, we could suffer
additional
impact our
financial performance.
that may adversely
loss
Our assets may become non-performing and sub-
performing assets in the future, which are subject to
increased risks relative to performing loans.
Our assets may in the near or the long term become
non-performing and sub-performing assets, which are
subject to increased risks relative to performing
assets. Loans may become non-performing or sub-
performing for a variety of reasons, such as the
underlying property being too highly leveraged,
decreasing income generated from the underlying
property, or the financial distress of the borrower, in
each case, that results in the borrower being unable to
meet its debt service and/or repayment obligations.
Such non-performing or sub-performing assets may
require a substantial amount of workout negotiations
and/or restructuring, which may involve substantial
cost and divert the attention of our management from
other activities and entail, among other things, a
substantial reduction in interest rate, the capitalization
of interest payments and a substantial write-down of
23
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
the principal of the loan. Even if a restructuring were
successfully accomplished, the borrower may not be
able or willing to maintain the restructured payments
or refinance the restructured mortgage upon maturity.
From time to time we find it necessary or desirable to
foreclose on some, if not many, of the loans we
acquire, and the foreclosure process may be lengthy
and expensive. Borrowers may resist foreclosure
actions by asserting numerous claims, counterclaims
and defenses to payment against us (such as lender
liability claims and defenses) even when such
assertions may have no basis in fact or law, in an
effort to prolong the foreclosure action and force the
lender into a modification of the loan or a favorable
buy-out of the borrower’s position. In some states,
foreclosure actions can take several years or more to
litigate. At any time prior to or during the foreclosure
proceedings, the borrower may file for bankruptcy,
which would have the effect of staying the foreclosure
actions and further delaying the resolution of our
claims. Foreclosure may create a negative public
perception of the related property, resulting in a
diminution of its value. Even if we are successful in
foreclosing on a loan, the liquidation proceeds upon
sale of the underlying real estate may not be sufficient
to recover our cost basis in the loan, resulting in a loss
to us. Furthermore, any costs or delays involved in the
foreclosure of a loan or a liquidation of the underlying
property will further reduce the proceeds and thus
increase our
loss. Any such reductions could
materially and adversely affect the value of the
commercial loans in which we invest.
Whether or not we have participated in the negotiation
of the terms of a loan, there can be no assurance as to
the adequacy of the protection of the terms of the
loan, including the validity or enforceability of the
loan and the maintenance of the anticipated priority
and perfection of the applicable security interests.
Furthermore, claims may be asserted that might
interfere with enforcement of our rights. In the event
of a foreclosure, we may assume direct ownership of
the underlying real estate. The liquidation proceeds
upon sale of that real estate may not be sufficient to
recover our cost basis in the loan, resulting in a loss to
us. Any costs or delays involved in the effectuation of
a foreclosure of the loan or a liquidation of the
underlying property will further reduce the proceeds
and increase our loss.
Whole loan mortgages are also subject to “special
hazard” risk (property damage caused by hazards,
such as earthquakes or environmental hazards, not
covered by standard property insurance policies), and
to bankruptcy risk (reduction
in a borrower’s
mortgage debt by a bankruptcy court). In addition,
responsibility
claims may be assessed against us on account of our
position as mortgage holder or property owner,
including
payments,
environmental hazards and other liabilities, which
could have a material adverse effect on our results of
operations, financial condition and our ability to make
distributions to our stockholders.
tax
for
We may experience losses if the creditworthiness of
our tenants deteriorates and they are unable to meet
their lease obligations.
We own properties leased to tenants of our real estate
assets and receive rents from tenants during the
contracted term of such leases. A tenant's ability to
pay rent is determined by its creditworthiness, among
other factors. If a tenant's credit deteriorates, the
tenant may default on its obligations under our lease
and may also become bankrupt. The bankruptcy or
insolvency of our tenants or other failure to pay is
likely to adversely affect the income produced by our
real estate assets. If a tenant defaults, we may
experience delays and incur substantial costs in
enforcing our rights as landlord. If a tenant files for
bankruptcy, we may not be able to evict the tenant
solely because of such bankruptcy or failure to pay. A
court, however, may authorize a tenant to reject and
terminate its lease with us. In such a case, our claim
against the tenant for unpaid, future rent would be
subject to a statutory cap that might be substantially
less than the remaining rent owed under the lease. In
addition, certain amounts paid to us within 90 days
prior to the tenant's bankruptcy filing could be
required to be returned to the tenant's bankruptcy
estate. In any event, it is highly unlikely that a
bankrupt or insolvent tenant would pay in full
amounts it owes us under a lease that it intends to
reject. In other circumstances, where a tenant's
financial condition has become impaired, we may
agree to partially or wholly terminate the lease in
advance of the termination date in consideration for a
lease termination fee that is likely less than the total
contractual rental amount. Without regard to the
manner in which the lease termination occurs, we are
likely to incur additional costs in the form of tenant
improvements and leasing commissions in our efforts
to lease the space to a new tenant. In any of the
foregoing circumstances, our financial performance
could be materially adversely affected.
Lease expirations,
terminations may adversely affect our revenue.
lease defaults and
lease
Lease expirations and lease terminations may result in
reduced revenues if the lease payments received from
replacement tenants are less than the lease payments
received from the expiring or terminating tenants. In
24
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
addition, lease defaults or lease terminations by one or
more significant tenants or the failure of tenants under
expiring leases to elect to renew their leases, could
cause us to experience long periods of vacancy with
no revenue from a facility and to incur substantial
capital expenditures and/or lease concessions to
obtain replacement tenants.
The real estate investments we expect to acquire will
be illiquid.
Because real estate investments are relatively illiquid,
our ability to adjust the portfolio promptly in response
to economic or other conditions will be limited.
Certain significant expenditures generally do not
change in response to economic or other conditions,
including: (i) debt service (if any), (ii) real estate
taxes, and (iii) operating and maintenance costs. This
combination of variable revenue and relatively fixed
expenditures may
result, under certain market
conditions, in reduced earnings and could have an
adverse effect on our financial condition.
loans
We may not control the special servicing of the
mortgage
the commercial
mortgage-backed securities in which we invest and,
in such cases, the special servicer may take actions
that could adversely affect our interests.
included
in
With respect to the commercial mortgage-backed
securities in which we may invest, overall control
over the special servicing of the related underlying
mortgage loans will be held by a “directing certificate
holder” or a “controlling class representative,” which
is appointed by the holders of the most subordinate
class of commercial mortgage-backed securities in
such series. To the extent that we acquire classes of
existing series of commercial mortgage-backed
securities originally rated AAA, we will not have the
right to appoint the directing certificate holder. In
connection with the servicing of the specially serviced
mortgage loans, the related special servicer may, at
the direction of the directing certificate holder, take
actions with respect to the specially serviced mortgage
loans that could adversely affect our interests.
We may be required to repurchase mortgage loans
or indemnify investors if we breach representations
and warranties, which could have a negative impact
on our earnings.
When we sell or securitize loans, we will be required
to make customary representations and warranties
about such
loan purchaser. Our
the
commercial mortgage loan sale agreements will
require us to repurchase or substitute loans in the
loans
to
event we breach a representation or warranty given to
the loan purchaser. In addition, we may be required to
repurchase loans as a result of borrower fraud or in
the event of early payment default on a mortgage
loan. Likewise, we may be required to repurchase or
substitute loans if we breach a representation or
warranty in connection with our securitizations. The
remedies available to a purchaser of mortgage loans
are generally broader than those available to us
the originating broker or correspondent.
against
Further, if a purchaser enforces its remedies against
us, we may not be able to enforce the remedies we
have against the sellers. The repurchased loans
typically can only be financed at a steep discount to
their repurchase price, if at all. They are also typically
sold at a significant discount to the unpaid principal
balance. Significant
could
adversely affect our cash flow, results of operations,
financial condition and business prospects.
repurchase
activity
We and our third party service providers’ and
servicers’ due diligence of potential assets may not
reveal all of the liabilities associated with such assets
and may not reveal other weaknesses in such assets,
which could lead to losses.
Before making an asset acquisition, we will assess the
strengths and weaknesses of the borrower, originator
or issuer of the asset as well as other factors and
characteristics that are material to the performance of
the asset. In making the assessment and otherwise
conducting customary due diligence, we will rely on
resources available to it, including our third party
service providers and servicers. This process is
particularly important with respect to newly formed
originators or issuers because there may be little or no
information publicly available about these entities and
assets. There can be no assurance that our due
diligence process will uncover all relevant facts or
that any asset acquisition will be successful.
When we foreclose on an asset, we may come to own
and operate the property securing the loan, which
would expose us to the risks inherent in that activity.
When we foreclose on an asset, we may take title to
the property securing that asset, and if we do not or
cannot sell the property, we would then come to own
and operate it as “real estate owned.” Owning and
operating real property involves risks that are different
(and in many ways more significant) than the risks
faced in owning an asset secured by that property. In
addition, we may end up owning a property that we
would not otherwise have decided to acquire directly
at the price of our original investment or at all.
Further, some of the property underlying the assets we
25
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
are acquiring are of a different type or class than
property we have had experience owning directly,
including properties such as hotels. Accordingly, we
may not manage these properties as well as they might
be managed by another owner, and our returns to
investors could suffer. If we foreclose on and come to
own property, our financial performance and returns
to investors could suffer.
rules
related
to certain of our
Accounting
transactions are highly complex and
involve
significant judgment and assumptions, and changes
in accounting treatment may adversely affect our
profitability and impact our financial results.
Accounting rules for mortgage
loan sales and
securitizations, valuations of financial instruments,
investment consolidations, acquisitions of real estate
and other aspects of our anticipated operations are
highly complex and involve significant judgment and
assumptions. These complexities could lead to a delay
in preparation of financial information and the
delivery of this information to our stockholders.
Changes in accounting interpretations or assumptions
could impact our financial statements and our ability
to prepare our financial statements in a timely fashion.
Our inability to prepare our financial statements in a
timely fashion in the future would likely adversely
affect our share price significantly.
The fair value at which our assets may be recorded
may not be an indication of their realizable value.
Ultimate realization of the value of an asset depends
to a great extent on economic and other conditions.
Further, fair value is only an estimate based on good
faith judgment of the price at which an investment can
be sold since market prices of investments can only be
determined by negotiation between a willing buyer
and seller. If we were to liquidate a particular asset,
the realized value may be more than or less than the
amount at which such asset is valued. Accordingly,
the value of our common shares could be adversely
affected by our determinations regarding the fair value
of our investments, whether in the applicable period
or in the future. Additionally, such valuations may
fluctuate over short periods of time.
Risks Related to Our Relationship with Our
Manager
The management agreement was not negotiated on
an arm’s length basis and the terms, including fees
payable, may not be as favorable to us as if it were
negotiated with an unaffiliated third party.
Because the Manager is owned by members of our
the management agreement was
management,
developed by
Although our
related parties.
independent directors, who were responsible for
protecting our and our stockholders’ interests with
regard to the management agreement, had the benefit
of external financial and legal advisors, they did not
have the benefit of arm’s-length advice from our
executive officers. The terms of the management
agreement, including fees payable, may not reflect the
terms we may have received if it was negotiated with
an unrelated third party. In addition, particularly as a
result of our relationship with the principal owners
and employees of the Manager, our directors may
choose not to enforce, or to enforce less vigorously,
our rights under the management agreement because
of our desire to maintain our ongoing relationship
with our Manager.
There may be conflicts of interest between us and
our executive officers.
is owned by members of our
The Manager
management. The owners of the Manager will be
entitled to receive any profit from the management fee
we pay to our Manager either in the form of
distributions by our Manager or increased value of
their ownership interests in the Manager. This may
cause our management to have interests that conflict
with our interests and those of our stockholders.
We are dependent upon the Manager who provides
services to us through the management agreement
and we may not find suitable replacements for our
Manager
is
terminated or the Manager’s key personnel are no
longer available to us.
the management agreement
if
The Manager is responsible for making all of our
investment decisions. We believe that the successful
implementation of our investment and financing
strategies depend upon the experience of certain of the
Manager’s officers and employees. None of these
individuals’ continued service is guaranteed. If the
these
management agreement
individuals leave the Manager, the Manager or we
may be unable to replace them with persons with
appropriate experience, or at all, and we may not be
able to execute our business plan.
terminated or
is
The management fee is payable regardless of our
performance.
The Manager receives a management fee from us that
is based on a percentage of our stockholders’ equity,
regardless of the performance of our investment
portfolio (except to the extent that performance affects
26
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
our stockholders’ equity). For example, we pay our
Manager a management fee for a specific period even
if we experienced a net loss during the same period.
The Manager’s
substantial
entitlement
nonperformance-based compensation may reduce its
incentive to provide attractive risk-adjusted returns for
our investment portfolio. This in turn could limit our
ability to make distributions to our stockholders and
the market price of our common stock.
to
The fee structure of the management agreement may
limit the Manager’s ability to retain access to its key
personnel.
to
provide
the manager
The management agreement does not provide the
Manager with an incentive management fee that
would pay the Manager additional compensation as a
result of meeting or exceeding performance targets.
Some of our externally managed competitors pay their
managers an incentive management fee, which could
enable
additional
compensation to its key personnel. Thus, the lack of
an incentive fee in the management agreement may
limit the ability of the Manager to provide key
personnel with additional compensation for strong
performance, which could adversely affect
the
Manager’s ability to retain these key personnel. If the
Manager were not able to retain any of the key
personnel that will be providing services to the
Manager, it would have to find replacement personnel
to provide those services. Those replacement key
personnel may not be able to produce the same
operating results as the current key personnel.
Conflicts of interest could arise in connection with
our executive officers’ fiduciary duties.
Our current executive officers are members or
employees of the Manager while continuing to be
executive officers of Annaly. Our executive officers,
by virtue of their positions, have fiduciary duties to
our company and our stockholders. The duties of our
executive officers to us and our stockholders may
come into conflict with the interests of such officers in
their capacities as members or employees of the
Manager.
Risks Related to Our Taxation as a REIT
Our failure to qualify as a REIT would have adverse
tax consequences.
We believe that since 1997 we have qualified for
taxation as a REIT for federal income tax purposes
under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, and Treasury
Regulations promulgated thereunder (or the Code).
We plan to continue to meet the requirements for
taxation as a REIT. The determination that we are a
REIT requires an analysis of various factual matters
and circumstances that may not be totally within our
control. For example, to qualify as a REIT, at least
75% of our gross income must come from real estate
sources and 95% of our gross income must come from
real estate sources and certain other sources that are
itemized in the REIT tax laws. We are also required
to distribute to stockholders at least 90% of our REIT
taxable income (determined without regard to the
deduction for dividends paid and by excluding any net
capital gain). Even a technical or inadvertent mistake
could jeopardize our REIT status. Furthermore,
Congress and the Internal Revenue Service (IRS)
might make changes to the tax laws and regulations,
and the courts might issue new rulings that make it
more difficult or impossible for us to remain qualified
as a REIT.
If we fail to qualify as a REIT, we would be subject to
federal income tax at regular corporate rates. Also,
unless the IRS granted us relief under certain statutory
provisions, we would remain disqualified as a REIT
for four years following the year we first fail to
qualify. If we fail to qualify as a REIT, we would
have to pay significant income taxes and would
therefore have less money available for investments or
for distributions to our stockholders. This would
likely have a significant adverse effect on the value of
our securities. In addition, the tax law would no
longer require us to make distributions to our
stockholders.
A REIT that fails the quarterly asset tests for one or
more quarters will not lose its REIT status as a result
of such failure if either (i) the failure is regarded as a
de minimis failure under standards set out in the
Code, or (ii) the failure is greater than a de minimis
failure but is attributable to reasonable cause and not
willful neglect. In the case of a greater than de
minimis failure, however, the REIT must pay a tax
and must remedy the failure within 6 months of the
close of the quarter in which the failure was
identified. In addition, the Code provides relief for
failures of other tests imposed as a condition of REIT
qualification, as long as the failures are attributable to
reasonable cause and not willful neglect. A REIT
would be required to pay a penalty of $50,000,
however, in the case of each failure.
We have certain distribution requirements, which
27
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
could adversely affect our ability to execute our
business plan.
As a REIT, we must distribute at least 90% of our
REIT taxable income (determined without regard to
the deduction for dividends paid and by excluding any
net capital gain). The required distribution limits the
amount we have available for other business purposes,
including amounts to fund our growth. Also, it is
possible that because of the differences between the
time we actually receive revenue or pay expenses and
the period we report those items for distribution
purposes, we may have to borrow funds on a short-
term basis to meet the 90% distribution requirement.
the extent
income, we will be subject
To
this distribution
that we satisfy
requirement, but distribute less than 100% of our
taxable
to federal
corporate income tax on our undistributed taxable
income. In addition, we will be subject to a non-
deductible 4% excise tax if the actual amount that we
pay out to our stockholders in a calendar year is less
than a minimum amount specified under federal tax
laws. We
to our
stockholders to comply with the REIT qualification
requirements of the Code.
to make distributions
intend
From time to time, we may generate taxable income
greater than our income for financial reporting
purposes prepared in accordance with GAAP, or
differences in timing between the recognition of
taxable income and the actual receipt of cash may
occur. For example, if we purchase agency securities
at a discount, we are generally required to accrete the
discount into taxable income prior to receiving the
cash proceeds of the accreted discount at maturity. If
we do not have other funds available in these
situations we could be required to borrow funds on
unfavorable
at
disadvantageous prices or distribute amounts that
would otherwise be invested in future acquisitions to
make distributions sufficient to enable us to pay out
enough of our taxable income to satisfy the REIT
distribution requirement and
to avoid corporate
income tax and the 4% excise tax in a particular year.
These scenarios could increase our costs or reduce our
stockholders' equity. Thus, compliance with the REIT
requirements may hinder our ability to grow, which
could adversely affect the value of our common stock.
investments
terms,
sell
Limits on ownership of our common stock could
have adverse consequences to you and could limit
your opportunity to receive a premium on our stock.
To maintain our qualification as a REIT for federal
income tax purposes, not more than 50% in value of
28
to
the outstanding shares of our capital stock may be
owned, directly or indirectly, by five or fewer
individuals (as defined in the federal tax laws to
include certain entities). Primarily
facilitate
maintenance of our qualification as a REIT for federal
income tax purposes, our charter prohibits ownership,
directly or by the attribution provisions of the federal
tax laws, by any person of more than 9.8% of the
lesser of the number or value of the issued and
outstanding shares of our common stock and will
prohibit ownership, directly or by the attribution
provisions of the federal tax laws, by any person of
more than 9.8% of the lesser of the number or value
of the issued and outstanding shares of any class or
series of our preferred stock. Our board of directors,
in its sole and absolute discretion, may waive or
modify the ownership limit with respect to one or
more persons who would not be
treated as
“individuals” for purposes of the federal tax laws if it
is satisfied, based upon information required to be
provided by the party seeking the waiver and upon an
opinion of counsel satisfactory to the board of
directors, that ownership in excess of this limit will
not otherwise jeopardize our status as a REIT for
federal income tax purposes.
The ownership limit may have the effect of delaying,
deferring or preventing a change in control and,
therefore, could adversely affect our stockholders’
ability to realize a premium over the then-prevailing
market price for our common stock in connection with
a change in control.
A REIT cannot invest more than 25% of its total
assets in the stock or securities of one or more
taxable REIT subsidiaries; therefore, our taxable
subsidiaries cannot constitute more than 25% of our
total assets.
A taxable REIT subsidiary (or TRS) is a corporation,
other than a REIT or a qualified REIT subsidiary, in
which a REIT owns stock and which elects TRS
status. The term also includes a corporate subsidiary
in which the TRS owns more than a 35% interest. A
REIT may own up to 100% of the stock of one or
more taxable REIT subsidiaries. A TRS may earn
income that would not be qualifying income if it was
earned directly by the parent REIT. Overall, at the
close of any calendar quarter, no more than 25% of
the value of a REIT’s assets may consist of stock or
securities of one or more taxable REIT subsidiaries.
taxable REIT
The stock and securities of our
subsidiaries are expected to represent less than 25% of
the value of our total assets. Furthermore, we intend
to monitor the value of our investments in the stock
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
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and securities of our taxable REIT subsidiaries to
ensure compliance with the above-described 25%
limitation. We cannot assure you, however, that we
will always be able to comply with the 25% limitation
so as to maintain REIT status.
Taxable REIT subsidiaries are subject to tax at the
regular corporate rates, are not required to distribute
dividends, and the amount of dividends a TRS can
pay to its parent REIT may be limited by REIT gross
income tests.
A TRS must pay income tax at regular corporate rates
on any income that it earns. Our taxable REIT
subsidiaries will pay corporate income tax on their
taxable income, and their after-tax net income will be
available for distribution to us.
Such income,
however, is not required to be distributed.
Moreover, the annual gross income tests that must be
satisfied to ensure REIT qualification may limit the
amount of dividends that we can receive from our
taxable REIT subsidiaries and still maintain our REIT
status. Generally, not more than 25% of our gross
income can be derived from non-real estate related
sources, such as dividends from a TRS. If, for any
taxable year, the dividends we received from our
taxable REIT subsidiaries, when added to our other
items of non-real estate related income, represented
more than 25% of our total gross income for the year,
we could be denied REIT status, unless we were able
to demonstrate, among other things, that our failure of
the gross income test was due to reasonable cause and
not willful neglect.
The limitations imposed by the REIT gross income
tests may impede our ability to distribute assets from
our taxable REIT subsidiaries to us in the form of
dividends. Certain asset transfers may, therefore,
have to be structured as purchase and sale transactions
upon which our taxable REIT subsidiaries recognize a
taxable gain.
If interest accrues on indebtedness owed by a TRS to
its parent REIT at a rate in excess of a commercially
reasonable rate, or if transactions between a REIT
and a TRS are entered into on other than arm’s-
length terms, the REIT may be subject to a penalty
tax.
its parent REIT at a rate
If interest accrues on an indebtedness owed by a TRS
to
in excess of a
commercially reasonable rate, the REIT is subject to
tax at a rate of 100% on the excess of (i) interest
payments made by a TRS to its parent REIT over (ii)
the amount of interest that would have been payable
the
interest accrued on
indebtedness at a
had
commercially reasonable rate. A tax at a rate of 100%
is also imposed on any transaction between a TRS and
its parent REIT to the extent the transaction gives rise
to deductions to the TRS that are in excess of the
deductions that would have been allowable had the
transaction been entered into on arm’s-length terms.
While we will scrutinize all of our transactions with
our taxable REIT subsidiaries in an effort to ensure
that we do not become subject to these taxes, there is
no assurance that we will be successful. We may not
be able to avoid application of these taxes.
We may in the future choose to pay dividends in our
own stock, in which case you may be required to pay
income taxes in excess of the cash dividends you
receive.
We may in the future distribute taxable dividends that
are payable in cash and shares of our common stock at
the election of each stockholder. Taxable stockholders
receiving such dividends will be required to include
the full amount of the dividend as ordinary income to
the extent of our current and accumulated earnings
and profits for U.S. federal income tax purposes. As a
result, stockholders may be required to pay income
taxes with respect to such dividends in excess of the
cash dividends received. If a U.S. stockholder sells the
stock that it receives as a dividend in order to pay this
tax, the sales proceeds may be less than the amount
included in income with respect to the dividend,
depending on the market price of our stock at the time
of the sale. Furthermore, with respect to certain non-
U.S. stockholders, we may be required to withhold
U.S. tax with respect to such dividends, including in
respect to all or a portion of such dividend that is
payable in stock. In addition, if a significant number
of our stockholders determine to sell shares of our
common stock in order to pay taxes owed on
dividends, it may put downward pressure on the
trading price of our common stock.
Even if we remain qualified as a REIT, we may face
other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT,
we may be subject to certain federal, state and local
taxes on our income and assets, including taxes on
any undistributed income, tax on income from some
activities conducted as a result of a foreclosure, excise
taxes, state or local income, property and transfer
taxes, such as mortgage recording taxes, and other
taxes. In addition, in order to meet the REIT
qualification requirements, prevent the recognition of
certain types of non-cash income, or to avert the
imposition of a 100% tax that applies to certain gains
29
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
derived by a REIT from dealer property or inventory,
we may hold some of our assets through our TRSs or
other subsidiary corporations that will be subject to
corporate level income tax at regular rates.
Complying with REIT requirements may cause us to
forgo otherwise attractive opportunities.
satisfy
continually
To remain qualified as a REIT for federal income tax
tests
purposes, we must
concerning, among other things, the sources of our
income, the nature and diversification of our assets,
the amounts that we distribute to our stockholders and
the ownership of our stock. We may be required to
make distributions to stockholders at disadvantageous
times or when we do not have funds readily available
for distribution, and may be unable to pursue
investments that would be otherwise advantageous to
us in order to satisfy the source-of-income or asset-
diversification requirements for qualifying as a REIT.
Thus, compliance with the REIT requirements may
hinder our ability to make and, in certain cases, to
maintain ownership of, certain attractive investments.
Complying with REIT requirements may force us to
liquidate otherwise attractive investments.
To remain qualified as a REIT, we must ensure that at
the end of each calendar quarter, at least 75% of the
value of our assets consists of cash, cash items,
government securities and qualified REIT real estate
assets. The remainder of our investment in securities
(other than government securities and qualified real
estate assets) generally cannot include more than 10%
of the outstanding voting securities of any one issuer
or more than 10% of the total value of the outstanding
securities of any one issuer. In addition, in general, no
more than 5% of the value of our assets (other than
government securities and qualified real estate assets)
can consist of the securities of any one issuer, and no
more than 25% of the value of our total securities can
be represented by securities of one or more TRSs. If
we fail to comply with these requirements at the end
of any calendar quarter, we must correct the failure
within 30 days after the end of the calendar quarter or
qualify for certain statutory relief provisions to avoid
losing our REIT qualification and suffering adverse
tax consequences. As a result, we may be required to
liquidate from our investment portfolio otherwise
attractive investments. These actions could have the
effect of reducing our income and amounts available
for distribution to our stockholders.
Liquidation of assets may jeopardize our REIT
qualification or create additional tax liability for us.
To remain qualified as a REIT, we must comply with
requirements regarding the composition of our assets
and our sources of income. If we are compelled to
liquidate our investments to repay obligations to our
lenders, we may be unable to comply with these
our
requirements,
qualification as a REIT, or we may be subject to a
100% tax on any resultant gain if we sell assets that
are treated as dealer property or inventory.
jeopardizing
ultimately
Complying with REIT requirements may limit our
ability to hedge effectively and may cause us to incur
tax liabilities.
The REIT provisions of the Code could substantially
limit our ability to hedge our liabilities. Any income
from a properly designated hedging transaction we
enter into to manage risk of interest rate changes with
respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or
carry real estate assets generally does not constitute
"gross income" for purposes of the 75% or 95% gross
income tests. To the extent that we enter into other
types of hedging transactions, the income from those
transactions is likely to be treated as non-qualifying
income for purposes of both of the gross income tests.
As a result of these rules, we may have to limit our
use of advantageous hedging techniques or implement
those hedges through our TRSs. This could increase
the cost of our hedging activities because our TRSs
would be subject to tax on gains or expose us to
greater risks associated with changes in interest rates
than we would otherwise want to bear. In addition,
losses in our TRSs will generally not provide any tax
benefit, except for being carried forward against
future taxable income in the TRSs.
The failure of a mezzanine loan or similar debt to
qualify as a real estate asset could adversely affect
our ability to qualify as a REIT.
We invest in mezzanine loans and similar debt, for
which the IRS has provided a safe harbor but not rules
of substantive law. Pursuant to the safe harbor, if a
mezzanine loan meets certain requirements, it will be
treated by the IRS as a real estate asset for purposes of
the REIT asset tests, and interest derived from the
mezzanine loan will be treated as qualifying mortgage
interest for purposes of the REIT 75% income test.
We may acquire mezzanine loans or similar debt that
do not meet all of the requirements of this safe harbor.
In the event we own a mezzanine loan or similar debt
that does not meet the safe harbor, the IRS could
challenge such loan's treatment as a real estate asset
for purposes of the REIT asset and income tests and,
if such a challenge were sustained, we could fail to
30
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
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qualify as a REIT.
Qualifying as a REIT involves highly technical and
complex provisions of the Code.
limited
Qualification as a REIT involves the application of
highly technical and complex Code provisions for
which only
judicial and administrative
authorities exist. Even a technical or inadvertent
violation could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of
certain asset, income, organizational, distribution,
stockholder ownership and other requirements on a
continuing basis. In addition, our ability to satisfy the
REIT qualification requirements depends in part on
the actions of third parties over which we have no
control or only limited influence, including in cases
where we own an equity interest in an entity that is
classified as a partnership for federal income tax
purposes.
The 100% tax on prohibited transactions will limit our
ability to engage in transactions, including certain
methods of structuring CMOs, which would be treated
as prohibited transactions for federal income tax
purposes.
The term "prohibited transaction" generally includes a
sale or other disposition of property (including agency
securities, but other than foreclosure property, as
discussed below) that is held primarily for sale to
customers in the ordinary course of a trade or business
by us or by a borrower that has issued a shared
appreciation mortgage or similar debt instrument to
us. We could be subject to this tax if we were to
dispose of or structure CMOs in a manner that was
treated as a prohibited transaction for federal income
tax purposes.
We intend to conduct our operations at the REIT level
so that no asset that we own (or are treated as owning)
will be treated as, or as having been, held for sale to
customers, and that a sale of any such asset will not be
treated as having been in the ordinary course of our
business. As a result, we may choose not to engage in
certain transactions at the REIT level, and may limit
the structures we utilize for our CMO transactions,
even though the sales or structures might otherwise be
beneficial to us. In addition, whether property is held
"primarily for sale to customers in the ordinary course
of a trade or business" depends on the particular facts
and circumstances. No assurance can be given that
any property that we sell will not be treated as
property held for sale to customers, or that we can
comply with certain safe-harbor provisions of the
Code that would prevent such treatment. The 100%
is held
through a TRS or other
tax does not apply to gains from the sale of property
that
taxable
corporation, although such income will be subject to
tax in the hands of the corporation at regular corporate
rates. We intend to structure our activities to avoid
prohibited transaction characterization.
New legislation or administrative or judicial action,
in each instance potentially with retroactive effect,
could make it more difficult or impossible for us to
remain qualified as a REIT.
The present federal income tax treatment of REITs
may be modified, possibly with retroactive effect, by
legislative, judicial or administrative action at any
time, which could affect the federal income tax
treatment of an investment in us. The federal income
tax rules dealing with REITs constantly are under
review by persons involved in the legislative process,
the IRS and the U.S. Treasury Department, which
results in statutory changes as well as frequent
revisions to regulations and interpretations. Revisions
in federal tax laws and interpretations thereof could
affect or cause us to change our investments and
commitments and affect the tax considerations of an
investment in us.
Uncertainty exists with respect to the treatment of
our TBAs for purposes of the REIT asset and
income tests.
We purchase and sell Agency mortgage-backed
securities through TBAs and recognize income or
gains from the disposition of those TBAs, through
dollar roll transactions or otherwise, and may continue
to do so in the future. While there is no direct
authority with respect to the qualification of TBAs as
real estate assets or U.S. Government securities for
purposes of the 75% asset test or the qualification of
income or gains from dispositions of TBAs as gains
from the sale of real property (including interests in
real property and interests in mortgages on real
property) or other qualifying income for purposes of
the 75% gross income test, we treat our TBAs as
qualifying assets for purposes of the REIT asset tests,
and we treat income and gains from our TBAs as
qualifying income for purposes of the 75% gross
income test, based on an opinion of K&L Gates LLP
substantially to the effect that (i) for purposes of the
REIT asset tests, our ownership of a TBA should be
treated as ownership of
the underlying agency
securities, and (ii) for purposes of the 75% REIT
gross income test, any gain recognized by us in
connection with the settlement of our TBAs should be
treated as gain from the sale or disposition of the
underlying agency securities. Opinions of counsel are
31
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
is
and
and
not binding on the IRS, and no assurance can be given
that the IRS will not successfully challenge the
conclusions set forth in such opinions. In addition, it
must be emphasized that the opinion of K&L Gates
LLP is based on various assumptions relating to our
fact-based
upon
conditioned
TBAs
representations
covenants made by our
management regarding our TBAs. No assurance can
be given that the IRS would not assert that such assets
or income are not qualifying assets or income. If the
IRS were to successfully challenge the opinion of
K&L Gates LLP, we could be subject to a penalty tax
or we could fail to remain qualified as a REIT if a
sufficient portion of our assets consists of TBAs or a
sufficient portion of our income consists of income or
gains from the disposition of TBAs.
Dividends payable by REITs generally do not qualify
for the reduced tax rates on dividend income from
regular corporations.
The maximum U.S. federal income tax rate for certain
qualified dividends payable to domestic stockholders
that are individuals, trusts, and estates is 20%.
Dividends payable by REITs, however, are generally
not eligible for the reduced rates and therefore may be
subject to a 39.6% maximum U.S. federal income tax
rate on ordinary income. The more favorable rates
applicable to regular corporate dividends could cause
investors who are individuals, trusts, and estates to
perceive investments in REITs to be relatively less
attractive than investments in the stock of non-REIT
corporations
that pay dividends, which could
adversely affect the value of the shares of REITs,
including our shares.
Risks of Ownership of Our Common Stock
The market price and trading volume of our shares
of common stock may be volatile and issuances of
large amounts of shares of our common stock could
cause the market price of our common stock to
decline.
If we issue a significant number of shares of common
stock or securities convertible into common stock in a
short period of time, there could be a dilution of the
existing common stock and a decrease in the market
price of the common stock.
The market price of our shares of common stock may
be highly volatile and could be subject to wide
fluctuations. In addition, the trading volume in our
shares of common stock may fluctuate and cause
significant price variations to occur. We cannot assure
you that the market price of our shares of common
stock will not fluctuate or decline significantly in the
future. Some of the factors that could negatively affect
our share price or result in fluctuations in the price or
trading volume of our shares of common stock
include those set forth under “Special Note Regarding
Forward-Looking Statements” as well as:
in our
results or business
actual or anticipated variations
quarterly operating
prospects;
changes
in our earnings estimates or
publication of research reports about us or
the real estate industry;
an inability to meet or exceed securities
analysts' estimates or expectations;
increases in market interest rates;
hedging or arbitrage trading activity in our
shares of common stock;
capital commitments;
changes in market valuations of similar
companies;
adverse market reaction to any increased
indebtedness we incur in the future;
additions or departures of management
personnel;
actions by institutional stockholders;
speculation
community;
changes in our distribution policy;
general market and economic conditions; and
future sales of our shares of common stock
or
or
exchangeable or exercisable for, our shares
of common stock.
the press or
convertible
investment
securities
into,
in
Holders of our shares of common stock will be subject
to the risk of volatile market prices and wide
fluctuations in the market price of our shares of
common stock. These factors may cause the market
price of our shares of common stock to decline,
regardless of our financial condition, results of
operations, business or prospects. It is impossible to
assure you that the market prices of our shares of
common stock will not fall in the future.
There may be future sales or other dilution of our
equity, which may adversely affect the market price
of our common stock.
Under our charter, we have 2,000,000,000 authorized
shares of capital stock, par value of $0.01 per share.
Sales of a substantial number of shares of our
common stock or other equity-related securities in the
public market, or any hedging or arbitrage trading
activity that may develop involving our common
32
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
stock, could depress the market price of our common
stock and impair our ability to raise capital through
the sale of additional equity securities. We cannot
predict the effect that future sales of our common
stock or other equity-related securities would have on
the market price of our common stock.
Our charter does not permit ownership of over 9.8%
of our common or preferred stock and attempts to
acquire our common or preferred stock in excess of
the 9.8% limit are void without prior approval from
our board of directors.
For the purpose of preserving our REIT qualification
and for other reasons, our charter prohibits direct or
constructive ownership by any person of more than
9.8% of the lesser of the total number or value of the
outstanding shares of our common stock or more than
9.8% of the outstanding shares of our preferred stock.
Our charter’s constructive ownership rules are
complex and may cause the outstanding stock owned
by a group of related individuals or entities to be
deemed to be constructively owned by one individual
or entity. As a result, the acquisition of less than 9.8%
of the outstanding stock by an individual or entity
could cause
to own
constructively in excess of 9.8% of the outstanding
stock and thus be subject to our charter’s ownership
limit. Any attempt to own or transfer shares of our
common or preferred stock in excess of the ownership
limit without the consent of the board of directors
shall be void and will result in the shares being
transferred by operation of law to a charitable trust.
individual or entity
that
Provisions contained in Maryland law that are
reflected in our charter and bylaws may have an
anti-takeover effects, potentially preventing investors
from receiving a “control premium” for their shares.
Provisions contained in our charter and bylaws, as
well as Maryland corporate law, may have anti-
takeover effects that delay, defer or prevent a takeover
attempt, which may prevent stockholders from
receiving a “control premium” for their shares. For
example, these provisions may defer or prevent tender
offers for our common stock or purchases of large
blocks of our common stock, thereby limiting the
opportunities for our stockholders
to receive a
premium for their common stock over then-prevailing
market prices. These provisions include the following:
Ownership limit. The ownership limit in our
charter limits related investors including, among
other things, any voting group, from acquiring
over 9.8% of our common stock or more than
9.8% of our preferred stock without the consent
of our board of directors.
Preferred Stock. Our charter authorizes our
board of directors to issue preferred stock in one
or more classes and to establish the preferences
and rights of any class of preferred stock issued.
These actions can be taken without soliciting
stockholder approval.
business
combination
statute.
Maryland
Maryland law restricts the ability of holders of
more than 10% of the voting power of a
corporation’s shares to engage in a business
combination with the corporation.
Maryland control share acquisition statute.
Maryland law limits the voting rights of “control
shares” of a corporation in the event of a
“control share acquisition.”
The repurchase right in our Convertible Senior
Notes triggered by a fundamental change could
discourage a potential acquirer.
require us
If we undergo certain fundamental changes, such as
the acquisition of 50% of the voting power of all
shares of our common equity entitled
to vote
generally in the election of directors, holders of our
Convertible Senior Notes may
to
repurchase all or a portion of their notes at a price
equal to 100% of the principal amount of the notes to
be purchased plus any accrued and unpaid interest up
to, but excluding, the repurchase date. We will pay
for all notes so repurchased with shares of our
common stock using a price per share equal to the
average daily volume-weighted average price of our
common stock for the 20 consecutive trading days
ending on the trading day immediately prior to the
occurrence of the fundamental change. The issuance
of these shares of common stock upon certain
fundamental changes could discourage a potential
acquirer.
Broad market fluctuations could negatively impact
the market price of our shares of common stock.
The stock market has experienced extreme price and
volume fluctuations that have affected the market
price of many companies in industries similar or
related to ours and that have been unrelated to these
companies’ operating performance. These broad
market fluctuations could reduce the market price of
our shares of common stock. Furthermore, our
operating results and prospects may be below the
expectations of public market analysts and investors
or may be lower than those of companies with
comparable market capitalizations, which could lead
to a material decline in the market price of our shares
of common stock.
33
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Risk Factors
We have not established a minimum dividend
payment level.
We intend to pay quarterly dividends and to make
distributions to our stockholders in amounts such that
all or substantially all of our taxable income in each
year (subject to certain adjustments) is distributed.
This enables us to qualify for the tax benefits
accorded to a REIT under the Code. We have not
established a minimum dividend payment level and
our ability to pay dividends may be adversely affected
for the reasons described in this section.
All
distributions will be made at the discretion of our
board of directors and will depend on our earnings,
our financial condition, maintenance of our REIT
status and such other factors as our board of directors
may deem relevant from time to time.
Our reported GAAP financial results differ from the
taxable income results that impact our dividend
distribution requirements and, therefore, our GAAP
results may not be an accurate indicator of future
taxable income and dividend distributions.
the
this
timing of
Differences exist
Generally, the cumulative net income we report over
the life of an asset will be the same for GAAP and tax
income
purposes, although
recognition over the life of the asset could be
materially different.
the
accounting for GAAP net income and REIT taxable
income that can lead to significant variances in the
amount and timing of when income and losses are
recognized under these two measures. Due to these
differences, our reported GAAP financial results
could materially differ from our determination of
taxable income.
in
interest in real estate” (or Qualifying Real Estate
Assets) and at least 80% of our assets in Qualifying
Real Estate Assets plus real estate related assets. The
assets that we acquire, therefore, are limited by the
provisions of the Investment Company Act and the
the
rules and
Investment Company Act.
regulations promulgated under
interpretation
We rely on an
that “whole pool
certificates” that are issued or guaranteed by Fannie
Mae, Freddie Mac or Ginnie Mae (or Agency Whole
Pool Certificates) are Qualifying Real Estate Assets
under Section 3(c)(5)(C). This interpretation was
promulgated by the SEC staff in a no-action letter
over 30 years ago, was reaffirmed by the SEC in 1992
and has been commonly relied upon by mortgage
REITs.
to
in
related
Section
On August 31, 2011, the SEC issued a concept release
titled “Companies Engaged
the Business of
Acquiring Mortgages
and Mortgage-Related
Instruments” (SEC Release No. IC-29778). Under the
concept release, the SEC is reviewing interpretive
issues
3(c)(5)(C)
the
exemption. Among other things, the SEC requested
comments on whether it should revisit whether
Agency Whole Pool Certificates may be treated as
interests in real estate (and presumably Qualifying
Real Estate Assets) and whether companies, such as
us, whose primary business consists of investing in
Agency Whole Pool Certificates are the type of
entities that Congress intended to be encompassed by
the exclusion provided by Section 3(c)(5)(C). The
potential outcomes of the SEC’s actions are unclear as
is the SEC’s timetable for its review and actions.
Regulatory Risks
Loss of Investment Company Act exemption would
adversely affect us.
We intend to conduct our business so as not to
become regulated as an investment company under
the Investment Company Act of 1940, as amended (or
Investment Company Act). If we fail to qualify for
this exemption, our ability to use leverage would be
substantially reduced, and we would be unable to
conduct our business as we currently conduct it.
We currently rely on the exemption from registration
provided by Section 3(c)(5)(C) of the Investment
Company Act. Section 3(c)(5)(C) as interpreted by
the staff of the SEC, requires us to invest at least 55%
of our assets in “mortgages and other liens on and
34
If the SEC determines that any of these securities are
not Qualifying Real Estate Assets or real estate related
assets, adopts a contrary interpretation with respect to
Agency Whole Pool Certificates or otherwise believes
we do not satisfy the exemption under Section
3(c)(5)(C), we could be required to restructure our
activities or sell certain of our assets. The net effect of
these factors will be to lower our net interest
income. If we fail to qualify for exemption from
registration as an investment company, our ability to
use leverage would be substantially reduced, and we
would not be able to conduct our business as
described. Our business will be materially and
adversely affected if we fail to qualify for this
exemption.
Compliance with proposed and recently enacted
changes in securities laws and regulations increases
our costs.
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Risk Factors
The Dodd-Frank Act contains many regulatory
changes and calls for future rulemaking that may
affect our business, including, but not limited to
resolutions involving derivatives, risk-retention in
securitizations and short-term financings. We are
evaluating, and will continue to evaluate the potential
impact of regulatory change under the Dodd-Frank
Act.
Changes in laws or regulations governing our
operations or our failure to comply with those laws
or regulations may adversely affect our business.
We are subject to regulation by laws at the local, state
and federal level, including securities and tax laws
and financial accounting and reporting standards.
These
their
laws and regulations, as well as
interpretation, may be changed from time to time.
Accordingly, any change in these laws or regulations
or the failure to comply with these laws or regulations
could have a material adverse impact on our business.
Certain of
regulations pertain
laws and
specifically to REITs.
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35
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive and administrative office is located at
1211 Avenue of the Americas, Suite 2902 New York,
New York 10036, telephone 212-696-0100. This
office is leased under a non-cancelable lease expiring
December 31, 2014.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in various claims
and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate
disposition of these matters will not have a material
effect on our consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
None.
36
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of
Equity Securities
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading publicly on October
8, 1997 and is traded on the New York Stock Exchange
under the trading symbol “NLY.” As of February 10,
2014, we had 947,463,924 shares of common stock
issued and outstanding which were held by
approximately 488,000 beneficial holders.
The following table sets forth, for the periods indicated,
the high, low, and closing prices per share of our
common stock as reported on the New York Stock
Exchange composite tape and the cash dividends
declared per share of our common stock.
First quarter
Second quarter
Third quarter
Fourth quarter
High
$16.18
$16.00
$12.69
$12.22
Low
$14.12
$12.16
$10.63
$9.66
2013
Close
$15.89
$12.57
$11.58
$9.97
Common Dividends
Declared Per Share
$0.45
$0.40
$0.35
$0.30
High
$17.20
$17.19
$17.75
$16.93
Low
$15.52
$15.52
$16.00
$13.72
2012
Close
$15.82
$16.78
$16.84
$14.04
Common Dividends
Declared Per Share
$0.55
$0.55
$0.50
$0.45
On February 14, 2014, the last reported sale price of our
common stock on the New York Stock Exchange was
$10.80 per share.
We intend to pay quarterly dividends and to distribute
to our stockholders all or substantially all of our taxable
income in each year (subject to certain adjustments).
This will enable us to qualify for the tax benefits
accorded to a REIT under the Code. We have not
established a minimum dividend payment level and our
ability to pay dividends may be adversely affected for
the reasons described under the caption “Risk Factors.”
All distributions will be made at the discretion of our
board of directors and will depend on our earnings, our
financial condition, maintenance of our REIT status and
such other factors as our board of directors may deem
relevant from time to time. No dividends can be paid
on our common stock unless we have paid full
cumulative dividends on our preferred stock. From the
through
issuance of our preferred stock
date of
December 31, 2013, we have paid full cumulative
dividends on our preferred stock.
Share Performance Graph
The following graph and
table set forth certain
information comparing the yearly percentage change in
cumulative total return on our common stock to the
cumulative total return of the Standard & Poor’s
Composite 500 stock Index or S&P 500 Index, and the
Bloomberg REIT Mortgage Index, or BBG REIT index,
an industry index of mortgage REITs. The comparison
is for the period from December 31, 2008 to December
31, 2013 and assumes the reinvestment of dividends.
The graph and table assume that $100 was invested in
our common stock and the two other indices on
December 31, 2008. Upon written request we will
provide stockholders with a list of the REITs included
in the BBG REIT Index.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of
Equity Securities
200
175
150
125
100
75
50
25
0
100
100
121
79
73
139
141
91
86
92
85
142
106
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137
128
94
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
Annaly Capital Management, Inc.
S&P 500 Index
BBG Reit Index
Annaly Capital Management,
S&P 500 Index
BBG Reit Index
12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013
128
137
94
141
92
85
100
100
100
142
106
95
139
91
86
121
79
73
The information in the share performance graph and table has been obtained from sources believed to be reliable, but
neither its accuracy nor its completeness can be guaranteed. The historical information set forth above is not
necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future
share performance.
38
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of
Equity Securities
Equity Compensation Plan Information
On May 27, 2010, at our 2010 Annual Meeting of
Stockholders, our stockholders approved the 2010
Equity Incentive Plan. The 2010 Equity Incentive Plan
authorizes the Compensation Committee of the board of
directors to grant options, stock appreciation rights,
dividend equivalent rights, or other share-based awards,
including restricted shares up to an aggregate of
25,000,000 shares, subject to adjustments as provided in
the 2010 Equity Incentive Plan. For a description of our
2010 Equity Incentive Plan, see Notes to Consolidated
Financial Statements.
We had previously adopted a long term stock incentive
plan for executive officers, key employees and
nonemployee directors (the Incentive Plan). Since the
adoption of the 2010 Equity Incentive Plan, no further
awards will be made under the Incentive Plan, although
existing awards will remain effective. All stock options
issued under the 2010 Equity Incentive Plan and
Incentive Plan (the Incentive Plans) were issued at the
current market price on the date of grant, subject to an
four equal
four year vesting
immediate or
installments with a contractual term of 5 or 10 years.
The grant date fair value is calculated using the Black-
Scholes option valuation model. For a description of
our Incentive Plan, see Notes to Consolidated Financial
Statements.
in
The following
information as of
December 31, 2013 concerning shares of our common
stock authorized for issuance under the Incentive Plans.
table provides
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available for
future issuance under the
Incentive Plans (excluding
previously issued)
(dollars in thousands)
15.44 26,833,804
-
3,581,752 15.44 26,833,804
3,581,752
-
Share Repurchases
On October 16, 2012 the Company announced that its
board of directors authorized the repurchase of up to
$1.5 billion of its outstanding common shares over a 12
month period. The repurchase plan expired on October
16, 2013 and there were no purchases made by or on
behalf of us or any “affiliated purchaser” (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of
1934, as amended), of our common stock during the
quarter ended December 31, 2013.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Selected Financial Data
ITEM 6.
SELECTED FINANCIAL DATA
read
in
The selected
conjunction with
information
contained in the Financial Statements and Notes thereto
financial data should be
the more detailed
and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”
included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
Statement of Operations Data:
2013
For the Years Ended December 31,
2010
2012
2011
2009
Total interest income
Total interest expense
Net interest income
Other income (loss)
General and administrative expenses
Income (loss) before income taxes and income
from equity method investment in affiliate
Income (loss) from equity method investment in
affiliate
Income taxes
Net income (loss)
Dividends on preferred stock
Net income (loss) available (related) to common
shareholders
Net income (loss) per share available (related) to
common shareholders:
Basic
Diluted
Weighted average number of common shares
outstanding:
(dollars in thousands, except per share data)
$ 2,922,602
$ 2,683,134
$ 2,918,562 $ 3,259,145 $ 3,579,618
480,326 428,225 575,959
667,172
624,714
3,099,292 2,254,909 2,346,643
2,591,973
2,293,848
(584,602) (2,459,576) (783,293) (218,631)
1,676,144
237,344 171,847 131,908
235,559
232,081
3,737,911
1,771,812
402,372
1,299,769 1,996,104
-
8,213
3,729,698
71,968
- 1,140 2,945 (252)
34,381
1,267,280 1,961,471
18,501
59,051
344,461
16,854
35,912
1,735,900
39,530
35,434
18,033
$ 3,657,730 $ 1,696,370 $ 327,607
$ 1,249,247
$ 1,942,970
$3.86
$3.74
$1.74
$1.71
$0.37
$0.37
$2.12
$2.04
$3.55
$3.52
Basic
Diluted
947,337,915 972,902,459 874,212,039 588,192,659 546,973,036
1,005,755,057 874,518,938 625,307,174 553,130,643
995,557,026
Other Financial Data:
Total assets
6.00% Series B Cumulative Convertible Preferred
Stock
Total stockholders' equity
Dividends declared per common share
$
81,922,460
$
133,452,295
$
109,630,002
$
83,026,590
$
69,376,190
$
-
$
$
12,405,055
1.50
$
-
$
$
15,924,444
2.05
$
$
$
32,272
15,760,642
2.44
$
$
$
40,032
9,864,900
2.65
$
$
$
63,114
9,554,426
2.54
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special
Statements
Note
Regarding
Forward-Looking
Certain statements contained in this annual report, and
certain statements contained in our future filings with
the Securities and Exchange Commission (the SEC or
the Commission), in our press releases or in our other
public or stockholder communications may not be based
on historical facts and are "forward-looking statements"
within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking
statements, which are based on various assumptions,
(some of which are beyond our control) may be
identified by reference to a future period or periods, or
by the use of forward-looking terminology, such as
"may,"
"anticipate,"
"continue," or similar terms or variations on those
terms, or the negative of those terms. Actual results
could differ materially from those set forth in forward-
looking statements due to a variety of factors, including,
but not limited to, changes in interest rates, changes in
the yield curve, changes in prepayment rates, the
availability of mortgage-backed securities and other
securities for purchase, the availability of financing,
and, if available, the terms of any financing, changes in
the market value of our assets, changes in business
conditions and the general economy, our ability to grow
the commercial mortgage business, credit risks related
to our investments in commercial real estate assets and
"believe,"
"expect,"
"will,"
transactions, changes
to consummate any
corporate debt, our ability
investment opportunities and other
contemplated
in governmental
corporate
regulations affecting our business, our ability
to
maintain our classification as a real estate investment
trust (or REIT) for federal income tax purposes, our
ability to maintain our exemption from registration
under the Investment Company Act of 1940, as
amended (or Investment Company Act), and risks
the business of our subsidiaries,
associated with
including the investment advisory businesses of our
subsidiary, and risks associated with the broker dealer
business of our subsidiary. For a discussion of the risks
and uncertainties which could cause actual results to
differ from those contained in the forward-looking
statements, see the information under the caption “Risk
Factors” contained in this Form 10-K. We do not
undertake and specifically disclaim any obligation, to
publicly release the result of any revisions which may
be made to any forward-looking statements to reflect
the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
All references to “Annaly”,“we,” “us,” or “our” mean
Annaly Capital Management, Inc. and all entities
owned by us, except where it is made clear that the term
means only the parent company. Refer to the Glossary
of Terms for definitions of commonly used terms in this
annual report on Form 10-K.
41
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Page
Overview……………………………………………………………………………………………43
Business Environment…………………………………………………………………………… 43
Economic Environment……………………………………………………………………………43
Financial Regulatory Reform…………………………………………………………………… 45
Results of Operations…………………………………………………………………………… 45
Net Income Summary…………………………………………………………………………… 45
Non-GAAP Financial Measures………………………………………………………………… 46
Core Earnings Summary………………………………………………………………………… 47
Economic Interest Expense and Economic Net Interest Income………………………………… 47
Interest Income and Average Earning Asset Yield……………………………………………… 48
Economic Interest Expense and the Cost of Interest-Bearing Liabilities………………………… 48
Economic Net Interest Income……………………………………………………………………49
Other Income…………………………………………………………………………………… 50
General and Administrative Expenses…………………………………………………………… 50
Unrealized Gains and Losses…………………………………………………………………… 51
Net Income and Return on Average Equity……………………………………………………… 52
Financial Condition……………………………………………………………………………… 52
Investment Securities…………………………………………………………………………… 52
Contractual Obligations………………………………………………………………………… 54
Off-Balance Sheet Arrangements………………………………………………………………… 55
Capital Management………………………………………………………………………………55
Stockholders’ Equity…………………………………………………………………………… 56
Common and Preferred Stock…………………………………………………………………… 56
Distributions to Stockholders…………………………………………………………………… 57
Leverage and Capital………………………………………………………………………………57
Risk Management…………………………………………………………………………………58
Risk Developments in 2013……………………………………………………………………… 58
Risk Appetite…………………………………………………………………………………… 58
Governance……………………………………………………………………………………… 59
Description of Risks………………………………………………………………………………61
Liquidity Risk Management……………………………………………………………………… 61
Funding…………………………………………………………………………………………61
Excess Liquidity……………………………………………………………………………… 62
Maturity Profile…………………………………………………………………………………63
Stress Testing………………………………………………………………………………… 65
Liquidity Management Policies…………………………………………………………………66
Investment/Market Risk Management…………………………………………………………… 66
Credit and Counterparty Risk Management……………………………………………………… 67
Operational Risk Management…………………………………………………………………… 69
Compliance, Regulatory and Legal Risk Management…………………………………………… 69
Critical Accounting Policies………………………………………………………………………69
Valuation of Financial Instruments……………………………………………………………… 69
Revenue Recognition………………………...……………………………………………………70
Use of Estimates………………………...……………………………………………………… 70
Glossary of Terms………………………...………………………………………………………71
42
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Overview
We are a leading mortgage REIT that is externally
managed by Annaly Management Company LLC (or
Manager). Our common stock is listed on the New York
Stock Exchange under the symbol “NLY”. Since our
founding in 1997, we have strived to generate net
income for distribution to our stockholders through the
prudent selection and management of our investments.
We own a portfolio of real estate related investments.
We use our capital coupled with borrowed funds to
invest in real estate related investments, earning the
spread between the yield on our assets and the cost of
our borrowings.
We are organized around the following operations:
Annaly, the parent company
Annaly Commercial Real Estate Group, Inc. (or
ACREG) (formerly known as CreXus Investment
Corp. (or CreXus))
RCap Securities, Inc.
Fixed Income Discount Advisory Company (or
FIDAC)
Annaly Middle Market Lending LLC
Shannon Funding LLC
Our asset portfolio was $75.1 billion as of December
31, 2013 compared to $127.0 billion as of December
31, 2012, reflecting a decrease in Agency mortgage-
backed securities partially offset by an increase in
commercial real estate debt and preferred equity related
to our acquisition of CreXus during the second quarter
of 2013. ACREG represented approximately 2.1% of
our asset portfolio as of December 31, 2013.
We generated net income of $3.7 billion, or $3.86 per
basic share for the year ended December 31, 2013
compared to $1.7 billion, or $1.74 per basic share for
the same period in 2012. Leverage at December 31,
2013 and 2012 was 5.0:1 and 6.5:1, respectively. At
December 31, 2013 and 2012 the Company’s capital
ratio was 15.1% and 11.9%, respectively. We produced
a return on average equity for the years ended
December 31, 2013 and 2012 of 26.7% and 10.7%,
respectively. At December 31, 2013 and 2012, the
Company had a common stock book value per share of
$12.13 and $15.85, respectively.
Invests primarily in various types of Agency mortgage-
backed securities and related derivatives to hedge these
investments.
Wholly-owned subsidiary that was acquired during the
second quarter of 2013 and specializes in acquiring,
financing and managing commercial mortgage loans and
other commercial real estate debt, commercial mortgage-
backed securities and other commercial real estate-
related assets.
Wholly-owned subsidiary that operates as a broker-
dealer, and is a member of the Financial Industry
Regulatory Authority.
Wholly-owned subsidiary that manages an affiliated
REIT for which it earns fee income.
Wholly-owned subsidiary that engages in corporate
middle market lending transactions.
Wholly-owned subsidiary
residential
mortgage loans and provides warehouse financing to
residential mortgage originators in the United States.
that acquires
Business Environment
We have been decreasing leverage quarter-over-quarter
amid sustained government involvement in the Agency
mortgage-backed securities market and in the interest
rate markets. We have also been cautious because we
believe
is
possible, but it is unclear how the outcome of such
reform may affect us.
regulatory
increased
financial
reform
Economic Environment
Economic growth, as measured by real gross domestic
product (or GDP), improved steadily throughout 2013,
from a seasonally-adjusted annual rate of 1.1% in the
first quarter to 2.5% in the second quarter and 4.1% in
the third quarter, according to the Bureau of Economic
Analysis. However, an unusually high buildup in
inventories boosted the headline growth number. Real
final sales, or GDP growth without the effect of change
inventories, showed underlying growth at a
in
43
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
lackluster, though improving, annualized rate of 0.2%,
2.1% and 2.5% in each respective quarter. While the
economy appears stable, the details beyond headline
economic
typically not
associated with a strong recovery.
reveal weakness
reports
The Federal Reserve (or Fed) currently conducts
monetary policy with a dual mandate: full employment
and price stability. The employment situation improved
throughout 2013, with average monthly
steadily
employment increases of approximately 195,000 in the
first half and approximately 189,000 in the second half
of the year through November 2013, roughly equal to
job growth in 2012 (according to the Bureau of Labor
Services). While
the unemployment rate dropped
steadily, it remains elevated and the decline has
primarily been the result of reduced labor force
participation, as more people left the labor force from
July 2013 to November 2013 than were hired. Inflation
trended to the downside throughout the year, missing
the Fed’s 2% target. After ending 2012 at 1.6%, the
annual growth in the Fed’s preferred price measure, or
core PCE which is defined as personal consumption
expenditure prices excluding food and energy prices,
declined steadily, dropping to just above 1% in
November 2013. The Federal Open Market Committee
(FOMC or the Committee) has noted that “inflation
persistently below its 2 percent objective could pose
risks to economic performance,” but expects that
inflation will eventually
its
objective.
trend back
towards
The FOMC aimed to support this dual mandate in 2013
through both keeping its target rate at the lower bound
in 2013 and conducting open market operations, or
Quantitative Easing (or QE). The third round of QE (or
QE3) began on September 13, 2012, as the FOMC
announced an expansion of its previous quantitative
easing programs of large scale asset purchases. QE3
entails monthly purchases of U.S. Treasury securities
and Agency mortgage-backed securities at the initial
pace of $45 billion and $40 billion, respectively. In
addition, the FOMC announced that it would maintain
its existing accommodative policy of reinvesting
its holdings of Agency
principal payments from
mortgage-backed securities into new Agency mortgage-
backed securities purchases in order to reduce long-term
interest rates and support mortgage markets. The
program is open-ended in nature, and the FOMC noted
that it would continue or expand the program as
necessary until the outlook for the labor market
improved substantially. The stated goal of this program
was “to support a stronger economic recovery and to
help ensure that inflation, over time, is at the rate most
consistent with its dual mandate.”
44
to economic performance,
To further enhance their accommodative policy and tie
it more explicitly
in
December 2012, the FOMC began implementation of
“forward guidance” regarding the future path of short-
term rates. In this guidance, the FOMC announced that
it anticipates its current target for the federal funds rate,
at 0-1/4%, would be appropriate as long as the
unemployment rate remained above 6-1/2%, inflation is
projected to be no more than a half percentage point
above the Committee’s 2% longer-run goal, and longer-
term inflation expectations continue to be stable.
In May 2013, after a string of moderately stronger
employment reports, the FOMC announced that it was
prepared to increase or reduce its purchases under QE3.
In addition, in June 2013, then Chairman Bernanke
noted that if upcoming economic data is consistent with
the FOMC’s forecast, the FOMC believed it may
moderate the pace of purchases. The possibility for a
change in the execution of QE3 this year coincided with
the beginning of a sharp rise in interest rates and
volatility. The 10-year Treasury, which closed at a price
to yield 1.63% on May 2, 2013, fell in price to yield
2.49% on September 30, 2013. Volatility, as measured
by the Merrill Lynch MOVE index, spiked during the
same period from 49.63 to 80.16 as market participants
attempted to price in reduced Fed support via bond
purchases.
At their December 17-18, 2013 meeting, the FOMC
decided to reduce monthly purchases of U.S. Treasury
bonds and Agency mortgage-backed securities by $5
billion each, therefore purchasing $40 billion in U.S.
Treasuries and $35 billion in Agency mortgage-backed
securities per month beginning in January 2014. In
conjunction with this decision, the FOMC strengthened
its commitment to low short-term rates. In their
December 2013 statement, the Committee indicated
that, as an addendum to its previously given policy
targets, they now anticipate that it will be appropriate to
maintain the current 0-0.25% target range for the
federal funds rate “well past
the
unemployment rate declines below 6-1/2 percent,
especially if projected inflation continues to run below
the Committee’s 2 percent longer-run goal.” The
Committee pointed to “the cumulative progress toward
maximum employment and the improvement in the
outlook for labor market conditions” as cause for the
taper decision. On January 29, 2014, the Fed announced
that beginning in February, it will add to its holdings of
Agency mortgage-backed securities at a pace of $30
billion per month rather than $35 billion per month, and
will add to its holdings of longer-term Treasury
time
that
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
securities at a pace of $35 billion per month rather than
$40 billion per month.
Results of Operations
In response to the Fed’s taper decision and improved
economic outlook, long-term rates, benchmarked by the
10-year U.S. Treasury, remained elevated through the
end of the year. The mortgage basis, or spread between
the 30-year Agency mortgage-backed securities current
coupon and the 10-year U.S. Treasury, which had
widened amidst volatility during the second and third
quarters of 2013, finished the year higher, resulting in
lower mortgage origination and decreased prepayment
speeds.
Financial Regulatory Reform
Uncertainty remains surrounding financial regulatory
reform and its impact on the markets and the broader
economy. In particular, the government is attempting to
change its involvement through the Agencies in the
mortgage market. There have been conflicting
legislative initiatives regarding the Agencies, and it is
unclear which approach, if any, may become law. In
addition, regulators remain focused on the wholesale
funding markets, bank capital levels and shadow
banking. It is difficult to predict the ultimate legislative
and other regulatory outcomes of these efforts. We
continue to monitor these legislative and regulatory
developments and evaluate their potential impact on our
business.
The results of our operations are affected by various
factors, many of which are beyond our control. Certain
of such risks and uncertainties are described herein (see
Forward-Looking
Regarding
“Special
Statements”) and in Part I, Item 1A. “Risk factors”.
Note
Net Income Summary
For the year ended December 31, 2013, our net income
was $3.7 billion, or $3.86 per average basic common
share, as compared to $1.7 billion, or $1.74 per average
basic common share, for the year ended December 31,
2012 and $344.5 million, or $0.37 per average basic
common share, for the year ended December 31, 2011.
We attribute the majority of the $2.0 billion increase in
net income for the year ended December 31, 2013 from
the year ended December 31, 2012 to the change in
unrealized gains (losses) on interest rate swaps, which
resulted in a gain of $2.0 billion for the year ended
December 31, 2013 compared to a loss of $32.2 million
for the same period in 2012. The change in the fair
value of interest rate swaps was primarily attributable to
the rise in interest rates experienced during the year
ended December 31, 2013. Net income increased $1.4
billion for the year ended December 31, 2012 compared
to the year ended December 31, 2011, primarily
attributable to the unrealized losses on interest rate
swaps of $32.2 million for the year ended December 31,
2012 compared to an unrealized loss on interest rate
swaps of $1.8 billion for the year ended December 31,
2011.
The following table presents the net income summary
for the years ended December 31, 2013, 2012 and 2011.
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45
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Net Income Summary
Total interest income
Total interest expense
Net interest income
Other income (loss)
General and administrative expenses
Income (loss) before income taxes and equity method investment in affiliates
Income taxes
Income (loss) from equity method investment in affiliate
Net income (loss)
Dividends on preferred stock
Net income (loss) available (related) to common shareholders
Net income (loss) per share available (related) to common shareholders:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Other information:
Average total assets
Average equity
Return on average total assets
Return on average equity
2013
For the Years Ended December 31,
2012
2011
(dollars in thousands, except per share data)
$ 2,918,562 $ 3,259,145 $ 3,579,618
480,326
667,172
624,714
2,293,848 2,591,973
3,099,292
1,676,144 (584,602) (2,459,576)
237,344
232,081
235,559
402,372
3,737,911 1,771,812
8,213 35,912
59,051
- 1,140
-
344,461
16,854
$ 3,657,730 $ 1,696,370 $ 327,607
1,735,900
39,530
3,729,698
71,968
$ 3.86 $ 1.74 $ 0.37
$ 3.74 $ 1.71 $ 0.37
947,337,915
972,902,459
995,557,026 1,005,755,057
874,212,039
874,518,938
$ 107,355,670 $ 126,649,002 $ 101,054,583
$ 16,206,642 $ 13,700,771
$ 13,968,979
0.34%
3.47%
2.51%
26.70%
1.37%
10.71%
We use daily balances to calculate average Interest
Earning Assets and Interest Bearing Liabilities. For the
purpose of computing net interest income and ratios
relating to cost of funds measures throughout this
report, interest expense includes interest expense on
the
interest
Consolidated
and
Comprehensive Income (Loss) as Realized gains
(losses) on interest rate swaps.
rate swaps, which
of Operations
Statements
recorded
in
is
Non-GAAP Financial Measures
This Management Discussion and Analysis section
contains analysis and discussion of non-GAAP
measurements. The non-GAAP measurements include
the following:
core earnings;
core earnings per average basic common share;
economic interest expense; and
economic net interest income.
46
Core earnings is defined as net income (loss) excluding
gains or losses on disposals of investments and
termination of interest rate swaps, unrealized gains or
losses on interest rate swaps and Agency interest-only
mortgage-backed securities, net loss on extinguishment
of the 4% Convertible Senior Notes due 2015, net gains
and losses on trading assets, impairment losses and loss
on previously held equity interest in CreXus.
We believe that core earnings, core earnings per
average basic common share, economic interest expense
and economic net interest income provide meaningful
information to consider, in addition to the respective
amounts prepared in accordance with GAAP. The non-
GAAP measures help us to evaluate our financial
position and performance without the effects of certain
that are not
transactions and GAAP adjustments
necessarily
investment
portfolio and operations.
indicative of our current
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
the economic value of our
Our presentation of
investment strategy has important limitations. Other
market participants may calculate core earnings, core
earnings per average basic common share, economic
interest expense and economic net interest income
differently than we calculate them, making comparative
analysis difficult.
Although we believe that the calculation of the
economic value of our investment strategy described
above helps evaluate and measure our financial position
and performance without
the effects of certain
transactions, it is of limited usefulness as an analytical
tool. Therefore, the economic value of our investment
strategy should not be viewed in isolation and is not a
substitute for net income (loss), net income (loss) per
basic share available to common stockholders, interest
expense and net
in
accordance with GAAP.
income computed
interest
Core Earnings Summary
Our core earnings were $1.2 billion, or $1.21 per
average basic common share, for the year ended
December 31, 2013 compared to $1.5 billion, or $1.54
per average basic common share, for the same period in
2012 and $2.0 billion, or $2.31 per average basic
common share, for the same period in 2011. We
attribute the majority of the decrease in core earnings
for the year ended December 31, 2013 from the year
ended December 31, 2012 to a decline in economic net
interest income of $312.7 million for the year ended
December 31, 2013 compared to the same period in
2012, primarily attributable to a decline in average
Interest Earning Assets. We attribute the majority of the
decrease in core earnings for the year ended December
31, 2012 from the year ended December 31, 2011 to a
decline in economic net interest income of $518.7
million for
the year ended December 31, 2012
compared to the same period in 2011, primarily
attributable to a 80 basis point decline in our economic
net interest rate spread.
The following table provides GAAP measures of net
income (loss) and net income (loss) per basic share
available to common stockholders for the years ended
December 31, 2013, 2012 and 2011 and details with
respect to reconciling the aforementioned line items on
a non-GAAP basis:
For the Years Ended December 31,
2011
2012
2013
GAAP net income
Adjustments:
Realized (gains) losses on termination of interest rate swaps
Unrealized (gains) losses on interest rate swaps
Net (gains) losses on disposal of investments
Net loss on extinguishment of 4% Convertible Senior Notes
Net (gains) losses on trading assets
Net unrealized (gains) losses on interest-only Agency mortgage-backed securities
Impairment of goodwill
Loss on previously held equity interest in CreXus
Core earnings
GAAP net income per average basic common share
Core earnings per average basic common share
(dollars in thousands, except per share data)
$ 3,729,698 $ 1,735,900 $ 344,461
101,862 2,385
-
(2,002,200) 32,219 1,815,107
(403,045) (432,139) (206,846)
-
- 162,340
(1,509) (22,910) (21,398)
106,657
(244,730) 59,937
-
-
23,987
-
-
18,896
$
$
$
1,222,959
1,537,732
2,037,981
$
$
3.86
1.21
$
$
1.74
1.54
$
$
0.37
2.31
Economic Interest Expense and Economic Net
Interest Income
We believe the economic value of our investment
strategy is depicted by the economic net interest income
we earn. We calculate economic net interest income by
determining our GAAP net
income and
reducing it by interest expense on interest rate swaps.
interest
Our economic interest expense, which is composed of
interest expense on our Interest Bearing Liabilities plus
interest expense on interest rate swaps, reflects total
contractual interest payments.
The following table provides GAAP measures of
interest expense and net interest income and details with
47
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
respect to reconciling the aforementioned line items on
a non-GAAP basis for each respective period:
GAAP Inte rest
Expense
Add: Realized
Losses on
Inte rest Rate
Swaps (1)
Economic
Inte rest
Expense
GAAP Net
Interest Income
(dollars in thousands)
Less: Realized
Losses on
Interest Rate
Swaps (1)
Economic Net
interest Income
For the Years Ended:
December 31, 2013
December 31, 2012
December 31, 2011
(1)
and Comprehensive Income (Loss).
$ 908,294 $ 1,385,554
$ 893,769 $ 1,698,204
$ 882,395 $ 2,216,897
Interest expense related to our interest rate swaps is recorded in realized gains (losses) on interest rate swaps on the Consolidated Statements of Operations
$ 624,714 $ 908,294 $ 1,533,008 $ 2,293,848
$ 667,172 $ 893,769 $ 1,560,941 $ 2,591,973
$ 480,326 $ 882,395 $ 1,362,721 $ 3,099,292
Interest Income and Average Earning Asset Yield
Prepayment speeds, as reflected by the Constant
Prepayment Rate, or CPR, and interest rates vary
according to the type of investment, conditions in
financial markets, competition and other factors, none
of which can be predicted with any certainty. In general,
as prepayment speeds on our Agency mortgage-backed
securities portfolio increase, related purchase premium
amortization increases, thereby reducing the yield on
such assets. The following table presents the CPR
experienced on our Agency mortgage-backed securities
portfolio for the periods presented.
Years Ended
December 31, 2013
December 31, 2012
December 31, 2011
CPR
14%
20%
17%
Our interest income, which reflects the amortization of
purchase premiums and accretion of discounts from our
asset portfolio, for the years ended December 31, 2013,
2012 and 2011 was $2.9 billion, $3.3 billion and $3.6
billion, respectively. We had average Interest Earning
Assets of $105.4 billion, $117.3 billion and $96.7
billion, and the yield on our average Interest Earning
Assets was 2.77%, 2.78%, and 3.70% for the years
ended December 31, 2013, 2012 and 2011, respectively.
The decline in interest income of $340.6 million for the
year ended December 31, 2013 compared to the year
ended December 31, 2012 was primarily due to an
$11.9 billion decrease in average Interest Earning
Assets, partially offset by lower amortization on our
Investment Securities resulting from lower prepayment
speeds, for
the year ended December 31, 2013
compared to the same period in 2012. Interest income
decreased by $320.5 million for the year ended
December 31, 2012 compared to the year ended
December 31, 2011, primarily attributable to a decline
in yield on Interest Earning Assets of 92 basis points,
48
partially offset by an increase in average Interest
Earning Assets of $20.6 billion.
Economic Interest Expense and the Cost of Interest
Bearing Liabilities
Our largest expense is the cost of Interest Bearing
Liabilities and interest expense on interest rate swaps,
which is recorded in realized gains (losses) on interest
rate swaps on
the Consolidated Statements of
Operations and Comprehensive Income (Loss). We had
average Interest Bearing Liabilities of $91.2 billion,
$103.4 billion and $84.6 billion for the years ended
December 31, 2013, 2012 and 2011, respectively. Our
total economic interest expense was $1.5 billion, which
included $908.3 million in interest expense on interest
rate swaps, $1.6 billion, which included $893.8 million
in interest expense on interest rate swaps, and $1.4
billion, which included $882.4 million in interest
expense on interest rate swaps, for the years ended
December 31, 2013, 2012 and 2011, respectively. Our
cost of funds on average Interest Bearing Liabilities was
1.68%, 1.51% and 1.61%, including interest expense on
interest rate swaps, for the years ended December 31,
2013, 2012 and 2011, respectively. Economic interest
expense, including interest expense on interest rate
swaps, for the year ended December 31, 2013 decreased
by $27.9 million when compared to the year ended
December 31, 2012, primarily due to the $12.2 billion
decline in average Interest Bearing Liabilities for the
year ended December 31, 2013 compared to the same
period in 2012, partially offset by a 17 basis point
increase in the cost of Interest Bearing Liabilities,
largely attributable
swap expense.
Economic interest expense, including interest expense
on interest rate swaps, for the year ended December 31,
2012 increased by $198.2 million when compared to the
same period in 2011, due to the increase in Interest
Bearing Liabilities and the increase in notional amount
of interest rate swaps. The average Interest Bearing
Liabilities increased by $18.8 billion for the year ended
December 31, 2012, when compared to the same period
in 2011.
increased
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
The table below shows our average Interest Bearing
Liabilities and cost of funds on average Interest Bearing
Liabilities as compared to average one-month and
average six month LIBOR for the periods presented.
Cost of Funds on Average Interest Bearing Liabilities
Average
Inte rest
Be aring
Liabilities
Intere st
Bearing
Liabilities at
Period End
Economic
Inte rest
Expense (1)
Average
Cost of
Interest
Be aring
Liabilities
$ 91,182,731 $ 67,066,390 $1,533,008
$103,362,717
$105,914,990 $1,560,941
$ 84,595,933 $ 86,269,611 $1,362,721
1.68%
1.51%
1.61%
Average
One -
Month
LIBOR
Ave rage
Six-
Month
LIBOR
Ave rage One-
Month LIBOR
Relative to Average
Six-Month LIBOR
(dollars in thousands)
0.41%
0.69%
0.51%
0.19%
0.24%
0.23%
(0.22%)
(0.45%)
(0.28%)
Average Cost of
Inte rest Bearing
Liabilities Re lative
to Average One-
Month LIBOR
Average Cost of
Inte re st Be aring
Liabilities Relative
to Ave rage Six-
Month LIBOR
1.49%
1.27%
1.38%
1.27%
0.82%
1.10%
For the Years Ended:
December 31, 2013
December 31, 2012
December 31, 2011
(1) Economic interest expense includes interest expense on interest rate swaps.
We do not manage our portfolio to have a pre-
designated amount of borrowings at quarter or year end.
Our borrowings at period end are a snapshot of our
borrowings as of a date, and this number should be
expected to differ from average borrowings over the
period for a number of reasons. The mortgage-backed
securities we own pay principal and interest towards the
end of each month and the mortgage-backed securities
we purchase are typically settled during the beginning
of the month. As a result, depending on the amount of
mortgage-backed securities we have committed to
purchase, we may retain the principal and interest we
receive in the prior month, or we may use it to pay
down our borrowings. Moreover, we use interest rate
swaps, swaptions and other derivative instruments to
hedge our portfolio and as we pledge or receive
collateral under these agreements, our borrowings on
any given day may be increased or decreased. Our
average borrowings during a quarter will differ from
period end borrowings as we implement our portfolio
management strategies and risk management strategies
over changing market conditions by increasing or
decreasing leverage. Additionally, these numbers will
differ during periods when we conduct capital raises, as
in certain instances we may purchase additional assets
and increase leverage with the expectation of a
successful capital raise. Since our average borrowings
and period end borrowings can be expected to differ, we
believe our average borrowings during a period provide
a more accurate representation of our exposure to the
risks associated with leverage.
As of each of December 31, 2013 and 2012, 99% of our
debt consisted of borrowings collateralized by a pledge
of our Investment Securities. These borrowings appear
on our Consolidated Statements of Financial Condition
as Repurchase Agreements. All of our Agency
mortgage-backed securities and debentures are currently
accepted as collateral for these borrowings. However,
we limit our borrowings, and thus our potential asset
growth, in order to maintain unused borrowing capacity
and thus increase the liquidity and strength of our
balance sheet. As of December 31, 2013, the term to
maturity of our repurchase agreements ranged from one
day to six years. Additionally, we have entered into
borrowings giving the counterparty the right to call the
balance prior to maturity. At December 31, 2013 and
2012, the weighted average cost of funds for all of our
borrowings was 2.37% and 1.55%, respectively,
including the effect of the interest rate swaps, 4%
Convertible Senior Notes due 2015 and 5% Convertible
Senior Notes due 2015 (collectively, the Convertible
Senior Notes), and the weighted average days to
maturity was 208 days and 197 days, respectively.
Economic Net Interest Income
Our economic net interest income, including interest
paid on interest rate swaps, totaled $1.4 billion, $1.7
billion and $2.2 billion for the years ended December
31, 2013, 2012 and 2011, respectively. The decline for
the year ended December 31, 2013 compared to the
same period in 2012 was primarily due to a lower net
interest rate spread. Our average Interest Earning Assets
decreased by $11.9 billion during the year ended
December 31, 2013 compared to the same period in
2012. Our net interest rate spread for the year ended
December 31, 2013 was 1.09% compared to 1.29% for
the year ended December 31, 2012. Economic net
interest income declined by $518.7 million during the
year ended December 31, 2012 compared to the same
period in 2011, primarily due to a decline in economic
interest rate spread of 80 basis points.
The table below shows our average Interest Earning
Assets, total interest income, yield on average Interest
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49
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Earning Assets, average Interest Bearing Liabilities,
economic interest expense, cost of funds on average
interest
Interest Bearing Liabilities, economic net
income and net interest rate spread for the periods
presented.
Economic Net Interest Income
Average
Interest
Earning
Assets (1)
Total
Interest
Income
Yield on
Average
Interest
Earning Assets
Average
Interest
Bearing
Liabilities
Economic
Interest
Expense (2)
Average Cost
of Interest
Bearing
Liabilities
Economic
Net
Interest
Income (3)
Net
Interest
Rate
Spread
For the Years Ended:
December 31, 2013
December 31, 2012
December 31, 2011
$ 2,918,562
$105,375,229
$117,274,876
$ 3,259,145
$ 96,702,984 $ 3,579,618
(1) Does not reflect unrealized gains/ (losses) or premium/ (discount).
(2) Economic interest expense includes interest expense on interest rate swaps.
(3) Economic net interest income includes interest expense on interest rate swaps.
Other Income
Other income is largely comprised of investment
advisory fees, net gains or losses on sales of Agency
investments,
mortgage-backed securities and other
dividend
equity
available-for-sale
from
securities and net gains or losses on derivatives.
income
FIDAC is a registered investment advisor specializing
in managing fixed income securities. In October 2013,
we sold the net assets and operations of Merganser
Capital Management, Inc. (or Merganser), a registered
investment advisor specializing in managing fixed
income securities, to a third party. Investment advisory
income for the years ended December 31, 2013, 2012
and 2011 totaled $43.6 million, $82.1 million and $79.1
million, respectively, net of fees paid to third parties
for
pursuant
facilitating and promoting distribution of shares or units
to FIDAC’s clients. The decline in investment advisory
income for
the year ended December 31, 2013
compared to the same period in 2012 was due to lower
advisory fees from affiliates. Investment advisory
income for
the year ended December 31, 2012
compared to the same period in 2011 increased slightly
by $3.1 million.
service agreements
to distribution
For the years ended December 31, 2013, 2012 and
2011, we disposed of Investments Securities with a
carrying value of $56.8 billion, $32.2 billion and $20.1
billion for an aggregate net gain of $424.1 million,
$438.5 million and $206.8 million, respectively. We
may from time to time sell existing assets to acquire
new assets, which our management believes might have
higher risk-adjusted returns, or to manage our balance
sheet as part of our asset/liability management strategy.
50
(dollars in thousands)
2.77% $ 91,182,731 $1,533,008
2.78% $103,362,717
$1,560,941
3.70% $ 84,595,933 $1,362,721
1.68% $1,385,554
1.51% $1,698,204
1.61% $2,216,897
1.09%
1.27%
2.09%
Dividend income from our investments in Chimera
Investment Corporation (or Chimera) and CreXus (we
held shares prior to our acquisition of CreXus, which
closed during the second quarter of 2013), totaled $18.6
million, $28.3 million and $31.5 million for the years
ended December 31, 2013, 2012 and 2011, respectively.
The decline in dividend income for the year ended
December 31, 2013 as compared to the same period in
2012 was primarily due to CreXus declaring a dividend
for only the first quarter of 2013 as a result of its
acquisition. Dividend income for the year ended
December 31, 2012 decreased slightly by $3.2 million
compared to the same period in 2011. Chimera is and
CreXus was managed by our wholly-owned subsidiary
FIDAC.
The aggregate net gain (loss) on interest rate swaps was
$992.0 million, ($928.4) million and ($2.7) billion for
the years ended December 31, 2013, 2012 and 2011,
respectively. The change in the aggregate net gain (loss)
on interest rate swaps for the year ended December 31,
2013 as compared to the same period in 2012 is
primarily attributable to the rise in interest rates
experienced in 2013. The change in the aggregate net
gain (loss) on interest rate swaps for the year ended
December 31, 2012 as compared to the same period in
2011 was primarily attributable
interest rates
to
remaining relatively unchanged in 2012.
General and Administrative Expenses
General and administrative (or G&A) expenses consists
of compensation expense, the management fee and
other expenses. G&A expenses were $232.1 million,
$235.6 million and $237.3 million for the years ended
December 31, 2013, 2012 and 2011, respectively. For
the year ended December 31, 2013, any compensation
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
expense incurred by us reduced the amount of the
management fee by the same amount. G&A expenses as
a percentage of average total assets was 0.22%, 0.19%
and 0.23% for the years ended December 31, 2013,
2012 and 2011, respectively. The decrease in G&A
expenses of $3.5 million for the year ended December
31, 2013 as compared to the same period in 2012 was
primarily the result of the pro forma adjustment to the
management fee which resulted in lower compensation
expenses in 2013, partially offset by an increase in other
general and administrative expenses which included
$7.3 million related to our acquisition of CreXus in
2013. G&A expenses decreased slightly by $1.8 million
for the year ended December 31, 2012 as compared to
the same period in 2011.
The table below shows our total G&A expenses as
compared to average total assets and average equity for
the periods presented.
G&A Expenses and Operating Expense Ratios
For the Years Ended:
December 31, 2013
December 31, 2012
December 31, 2011
Total G&A
Expenses
Total G&A
Expenses/Average Assets
Total G&A
Expenses/Average Equity
$ 232,081
$ 235,559
$ 237,344
(dollars in thousands)
0.22%
0.19%
0.23%
1.66%
1.45%
1.73%
Unrealized Gains and Losses
With our “available-for-sale” accounting treatment,
unrealized fluctuations in market values of assets do not
impact our GAAP or taxable income but rather are
reflected on our balance sheet by changing the carrying
value of the asset and stockholders’ equity under
“Accumulated Other Comprehensive Income (Loss).”
As a result of this fair value accounting treatment, our
book value and book value per share are likely to
fluctuate far more than if we used historical amortized
cost accounting. As a result, comparisons with
companies that use historical cost accounting for some
or all of their balance sheet may not be meaningful.
The table below shows cumulative unrealized gains and
losses on our available-for-sale investments reflected in
the Consolidated Statements of Financial Condition.
Unrealized Gains and Losses
Unrealized gain
Unrealized loss
Net unrealized gain (loss)
As of December 31,
2013
2012
(dollars in thousands)
$ 600,034 $ 3,092,778
(3,348,967) (39,536)
$ (2,748,933) $ 3,053,242
Unrealized changes in the estimated fair value of
available-for-sale investments may have a direct effect
on our potential earnings and dividends: positive
changes will increase our equity base and allow us to
increase our borrowing capacity while negative changes
tend to limit borrowing capacity under our investment
policy. A very large negative change in the net fair
value of our available-for-sale investment securities
might impair our liquidity position, requiring us to sell
assets with the likely result of realized losses upon sale.
The decline in value of these securities for the year
ended December 31, 2013 is solely due to market
the quality of
conditions and not
the assets.
Substantially all of
the Agency mortgage-backed
securities are “AAA” rated or carry an implied “AAA”
rating. The investments are not considered to be other-
than-temporarily impaired because we currently have
the ability and intent to hold the investments to maturity
or for a period of time sufficient for a forecasted market
price recovery up to or beyond the cost of the
investments, and it is not more likely than not that we
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51
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
will be required to sell the investments before recovery
of the amortized cost bases, which may be maturity.
Also, we are guaranteed payment of the principal
amount of the securities by the respective issuing
government agency.
Net Income and Return on Average Equity
Our net income was $3.7 billion, $1.7 billion and
$344.5 million for the years ended December 31, 2013,
2012 and 2011, respectively. Our return on average
equity was 26.70%, 10.71% and 2.51% for the years
ended December 31, 2013, 2012 and 2011, respectively.
The table below shows the components of our return on
average equity for the periods presented.
Components of Return on Average Equity
Economic
Net
Interest
Income/
Average
Equity(1)
Net
Investment
Advisory and
Service
Fees/Average
Equity
Realized and
Unrealized Gains
and
Losses/Average
Equity
Other Income
(Loss)/Average
Equity(2)
G&A
Expenses/
Average
Equity
Income
Taxes/
Average
Equity
Return
on
Average
Equity
For the Years Ended:
December 31, 2013
December 31, 2012
December 31, 2011
9.92%
10.48%
16.18%
0.31%
0.51%
0.58%
18.25%
1.22%
(12.36%)
(0.06%)
0.17%
0.27%
(1.66%)
(1.45%)
(1.73%)
(0.06%)
(0.22%)
(0.43%)
26.70%
10.71%
2.51%
(1) Economic net interest income includes interest expense on interest rate swaps.
(2) Other income (loss) includes dividend income from affiliates, impairment of goodwill, loss on previously held equity interest in CreXus and other income (loss).
Financial Condition
Total assets were $81.9 billion and $133.5 billion as of
December 31, 2013 and 2012, respectively. The change
was primarily due to a $53.6 billion decrease in Agency
mortgage-backed securities partially offset by an
increase in commercial real estate debt and preferred
equity related to our acquisition of CreXus Investment
Corp. in April 2013 and subsequent growth of the
commercial portfolio.
Investment Securities
Substantially all of our Agency mortgage-backed
securities at December 31, 2013 and 2012 were backed
by single-family mortgage loans. Substantially all of the
mortgage assets underlying these mortgage-backed
securities were secured with a first lien position on the
underlying single-family properties. Our mortgage-
backed securities were largely Freddie Mac, Fannie
Mae or Ginnie Mae pass through certificates or CMOs,
which carry an actual or implied “AAA” rating. We
carry all of our Agency mortgage-backed securities at
fair value.
We accrete discount balances as an increase to interest
income over the expected life of the related Interest
Earning Assets and we amortize premium balances as a
decrease to interest income over the expected life of the
related Interest Earning Assets. At December 31, 2013,
and 2012 we had on our Consolidated Statements of
Financial Condition a total of $25.7 million and $27.4
million, respectively, of unamortized discount (which is
the difference between the remaining principal value
and current amortized cost of our Investment Securities
acquired at a price below principal value) and a total of
$4.6 billion and $5.9 billion,
respectively, of
unamortized premium (which is the difference between
the remaining principal value and the current amortized
cost of our Investment Securities acquired at a price
above principal value).
We received mortgage principal repayments of $21.7
billion and $35.1 billion for the years ended December
31, 2013 and 2012, respectively.
The average
prepayment speed for the years ended December 31,
2013 and 2012 was 14% and 20%, respectively. Given
our current portfolio composition, if mortgage principal
prepayment rates were to increase over the life of our
mortgage-backed securities, all other factors being
equal, our net interest income would decrease during
the life of these mortgage-backed securities as we
would be required to amortize our net premium balance
into income over a shorter time period. Similarly, if
mortgage principal prepayment rates were to decrease
over the life of our mortgage-backed securities, all other
factors being equal, our net interest income would
increase during the life of these mortgage-backed
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52
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
securities as we would amortize our net premium
balance over a longer time period.
The table below summarizes certain characteristics of
our Agency mortgage-backed securities and Agency
debentures, excluding interest-only securities, as of the
dates presented.
Agency Mortgage-Backed Securities and Agency Debentures
Principal
Amount
Net Premium
Amortized
Cost
Amortized
Cost/Principal
Amount
(dollars in thousands)
Carrying Value
Carrying
Value/Principal
Amount
Weighted
Average
Coupon Rate
Weighted
Average
Yield
At December 31, 2013 $ 71,430,069 $ 3,558,168 $ 74,988,237
At December 31, 2012 $ 118,226,692 $ 5,032,210 $ 123,258,902
104.98% $ 72,238,708
104.26% $ 126,316,768
101.13%
106.84%
3.62%
3.98%
2.89%
2.79%
The tables below summarize certain characteristics of our Agency mortgage-backed securities and Agency debentures
and interest-only securities, as of the dates presented. The index level for adjustable-rate Agency mortgage-backed
securities and Agency debentures is the weighted average rate of the various short-term interest rate indices, which
determine the coupon rate.
Adjustable-Rate Agency Mortgage-Backed Securities and Agency Debentures
Weighted
Average Term
to Next
Adjustment
Principal
Amount
Weighted
Average
Lifetime
Cap
(dollars in thousands)
Weighted
Average
Coupon
Rate
Weighted
Average
Asset
Yield
Principal Amount at
Period End as % of
Total Investment
Securities
At December 31, 2013
At December 31, 2012
$6,719,599
$8,298,988
33 months
37 months
6.44%
8.34%
2.81%
3.16%
2.80%
2.51%
9.41%
7.02%
Fixed-Rate Agency Mortgage-Backed Securities and Agency Debentures Characteristics
Principal
Amount
Weighted
Average
Coupon Rate
Weighted
Average
Asset Yield
(dollars in thousands)
Principal Amount at
Period End as % of
Total Investment
Securities
At December 31, 2013
At December 31, 2012
64,710,470
$
$109,927,704
3.71%
4.04%
2.90%
2.82%
90.59%
92.98%
Agency Interest-Only Mortgage-Backed Securities
Notional
Amount
Net Premium
Amortized
Cost
Amortized
Cost/Notional
Amount
Carrying
Value
Carrying
Value/Notional
Amount
Weighted
Average
Coupon Rate
Weighted
Average Asset
Yield
At December 31, 2013
At December 31, 2012
$ 7,374,675 $ 1,041,990 $ 1,041,990
$ 5,862,912 $ 797,080 $ 797,080
(dollars in thousands)
14.13% $ 1,120,126
13.60% $ 656,007
15.19%
11.19%
3.82%
4.14%
9.00%
(4.83%)
At December 31, 2013 and 2012, we held Agency mortgage-backed securities and Agency debentures, excluding
interest-only securities, with coupons linked to various indices. The following tables detail the portfolio characteristics
by index.
Adjustable-Rate Agency Mortgage-Backed Securities and Agency Debentures by Index
December 31, 2013
53
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Weighted average term to next adjustment
Weighted average annual period cap
Weighted average lifetime cap at December 31, 2013
Investment principal value as percentage of Investment
Securities at December 31, 2013
Twelve
Month
Libor
40 mo.
12-
Month
Moving
Average
1 mo.
11th
Six-
District
Other
Month
Cost of
Indices (1)
Libor
Funds
34 mo.
1 mo.
4 mo.
1.78% 2.00% 0.00% 0.00%
0.00%
11.20% 9.81% 7.36% 10.80% 10.74% 2.36%
1-Year
Treasury
Index
18 mo.
2.00%
0.40% 4.04% 0.28% 0.23%
0.18%
4.28%
(1) Combination of indices that account for less than 0.05% of total or adjust over time, without a reset index.
Adjustable-Rate Agency Mortgage-Backed Securities and Agency Debentures by Index
December 31, 2012
Weighted average term to next adjustment
Weighted average annual period cap
Weighted average lifetime cap at December 31, 2012
Investment principal value as percentage of Investment
Securities at December 31, 2012
Six-
Month
Libor
5 mo.
12-
1-Year
Month
One-
Treasury
Moving
Month
Average
Libor
Index
1 mo.
3 mo.
23 mo.
1.89%
0.82% 1.70% 2.00% 0.00%
6.10% 11.15% 9.85% 9.44% 10.71% 11.34%
11th
District
Cost of
Funds
3 mo.
0.17%
Twelve
Month
Libor
42 mo.
Other
Indices (1)
40 mo.
0.00%
4.82%
0.10% 0.30% 3.71% 0.21%
0.20%
0.25%
2.30%
(1) Combination of indices that account for less than 0.05% of total or adjust over time, without a reset index.
Contractual Obligations
The following table summarizes the effect on our
liquidity and cash flows from contractual obligations for
repurchase agreements, Convertible Senior Notes,
interest expense on
repurchase agreements and
Convertible Senior Notes, the non-cancelable office
leases and employment agreements as of December 31,
2013. The table does not include the effect of net
interest rate payments under our interest rate swap
agreements. The net swap payments will fluctuate
based on monthly changes in the receive rate. As of
December 31, 2013, the interest rate swaps had a net
negative fair value of $582.8 million.
Repurchase agreements
Interest expense on repurchase agreements,
based on rates at December 31, 2013
Convertible Senior Notes
Interest expense on Convertible Senior Notes
Long-term operating lease obligations
Employment contracts of our subsidiaries
Total
Within One
Ye ar
One to Three
Ye ars
Three to
Five Years
More than
Five Years
Total
(dollars in thousands)
$51,931,001 $ 6,390,000 $3,360,000
$ 100,000 $61,781,001
694 585,111
41,515
244,659 298,243
- 857,541
- - 857,541
41,802 14,600 - - 56,402
- - 2,480
2,103 377
- - 2,550
2,550 -
$ 100,694 $63,285,085
$52,222,115 $ 7,560,761 $3,401,515
54
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
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We had no material unfunded loan commitments as of
December 31, 2013.
In the coming periods, we expect to continue to finance
our Agency mortgage-backed securities in a manner
that is consistent with our current operations via
repurchase agreements. We also intend to consider
using securitization structures or other term structures to
finance certain of our mortgage loans. During the year
ended December 31, 2013, we received $21.7 billion
from principal repayments and $56.5 billion in cash
from disposal of Investment Securities. During the year
ended December 31, 2012, we received $35.1 billion
from principal repayments and $32.3 billion in cash
from disposal of Investment Securities.
Off-Balance Sheet Arrangements
other
We do not have any relationships with unconsolidated
entities or financial partnerships, such as entities often
referred to as structured finance or special purpose
entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements
or
limited
purposes. Further, we have not guaranteed any
obligations of unconsolidated entities nor do we have
any commitment or intent to provide funding to any
such entities. As such, we are not materially exposed to
any market, credit, liquidity or financing risk that could
arise if we had engaged in such relationships.
contractually
narrow
or
Capital Management
Maintaining a strong balance sheet that can support the
business even in times of economic stress and market
volatility is of critical importance to our business
strategy. A strong and robust capital position is essential
to executing our investment strategy. The firm’s capital
strategy is predicated on a strong capital position, which
enables us to execute our investment strategy regardless
of the market environment.
Our Internal Capital Adequacy Assessment Program (or
ICAAP) framework supports capital and business
performance measurement, and is integrated within the
overall risk governance framework. The ICAAP
framework is designed to align capital measurement
with the firm’s risk appetite.
The firm’s objective is to maintain an active ICAAP
requires active
that
assessment and reporting of internal capital adequacy,
sound governance,
reflects
incorporates stress testing based on internal and external
factors and identifies potential capital actions to ensure
the firm’s capital and available financial resources
remain in excess of internal capital requirements.
The capital policy defines the parameters and principles
supporting a comprehensive capital management
practice, including processes that effectively identify,
measure and monitor risks impacting capital adequacy.
The capital assessment process considers the precision
in risk measures as well as the volatility of exposures
and the relative activities producing risk. Parameters
used in modeling economic capital must align with the
firm’s risk appetite.
Economic capital is our internal quantification of the
risks inherent in our business and considers the amount
of capital our firm needs as a buffer to protect against
risk. It is considered the capital needed to remain
solvent under extreme scenarios. It is a probabilistic
measure of potential future losses at a given confidence
level over a given time horizon.
The major risks impacting capital applicable to us are
liquidity,
investment/market, credit, counterparty,
operational, and other risks such as compliance, legal
and regulatory risks. For further discussion of the risks
the firm is subject to, please see “Risk Factors” above.
Capital requirements are based on maintaining levels
above approved limits, ensuring the quality of our
capital appropriately reflects our asset mix, market and
funding structure. As such we use a complement of
capital metrics and related threshold levels to measure
and analyze our capital from a magnitude and
composition perspective. Our policy is to maintain an
appropriate amount of available financial resources over
the aggregate economic capital requirements.
Available Financial Resources (or AFR) is the actual
capital held to protect against the unexpected losses
measured in our capital management process and may
include:
Common and preferred equity
Other forms of equity-like capital
Surplus credit reserves over expected losses
Other loss absorption instruments
In the event we fall short of our internal limits we will
take appropriate actions which may include asset sales,
changes in asset mix, reductions in asset purchases or
originations,
issuance of capital or other capital
enhancing or risk reduction strategies.
55
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Stockholders’ Equity
The following table provides a summary of total stockholders’ equity as of December 31, 2013 and 2012:
2013
2012
(dollars in thousands)
177,088
$
177,088
$
290,514 290,514
445,457 445,457
9,474 9,472
14,740,774
14,765,761
(2,748,933) 3,053,242
(534,306) (2,792,103)
15,924,444
$
12,405,055
$
common stock as 7.625% Series C Cumulative
Redeemable Preferred Stock (or Series C Preferred
Stock).
In May 2012, we issued 12,000,000 shares of Series C
Preferred Stock, with a par value of $0.01 per share and
a liquidation preference of $25.00 per share plus
accrued and unpaid dividends (whether or not declared).
On September 13, 2012, we amended our charter
through the filing of articles supplementary to our
charter to reclassify 18,400,000 shares of authorized
shares of common stock as 7.50% Series D Cumulative
Redeemable Preferred Stock (or Series D Preferred
Stock).
In September 2012, we issued 18,400,000 shares of
Series D Preferred Stock, with a par value of $0.01 per
share and a liquidation preference of $25.00 per share
plus accrued and unpaid dividends (whether or not
declared).
of
the
the
effectiveness
Following
articles
supplementary to our charter our authorized shares of
capital stock, par value of $0.01 per share, consists of
1,956,937,500 shares classified as common stock,
7,412,500 shares classified as 7.875% Series A
Cumulative Redeemable Preferred Stock, 4,600,000
shares classified as 6.00% Series B Cumulative
shares
Convertible Preferred Stock, 12,650,000
classified as 7.625% Series C Cumulative Redeemable
Preferred Stock and 18,400,000 shares classified as
7.50% Series D Cumulative Redeemable Preferred
Stock.
Stockholders’ Equity:
7.875% Series A Cumulative Redeemable Preferred Stock
7.625% Series C Cumulative Redeemable Preferred Stock
7.50% Series D Cumulative Redeemable Preferred Stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Common and Preferred Stock
During the years ended December 31, 2013, 2012 and
2011, 166,000, 603,000 and 679,000 options were
exercised for an aggregate exercise price of $2.2
million, $8.4 million and $9.0 million, respectively.
During the years ended December 31, 2013, 2012 and
2011, we issued 219,000, 170,000 and 26.2 million
shares and raised $2.9 million, $2.8 million and $455.5
million, respectively, through the Direct Purchase and
Dividend Reinvestment Program.
During the years ended December 31, 2012 and 2011,
1.3 million and 320,000 shares of 6.00% Series B
Cumulative Convertible Preferred Stock (or Series B
Preferred Stock) were converted into 4.0 million and
906,000 shares of common stock, respectively.
On March 19, 2012, we entered into six separate
(or Distribution
Distribution Agency Agreements
Agency Agreements) with each of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Credit Suisse
Securities (USA) LLC, Goldman, Sachs & Co., J.P.
Morgan Securities LLC, Morgan Stanley & Co. LLC
and RCap (together, the Agents). Pursuant to the terms
of the Distribution Agency Agreements, we may sell
from time to time through the Agents, as our sales
agents, up to 125,000,000 shares of our common stock.
We did not make any sales under the Distribution
Agency Agreements during the years ended December
31, 2013 and 2012.
On May 16, 2012, we amended our charter through the
filing of articles supplementary to our charter to
reclassify 12,650,000 shares of authorized shares of
56
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
On October 16, 2012, we announced that our board of
directors authorized the repurchase of up to $1.5 billion
of our outstanding common shares over a 12 month
period. All common shares purchased were part of a
publicly announced plan in open-market transactions.
the year ended December 31, 2012, we
During
repurchased approximately 27.8 million shares of our
outstanding common stock for $397.1 million, of which
$141.1 million had not settled at December 31, 2012.
During the year ended December 31, 2013, we did not
repurchase any shares of our outstanding common
stock.
Distributions to stockholders
During the year ended December 31, 2013, we declared
dividends to common stockholders totaling $1.4 billion,
or $1.50 per common share, of which $284.2 million, or
$0.30 per common share, was paid to stockholders on
January 31, 2014. During the year ended December 31,
2013, we declared dividends to Series A Preferred
stockholders totaling approximately $14.6 million or
$1.97 per share, Series C Preferred stockholders totaling
approximately $22.9 million or $1.91 per share, Series
D Preferred stockholders totaling approximately $34.5
million or $1.88 per share.
During the year ended December 31, 2012, we declared
dividends to common stockholders totaling $2.0 billion
or $2.05 per share, of which $432.2 million were paid to
stockholders on January 29, 2013. During the year
ended December 31, 2012, we declared dividends to
Series A Preferred stockholders totaling approximately
$14.6 million or $1.97 per share, Series B Preferred
stockholders totaling approximately $289,000 or $0.375
per share, Series C Preferred stockholders totaling
approximately $14.3 million or $1.19 per share, Series
D Preferred stockholders totaling approximately $10.4
million or $0.56 per share.
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During the year ended December 31, 2011, we declared
dividends to common stockholders totaling $2.2 billion
or $2.44 per share, of which $552.8 million were paid to
stockholders on January 27, 2012. During the year
ended December 31, 2011, we declared dividends to
Series A Preferred stockholders totaling approximately
$14.6 million or $1.97 per share, and Series B Preferred
stockholders totaling approximately $2.3 million or
$1.50 per share, which were paid to stockholders on
January 3, 2012.
Leverage and Capital
We believe that it is prudent to maintain a conservative
debt-to-equity ratio as there continues to be volatility in
the mortgage and credit markets. Our capital policy
governs our capital and leverage position including
setting limits. Based on the guidelines, we generally
expect to maintain a ratio of debt-to-equity of less than
12:1. Our actual leverage ratio varies from time to time
based
our
management’s opinion of the level of risk of our assets
and liabilities, our liquidity position, our level of unused
borrowing capacity, the availability of credit, over-
collateralization levels required by lenders when we
pledge assets to secure borrowings and our assessment
of domestic and international market conditions.
including
factors,
various
upon
Our debt-to-equity ratio at December 31, 2013
(including
loan participation sold and mortgages
payable which are non-recourse to us) and December
31, 2012 was 5.0:1 and 6.5:1, respectively. Our capital
ratio, which represents our ratio of stockholders’ equity
to total assets, was 15.1% and 11.9% at December 31,
2013 and 2012, respectively. Our net capital ratio was
15.9% and 12.3% at December 31, 2013 and 2012,
respectively. Our net capital ratio represents our ratio of
stockholders’ equity to total assets, adjusted to reflect
net balances of U.S. Treasury securities and U.S.
Treasury securities sold, not yet purchased, reverse
repurchase agreements and repurchase agreements, and
securities borrowed and securities loaned.
57
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Risk Management
We are subject to a variety of risks in the ordinary
conduct of our business. The effective management of
these risks is of critical importance to the overall
the firm. The objective of our risk
success of
management framework is to measure, monitor and
manage these risks. Our risk management framework is
intended to facilitate a holistic, enterprise wide view of
risk. We have built a strong and collaborative risk
culture throughout the firm focused on awareness which
ensures the key risks are understood and managed
appropriately. Each employee
is accountable for
monitoring and managing risk within their area of
responsibility.
Risk Developments in 2013
As a leading mortgage REIT we own a portfolio of real
estate investments and strive to generate net income for
our stockholders, earning a spread between the yield on
our assets and the cost of our borrowings. Accordingly,
we closely monitor conditions in the market that may
negatively affect the value of our assets and the access
and cost of our borrowings.
conducting open market operations (commonly known
as QE3) which began in September 2012, but have
more recently reduced purchases of U.S. Treasury and
Agency mortgage-backed securities. In addition, the
FOMC has provided forward guidance to the markets as
to the level of rates. As a result we have seen
significant volatility in the fixed income markets and
the value of our assets during the year.
There is also considerable uncertainty surrounding
financial regulatory reform which we continue to
monitor closely as it may impact our investment
portfolio and our availability and cost of borrowing.
There have been many proposed and enacted legislation
by various regulatory bodies. Those regulations may
impact the future of the Agencies, wholesale funding
markets, bank capital levels and market liquidity in
general.
Due to the economic uncertainty as well as the myriad
of financial regulation which may directly or indirectly
affect us we decreased leverage throughout the year
strengthening our balance sheet and liquidity profile.
Risk Appetite
The economic conditions during 2013 were challenging
and attributed to volatility in the fixed income markets.
While GDP improved steadily during the year and the
economy appears to continue moving towards the
FOMC targets, details beyond the headline numbers
may reveal economic weakness. In addition, the
employment situation has improved during the year as
measured by average monthly employment increases
and a decline in the unemployment rate. While the
employment picture may look positive, many of the
improvements in metrics can be attributed to reduced
labor force participation. During the year the FOMC
policy
continued
accommodative monetary
an
our
risk management
We maintain a firm-wide risk appetite statement which
defines the types and levels of risk we are willing to
take in order to achieve our business objectives, and
reflects
philosophy.
Fundamentally, we will only engage in risk activities
based on our core expertise that enhance value for our
stockholders. Our
capital
activities
preservation and income generation through proactive
portfolio management, supported by a conservative
liquidity and leverage posture.
focus
on
The risk appetite statement asserts the following key
parameters to guide our risk management activities.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Leverage
Capital buffer
Portfolio composition We will maintain a high quality asset portfolio with (1) at least 75% of the portfolio to
be high quality mortgage-backed securities and short term investments (equivalency
rating of AA+ or better) and (2) an aggregate weighted average equivalency rating of
single “A” or better.
We will operate at a debt-to-equity ratio no greater than 12:1.
We will maintain an excess capital buffer, of which at least 25% will be invested in
AAA rated mortgage-backed securities (or assets of similar or better liquidity
characteristics), to meet the liquidity needs of the firm.
We will manage interest rate risk to protect the portfolio from adverse rate movements.
We will use swaps and other derivatives to hedge market risk, targeting both income and
capital preservation.
Interest rate risk
Hedging
Capital preservation We will seek to protect our capital base through disciplined risk management practices.
Compliance
We will comply with regulatory requirements needed to maintain our REIT status and
our exemption from registration under the Investment Company Act.
when appropriate, with management our
risk
governance structure and our risk management and
risk assessment guidelines and policies. The BRC
oversees our process and policies for determining risk
tolerance and reviews management’s measurement
and monitoring of risk tolerances against established
limits. The BRC and BAC also receive regular reports
from management on various matters related to risk
exposure and the internal control environment.
A series of management committees have oversight or
decision-making responsibilities for risk management
activities. Memberships of these committees are
reviewed regularly to ensure the appropriate personnel
are engaged in the risk management process. Three
primary management
been
established to provide a comprehensive framework for
risk management. The management committees
responsible for risk management of the firm include
the Enterprise Risk Committee, Asset and Liability
Committee
and
Disclosure Committee. While these committees work
in
defined
responsibilities which are summarized below.
the Financial Reporting
collaboration,
committees
have
have
each
they
and
lines
Audit Services is an independent function with
reporting
is
responsible for performing our internal audit activities,
which includes independently assessing and validating
key controls within the risk management framework.
the BAC. Audit Services
to
Governance
through
Risk management begins with our board of directors,
through
the risk
the review and oversight of
management framework, and executive management,
through the ongoing formulation of risk management
practices and related execution in managing risk. The
board of directors exercises its oversight of risk
management primarily
the Board Risk
Committee (or BRC) and Board Audit Committee (or
BAC). Integral to the governance framework are
board of directors and management level committees
expressly engaged in the enterprise risk management
process. The BRC is responsible for oversight of our
risk governance structure, risk management and risk
assessment
regarding
investment/market, credit, operational, liquidity risk
and such other risks as necessary to fulfill the BRC’s
duties and responsibilities, our risk tolerance and our
capital, liquidity and funding. The BAC is responsible
for oversight of the quality and integrity of our
accounting, internal controls and financial reporting
practices, including independent auditor selection,
evaluation and review, and oversight of the internal
audit function.
guidelines
policies
and
Risk assessment and risk management are
the
responsibility of our management. The BRC’s
responsibility in this regard is one of oversight and
review. The BRC will review and discuss, as and
59
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IDIARIES
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60
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Description of Risks
We are subject to a variety of risks due to the business
we operate. Risk categories are an important component
robust enterprise wide
risk management
of a
framework. We have identified the following primary
categories that are utilized throughout the firm to
identify, assess, measure and monitor risk.
Risk
Liquidity Risk
Description
Risk to earnings, capital or business arising from our inability to meet our obligations
when they come due without incurring unacceptable losses because of inability to
liquidate assets or obtain adequate funding.
Investment/Market
Risk
Credit and
Counterparty Risk
Operational Risk
Compliance,
Regulatory and Legal
Risk
Risk to earnings, capital or business resulting in the decline in value of our assets or an
increase in the costs of financing caused from changes in market variables, such as
interest rates, which affect the values of invested securities and other investment
instruments.
Risk to earnings, capital or business, resulting from an obligor’s or counterparty's failure
to meet the terms of any contract or otherwise failure to perform as agreed. This risk is
present in lending, investing, funding and hedging activities.
Risk to earnings, capital, reputation or business arising from inadequate or failed internal
processes or systems, human factors or external events. Model risk is included in
operational risk.
Risk to earnings, capital, reputation or conduct of business arising from violations of, or
nonconformance with internal and external applicable rules and regulations, losses
resulting from lawsuits or adverse judgments, or from changes in the regulatory
environment that may impact our business model.
Liquidity Risk Management
Our liquidity risk management strategy is designed to
ensure the availability of sufficient resources to
support our business and meet our
financial
obligations under both normal and adverse market and
business environments. Our liquidity risk framework
is intended to ensure policies are in place which
includes a risk limit structure and ongoing monitoring
against those limits. Our liquidity risk management
practices have been formulated based on empirical
experience operating through business cycles and
periods of market volatility including the recent
risk management
financial crisis. Our
practices consist of the following primary elements:
liquidity
Funding
Excess Liquidity
Maturity Profile
Stress Testing
Liquidity Management
Policies
Funding
Availability of diverse and stable sources of funds.
Excess liquidity primarily in the form of unencumbered assets.
Diversity and tenor of liabilities and modest use of leverage.
Scenario modeling to measure the resiliency of our liquidity position.
Comprehensive policies including monitoring, risk limits and a contingent
funding plan (CFP).
financing sources are
Our primary
repurchase
agreements and various forms of equity. Through the
judicious use of leverage, we maintain excess liquidity
through
in high quality unencumbered
assets, which serve as our capital buffer.
investing
Repurchase agreements are our primary source of debt
financing. We conservatively manage our repurchase
agreement (or repo) funding position through a variety
of methods including diversity, breadth and depth of
counterparties and maintaining a staggered and longer-
term maturity profile.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
We anticipate that, upon repayment of each borrowing
under a repurchase agreement, we will use the
collateral immediately for borrowing under a new
repurchase agreement. We have not at the present
time entered into any commitment agreements under
which the lender would be required to enter into new
repurchase agreements during a specified period of
time.
Our repurchase agreements generally provide that the
valuations for the Agency mortgage-backed securities
securing our repurchase agreements are to be obtained
from a generally recognized source agreed to by the
parties. However, our repurchase agreements provide
that our lenders have the sole discretion to determine
the value of the Agency mortgage-backed securities
securing our repurchase agreements. In determining
the value of the Agency mortgage-backed securities
securing our repurchase agreements, such lenders are
required to act in good faith in making such valuation
determinations and, in certain of these instances, are
also required to act reasonably in this determination.
Our repurchase agreements generally provide that in
the event of a margin call we must provide additional
securities or cash on the same business day that a
margin call is made. Through December 31, 2013, we
did not have any margin calls on our repurchase
agreements that we were not able to satisfy with either
cash or additional pledged collateral. However,
the mortgages
should prepayment
speeds on
underlying our Agency mortgage-backed securities
and/or market interest rates suddenly increase or
market values decrease, margin calls on our
repurchase agreements could result, causing an
adverse change in our liquidity position.
At December 31, 2013, we had total pledged collateral
for repurchase agreements and interest rate swaps of
$67.9 billion. The weighted average haircut was
approximately 5% on repurchase agreements. The
quality and character of the Agency mortgage-backed
securities that we pledge as collateral under the
repurchase agreements and interest rate swaps did not
materially change during the year ended December 31,
2013 compared to the year ended December 31, 2012,
and our counterparties did not materially alter any
requirements, including required haircuts, related to
the collateral we pledge under repurchase agreements
the year ended
and
December 31, 2013.
interest rate swaps during
We had outstanding $61.8 billion with a weighted
average borrowing rate of 0.68% and weighted
average remaining maturities of 204 days as of
December 31, 2013.
At December 31, 2013 the repurchase agreements had
the following remaining maturities and weighted
average rates:
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days
Total
Re purchas e
Agre e me nts
De ce mbe r 31, 2013
We ighte d
Ave rage Rate
(dollars in thous ands )
% of Total
$ -
21,171,574
13,373,921
3,592,266
4,010,334
19,632,906
$ 61,781,001
0.00%
0.36%
0.43%
0.44%
0.52%
1.29%
0.68%
0.0%
34.3%
21.6%
5.8%
6.5%
31.8%
100.0%
Excess Liquidity
Our primary source of liquidity for the firm is the
availability of unencumbered assets which may be
provided as collateral to support additional funding
needs. We target minimum thresholds of available,
unencumbered assets to maintain excess liquidity. The
following table illustrates our asset portfolio and those
which are available to support potential collateral
62
obligations and funding needs. Assets are considered
encumbered if pledged as collateral against an existing
liability, and therefore no longer available to support
considered
additional
unencumbered if it has not been pledged. The
following table provides the carrying amount of our
encumbered and unencumbered financial assets as of
December 31, 2013:
funding. An
asset
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Financial Assets:
Cash and cash equivalents
Investments, at fair value:
U.S. Treasury securities
Agency mortgage-backed securities
Agency debentures
Commercial real estate debt and preferred equity
Corporate debt
Total financial assets
Encumbered
Unencumbered
(dollars in thousands)
Total
$
371,790
$
180,646
$
552,436
1,113,027
63,897,873
2,931,261
-
-
$
68,313,951
-
6,830,483
38,625
1,583,969
117,687
8,751,410
$
1,113,027
70,728,356
2,969,886
1,583,969
117,687
77,065,361
$
The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition.
We maintain liquid assets in order to satisfy our
current and future obligations in normal and stressed
operating environments. These are held as the primary
means of liquidity risk mitigation. The composition of
our liquid assets is considered as well and is subject to
certain parameters. The composition is monitored for
concentration risk, asset type and ratings. We believe
the assets we consider liquid can be readily converted
into cash, through liquidation or used as collateral in
financing arrangements. Liquid assets comprise cash
and cash equivalents, highly liquid securities including
U.S. Treasury and Agency securities and other assets
which we determine have characteristics indicative of
sufficient liquidity during normal and stressed market
environments. Our non-cash assets are largely actual
or implied AAA assets, and accordingly, we have not
had, nor do we anticipate having, difficulty in
converting our assets to cash. Our balance sheet also
generates liquidity on an on-going basis through
mortgage principal and interest repayments and net
earnings held prior to payment of dividends. The
majority of our liquid assets are held at our parent
level or in unrestricted subsidiaries. Carrying value
represents the market value of assets. The following
table presents our liquid and total assets as of
December 31, 2013.
Liquid Asse ts
Cash and cash equivalents
U.S. Treasury and Agency securities
Total liquid assets
Percentage of liquid assets to total assets
Maturity Profile
We consider the profile of our assets, liabilities and
derivatives when managing both liquidity risk as well
as investment/market risk employing a measurement
of both the maturity gap and interest rate gap.
We determine the amount of liquid assets that are
required to be held by monitoring several liquidity
metrics. We utilize several modeling techniques to
analyze our current and potential obligations including
the expected cash flow from our assets, liabilities and
the
derivatives. The
expected maturities and cash flows of our assets,
following
illustrates
table
Carrying Value
(dollars in thousands)
$
552,436
74,476,749
$
75,029,185
91.59%
liabilities and derivatives. The table is based on a static
portfolio and assumes no reinvestment of asset cash
flows and no future liabilities are entered into. In
assessing the maturity of our assets, liabilities and off
balance sheet obligations we typically use the stated
maturities unless otherwise described below. Asset
and liability cash flows are included in the maturity
analysis as follows:
Cash and cash equivalents are included in the
‘within 3 months’ maturity bucket, and not
the contractual maturity as they are typically
held for a short period of time;
63
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Repo, reverse repo, debt securities and
securities loaned and borrowed are modeled
their contractual maturity and
based on
segmented
the appropriate maturity
into
bucket;
Assets
prepayment
characteristics, including Agency mortgage-
backed securities, are placed into maturity
buckets based on their prepay adjusted cash
flows;
exhibit
that
Assets with stated maturities,
including
Agency debentures and U.S. Treasury
securities, are placed into maturity buckets
based on their contractual maturities;
Financial assets with no contractual maturity
including certain types of commercial real
estate assets are included in the ‘3 years and
over’ maturity bucket; and
off
sheet
commitments are classified on the basis of
the earliest date which they can be drawn
down.
Loans
balance
other
or
Our interest rate sensitivity gap is the difference
between Interest Earning Assets and Interest Bearing
Liabilities maturing or re-pricing within a given time
period. A gap is considered positive when the amount
of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive
liabilities exceeds interest-rate sensitive assets. During
a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net
interest income. During a period of falling interest
rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap
would tend to affect net interest income adversely.
Because different types of assets and liabilities with
the same or similar maturities may react differently to
changes in overall market rates or conditions, changes
in interest rates may affect net interest income
positively or negatively even if an institution were
perfectly matched in each maturity category. The
amount of assets and liabilities utilized to compute our
interest rate sensitivity gap was determined
in
accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans and securities
are included in the period in which their interest rates
are first scheduled to adjust and not in the period in
which
they mature. The amount of repurchase
agreements has been adjusted to include the effects of
interest rate swaps, which effectively lock in our
financing costs for a longer term. The interest rate
sensitivity of our assets and liabilities in the table
could vary substantially based on actual prepayment
experience.
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64
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Financial Asse ts:
Cash and cash equivalents
Reverse repurchase agreements
Securities borrowed
U.S. Treasury securities
Agency Mortgage-backed securities (principal)
Agency debentures (principal)
Corporate debt (principal)
Commercial real estate debt and preferred
equity (principal)
Total financial assets
Financial Liabilitie s:
Repurchase agreements
U.S. Treasury securities sold, not yet purchased
Securities loaned
Convertible Senior Notes (principal)
Participations Sold
Total financial liabilities
Le ss than 3
Months
3-12 Months
More than 1 Ye ar
to 3 Ye ars
3 Years and
Over
Total
$
552,436
100,000
2,582,893
-
-
-
-
(dollars in thousands)
-
$
-
-
-
-
-
-
-
$
-
-
189,465
-
-
12,489
-
$
-
-
928,450
-
-
105,935
$
552,436
100,000
2,582,893
1,117,915
-
-
118,424
12,973
3,248,302
$
$
2,071
2,071
$
447,319
649,273
1,124,860
2,159,245
$
1,587,223
6,058,891
$
$
$
$
38,137,761
-
2,527,668
-
-
40,665,429
13,793,240
-
-
-
-
13,793,240
6,390,000
928,565
-
857,541
-
8,176,106
$
3,460,000
989,829
-
14,050
4,463,879
$
$
$
61,781,001
1,918,394
2,527,668
857,541
14,050
67,098,654
$
$
$
Maturity gap
Cumulative maturity gap
$
(37,417,127)
$
(13,791,169)
$
(7,526,833)
$
(2,304,634)
$
(61,039,763)
$
(37,417,127)
$
(51,208,296)
$
(58,735,129)
$
(61,039,763)
Interest rate sensitivity gap
Cumulative rate sensitivity gap
Cumulative rate sensitivity gap as a % of total
rate sensitive assets
$
15,536,338
$
(13,070,701)
$
(29,139,107)
$
37,063,816
$
10,390,346
$
15,536,338
$
2,465,637
$
(26,673,470)
$
10,390,346
20.05%
3.18%
(34.42%)
13.41%
The methodologies we employ for evaluating interest
rate risk include an analysis of our interest rate “gap”,
measurement of the duration and convexity of our
portfolio and sensitivities to interest rates and spreads.
The gap is the difference between Interest Earning
Assets and Interest Bearing Liabilities including the
effect of derivatives. A gap is considered negative
when the amount of interest-rate sensitive liabilities
and derivatives exceed interest-rate sensitive assets.
During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income,
while a positive gap would tend to result in an increase
in net interest income. During a period of falling
interest rates the opposite would be expected. Because
different types of assets and liabilities with the same or
similar maturities may react differently to changes in
overall market rates or conditions, changes in interest
rates may affect net interest income differently than
expected. The table above sets forth the estimated
interest rate sensitivity of our Interest Earning Assets
and Interest Bearing Liabilities and hedges at
December 31, 2013. The interest rate sensitivity of
our assets and liabilities in the table could vary
substantially based on actual experience.
Stress Testing
65
We utilize liquidity stress testing to ensure we have
sufficient liquidity under a variety of scenarios and
stresses. These stress tests are considered and assist
with the management of our pool of liquid assets, and
influence our current and future funding plans. Our
stress tests are modeled over both short term and
longer time horizons. The stresses applied include
market-wide and firm-specific stresses. Standard stress
tests are performed regularly. Some of the elements
used in our stress testing are as follows:
Stress
tests
assume
all
contractual
obligations are met
Unencumbered
liquid collateral haircuts
increase, therefore decreasing the liquidity
generated against those assets
Unencumbered illiquid assets are assumed to
have no liquidity value
of
some
Loss
securities
financing
transactions as they come due and haircuts
on the arrangement that are renewed increase
An adverse interest rate scenario is applied
reducing market values and
requiring
additional collateral on securities financing
transactions
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Forecasted asset originations and funding
lending portfolios
lending and
requirements for our
including middle market
commercial real estate are uninterrupted
Dividends
and
administrative expenses continue as planned
payable
general
and
No issuance of debt or equity securities
Any uncommitted funding vehicles are not
available or utilized
Liquidity Management Policies
We utilize a comprehensive liquidity policy structure
to inform our liquidity risk management practices
including monitoring and measurement, along with
well-defined key
limits. Both quantitative and
qualitative targets are utilized to measure the ongoing
stability and condition of the liquidity position, and
include the level and composition of unencumbered
assets, as well as both short-term and long-term
sustainability of the funding composition under stress
conditions.
We also monitor early warning metrics designed to
measure the quality and depth of liquidity sources
based upon both company-specific and macro
environmental conditions. The metrics assess both the
short-term and long-term liquidity conditions and are
integrated into our CFP, with various liquidity ratings
influencing management actions with respect
to
contingency planning and potential related actions.
Investment/Market Risk Management
One of the primary risks we are subject to is interest
rate risk. Changes in the level of interest rates can
affect our net interest income, which is the difference
between the income we earn on our Interest Earning
66
Assets and the interest expense incurred from Interest
Bearing Liabilities and derivatives. Changes in the
level of interest rates can also affect the value of our
securities and our ability to realize gains from the sale
of these assets. We may utilize a variety of financial
instruments, including interest rate swaps, swaptions,
options and other hedges, in order to limit the effects
of interest rates on our results. Our portfolio and the
value of our portfolio, including derivatives, may be
adversely affected as a result of changing interest rates
and spreads.
We simulate a wide variety of interest rate scenarios in
evaluating our risk. Rates are shocked up and down
including both parallel and non-parallel rate scenarios.
Scenarios are run to capture our sensitivity to interest
rates, spreads and the shape of the yield curve. We
also consider assumptions affecting our analysis such
as prepayments. In addition to predefined interest rate
scenarios, we utilize Value-at-Risk measures
to
estimate potential losses in the portfolio over various
time horizons utilizing various confidence levels. The
following tables estimate the potential changes in
economic net interest income over a twelve month
period and the immediate effect on our portfolio
market value, should interest rates increase or decrease
by 25, 50 or 75 basis points, and mortgage option
adjusted spreads increase or decrease by 5, 15 or 25
basis points, assuming the shocks will be parallel and
instantaneous. All changes to income and portfolio
market value are measured as percentage changes
from the projected net interest income and portfolio
value at the base interest rate scenario. The base
interest rate scenario assumes
interest rates at
December 31, 2013 and various estimates regarding
prepayments and all activities are made at each level
of rate shock. Actual results could differ significantly
from these estimates.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Change in Interest Rate
-75 Basis Points
-50 Basis Points
-25 Basis Points
Base Interest Rate
+25 Basis Points
+50 Basis Points
+75 Basis Points
Projected Percentage
Change in Economic Net
Interest Income (1)
(12.7%)
(8.0%)
(3.3%)
-
5.8%
9.7%
13.0%
Change in Portfolio Value,
with Effect of Interest Rate
Swaps
1.3%
0.9%
0.5%
-
(0.5%)
(1.1%)
(1.7%)
Estimated
Change as a
% on NAV
8.3%
5.8%
3.1%
-
(3.4%)
(6.9%)
(10.6%)
(1) S c e n a rios in c lud e In ve s tme n t S e c uritie s , re pu rc ha s e a gre e me n ts a nd inte re s t ra te s wa ps on ly. Ec o no mic n e t in te re s t inc ome inc lu de s in te re s t
e xpe n s e o n in te re s t ra te s wa p s .
MBS Spread Shock
-25 Basis points
-15 Basis points
-5 Basis points
Base Interest Rate
+5 Basis points
+15 Basis points
+25 Basis points
Estimated Change in
Portfolio Market Value
1.5%
0.9%
0.3%
-
(0.3%)
(0.9%)
(1.5%)
Estimated Change as a %
on NAV
9.8%
5.8%
1.9%
-
(2.0%)
(5.8%)
(9.6%)
Value-at-Risk (VaR) analysis is a technique that
estimates the potential losses that could occur on risk
positions as a result of movements in market rates and
prices over a specified time horizon and to a given
level of confidence. VAR calculations are performed
for all material positions in our investment portfolio
including hedges as a tool for managing our risk. The
VaR models are based predominantly on historical
simulation. These models derive future scenarios from
past series of recorded market rate and price changes.
VaR is utilized in our Economic Capital framework.
For a full discussion of our capital management
process please refer to the section titled “Capital
Management” of Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations”.
Credit and Counterparty Risk Management
Our investment strategy is to profitably invest in assets
and hedging vehicles within the confines of the risk
appetite statement. The Investment Teams seek to
generate the highest returns on capital invested, after
consideration of the amount, nature and variability of
anticipated cash flows from the asset; the ability to
67
pledge the asset to secure collateralized borrowings;
the credit of the underlying borrower; the capital
requirements determined by our capital policy
resulting from the purchase and financing of the asset
and the impact of the asset to portfolio targets and
limits.
Key risk parameters have been established to further
specify Annaly’s credit risk appetite. We will maintain
a high quality asset portfolio with at least 75% of the
portfolio to be high quality mortgage-backed securities
and short term investments (equivalency rating of
AA+ or better), and an aggregate weighted average
equivalency rating of single “A” or better.
While we do not expect to encounter credit risk in our
Agency investments, we face credit risk on the non-
Agency portions of our portfolio. The Company is
exposed to credit risk on commercial real estate
investments and corporate debt. We generally face
more credit risk on investments where we hold
subordinated debt or equity positions. The Company is
exposed to risk of loss if an issuer, borrower or a
contractual
counterparty
obligations. The Company has established policies and
to perform
fails
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
including
procedures for mitigating credit risk,
reviewing and establishing limits for credit exposure,
limiting
transactions with specific counterparties,
maintaining qualifying collateral and continually
assessing
the creditworthiness of counterparties,
borrowers and issuers. We only originate or purchase
commercial investments that meet our comprehensive
underwriting process and credit standards and are
approved by the appropriate committee. Once a
is made, our ongoing
commercial
investment
surveillance process includes regular reviews, analysis
and oversight of investments by our investment
personnel and appropriate committee. We review
credit and other risks of loss associated with each
investment and determine the appropriate allocation of
capital to apply to each investment under our capital
policy. Our management will monitor the overall
portfolio risk and determine levels of provision for
loss. Our portfolio composition as of December 31,
2013 and 2012 was as follows:
Asset Portfolio (using balance sheet values)
Category
Agency mortgage-backed securities(1)
Agency debentures
Commercial real estate debt and equity investments(2)
Other mortgage-backed-securities
Corporate debt, held for investment
(1)
Including TBAs held for delivery.
(2) Net of unamortized origination fees.
2013
93.7%
4.0%
2.1%
0.0%
0.2%
2012
97.5%
2.4%
0.0%
0.0%
0.1%
we pledge securities and cash as collateral as part of a
margin arrangement. If a counterparty were to default
on its obligations, we would be exposed to a loss to a
derivative counterparty to the extent that the amount of
our securities or cash pledged exceeded the unrealized
loss on the associated derivative and we were not able
to recover the excess collateral.
We monitor our exposure to counterparties across
several dimensions including by type of arrangement,
collateral
ratings and
geography.
type, counterparty
type,
Our use of repurchase and derivative agreements
create exposure to credit risk relating to potential
losses that could be recognized if the counterparties to
these agreements fail to perform their obligations
under the contracts. In the event of default by a
counterparty, we could have difficulty obtaining our
assets pledged as collateral. A significant portion of
our Agency securities are financed with repurchase
agreements by pledging our agency securities as
collateral to the lender. The collateral we pledge
exceeds the amount of the borrowings under each
agreement. If the counterparty to the repurchase
agreement defaults on its obligations and we are not
able to recover our pledged asset, we are at risk of
losing
the over-collateralization or haircut. The
amount of this exposure is the difference between the
the
amount
counterparty and the fair value of the collateral
pledged by us to the lender including accrued interest
receivable on such collateral.
interest due
to us plus
loaned
to
We also use interest rate swaps and other derivatives
to manage interest rate risk. Under these agreements,
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
The following table summarizes our exposure to counterparties by geography:
Country
Number of
Counterparties
Repurchase
Agreement
Financing
Interest Rate
Swaps at Fair
Value
(dollars in thousands)
Exposure (1)
$
North America
38,390,223
Europe
18,312,732
Asia (non-Japan)
1,052,888
Japan
4,025,158
Total
61,781,001
(1) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement financing and
2,849,426
1,058,768
56,175
244,276
4,208,645
(481,837)
(100,902)
-
-
(582,739)
16
11
1
4
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$
$
$
$
$
unrealized loss on swaps for each counterparty.
Operational Risk Management
We are subject to operational risk in each of our
business and support functions. Operational risk may
arise from internal or external sources including
human error, fraud, systems issues, process change,
vendors, business interruptions and other external
events. Model risk considers potential errors with a
model’s results due to uncertainty in model parameters
and inappropriate methodologies used. The result of
these risks may include financial loss and reputational
damage. We manage operational risk through a variety
of tools including policies and procedures which cover
topics such as business continuity, personal conduct
and vendor management. Other tools include training,
on topics such as cyber security awareness; testing,
including disaster recovery testing; systems controls,
including access controls; and monitoring, which
includes the use of key risk indicators. Employee
level lines of defense against operational risk include
the empowerment of business units to identify and
mitigate operational risk sources, an independent
operational risk group which reports to the Chief Risk
Officer of our Manager, testing by our internal audit
staff, and our overall governance framework.
Compliance,
Management
Regulatory
and
Legal
Risk
Our business is organized as a REIT and we plan to
continue to meet the requirements for taxation as a
REIT. The determination that we are a REIT requires
an
and
circumstances. Accordingly, we closely monitor our
REIT status within our risk management program.
The financial services industry is highly regulated and
analysis of various
factual matters
to
receive
increasing attention
continues
from
regulators which may impact both our company as
well as our business strategy. We proactively monitor
the potential impact regulation may have both directly
and indirectly on our firm. In conjunction with the
legal department we maintain a process to actively
monitor both actual and potential legal action that may
Our risk management framework is
affect us.
designed to identify, monitor and manage these risks
under the oversight of the Enterprise Risk Committee.
We currently rely on the exemption from registration
provided by Section 3(c)(5)(C) of the Investment
Company Act and we plan to continue to meet the
requirements for this exemption from registration.
The determination that we qualify for this exemption
from registration depends on various factual matters
and circumstances. Accordingly, in conjunction with
the
legal department, we closely monitor our
compliance with Section 3(c)(5)(C) within our risk
management program. The monitoring of this this risk
is also under the oversight of the Enterprise Risk
Committee.
Critical Accounting Policies
Our critical accounting policies are as follows:
Valuation of Financial Instruments
Agency mortgage-backed securities and debentures
There is an active market for Agency mortgage-
backed securities and debentures. Since we primarily
invest in securities that can be measured from actively
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
the Treasury curve and
quoted prices, there is a high degree of observable
inputs and less subjectivity in measuring fair value.
Internal market values are determined using quoted
prices from the To-Be-Announced (or TBA) security
the underlying
market,
characteristics of the individual securities, which may
include coupon, periodic and life caps, reset dates and
the expected life of the security. All internal market
values are compared to external sources or dealer
quotes to determine reasonableness. Additionally,
securities used as collateral for repurchase agreements
are priced daily by counterparties to ensure sufficient
collateralization, providing additional verification of
our internal pricing.
Interest rate swaps
We use the overnight indexed swap (or OIS) curve as
an input to value substantially all of our interest rate
swaps. We believe using the OIS curve, which reflects
the interest rate typically paid on cash collateral,
enables us to most accurately determine the fair value
of interest rate swaps.
Consistent with market
practice, we have negotiated agreements with certain
counterparties to exchange collateral (or margining)
based on the level of fair values of the interest rate
swaps. Through this margining process, one party or
each party to a derivative contract provides the other
party with information about the fair value of the
the amount of
derivative contract
collateral required, providing additional verification of
our recorded fair value of the interest rate swaps.
to calculate
Revenue Recognition
Interest income on Agency mortgage-backed securities
and debentures is recognized over the projected life of
the securities using the interest method. The projected
life of the securities is determined based on expected
prepayment speeds, past prepayment history of the
security, government initiatives that would affect the
Agency mortgage-backed securities market and
market consensus. Adjustments are made for actual
prepayment activity as it relates to calculating the
effective yield. Gains or
investment
securities are recorded on trade date based on the
average cost of the security.
losses on
Use of Estimates
The use of GAAP requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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70
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
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Glossary of Terms
A
Adjustable-Rate Mortgage (ARM)
A mortgage loan on which interest rates are adjusted at
regular intervals according to predetermined criteria.
An ARM’s interest rate is tied to an objective,
published interest rate index.
Agency
Refers to a federally chartered corporation, such as the
Federal National Mortgage Association, or the Federal
Home Loan Mortgage Corporation, or an agency of
the U.S. Government, such as
the Government
National Mortgage Association.
Agency Debentures
Debt issued by a federal agency or a government-
sponsored enterprise (GSE) for financing purposes.
These types of debentures are not backed by collateral,
but by the integrity and credit worthiness of the
issuer. Agency debentures issued by a GSE are
backed only by that GSE's ability to pay. The callable
feature allows the agency to repay the bond prior to
maturity.
Agency Mortgage-Backed Securities
Refers to residential mortgage-backed securities that
are issued or guaranteed by an Agency.
Amortization
Liquidation of a debt through installment payments.
Average Life
On a mortgage-backed security, the average time to
receipt of each dollar of principal, weighted by the
amount of each principal prepayment, based on
prepayment assumptions.
B
Basis Point
Smallest measure used in quoting yields on bonds and
notes. One basis point is 0.01% of yield. For example,
a bond’s yield that changed from 6.52% to 7.19%
would be said to have moved 67 basis points.
Benchmark
A bond whose terms are used for comparison with
other bonds of similar maturity. The global financial
market typically looks to U.S. Treasury securities as
benchmarks.
71
Beneficial Owner
One who benefits from owning a security, even if the
security’s title of ownership is in the name of a broker
or bank ("street name").
B-Note
Subordinate mortgage notes and/or subordinate
mortgage loan participations.
B-Piece
The most subordinate commercial mortgage-backed
security bond class.
Bond
(1) The written evidence of debt, bearing a stated rate
or stated rates of interest, or stating a formula for
determining that rate, and maturing on a date certain,
on which date and upon presentation a fixed sum of
money plus interest (usually represented by interest
coupons attached to the bond) is payable to the holder
or owner. (2) For purposes of computations tied in to
“per bond,” a $1,000 increment of an issue (no matter
what the actual denominations are); (3) Bonds are
long-term securities with a maturity of greater than
one year.
Book Value Per Share
Calculated by summing common stock, additional
paid-in capital, accumulated other comprehensive
income (loss) and accumulated deficit and dividing
that number by the total common shares outstanding.
Broker
Generic name for a securities firm engaged in both
buying and selling securities on behalf of customers
on its own account.
C
Capital Buffer
Includes unencumbered financial assets which can be
utilized as collateral to meet liquidity needs.
Capital Ratio
Calculated as total stockholders’ equity divided by
total assets.
Carry
The cost of borrowing
finance an
underwriting or trading position. A positive carry
funds
to
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
happens when the rate on the securities being financed
is greater than the rate on the funds borrowed. A
negative carry is when the rate on the funds borrowed
is greater than the rate on the securities that are being
financed.
Collateral
Securities, cash or property pledged by a borrower to
secure payment of a loan or derivative. If the borrower
fails to repay the loan, the lender may take ownership
of the collateral.
for gains or
Core Earnings and Core Earnings Per Basic Share
Non-GAAP financial measures that represent GAAP
net income and GAAP basic earnings per share
adjusted
losses on disposals of
investments, trading assets and termination of interest
rate swaps, unrealized gains or losses on interest rate
swaps and Agency interest-only mortgage-backed
securities, net loss on extinguishment of the 4%
Convertible Senior Notes due 2015, net gains and
losses on trading assets, impairment losses and loss on
previously held equity interest in CreXus.
Collateralized Mortgage Obligation (CMO)
A multiclass bond backed by a pool of mortgage pass-
through securities or mortgage loans.
Corporate Debt
Non-government debt securities. Long-term corporate
debt is issued as bonds.
Commodity Futures Trading Commission (CFTC)
An independent U.S. federal agency established by the
Commodity Futures Trading Commission Act of 1974.
The CFTC regulates the commodity futures and
options markets. Its goals include the promotion of
competitive and efficient futures markets and the
protection of investors against manipulation, abusive
trade practices and fraud.
Counterparty
One of two entities in a transaction. For example, in
the bond market a counterparty can be a state or local
government, a broker-dealer or a corporation.
Coupon
The interest rate on a bond that is used to compute the
amount of interest due on a periodic basis.
Constant Prepayment Rate (CPR)
The percentage of outstanding mortgage loan principal
that prepays in one year, based on the annualization of
the Single Monthly Mortality, which reflects the
outstanding mortgage loan principal that prepays in
one month.
Credit and Counterparty Risk
Risk to earnings, capital or business, resulting from an
obligor’s or counterparty's failure to meet the terms of
any contract or otherwise failure to perform as agreed.
Credit and counterparty risk is present in lending,
investing, funding and hedging activities.
Contingent Funding Plan (CFP)
An action plan used for responding to a liquidity
crisis. It is to be enacted when we experience
heightened concerns regarding our liquidity position.
Conventional Mortgage Loan
A mortgage loan granted by a bank or thrift institution
that is based solely on real estate as security and is not
insured or guaranteed by a government agency.
Convertible Securities
Securities which may be converted into shares of
another security under stated terms, often into the
issuing company's common stock.
Convexity
A measure of the change in a security’s duration with
respect to changes in interest rates. The more convex a
security is, the more its duration will change with
interest rate changes.
Current Face
The current remaining monthly principal on a
mortgage security. Current face is computed by
multiplying the original face value of the security by
the current principal balance factor.
D
Dealer
Person or organization that underwrites, trades and
sells securities, e.g., a principal market-maker in
securities.
Default Risk
Possibility that a bond issuer will fail to pay principal
or interest when due.
Derivative
A financial product that derives its value from the
price, price fluctuations and price expectations of an
underlying instrument (e.g. futures contracts, options,
interest rate swaps, interest rate swaptions and certain
to-be-announced securities).
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Discount Price
When the dollar price is below face value, it is said to
be selling at a discount.
Discount Rate
The rate the Federal Reserve charges on loans to
member banks.
Federal Deposit Insurance Corporation (FDIC)
An independent agency created by the U.S. Congress
to maintain stability and public confidence in the
nation's
insuring deposits,
examining and supervising financial institutions for
safety and soundness and consumer protection, and
managing receiverships.
financial system by
Duration
The weighted maturity of a fixed-income investment’s
cash flows, used in the estimation of the price
sensitivity of fixed-income securities for a given
change in interest rates.
E
Economic Capital
A measure of the risk a firm is subject to. It is the
amount of capital a firm needs as a buffer to protect
against risk. It is a probabilistic measure of potential
future losses at a given confidence level over a given
time horizon.
Economic Interest Expense
Non-GAAP financial measure that is composed of
GAAP interest expense adjusted for gains or losses on
interest rate swaps.
Economic Net Interest Income
Non-GAAP financial measure that is composed of
GAAP net interest income adjusted for gains or losses
on interest rate swaps.
Encumbered Assets
Assets on the company’s balance sheet which have
been pledged as collateral against an existing liability.
F
Face Amount
The par value (i.e., principal or maturity value) of a
security appearing on the face of the instrument.
Factor
A decimal value reflecting the proportion of the
outstanding principal balance of a mortgage security,
which changes over time, in relation to its original
principal value.
Fannie Mae
Federal National Mortgage Association.
Federal Funds Rate
The interest rate charged by banks on overnight loans
of their excess reserve funds to other banks.
Fixed-Rate Mortgage
A mortgage
level monthly payments,
determined at the outset, which remain constant over
the life of the mortgage.
featuring
Floating Rate Bond
A bond for which the interest rate is adjusted
periodically according to a predetermined formula,
usually linked to an index.
Floating Rate CMO
A CMO tranche which pays an adjustable rate of
interest tied to a representative interest rate index such
as the LIBOR, the Constant Maturity Treasury or the
Cost of Funds Index.
Freddie Mac
Federal Home Loan Mortgage Corporation.
Futures Contract
A legally binding agreement to buy or sell a
commodity or financial instrument in a designated
future month at a price agreed upon at the initiation of
the contract by the buyer and seller. Futures contracts
are standardized according to the quality, quantity, and
delivery time and location for each commodity. A
futures contract differs from an option in that an
option gives one of the counterparties a right and the
other an obligation to buy or sell, while a futures
contract
both
an
counterparties, one to deliver and the other to accept
delivery. A futures contract is part of a class of
financial instruments called derivatives.
obligation
represents
of
G
GAAP
Accounting principles generally accepted in the United
States of America.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Ginnie Mae
Government National Mortgage Association.
H
Hedge
An investment made with the intention of minimizing
the impact of adverse movements in interest rates or
securities prices.
I
In-the-Money
Description for an option that has intrinsic value and
can be sold or exercised for a profit; a call option is in-
the-money when the strike price is below the market
price of the underlying formatting security.
Interest Bearing Liabilities
Refers to repurchase agreements, participation sold,
convertible senior notes, securities loaned and U.S.
Treasury securities sold, not yet purchased.
Interest Earning Assets
Refers to Investment Securities, securities borrowed,
U.S. Treasury
repurchase
agreements, cash and cash equivalents and commercial
real estate debt and preferred equity interests.
securities,
reverse
Interest Only (IO) Bond
The interest portion of mortgage, Treasury or bond
payments, which is separated and sold individually
from the principal portion of those same payments.
Interest Rate Risk
The risk that an investment's value will change due to
a change in the absolute level of interest rates, in the
spread between two rates, in the shape of the yield
curve or in any other interest rate relationship. As
market interest rates rise, the value of current fixed
income investment holdings declines. Diversifying,
deleveraging and hedging techniques are utilized to
mitigate this risk. Interest rate risk is a form of market
risk.
Interest Rate Swap
to
A binding agreement between counterparties
exchange periodic
interest payments on some
predetermined dollar principal, which is called the
notional principal amount. For example, one party will
pay fixed and receive variable.
The swaption agreement will specify whether the
buyer of the swaption will be a fixed-rate receiver or a
fixed-rate payer. The writer of the swaption becomes
the counterparty to the swap if the buyer exercises.
Internal Capital Adequacy Assessment Program
(ICAAP)
The ongoing assessment and measurement of our
risks, and the amount of capital which is necessary to
hold against those risks. The objective is to ensure
that the firm is appropriately capitalized relative to the
risks in our business.
International Swaps and Derivatives Association
Master Agreements (ISDA)
Standardized contract developed by ISDA used as an
umbrella under which bilateral derivatives contracts
are entered into.
Inverse IO Bond
An interest-only bond whose coupon is determined by
a formula expressing an inverse relationship to a
benchmark rate, such as LIBOR. As the benchmark
rate changes, the IO coupon adjusts in the opposite
direction. When the benchmark rate is relatively low,
the IO pays a relatively high coupon payment, and
vice versa.
Investment/Market Risk
Risk to earnings, capital or business resulting in the
decline in value of our assets caused from changes in
market variables, such as interest rates, which affect
the values of invested securities and other investment
instruments.
Investment Securities
Refers to Agency mortgage-backed securities and
Agency debentures.
L
Leverage
The use of borrowed money to increase investing
power.
Leverage Ratio
Calculated as total debt to total stockholders' equity.
and
Includes non-recourse
mortgages payable.
loan participations
Interest Rate Swaption
Options on interest rate swaps. The buyer of a
swaption has the right to enter into an interest rate
swap agreement at some specified date in the future.
LIBOR (London Interbank Offered Rate)
The rate banks charge each other for short-term
Eurodollar loans. LIBOR is frequently used as the
base for resetting rates on floating-rate securities.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Liquidity Risk
Risk to earnings, capital or business arising from our
inability to meet our obligations when they come due
without incurring unacceptable losses because of
inability to liquidate assets or obtain adequate funding.
Long-Term Debt
Debt which matures in more than one year.
M
Master Netting Agreement
An agreement between two counterparties who have
multiple derivative contracts or repurchase / reverse
repurchase agreements with each other that provides
for the net settlement of all contracts, as well as cash
collateral, through a single payment, in a single
currency, in the event of default on or termination of
any one contract.
Monetary Policy
Action taken by the Board of Governors of the Federal
Reserve System to influence the money supply or
interest rates.
Mortgage-Backed Securities (MBS)
A security representing a direct interest in a pool of
mortgage loans. The pass-through issuer or servicer
collects the payments on the loans in the pool and
"passes through" the principal and interest to the
security holders on a pro rata basis.
N
NAV
Net asset value.
Net Capital Ratio
Calculated by taking total stockholders’ equity divided
by total assets less the net balances of U.S. Treasury
securities and U.S. Treasury securities sold, not yet
purchased,
repurchase agreements and
repurchase agreements, and securities borrowed and
securities loaned.
reverse
Net Equity Yield
Calculated using GAAP net
income, excluding
depreciation and amortization expense, divided by
average net equity.
Net Interest Income
Represents interest income earned on our portfolio
investments, less interest expense paid for borrowings.
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Net Interest Spread
Calculated by taking the annualized yield on average
interest earning assets minus the annualized cost of
funds on average interest bearing liabilities, including
the net interest payments on interest rate swaps.
Interest earning assets includes Investment Securities
(includes Agency mortgage-backed securities and
Agency debentures), U.S. Treasury
securities,
securities loaned, commercial real estate debt and
preferred equity, reverse repurchase agreements and
cash and cash equivalents.
Notional Amount
A stated principal amount in a derivative contract on
which the contract is based.
O
Option Contract
A contract in which the buyer has the right, but not the
obligation, to buy or sell an asset at a set price on or
before a given date. Buyers of call options bet that a
security will be worth more than the price set by the
option (the strike price), plus the price they pay for the
option itself. Buyers of put options bet that the
security’s price will drop below the price set by the
option. An option is part of a class of financial
instruments called derivatives, which means these
financial instruments derive their value from the worth
of an underlying investment.
Operational Risk
Risk to earnings, capital, reputation or business arising
from
internal processes or
systems, human factors or external events.
inadequate or failed
Original Face
The face value or original principal amount of a
security on its issue date.
Other Income
Represents gains and losses on assets sold, gains and
losses on trading assets and investment advisory and
dividend income.
Out-of-the-Money
Description for an option that has no intrinsic value
and would be worthless if it expired today; for a call
option, this situation occurs when the strike price is
higher than the market price of the underlying
security; for a put option, this situation occurs when
the strike price is less than the market price of the
underlying security.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Over-The-Counter Market (OTC)
A securities market that is conducted by dealers
throughout the country through negotiation of price
rather than through the use of an auction system as
represented by a stock exchange.
P
Pass Through Security
The securitization structure where a GSE or other
entity “passes”
the
borrowers every month to the investor, after deducting
fees and expenses.
the amount collected from
term used
P&I (Principal and Interest)
The
to regularly scheduled
payments or prepayments of principal and of interest
on a mortgage or other security.
to refer
Par
Price equal to the face amount of a security; 100%.
Par Amount
The principal amount of a bond or note due at
maturity. Also known as par value.
Pool
A collection of mortgage loans assembled by an
originator or master servicer as the basis for a security.
In the case of Ginnie Mae, Fannie Mae, or Freddie
Mac mortgage pass-through securities, pools are
identified by a number assigned by the issuing agency.
Premium
The amount by which the price of a security exceeds
its principal amount. When the dollar price of a bond
is above its face value, it is said to be selling at a
premium.
Prepayment
The unscheduled partial or complete payment of the
principal amount outstanding on a mortgage loan or
other debt before it is due.
Prepayment Risk
The risk that falling interest rates will lead to heavy
prepayments of mortgage or other loans, forcing the
rates.
investor
lower prevailing
reinvest at
to
Prime Rate
The indicative interest rate on loans that banks quote
to their best commercial customers.
76
R
Rate Reset
The adjustment of the interest rate on a floating-rate
security according to a prescribed formula.
Real Estate Investment Trust (REIT)
A special purpose investment vehicle that provides
investors with the ability to participate directly in the
ownership or financing of real-estate related assets by
pooling their capital to purchase and manage mortgage
loans and/or income property.
Reinvestment Risk
The risk that interest income or principal repayments
will have to be reinvested at lower rates in a declining
rate environment.
Repurchase Agreement
The sale of securities to investors with the agreement
to buy them back at a higher price after a specified
time period; a form of short-term borrowing. For the
party on the other end of the transaction (buying the
security and agreeing to sell in the future) it is a
reverse repurchase agreement.
Residual
In a CMO, the residual is that tranche which collects
any cash flow from the collateral that remains after
obligations to the other tranches have been met.
Return on Average Equity
Calculated by taking earnings divided by average
stockholders' equity excluding preferred shares.
Reverse Repurchase Agreement
Refer to Repurchase Agreement. From the customer's
perspective, the customer provides a collateralized
loan to the seller.
Risk Appetite Statement
Defines the types and levels of risk the company is
willing to take in order to achieve its business
objectives, and reflects the entity’s risk management
philosophy.
S
Secondary Market
Ongoing market for bonds previously offered or sold
in the primary market.
Settlement Date
The date securities must be delivered and paid for to
complete a transaction.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
Short-Term Debt
Generally, debt which matures in one year or less.
However, certain securities that mature in up to three
years may be considered short-term debt.
individual
Spread
When buying or selling a bond through a brokerage
firm, an
investor will be charged a
commission or spread, which is the difference between
the market price and cost of purchase, and sometimes
a service fee. Spreads differ based on several factors
including liquidity.
T
Target Assets
Includes Agency mortgage-backed securities, to-be-
announced forward contracts, agency debentures,
commercial real estate investments, other mortgage-
backed securities and corporate debt.
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To-Be-Announced Securities (TBAs)
A contract for the purchase or sale of a mortgage-
backed security to be delivered at an agreed-upon
future date but does not include a specified pool
number and number of pools or precise amount to be
delivered.
Total Return
Investment performance measure over a stated time
period which includes coupon interest, interest on
interest, and any realized and unrealized gains or
losses.
U
Unencumbered Assets
Assets on our balance sheet which have not been
pledged as collateral against an existing liability.
Enterprise
Government-Sponsored
U.S.
Obligations (GSE)
Obligations of agencies originally established or
chartered by the U.S. government to serve public
purposes as specified by the U.S. Congress; these
obligations are not explicitly guaranteed as to the
timely payment of principal and interest by the full
faith and credit of the U.S. government.
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U.S. Treasury
U.S. Department of the Treasury.
V
Value-at-Risk (VaR)
A statistical technique which measures the potential
loss in value of an asset or portfolio over a defined
period for a given confidence interval.
Volatility
A statistical measure of the variance of price or yield
over time. Volatility is low if the price does not
change very much over a short period of time, and
high if there is a greater change.
W
Warehouse Lending
A line of credit extended to a loan originator to fund
mortgages extended by the loan originators to property
purchasers. The loan typically lasts from the time the
mortgage is originated to when the mortgage is sold
into the secondary market, whether directly or through
a securitization. Warehouse lending can provide
liquidity to the loan origination market.
Weighted Average Coupon
The weighted average interest rate of the underlying
mortgage loans or pools that serve as collateral for a
security, weighted by the size of the principal loan
balances.
Weighted Average Life (WAL)
The assumed weighted average amount of time that
will elapse from the date of a security’s issuance until
each dollar of principal is repaid to the investor. The
WAL will change as the security ages and depending
on
the actual realized rate at which principal,
scheduled and unscheduled, is paid to the loans
underlying the MBS.
Y
Yield-to-Maturity
The expected rate of return of a bond if it is held to its
maturity date; calculated by taking into account the
current market price, stated redemption value, coupon
payments and time to maturity and assuming all
coupons are reinvested at the same rate; equivalent to
the internal rate of return.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market
risk are contained within the section titled “Risk
Management” of Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and the related notes, together
with the Report of Independent Registered Public
Accounting Firm thereon, are set forth beginning on
page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our Chief Executive
Officer (the CEO) and Chief Financial Officer (the
CFO), reviewed and evaluated the effectiveness of the
design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-
15(e) of the Securities Exchange Act) as of the end of
the period covered by this report. Based on that
review and evaluation, the CEO and CFO have
concluded that our current disclosure controls and
procedures, as designed and implemented, (1) were
effective in ensuring that information regarding the
Company and its subsidiaries is accumulated and
communicated to our management, including our CEO
and CFO, by our employees, as appropriate to allow
timely decisions regarding required disclosure and (2)
were effective in providing reasonable assurance that
information the Company must disclose in its periodic
reports under the Securities Exchange Act is recorded,
processed, summarized and reported within the time
periods prescribed by the SEC’s rules and forms.
There have been no changes in our internal controls
over financial reporting that occurred during the
quarter ended December 31, 2013 that have materially
affected, or are reasonably likely to materially affect
our internal control over financial reporting.
Management Report On Internal Control Over
Financial Reporting
Management of the Company is responsible for
establishing and maintaining adequate internal control
over financial reporting.
Internal control over
financial reporting is defined in Rules 13a-15(f) under
the Securities Exchange Act as a process designed by,
or under the supervision of, the Company’s principal
78
executive and principal financial officers and effected
by the Company’s board of directors, management and
other personnel
to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external
purposes
in accordance with generally accepted
accounting principles and includes those policies and
procedures that:
• pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the
Company;
• provide reasonable assurance that transactions are
recorded as necessary to permit preparation of
financial statements in accordance with generally
accepted accounting principles, and that receipts
and expenditures of the Company are being made
only
in accordance with authorizations of
management and directors of the Company; and
• provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. As a result, even systems determined
to be effective can provide only reasonable assurance
regarding the preparation and presentation of financial
statements. Moreover, projections of any evaluation
of effectiveness to future periods are subject to the
risks that controls may become inadequate because of
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
assessed
The Company’s management
the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2013. In
making this assessment, the Company’s management
used criteria set forth by the Committee of Sponsoring
Organizations of
the Treadway Commission (or
Internal Control-Integrated Framework
COSO)
(1992).
the Company’s
Based on management’s assessment as of December
31, 2013,
internal control over
financial reporting was effective based on those
criteria.
The Company’s independent registered
public accounting firm, Ernst and Young LLP, has
issued an attestation report on the Company’s internal
control over financial reporting, which is included
herein.
79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Annaly Capital Management, Inc. and Subsidiaries
We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Annaly Capital
Management, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Annaly Capital Management, Inc. and Subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated statements of financial condition of Annaly Capital Management, Inc. and Subsidiaries as of
December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2013 of Annaly
Capital Management, Inc. and Subsidiaries and our report dated February 27, 2014 expressed an unqualified opinion
thereon.
/s/Ernst & Young LLP
New York, New York
February 27, 2014
80
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
ITEM 9B. OTHER INFORMATION
None.
81
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by Item 10 as to our
directors is incorporated herein by reference to the
proxy statement to be filed with the SEC within 120
days after December 31, 2013. The information
regarding our executive officers required by Item 10
appears in Part I of this Form 10-K. The information
required by Item 10 as to our compliance with Section
16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the proxy statement to be
filed with the SEC within 120 days after December 31,
2013.
We have adopted a Code of Business Conduct and
the meaning of Item 406(b) of
Ethics within
Regulation S-K. This Code of Business Conduct and
ITEM 11. EXECUTIVE COMPENSATION
Ethics applies to our principal executive officer,
principal financial officer and principal accounting
officer. This Code of Business Conduct and Ethics is
publicly available on our website at www.annaly.com.
If we make substantive amendments to this Code of
Business Conduct and Ethics or grant any waiver,
including any implicit waiver, we intend to disclose
these events on our website.
The information regarding certain matters pertaining
to our corporate governance required by Item
407(c)(3), (d)(4) and (d)(5) of Regulation S-K is
incorporated by reference to the Proxy Statement to be
filed with the SEC within 120 days after December 31,
2013.
The information required by Item 11 is incorporated
herein by reference to the proxy statement to be filed
with the SEC within 120 days after December 31,
2013.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated
herein by reference to the proxy statement to be filed
with the SEC within 120 days after December 31,
2013.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated
herein by reference to the proxy statement to be filed
with the SEC within 120 days after December 31,
2013.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated
herein by reference to the proxy statement to be filed
with the SEC within 120 days after December 31,
2013.
82
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
Exhibits, Financial Statement Schedules
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Documents filed as part of this report:
1.
2.
Financial Statements.
Schedules to Financial Statements:
All financial statement schedules not included have been omitted because they are either inapplicable or the
information required is provided in our Financial Statements and Notes thereto, included in Part II, Item 8, of this
annual report on Form 10-K.
3.
Exhibits:
EXHIBIT INDEX
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Exhibit
Number
Exhibit Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
Articles of Amendment and Restatement of the Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-
11 (Registration No. 333-32913) filed with the Securities and Exchange Commission on
August 5, 1997).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-3 (Registration
Statement 333-74618) filed with the Securities and Exchange Commission on June 12, 2002).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 8-K (filed with the Securities and Exchange
Commission on August 3, 2006)).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.4 of the Registrant's Form 10-Q (filed with the Securities and Exchange
Commission on May 7, 2008)).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 8-K (filed with the Securities and Exchange
Commission on June 23, 2011)).
Form of Articles Supplementary designating the Registrant’s 7.875% Series A Cumulative
Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by
reference to Exhibit 3.3 to the Registrant’s 8-A filed April 1, 2004).
Articles Supplementary of the Registrant’s designating an additional 2,750,000 shares of the
Company’s 7.875% Series A Cumulative Redeemable Preferred Stock, as filed with the State
Department of Assessments and Taxation of Maryland on October 15, 2004 (incorporated by
reference to Exhibit 3.2 to the Registrant’s 8-K filed October 4, 2004).
Articles Supplementary designating the Registrant’s 6% Series B Cumulative Convertible
Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.1 to the Registrant’s 8-K filed April 10, 2006).
Articles Supplementary designating the Registrant’s 7.625% Series C Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed May 16, 2012).
Articles Supplementary designating the Registrant’s 7.50% Series D Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed September 13, 2012).
Amended and Restated Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3.1 of the Registrant’s Form 8-K (filed with the Securities and Exchange Commission
83
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ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
Exhibits, Financial Statement Schedules
3.12
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1
10.2
10.3
10.10
12. 1
21.1
23.1
23.2
31.1
31.2
32.1
on March 22, 2011)).
Amendment to the Amended and Restated Bylaws of the Registrant (incorporated by reference
to Exhibit 3.12 of the Registrant’s Quarterly Report on Form 10-Q filed on August 8, 2013).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment
No. 1 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913)
filed with the Securities and Exchange Commission on September 17, 1997).
Specimen Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 to the
Registrant’s Registration Statement on Form S-3 (Registration No. 333-74618) filed with the
Securities and Exchange Commission on December 5, 2001).
Specimen Series A Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 8-A filed with the SEC on April 1, 2004).
Specimen Series B Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on April 10, 2006).
Specimen Series C Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 16, 2012).
Specimen Series D Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on September 13,
2012).
Indenture, dated as of February 12, 2010, between the Registrant and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K
filed with the Securities and Exchange Commission on February 12, 2010).
Supplemental Indenture, dated as of February 12, 2010, between the Registrant and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s
Form 8-K filed with the Securities and Exchange Commission on February 12, 2010).
Form of 4.00% Convertible Senior Note due 2015 (included in Exhibit 4.8).
Second Supplemental Indenture, dated as of May 14, 2012, between the Registrant and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s
Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
Form of 5.00% Convertible Senior Note due 2015 (included in Exhibit 4.10).
Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-11 (Registration No. 333-32913) filed with the Securities
and Exchange Commission on August 5, 1997).*
Form of Master Repurchase Agreement (incorporated by reference to Exhibit 10.7 to the
Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed with the
Securities and Exchange Commission on August 5, 1997).
Management Agreement, effective as of July 1, 2013, by and between the Registrant and
Annaly Management Company LLC (incorporated by reference from Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on July 2, 2013).
Registrant’s 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report Form 8-K filed with the SEC on June 1, 2010).*
Computation of ratio of earnings to combined fixed charges and preferred stock dividends and
ratio of earnings to fixed charges.
Subsidiaries of Registrant.
Consent of Ernst & Young LLP.
Consent of Deloitte & Touche LLP.
Certification of Wellington J. Denahan, Chairman and Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Glenn A. Votek, Chief Financial Officer (Principal Financial Officer) of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Wellington J. Denahan, Chairman and Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
84
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ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
Exhibits, Financial Statement Schedules
Sarbanes-Oxley Act of 2002.
Certification of Glenn A. Votek, Chief Financial Officer (Principal Financial Officer) of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Instance Document †
Taxonomy Extension Schema Document †
Taxonomy Extension Calculation Linkbase Document †
Additional Taxonomy Extension Definition Linkbase Document Created†
Taxonomy Extension Label Linkbase Document †
Taxonomy Extension Presentation Linkbase Document †
32.2
Exhibit
101.INS
XBRL
Exhibit
101.SCH
XBRL
Exhibit
101.CAL
XBRL
Exhibit
101.DEF
XBRL
Exhibit
101.LAB
XBRL
Exhibit
101.PRE
XBRL
*
Exhibits to this Form 10-K.
Exhibit Numbers 10.1 and 10.3 are management contracts or compensatory plans required to be filed as
Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents
†
formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at
December 31, 2013 and December 31, 2012; (ii) Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended December 31, 2013, 2012 and 2011; (iii) Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2013, 2012 and 2011; (iv) Consolidated Statements of Cash Flows for the years
ended December 31, 2013, 2012 and 2011; and (v) Notes to Consolidated Financial Statements. Users of this data are
advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a
registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed
for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under
these sections.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
Page
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS…………………………………………………F-1
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013 AND 2012 AND FOR
THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Consolidated Statements of Financial Condition………………………………………………………………………………… F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)………………………………………………… F-4
Consolidated Statements of Stockholders’ Equity………………………………………………………………………..………F-6
Consolidated Statements of Cash Flows………………………………………………………………………………………… F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Description of Business…………………………………………………………………………………………………F-10
Note 2.
Basis of Presentation…………………………………………………………………………………………………… F-10
Note 3.
Significant Accounting Policies…………………………………………………………………………………………F-10
Note 4.
Agency Mortgage-backed Securities……………………………………………………………………………………F-18
Note 5.
Acquisition of Crexus……………………………………………………………………………………………………F-20
Note 6.
Commercial Real Estate Investments……………………………………………………………………………………F-21
Note 7.
Fair Value Measurements…………………………………………………………………………………………………F-22
Note 8.
Repurchase Agreements…………………………………………………………………………………………………F-25
Note 9.
Derivative Instruments……………………………………………………………………………………………………F-26
Note 10. Convertible Senior Notes…………………………………………………………………………………………………F-29
Note 11. Common Stock and Preferred Stock……………………………………………………………………………………F-30
Note 12. Goodwill……………………………………………………………………………………………………………………F-32
Note 13. Net Income per Common Share…………………………………………………………………………………………F-32
Note 14. Long-term Stock Incentive Plan…………………………………………………………………………………………F-33
Note 15.
Income Taxes………………………………………………………………………………………………………………F-34
Note 16. Lease Commitments and Contingencies……………………………………………………………………………… F-34
Note 17. Risk Management…………………………………………………………………………………………………………F-35
Note 18. RCAP Regulatory Requirements…………………………………………………………………………………………F-36
Note 19. Related Party Transactions………………………………………………………………………………………………F-36
Note 20. Summarized Quarterly Results (Unaudited)……………………………………………………………………………F-38
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Annaly Capital Management, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc.
and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Annaly Capital Management, Inc. and Subsidiaries at December 31, 2013 and 2012,
and the consolidated results of their operations and their cash flows for each of the two years in the period ended
December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31,
2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 framework) and our report dated February 27, 2014 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
February 27, 2014
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Annaly Capital Management, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows of Annaly Capital Management, Inc. and Subsidiaries (the "Company") for the year
ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and
cash flows of Annaly Capital Management, Inc. and Subsidiaries for the year ended December 31, 2011, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2012
F-2
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
ASSETS
Cash and cash equivalents
Reverse repurchase agreements
Securities borrowed
Investments, at fair value:
U.S. Treasury securities (including pledged assets of $1,113,027 and $752,076, respectively)
Agency mortgage-backed securities (including pledged assets of $63,897,873 and $107,466,084, respectively)
Agency debentures (including pledged assets of $2,931,261 and $981,727, respectively)
Investment in affiliates
Commercial real estate debt and preferred equity investments
Investments in commercial real estate
Corporate debt, held for investment
Receivable for investments sold
Accrued interest and dividends receivable
Receivable for investment advisory income (including from affiliates of $6,839 and $14,077, respectively)
Intangible for customer relationships (net of accumulated amortization of $0 and $5,779, respectively)
Goodwill
Interest rate swaps, at fair value
Other derivatives, at fair value
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
U.S. Treasury securities sold, not yet purchased, at fair value
Repurchase agreements
Securities loaned
Payable for investments purchased
Payable for share buyback program
Convertible Senior Notes
Mortgages payable
Participation sold
Accrued interest payable
Dividends payable
Interest rate swaps, at fair value
Other derivatives, at fair value
Accounts payable and other liabilities
Total liabilities
Stockholders’ Equity:
7.875% Series A Cumulative Redeemable Preferred Stock:
7,412,500 authorized, issued and outstanding
7.625% Series C Cumulative Redeemable Preferred Stock:
12,650,000 authorized, 12,000,000 issued and outstanding
7.50% Series D Cumulative Redeemable Preferred Stock:
18,400,000 authorized, issued and outstanding
Common stock, par value $0.01 per share, 1,956,937,500 authorized,
947,432,862 and 947,213,204 issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
F-3
December 31, December 31,
2013
2012
$
552,436
100,000
2,582,893
$
615,789
1,811,095
2,160,942
1,117,915
70,388,949
2,969,885
139,447
1,583,969
60,132
117,687
1,193,730
273,079
6,839
-
94,781
559,044
146,725
34,949
752,076
123,963,207
3,009,568
234,120
-
-
63,944
290,722
419,259
17,730
6,989
55,417
-
9,830
41,607
$
81,922,460
$
133,452,295
$
1,918,394
61,781,001
2,527,668
764,131
-
825,262
19,332
14,065
160,921
284,230
1,141,828
55,518
25,055
$
495,437
102,785,697
1,808,315
8,256,957
141,149
825,541
-
-
186,896
432,154
2,584,907
-
10,798
69,517,405
117,527,851
177,088
177,088
290,514
290,514
445,457
445,457
9,474
14,765,761
(2,748,933)
(534,306)
9,472
14,740,774
3,053,242
(2,792,103)
12,405,055
15,924,444
$
81,922,460
$
133,452,295
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
For the years ended
December 31, December 31, December 31,
2012
2013
2011
$
3,225,269
$
3,555,900
Interest income:
Investment Securities and corporate debt
Commercial real estate debt and preferred equity
U.S. Treasury securities
Securities loaned
Reverse repurchase agreements
Other
Total interest income
Interest expense:
Repurchase agreements
Convertible Senior Notes
U.S. Treasury securities sold, not yet purchased
Securities borrowed
Participation sold
Total interest expense
Net interest income
Other income (loss):
Realized gains (losses) on interest rate swaps(1)
Realized gains (losses) on termination of interest rate swaps
Unrealized gains (losses) on interest rate swaps
Subtotal
Investment advisory income
Net gains (losses) on disposal of investments
Net loss on extinguishment of 4% Convertible Senior Notes
Dividend income from affiliates
Net gains (losses) on trading assets
Net unrealized gains (losses) on interest-only Agency mortgage-backed securities
Impairment of goodwill
Loss on previously held equity interest in CreXus
Income from underwriting
Other income (loss)
Subtotal
Total other income (loss)
General and administrative expenses:
Compensation and management fee
Other general and administrative expenses
Total general and administrative expenses
Income (loss) before income taxes and income from equity method
investment in affiliate
Income taxes
Income (loss) from equity method investment in affiliate
Net income (loss)
Dividends on preferred stock
$
2,793,703
76,096
29,081
8,788
10,459
435
2,918,562
$
530,170
67,057
20,235
6,785
467
624,714
2,293,848
$
(908,294)
(101,862)
2,002,200
992,044
43,643
403,045
-
18,575
1,509
244,730
(23,987)
(18,896)
-
15,481
684,100
1,676,144
-
17,222
9,903
6,218
533
3,259,145
$
577,243
67,221
15,114
7,594
-
667,172
2,591,973
$
(893,769)
(2,385)
(32,219)
(928,373)
82,138
432,139
(162,340)
28,336
22,910
(59,937)
-
-
-
525
343,771
(584,602)
167,366
64,715
232,081
190,702
44,857
235,559
3,737,911
1,771,812
8,213
-
35,912
-
3,729,698
1,735,900
71,968
39,530
-
14,706
6,897
1,707
408
3,579,618
426,769
35,017
13,081
5,459
-
480,326
3,099,292
(882,395)
-
(1,815,107)
(2,697,502)
79,075
206,846
-
31,516
21,398
(106,657)
-
-
5,618
130
237,926
(2,459,576)
206,251
31,093
237,344
402,372
59,051
1,140
344,461
16,854
Net income (loss) available (related) to common shareholders
$
3,657,730
$
1,696,370
$
327,607
Net income (loss) per share available (related) to common shareholders:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
$
$
3.86
3.74
$
$
1.74
1.71
$
$
0.37
0.37
947,337,915
995,557,026
972,902,459
1,005,755,057
874,212,039
874,518,938
Statement continued on following page.
F-4
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Net income (loss)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities
Unrealized losses on interest rate swaps
Reclassification adjustment for net (gains) losses included in net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
3,729,698
1,735,900
$
344,461
(5,378,089)
-
(424,086)
(5,802,175)
(2,072,477)
$
482,765
-
(438,511)
44,254
1,780,154
$
2,036,894
14,298
(206,846)
1,844,346
2,188,807
$
(1)
Interest expense related to the Company’s interest rate swaps is recorded in Realized losses on interest rate swaps on the Consolidated Statements of Operations
and Comprehensive Income (Loss).
See notes to consolidated financial statements.
F-5
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011
(dollars in thousands, except per share data)
7.875% Series A
Cumulative
Redeemable
Preferred Stock
7.625% Series
C Cumulative
Redeemable
Preferred Stock
7.50% Series D
Cumulative
Redeemable
Preferred Stock
Common
Stock
Par
Value
Additional Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
290,514
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
445,457
-
-
BALANCE, December 31, 2010
177,088
Net income (loss)
Unrealized gains (losses) on available-for-sale securities
Unrealized (gains) losses on interest rate swaps
Reclassification adjustment for net (gains) losses included in net income (loss)
Exercise of stock options
Stock compensation expense
Conversion of Series B cumulative preferred stock
Net proceeds from direct purchase and dividend reinvestment
Net proceeds from follow-on offering
Contingent beneficial conversion feature on 4% Convertible Senior Notes
Preferred Series A dividends, declared $1.97 per share
Preferred Series B dividends, declared $1.50 per share
Common dividends declared, $2.44 per share
BALANCE, December 31, 2011
Net income (loss)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for net (gains) losses included in net income (loss)
Exercise of stock options
Stock compensation expense
Conversion of Series B cumulative preferred stock
Net proceeds from direct purchase and dividend reinvestment
Contingent beneficial conversion feature on 4% Convertible Senior Notes
Equity component on 5% Convertible Senior Notes
Offering expenses
Net proceeds from 7.625% Series C Cumulative Redeemable Preferred Stock offering
Net proceeds from 7.50% Series D Cumulative Redeemable Preferred Stock offering
Extinguishment of convertible debt
Buyback of common stock
Statement continued on following page.
-
-
-
-
-
-
-
-
-
-
-
-
-
177,088
-
-
-
-
-
-
-
-
-
-
-
-
-
-
F-6
-
-
-
-
-
7
3
9
262
3,105
-
-
-
-
9,702
-
-
-
2,036,894
14,298
(206,846)
-
-
-
-
-
-
-
-
-
-
-
-
-
8,946
5,266
7,750
455,285
5,348,741
67,637
-
-
-
344,461
-
-
-
-
-
-
-
-
-
(14,593)
(2,261)
(2,173,222)
(2,504,006)
1,735,900
6,316 9,175,245 1,164,642 (658,391) 9,864,900
344,461
2,036,894
14,298
(206,846)
8,953
5,269
7,759
455,547
5,351,846
67,637
(14,593)
(2,261)
(2,173,222)
15,760,642
1,735,900
482,765
(438,511)
8,438
5,584
32,272
2,794
61,725
11,717
(248)
290,514
445,457
(53,558)
(397,050)
-
-
-
8,432
5,584
32,232
2,792
61,725
11,717
(248)
-
-
(53,558)
(396,772)
-
482,765
(438,511)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(278)
-
-
-
-
-
-
-
-
-
-
-
-
-
15,068,870
3,008,988
40
2
6
-
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Disposal of subsidiary
Preferred Series A dividends, declared $1.97 per share
Preferred Series B dividends, declared $0.375 per share
Preferred Series C dividends, declared $1.19 per share
Preferred Series D dividends, declared $0.56 per share
Common dividends declared, $2.05 per share
BALANCE, December 31, 2012
Net income (loss)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for net (gains) losses included in net income (loss)
Exercise of stock options
Stock compensation expense
Net proceeds from direct purchase and dividend reinvestment
Contingent beneficial conversion feature on 4% Convertible Senior Notes
Disposal of subsidiary
Preferred Series A dividends, declared $1.97 per share
Preferred Series C dividends, declared $1.91 per share
Preferred Series D dividends, declared $1.88 per share
Common dividends declared, $1.50 per share
-
-
-
-
-
-
177,088
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
290,514
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
445,457
-
-
-
-
-
-
-
-
-
-
-
-
BALANCE, December 31, 2013
177,088
290,514
445,457
See notes to consolidated financial statements.
-
-
-
-
-
-
9,472
-
-
-
2
(2)
2
-
-
-
-
-
-
9,474
-
-
-
-
-
-
-
-
-
-
-
-
14,740,774
3,053,242
-
-
-
2,202
2,549
2,853
17,383
-
-
-
-
-
-
(5,378,089)
(424,086)
-
-
-
-
-
-
-
-
-
14,765,761
(2,748,933)
5,223
(14,593)
(289)
(14,297)
(10,351)
(1,989,690)
(2,792,103)
3,729,698
-
-
-
-
-
-
20,923
(14,593)
(22,875)
(34,500)
(1,420,856)
(534,306)
5,223
(14,593)
(289)
(14,297)
(10,351)
(1,989,690)
15,924,444
3,729,698
(5,378,089)
(424,086)
2,204
2,547
2,855
17,383
20,923
(14,593)
(22,875)
(34,500)
(1,420,856)
12,405,055
F-7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of Investment Securities premiums and discounts, net
Amortization of commercial real estate investment premiums and discounts, net
Amortization of intangibles
Amortization of deferred expenses
Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes
Net (gains) losses on sales of Agency mortgage-backed securities and debentures
Net loss on extinguishment of 4% Convertible Senior Notes
Stock compensation expense
Impairment of goodwill
Loss on previously held equity interest in CreXus
Non-cash component of disposal of subsidiary
Realized loss on disposal of subsidiary
Unrealized (gains) losses on interest rate swaps
Net unrealized (gains) losses on interest-only Agency mortgage-backed securities
Net (gains) losses on trading assets
(Gain) loss on investment with affiliate, equity method
Unrealized (gains) losses on equity securities
Proceeds from repurchase agreements of RCap
Payments on repurchase agreements of RCap
Proceeds from reverse repurchase agreements of RCap
Payments on reverse repurchase agreements of RCap
Proceeds from reverse repurchase agreements of Shannon
Payments on reverse repurchase agreements of Shannon
Proceeds from securities borrowed
Payments on securities borrowed
Proceeds from securities loaned
Payments on securities loaned
Proceeds from U.S. Treasury securities
Payments on U.S. Treasury securities
Net payments on derivatives
Net change in:
Due to / from brokers
Other assets
Accrued interest and dividends receivable
Receivable for investment advisory income
Receivable from prime broker
Accrued interest payable
Accounts payable and other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Payments on purchases of Agency mortgage-backed securities and debentures
Proceeds from sales of Agency mortgage-backed securities and debentures
Principal payments on Agency mortgage-backed securities
Proceeds from Agency debentures called
Payments on purchase of corporate debt
Proceeds from corporate debt called
Principal payments on corporate debt
Acquisition of CreXus
Purchases of commercial real estate investments
Proceeds from sale of commercial real estate investments
Principal payments on commercial real estate investments
Earn out payment
Proceeds from derivatives
Purchase of investment in affiliate
Purchase of customer relationships
Purchase of equity securities
Proceeds from sales of equity securities
Payment on disposal of subsidiary
Net cash provided by (used in) investing activities
Statement continued on following page.
F-8
For the Years Ended December 31,
2011
2012
2013
3,729,698
1,735,900
344,461
973,968
(238)
2,614
8,152
17,101
(424,086)
-
2,547
23,987
18,896
-
21,041
(2,002,200)
(244,730)
(1,509)
-
-
1,470,801
-
4,080
6,965
18,017
(432,139)
162,340
5,584
-
-
(1,177)
-
32,219
59,937
(20,525)
-
-
1,453,216,892
(1,471,279,777)
450,032,217
(448,403,808)
866,560
(783,874)
263,155,068
(263,577,019)
484,836,546
(484,117,193)
142,054,631
(141,019,615)
(133,023)
733,739,097
(727,275,192)
401,926,011
(402,805,044)
680,525
(751,721)
74,361,498
(75,593,708)
185,657,591
(184,654,177)
64,028,348
(64,746,420)
(10,173)
503
3,897
141,207
10,891
-
(25,975)
3,909
(12,892,722)
(39,071,377)
54,328,560
21,748,131
2,147,205
(82,502)
24,252
4,716
(724,889)
(984,743)
20,192
114,999
-
7,465
-
-
-
-
16,209
37,548,218
-
(9,243)
(6,151)
1,820
3,272
47,931
3,241
7,639,507
(86,161,777)
30,542,875
35,133,544
1,801,283
(81,090)
67,649
4,247
-
-
-
-
(13,387)
10,379
-
-
-
4,048
(800)
(18,693,029)
794,205
-
2,300
3,600
7,550
(206,846)
-
5,269
-
-
-
-
1,815,107
106,657
(21,398)
(98)
100
877,734,065
(878,806,056)
156,659,365
(156,502,577)
166,354
(177,845)
27,261,366
(27,973,422)
54,126,121
(53,539,061)
29,168,074
(28,490,573)
(7,158)
-
(3,258)
(64,362)
(3,378)
-
23,199
(1,698)
2,420,063
(69,065,069)
19,337,053
23,565,709
1,124,000
(31,675)
-
1,375
-
-
-
-
-
13,965
(57,500)
(3,555)
(3,990)
-
-
(25,119,687)
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Cash flows from financing activities:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
Proceeds from exercise of stock options
Net proceeds from Series C Preferred offering
Net proceeds from Series D Preferred offering
Net proceeds from issuance of 5% Convertible Senior Notes offering
Net payment on extinguishment of 4% Convertible Senior Notes
Net proceeds from direct purchases and dividend reinvestments
Net (payments) proceeds from follow-on offerings
Payments on participation sold
Net payment on share repurchase
Dividends paid
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest received
Dividends received
Investment advisory income received
Interest paid (excluding interest paid on interest rate swaps)
Net interest paid on interest rate swaps
Taxes paid
Noncash investing activities:
Receivable for investments sold
Payable for investments purchased
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment
Noncash financing activities:
Dividends declared, not yet paid
Conversion of Series B cumulative preferred stock
Contingent beneficial conversion feature on 4% Convertible Senior Notes
Equity component of 5% Convertible Senior Notes
See notes to consolidated financial statements.
381,641,327
(404,583,138)
2,204
-
-
-
-
2,855
-
(200)
(141,149)
(1,640,748)
(24,718,849)
352,497,651
(340,273,744)
8,438
290,514
445,457
727,500
(617,476)
2,794
(248)
-
(255,901)
(2,149,872)
10,675,113
(63,353)
(378,409)
615,789
552,436
994,198
615,789
273,023,622
(253,387,283)
8,953
-
-
-
-
455,547
5,351,846
-
-
(2,041,489)
23,411,196
711,572
282,626
994,198
4,035,661
21,624
54,534
656,648
885,234
10,447
4,718,524
29,522
84,483
595,152
892,656
52,590
4,309,690
31,876
75,827
455,873
876,099
61,045
1,193,730
764,131
290,722
8,256,957
-
4,315,796
(5,802,175)
44,254
1,844,346
284,230
-
17,383
-
432,154
32,272
61,725
11,717
552,806
7,759
60,087
-
F-9
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
1. DESCRIPTION OF BUSINESS
Annaly Capital Management, Inc. (the “Company” or
“Annaly”) is a Maryland corporation that commenced
operations on February 18, 1997. The Company owns a
portfolio of real estate related investments, including
mortgage pass-through
collateralized
mortgage obligations, agency callable debentures, other
securities representing interests in or obligations backed
by pools of mortgage loans, commercial real estate
assets and corporate loans. The Company’s principal
business objective is to generate net income for
distribution to its stockholders from its investments.
certificates,
The Company’s business operations are primarily
comprised of the following:
- Annaly, the parent company, which invests primarily
types of Agency mortgage-backed
in various
securities and related derivatives to hedge these
investments.
- Annaly Commercial Real Estate Group,
Inc.
(“ACREG”, formerly known as CreXus Investment
Corp. (“CreXus”)), a wholly-owned subsidiary that
that was acquired during the second quarter of 2013
which specializes
financing and
managing commercial mortgage loans and other
commercial real estate debt, commercial mortgage-
backed securities and other commercial real estate-
related assets.
in acquiring,
the Financial
- RCap Securities, Inc. (“RCap”), a wholly-owned
subsidiary which operates as a broker-dealer, and is a
member of
Industry Regulatory
Authority (“FINRA”).
Income Discount Advisory Company
Fixed
(“FIDAC”), a wholly-owned
subsidiary which
manages an affiliated real estate investment trust
(“REIT”) for which it earns fee income.
-
- Annaly Middle Market Lending LLC (formerly
known as Charlesfort Capital Management LLC), a
wholly-owned subsidiary which engages in corporate
middle market lending transactions.
Shannon Funding LLC (“Shannon”), a wholly-owned
subsidiary which acquires residential mortgage loans
and provides warehouse financing to residential
mortgage originators in the United States.
-
The Company has elected to be taxed as a REIT as
defined under the Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder (the
F-10
“Code”). The Company is externally managed by
Annaly Management Company LLC (the “Manager”).
2.
BASIS OF PRESENTATION
The accompanying consolidated financial statements
and related notes of the Company have been prepared in
accordance with accounting principles generally
accepted in the United States ("GAAP").
3.
SIGNIFICANT ACCOUNTING POLICIES
the accounts of
in consolidation. Beginning with
Principles of Consolidation – The consolidated
financial statements
the
include
Company and
its wholly-owned subsidiaries. All
intercompany balances and transactions have been
eliminated
the
Company’s consolidated financial statements for the
quarter and six month periods ended June 30, 2013, the
Company reclassified previously presented financial
information so that amounts previously presented in the
Consolidated
and
Comprehensive Income (Loss) as interest income from
Investments are presented as interest income from
Reverse
and Other.
Consolidated financial statements for periods prior to
June 30, 2013 have been conformed to the current
presentation.
of Operations
agreements
Statements
repurchase
The Company has evaluated all of its investments in
legal entities in order to determine if they are variable
interests in Variable Interest Entities ("VIEs"). A VIE is
defined as an entity in which equity investors (i) do not
have the characteristics of a controlling financial
interest, and/or (ii) do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. A
variable interest is an investment or other interest that
will absorb portions of a VIE's expected losses or
receive portions of the entity’s expected residual
returns. A VIE is required to be consolidated by its
primary beneficiary, which is defined as the party that
(i) has the power to control the activities that most
significantly impact the VIE’s economic performance
and (ii) has the obligation to absorb losses of the VIE
that could potentially be significant to the VIE or the
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
right to receive benefits from the VIE that could
potentially be significant to the VIE.
and losses on sales of Investment Securities are
determined using the average cost method.
Cash and Cash Equivalents – Cash and cash
equivalents include cash on hand and cash held in
money market funds on an overnight basis. RCap is a
member of various clearing organizations with which it
maintains cash required for the conduct of its day-to-
day clearance activities. Cash and securities deposited
with clearing organizations are carried at cost, which
approximates fair value. The Company also maintains
collateral
the form of cash on margin with
counterparties to its interest rate swaps and other
derivatives. Cash and securities deposited with clearing
organizations and collateral held in the form of cash on
margin with counterparties to its interest rate swaps and
other derivatives totaled $371.8 million and $527.5
million at December 31, 2013 and 2012, respectively.
in
Fair Value Measurements – The Company carries
various financial instruments at fair value. A complete
discussion of the methodology utilized by the Company
financial
to estimate
these
to
instruments
consolidated financial statements.
fair value of certain
the notes
the
is
included
in
Revenue Recognition – The revenue recognition policy
by asset class is discussed below.
certificates,
Agency Mortgage-Backed Securities and Agency
Debentures – The Company invests primarily in
collateralized
mortgage pass-through
mortgage obligations and other mortgage-backed
securities representing interests in or obligations backed
by pools of mortgage loans and certificates guaranteed
by the Government National Mortgage Association
(“Ginnie Mae”), the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) or the Federal National
Mortgage Association (“Fannie Mae”) (collectively,
“Agency mortgage-backed securities”). The Company
also invests in Agency debentures issued by the Federal
Home Loan Banks, Freddie Mac and Fannie Mae.
securities and Agency
Agency mortgage-backed
to herein as “Investment
debentures are referred
Securities.” Although the Company generally intends
to hold most of its Investment Securities until maturity,
it may, from time to time, sell any of its Investment
Securities as part of its overall management of its
Investment Securities are classified as
portfolio.
available-for-sale and are reported at fair values
estimated by management
to
independent sources for reasonableness, with unrealized
gains and losses reported as a component of other
comprehensive income (loss). Investment Securities
transactions are recorded on trade date. Realized gains
that are compared
F-11
inverse
for Agency
On April 1, 2011, the Company elected the fair value
option
interest-only mortgage-backed
securities acquired on or after such date. Interest-only
securities and
interest-only securities are
collectively referred to as “interest-only securities.”
These Agency interest-only mortgage-backed securities
represent the Company’s right to receive a specified
proportion of the contractual interest flows of specific
Agency mortgage-backed securities. Agency interest-
only mortgage-backed securities acquired on or after
April 1, 2011 are measured at fair value as Net gains
the Company’s
(losses) on
Consolidated
and
Comprehensive Income (Loss). The
interest-only
securities are included in Agency mortgage-backed
the accompanying
fair value on
securities at
Consolidated Statements of Financial Condition.
trading assets
Statements
of Operations
in
the purchase of
Interest income from coupon payments is accrued based
on the outstanding principal amounts of the Investment
Securities and their contractual terms. Premiums and
discounts associated with
the
Investment Securities are amortized or accreted into
interest income over the projected lives of the securities
using the interest method. The Company’s policy for
estimating prepayment speeds for calculating
the
effective yield is to evaluate historical performance,
consensus prepayment speeds and current market
for actual
Adjustments are made
conditions.
prepayment activity.
Corporate Debt – The Company’s investments in
corporate debt are designated as held for investment,
and are carried at their principal balance outstanding
plus any premiums or discounts less allowances for loan
losses. No allowance for loan losses was deemed
necessary as of December 31, 2013 and 2012.
Equity Securities – The Company may invest in equity
securities that are classified as available-for-sale or
trading. Equity securities classified as available-for-
sale are reported at fair value, based on market quotes,
with unrealized gains and
losses reported as a
component of other comprehensive income (loss).
Equity securities classified as trading are reported at fair
value, based on market quotes, with unrealized gains
and losses reported in the Consolidated Statements of
Operations and Comprehensive Income (Loss) as Net
gains (losses) on trading assets. Dividends are recorded
in earnings based on the declaration date.
Derivative Instruments – The Company may use a
variety of derivative instruments to economically hedge
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
some of its exposure to market risks, including interest
rate and prepayment risk. These instruments include,
but are not limited to, interest rate swaps, options to
enter into interest rate swaps (“swaptions”), forward
contracts
for Agency mortgage-backed securities
purchases or sales of a generic pool, or to-be-
announced, basis (“TBA securities”) with the intent to
net settle (“TBA derivatives”), options on TBA
securities (“MBS options”) and U.S. Treasury futures
contracts. The Company may also invest in other types
of mortgage derivatives such as interest-only securities
and synthetic total return swaps, such as the Markit IOS
Synthetic Total Return Swap Index. The Company may
also enter into TBA dollar rolls. Derivatives are
accounted for in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 815, Derivatives and Hedging,
which requires recognition of all derivatives as either
assets or liabilities at fair value in the Consolidated
Statements of Financial Condition with changes in fair
value recognized in the Consolidated Statements of
Operations and Comprehensive Income (Loss).
Some derivative agreements contain provisions that
allow for netting or setting off by counterparty;
however, beginning on September 30, 2013,
the
Company elected to present related assets and liabilities
on a gross basis in the Consolidated Statements of
Financial Condition. Prior to September 30, 2013, the
Company presented in the Consolidated Statements of
Financial Condition the fair value of interest rate swap
the derivative
if
contracts net, by counterparty,
agreements included netting provisions.
Interest rate swap agreements - Interest rate swaps are
the primary instrument used to mitigate interest rate
risk. In particular, the Company uses interest rate
swaps to manage its exposure to changing interest rates
on its repurchase agreements by economically hedging
cash flows associated with these borrowings. Swap
(“OTC”)
agreements may
agreements which are negotiated directly with a
counterparty, or centrally cleared through a registered
commodities exchange. OTC swaps are fair valued
using internal pricing models and compared to the
counterparty market values. Centrally cleared swaps
are fair valued using internal pricing models and
compared to the exchange market values.
over-the-counter
be
Interest rate swaptions - Interest rate swaptions are
purchased to mitigate the potential impact of increases
or decreases in interest rates. Interest rate swaptions
provide the option to enter into an interest rate swap
agreement for a predetermined notional amount, stated
term and pay and receive
the
future. They are not centrally cleared. The premium
interest rates
in
paid for interest rate swaptions is reported as an asset in
the Consolidated Statement of Financial Position. The
difference between the premium and the fair value of
the swaption is reported in Net gain (loss) on trading
assets in the Consolidated Statements of Operations and
Comprehensive Income (Loss). If a swaption expires
unexercised, the realized loss on the swaption would be
equal to the premium paid. If the Company sells or
exercises a swaption, the realized gain or loss on the
swaption would be equal to the difference between the
cash received or the fair value of the underlying interest
rate swap received and the premium paid.
The fair value of interest rate swaptions is estimated
using internal pricing models and compared to the
counterparty market value.
TBA Dollar Rolls - A TBA security is a forward
contract for the purchase ("long position") or sale
("short position") of Agency mortgage-backed
securities at a predetermined price, face amount, issuer,
coupon and stated maturity on an agreed-upon future
date. The specific Agency mortgage-backed securities
delivered into the contract upon the settlement date,
published each month by the Securities Industry and
Financial Markets Association, are not known at the
time of the transaction. TBA dollar roll transactions are
accounted for as a series of derivative transactions. The
fair value of TBA derivatives is based on similar
methods used
to value Agency mortgage-backed
securities with gains and losses recorded in Net gains
the Consolidated
(losses) on
Statements of Operations and Comprehensive Income
(Loss).
trading assets
in
MBS Options – MBS options are generally options on
TBA contracts, which help manage mortgage market
risks and volatility while providing the potential to
enhance returns. MBS options are over-the-counter
traded instruments and those written on current-coupon
mortgage-backed securities are typically the most
liquid. MBS options are fair valued using internal
pricing models and compared to the counterparty
market value at the valuation date with gains and losses
recorded in Net gains (losses) on trading assets in the
Consolidated
and
Comprehensive Income (Loss).
of Operations
Statements
U.S. Treasury Futures - U.S. Treasury futures contracts
are derivatives that track the prices of specific U.S.
Treasury securities. Short sales of U.S. Treasury futures
contracts help mitigate the potential impact of changes
in interest rates on the portfolio performance. The
Company maintains a margin account which is settled
daily with Futures Commission Merchants (“FCMs”).
F-12
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The margin requirement varies based on the market
value of the open positions and the equity retained in
the account. Futures contracts are fair valued based on
exchange pricing with gains and losses recorded in Net
gains (losses) on trading assets in the Consolidated
Statements of Operations and Comprehensive Income
(Loss).
Other-Than-Temporary Impairment – Management
evaluates available-for-sale securities for other-than-
temporary impairment at least quarterly, and more
frequently when economic or market conditions warrant
such evaluation. When the fair value of an available-
for-sale security is less than its amortized cost the
security is considered impaired. For securities that are
impaired, the Company determines if it (1) has the
intent to sell the security, (2) is more likely than not that
it will be required to sell the security before recovery of
its amortized cost basis, or (3) does not expect to
recover the entire amortized cost basis of the security.
Further, the security is analyzed for credit loss (the
difference between the present value of cash flows
expected to be collected and the amortized cost basis).
The credit loss, if any, will then be recognized in the
Consolidated
and
Comprehensive Income (Loss), while the balance of
losses related to other factors will be recognized as a
component of other comprehensive income (loss).
There was no other-than-temporary impairment for the
years ended December 31, 2013, 2012 or 2011.
of Operations
Statements
the Company reviews
Loan Loss Reserves – To determine if loan loss
allowances are required on investments in corporate
debt,
the monthly and/or
quarterly financial statements of the borrowers to verify
they meet the covenants of the loan documents. If
based on the financial review it is deemed probable that
the Company will be unable to collect contractual
principal
financial
performance and delinquencies), a loan loss provision
would be recorded. No allowance for loan losses was
deemed necessary as of December 31, 2013 and 2012.
amounts
interest
(e.g.
and
with
securities
Repurchase Agreements – The Company finances the
acquisition of a significant portion of its Agency
mortgage-backed
repurchase
agreements. The Company examines each of the
specified criteria in ASC 860, Transfers and Servicing,
at the inception of each transaction and has determined
that each of the financings meet the specified criteria in
this guidance. None of the Company’s repurchase
agreements are accounted for as components of linked
transactions. As a result, the Company separately
accounts for the financial assets and related repurchase
financings in the accompanying consolidated financial
statements.
in
and
repurchase
agreements
repurchase
Reverse
agreements with the same counterparty and the same
maturity are presented net
the Consolidated
Statements of Financial Condition when the terms of
the agreements permit netting. The Company reports
cash flows on repurchase agreements as financing
activities in the Consolidated Statements of Cash Flows.
The Company reports cash flows on reverse repurchase
and repurchase agreements entered into by RCap and
Shannon as operating activities in the Consolidated
Statements of Cash Flows.
of
FIDAC, Merganser
Goodwill and Intangible Assets – The Company’s
Capital
acquisitions
Management, Inc. (“Merganser”) and CreXus were
accounted for using the acquisition method. In October
2013, the Company sold the operations of Merganser.
Under the acquisition method, net assets and results of
operations of acquired companies are included in the
consolidated financial statements from the date of
acquisition. The costs of FIDAC, Merganser and
CreXus were allocated to the assets acquired, including
identifiable intangible assets, and the liabilities assumed
based on their estimated fair values at the date of
acquisition. The excess of purchase price over the fair
value of the net assets acquired was recognized as
goodwill.
that
test for goodwill utilizes a
The Company tests goodwill for impairment on an
annual basis and at interim periods when events or
circumstances may make it more likely than not that an
impairment has occurred. If a qualitative analysis
indicates
impairment, a
there may be an
quantitative analysis is performed. The quantitative
impairment
two-step
approach, whereby the Company compares the carrying
value of each identified reporting unit to its fair value.
If the carrying value of the reporting unit is greater than
its fair value, the second step is performed, where the
implied fair value of goodwill is compared to its
carrying value. The Company recognizes an impairment
charge for the amount by which the carrying amount of
goodwill exceeds its fair value.
Intangible assets with an estimated useful life are
amortized over the expected life.
Convertible Senior Notes – The Company records the
4% Convertible Senior Notes and 5% Convertible
Senior Notes (collectively, the “Convertible Senior
Notes”) at their contractual amounts, adjusted by the
effects of a beneficial conversion feature and a
contingent beneficial conversion feature (collectively,
the “Conversion Features”). The Conversion Features’
intrinsic value is included in “Additional paid-in
F-13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
capital” on the Company’s Consolidated Statements of
Financial Condition and reduces the recorded liability
amount associated with the Convertible Senior Notes. A
Conversion Feature may be recognized as a result of
adjustments to the conversion price for dividends
declared to common stockholders.
Stock Based Compensation – The Company is required
to measure and recognize in the consolidated financial
statements the compensation cost relating to share-
based payment transactions. The Company recognizes
compensation expense on a straight-line basis over the
requisite service period for the entire award.
Income Taxes – The Company has elected to be taxed
as a REIT and intends to comply with the provisions of
the Code, with respect thereto. Accordingly, the
Company will not be subjected to federal income tax to
the extent of its distributions to stockholders and as long
as certain asset, income and stock ownership tests are
met. The Company and certain of its direct and indirect
subsidiaries,
including FIDAC, RCap and certain
subsidiaries of ACREG, have made separate joint
elections to treat these subsidiaries as taxable REIT
subsidiaries (“TRS”). As such, each of these TRSs is
taxable as a domestic C corporation and subject to
federal, state and local income taxes based upon their
taxable income.
The provisions of ASC 740, Income Taxes, (“ASC
740”) clarify the accounting for uncertainty in income
taxes recognized in financial statements and prescribe a
recognition threshold and measurement attribute for tax
positions taken or expected to be taken on a tax return.
ASC 740 also requires that interest and penalties related
to unrecognized tax benefits be recognized in the
financial statements. The Company does not have any
unrecognized tax benefits that would affect its financial
position. Thus, no accruals for penalties and interest
were necessary as of December 31, 2013 or 2012.
Use of Estimates – The preparation of the consolidated
financial statements in conformity with GAAP requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Commercial real estate mortgages and
loans are
designated as held for investment and are carried at
their outstanding principal balance, net of an
unamortized origination fee, premium or discount, less
a reserve for estimated losses if necessary. Origination
fees, premiums and discounts are amortized or accreted
over the estimated life of the loan. The difference
between the principal amount of a loan and proceeds at
acquisition is recorded as either a discount or premium.
Preferred Equity Interests Held for Investment –
Preferred equity interests are designated as held for
investment and are carried at their outstanding principal
balance, net of an unamortized origination fee, premium
or discount, less a reserve for estimated losses if
necessary. Origination fees, premiums and discounts
are amortized or accreted into interest income over the
estimated life of the investment.
Investments”). A provision
Allowance for Losses – The Company evaluates the
need for a loss reserve on its commercial real estate
mortgages, loans and preferred equity interests held for
investment (collectively referred to as “CRE Debt and
is
Preferred Equity
established when the Company believes CRE Debt and
Preferred Equity Investments are impaired, which is
when it is deemed probable that the Company will be
unable to collect contractual principal and interest
amounts. A provision for losses related to CRE Debt
and Preferred Equity Investments, including those
accounted for under ASC 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality,
may be established when it is probable the Company
will not collect amounts contractually due or all
amounts previously estimated
to be collectable.
Management assesses the credit quality of the portfolio
and adequacy of loan loss reserves on a quarterly basis,
or more frequently as necessary. Significant judgment is
required in this analysis. Depending on the expected
recovery of its investment, the Company considers the
estimated net recoverable value of the CRE Debt and
Preferred Equity Investments as well as other factors,
including but not limited to the fair value of any
collateral, the amount and the status of any senior debt,
the prospects for the borrower and the competitive
landscape where
the borrower conducts business.
Because this determination is based upon projections of
future
inherently
events, which
subjective, the amounts ultimately realized may differ
materially from the carrying value as of the reporting
date.
economic
are
Commercial Real Estate Investments
Commercial Real Estate Debt – The Company's
commercial real estate mortgages and
loans are
comprised of fixed-rate and adjustable-rate loans.
The Company may be exposed to various levels of
credit risk depending on the nature of its investments
and the nature and level of the assets underlying the
investments and credit enhancements, if any, supporting
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
include
its assets. The Company’s core investment process
includes procedures related to the initial approval of and
periodic monitoring of credit risk and other risks
associated with each investment. The Company’s
investment underwriting procedures
an
evaluation of the borrower’s ability to manage and
operate the properties. Management reviews loan to
value metrics upon either the origination or the
acquisition of a new investment but generally does not
update the loan to value metrics in the course of
quarterly surveillance. Management generally reviews
the most recent financial information produced by the
borrower, net operating income (“NOI”), debt service
coverage ratios, property debt yields (net cash flow or
amount of outstanding
NOI divided by
indebtedness), loan per unit and rent rolls relating to
each of the Company’s CRE Debt and Preferred Equity
Investments,
factors
important. Management also
management deems
reviews market pricing to determine the borrower’s
ability to refinance the asset at the maturity of the loan.
Management also reviews economic trends, both macro
as well as those directly affecting the property, and the
supply and demand of competing projects in the sub-
market in which the subject property is located.
consider other
and may
the
In connection with the quarterly surveillance review
process, loans are assigned an internal rating of
Performing Loans, Watch List Loans or Workout
Loans. Loans that are deemed Performing Loans meet
all present contractual obligations. Watch List Loans
are defined as performing or nonperforming loans for
which the timing of cost recovery is under review.
Workout Loans are defined as loans for which there is a
likelihood that we may not recover our cost basis.
Investments in Commercial Real Estate – Investments
in commercial real estate are carried at historical cost
less accumulated depreciation. Costs directly related to
acquisitions deemed to be business combinations are
expensed. Ordinary repairs and maintenance which are
not reimbursed by the tenants are expensed as incurred.
Major replacements and improvements that extend the
useful life of the asset are capitalized and depreciated
over their useful life.
Investments in real estate are depreciated using the
straight-line method over the estimated useful lives of
the assets, summarized as follows:
Category
Building
Site improvements
Term
35-40 years
2-7 years
The Company follows the acquisition method of
accounting for acquisitions of operating real estate held
for investment, where the purchase price of operating
real estate is allocated to tangible assets such as land,
building, site
identified
intangibles such as above/below market and in-place
leases.
improvements and other
The Company evaluates whether real estate acquired in
connection with a foreclosure (“REO”), UCC/deed in
lieu of foreclosure or a consensual modification of a
loan (herein collectively referred to as a foreclosure)
business
constitutes
combination accounting is applicable. Upon foreclosure
of a property, the excess of the carrying value of a loan,
if any, over the estimated fair value of the property, less
estimated costs to sell, is charged to provision for loan
losses.
and whether
business
a
Investments in real estate, including REO, which do not
meet the criteria to be classified as held for sale, are
separately presented in the consolidated statements of
financial condition as held for
investment. Such
operating real estate is reported at the lower of its
carrying value or its estimated fair value less estimated
costs to sell. Once a property is determined to be held
for sale, depreciation is no longer recorded. In addition,
if considered material to the overall consolidated
financial statements, the results of operations are
to
from discontinued
reclassified
operations
of
statements
in
comprehensive income (loss).
(loss)
consolidated
income
the
The Company's real estate portfolio (REO and real
estate held for investment) is reviewed on a quarterly
basis, or more frequently as necessary, to assess
whether there are any indicators that the value of its
operating real estate may be impaired or that its
carrying value may not be recoverable. A property's
value is considered impaired if the Company's estimate
of the aggregate future undiscounted cash flows to be
generated by the property is less than the carrying value
of the property. In conducting this review, the Company
considers U.S. macroeconomic factors, including real
estate sector conditions, together with asset specific and
other factors. To the extent an impairment has occurred
and is considered to be other than temporary, the loss
will be measured as the excess of the carrying amount
of the property over the calculated fair value of the
property.
Revenue Recognition – Commercial Real Estate
Investments - Interest income is accrued based on the
outstanding principal amount of the CRE Debt and
Preferred Equity Investments and their contractual
terms. Premiums and discounts associated with the
purchase of the CRE Debt and Preferred Equity
Investments are amortized or accreted into interest
F-15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
income over the projected lives of the CRE Debt and
Preferred Equity Investments using the interest method
based on the estimated recovery value.
based on the outstanding principal amount of those
investments and their stated terms.
Broker Dealer Activities
Reverse Repurchase Agreements – RCap enters into
reverse repurchase agreements as part of its matched
book trading activity. Reverse repurchase agreements
are recorded on trade date at the contract amount and
are collateralized by mortgage-backed or other
securities. Margin calls are made by RCap as necessary
based on the daily valuation of the underlying collateral
as compared to the contract price. RCap generates
income from the spread between what is earned on the
reverse repurchase agreements and what is paid on the
matched repurchase agreements. RCap’s policy is to
obtain possession of collateral with a market value in
excess of the principal amount loaned under reverse
repurchase agreements. To ensure that the market value
of the underlying collateral remains sufficient, collateral
is valued daily, and RCap will require counterparties to
deposit additional collateral, when necessary. All
reverse repurchase activities are transacted under master
repurchase agreements that give RCap the right, in the
event of default, to liquidate collateral held and in some
instances, to offset receivables and payables with the
same counterparty.
Securities
financings.
Securities Borrowed and Loaned Transactions – RCap
records securities borrowed and loaned transactions as
collateralized
borrowed
transactions require RCap to provide the counterparty
with collateral in the form of cash, or other securities.
RCap receives collateral in the form of cash or other
securities for securities loaned transactions. RCap
monitors the fair value of the securities borrowed and
loaned on a daily basis, with additional collateral
obtained or refunded as necessary. Securities borrowed
and securities loaned transactions are recorded at
contract value. For these transactions, the rebates
accrued by RCap are recorded as interest income or
expense.
U.S. Treasury Securities – RCap trades in U.S.
Treasury securities for its proprietary portfolio, which
consists of long and short positions on U.S Treasury
notes and bonds. U.S. Treasury securities are classified
as trading investments and are recorded on the trade
date at cost. Changes in fair value are reflected in Net
gains (losses) on trading assets in the Company’s
Consolidated
and
Comprehensive Income (Loss). Interest income or
expense on U.S. Treasury notes and bonds is accrued
of Operations
Statement
Derivatives - RCap enters primarily into U.S. Treasury,
Eurodollar, federal funds, German government and U.S.
equity index and currency futures and options contracts.
RCap maintains a margin account which is settled daily
with FCMs. Changes in the unrealized gains or losses
on the futures and options contracts as well as any
foreign exchange gains and losses are reflected in Net
gains (losses) on trading assets in the Company’s
Consolidated
and
Comprehensive
(Loss). Unrealized gains
(losses) are excluded from net income (loss) in arriving
the
at cash
Consolidated Statements of Cash Flows.
from operating activities
Statements
Income
of Operations
flows
in
A Summary of Recent Accounting Pronouncements
Follows:
Presentation
Receivables – Troubled Debt Restructurings by
Creditors (ASC 310-40)
Restructurings
In January 2014, the FASB issued ASU 2014-04,
Receivables–Troubled Debt
by
Creditors, Reclassification of Residential Real Estate
Collateralized Consumer Mortgage Loans upon
Foreclosure, which clarifies that an in substance
repossession or foreclosure has occurred, and a creditor
is considered to have received physical possession of
residential
real estate property collateralizing a
consumer mortgage loan, when the creditor obtains
legal title to the property upon completion of a
foreclosure or the borrower conveys all interest in the
property to the creditor through a deed in lieu of
foreclosure or similar arrangement. ASU 2014-04 also
requires disclosure of
the amount of foreclosed
residential real estate held by the creditor and the
recorded investment in mortgage loans collateralized by
residential real estate property in the process of
foreclosure. The update is effective for reporting
periods beginning after December 15, 2014. Adoption is
not expected to have a significant impact on the
consolidated financial statements.
Balance Sheet (ASC 210)
On December 23, 2011, FASB released ASU 2011-11
Balance Sheet: Disclosures about Offsetting Assets and
Liabilities. Under this update, the Company is required
to disclose both gross information and net information
about both instruments and transactions eligible for
offset in the Company’s Consolidated Statements of
Financial Condition and transactions subject to an
F-16
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
includes derivatives, sale and
agreement similar to a master netting arrangement. The
repurchase
scope
agreements and reverse sale and repurchase agreements
and securities borrowing and securities
lending
arrangements. This disclosure is intended to enable
financial statement users to understand the effect of
such arrangements on the Company’s financial position.
In January 2013, FASB released ASU 2013-01 Balance
Sheet: Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities, which served solely to
clarify the scope of financial instruments included in
ASU 2011-11 as there was concern about diversity in
practice. The objective of these updates is to support
further convergence of GAAP and IFRS requirements.
The updates are effective for annual reporting periods
beginning on or after January 1, 2013 and did not have
a significant impact on the consolidated financial
statements.
Comprehensive Income (ASC 220)
On December 23, 2011, the FASB issued ASU 2011-
12, Comprehensive Income: Deferral of Effective Date
for Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive
Income in ASU No. 2011-05, which defers those
changes in ASU 2011-05 that relate to the presentation
of reclassification adjustments out of accumulated other
comprehensive income. This was done to allow the
FASB time to re-deliberate the presentation on the face
of
statements
of
the
other
of
reclassifications
comprehensive income on the components of net
income and other comprehensive income. No other
requirements under ASU 2011-05 are affected by ASU
2011-12. FASB tentatively decided not to require
presentation of reclassification adjustments out of
accumulated other comprehensive income on the face of
the financial statements and to propose new disclosures
instead.
accumulated
financial
effects
out
the
it
In addition,
In February 2013, the FASB issued ASU 2013-02
Comprehensive
Income: Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive
Income. This update addresses the disclosure issue left
open at the deferral under ASU 2011-12. This update
requires the provision of information about the amounts
reclassified out of accumulated other comprehensive
income by component.
requires
presentation, either on the face of the statement where
net income is presented or in the notes, significant
amounts
reclassified out of accumulated other
comprehensive income by the respective line items of
net income but only if the amount reclassified is
required under GAAP to be reclassified to net income in
its entirety in the same reporting period. For other
amounts that are not required under GAAP to be
reclassified in their entirety to net income, a cross-
reference must be provided to other disclosures required
under GAAP that provide additional detail about those
amounts. This update is effective for reporting periods
beginning after December 15, 2012. Adoption of ASU
2013-02 did not have a significant impact on the
consolidated financial statements.
Broad Transactions
Financial Services – Investment Companies (ASC 946)
In June 2013, the FASB finalized ASU 2013-08
amending
the scope, measurement and disclosure
requirements under Topic 946 – Financial Services-
Investment Companies. In January 2014, the FASB has
officially removed the Investment Companies: Real
Estate Property
Investment
Investments and
Properties projects from its agenda. As stated in ASC
946-10-15-3, the guidance in Topic 946 does not apply
to REITs, and thus has no effect on the Company’s
consolidated financial statements.
the
F-17
Principal outstanding
Unamortized premium
Unamortized discount
Amortized cost
Gross unrealized gains
Gross unrealized losses
Estimated fair value
Amortized cost
Gross unrealized gains
Gross unrealized losses
Estimated fair value
Principal outstanding
Unamortized premium
Unamortized discount
Amortized cost
Gross unrealized gains
Gross unrealized losses
Estimated fair value
Amortized cost
Gross unrealized gains
Gross unrealized losses
Estimated fair value
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4.
AGENCY MORTGAGE-BACKED SECURITIES
The following tables present the Company’s available-for-sale Agency mortgage-backed securities portfolio as of
December 31, 2013 and 2012 which were carried at their fair value:
Decembe r 31, 2013
Freddie Mac
Fannie Mae
Ginnie Mae
Total
(dollars in thousands)
$
$
$
$
24,458,925
1,627,966
(9,533)
26,077,358
227,423
(1,267,106)
25,037,675
43,564,657
2,970,813
(11,568)
46,523,902
456,057
(1,781,683)
45,198,276
120,739
27,085
(383)
147,441
9,845
(4,288)
152,998
68,144,321
4,625,864
(21,484)
72,748,701
693,325
(3,053,077)
70,388,949
$
$
$
$
Fixe d Rate
Adjustable Rate
(dollars in thousands)
Total
$
$
$
68,784,424
538,556
(3,040,153)
66,282,827
3,964,277
154,769
(12,924)
4,106,122
$
$
$
72,748,701
693,325
(3,053,077)
70,388,949
Decembe r 31, 2012
Freddie Mac
Fannie Mae
Ginnie Mae
Total
$
$
$
(dollars in thousands)
$
$
$
$
$
44,296,234
2,121,478
(9,515)
46,408,197
1,166,299
(36,890)
47,537,606
115,267,274
2,838,203
(183,388)
117,922,089
70,649,782
3,695,381
(12,315)
74,332,848
1,913,334
(146,533)
76,099,649
5,786,718
259,013
(4,613)
6,041,118
Fixe d Rate
Adjustable Rate
(dollars in thousands)
Total
$
$
$
$
$
$
273,988
39,348
(389)
312,947
17,583
(4,578)
325,952
121,053,992
3,097,216
(188,001)
123,963,207
115,220,004
5,856,207
(22,219)
121,053,992
3,097,216
(188,001)
123,963,207
Actual maturities of Agency mortgage-backed securities
are generally shorter than stated contractual maturities
because actual maturities of Agency mortgage-backed
securities are affected by periodic payments and
prepayments of principal on the underlying mortgages.
following
The
the Company’s
table summarizes
Agency mortgage-backed securities as of December 31,
2013 and 2012, according to their estimated weighted
average life classifications:
F-18
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Weighted Average Life
Estimated Fair Value Amortized Cost
Estimated
Fair Value
Amortized
Cost
December 31, 2013
December 31, 2012
Less than one year
Greater than one year through five years
Greater than five years through ten years
Greater than ten years
Total
$
65,584
50,046,013
14,915,716
5,361,636
70,388,949
(dollars in thousands)
$
$
64,561
51,710,059
15,292,973
5,681,108
72,748,701
1,264,094
119,288,168
3,104,073
306,872
123,963,207
$
$
$
1,250,405
116,510,310
2,992,054
301,223
121,053,992
$
$
The weighted average lives of the Agency mortgage-
backed securities at December 31, 2013 and 2012 in the
table above are based upon principal prepayment rates
for each security provided through subscription-based
financial information services. The prepayment model
considers current yield, forward yield, steepness of the
yield curve, current mortgage rates, mortgage rate of the
outstanding loans, loan age, margin, volatility and other
factors. The actual weighted average lives of the
Agency mortgage-backed securities could be longer or
shorter than estimated.
The following table presents the gross unrealized losses
and estimated fair value of the Company’s Agency
mortgage-backed securities by length of time that such
securities have been in a continuous unrealized loss
position at December 31, 2013 and 2012.
Decembe r 31, 2013
De ce mber 31, 2012
Estimated
Fair Value
Gross
Unrealized
Losses
Number of
Se curities
Estimated
Fair Value
(dollars in thousands)
Less than 12 Months
12 Months or More
Total
$
$
47,677,197
6,102,283
53,779,480
(2,569,474)
$
(483,603)
$
(3,053,077)
583
55
638
$
$
11,220,514
147,775
11,368,289
Gross
Unrealize d
Losses
Numbe r of
Se curities
$
(82,721)
(105,280)
$
(188,001)
187
39
226
The decline in value of these securities is solely due to
market conditions and not the quality of the assets.
Substantially all of
the Agency mortgage-backed
securities are “AAA” rated or carry an implied “AAA”
rating. The investments are not considered to be other-
the Company
impaired because
than-temporarily
currently has the ability and intent to hold the
investments to maturity or for a period of time sufficient
for a forecasted market price recovery up to or beyond
the cost of the investments, and it is not more likely
than not that the Company will be required to sell the
investments before recovery of the amortized cost
bases, which may be maturity. Also, the Company is
guaranteed payment of the principal amount of the
securities by the respective issuing government agency.
During the year ended December 31, 2013, the
Company disposed of $54.5 billion of Agency
mortgage-backed securities, resulting in a realized gain
of $440.2 million. During the year ended December 31,
2012, the Company sold $30.4 billion of Agency
mortgage-backed securities, resulting in a realized gain
of $438.5 million. During the year ended December 31,
2011, the Company sold $18.7 billion of Agency
mortgage-backed securities, resulting in a realized gain
of $199.2 million. Average cost is used as the basis on
which the realized gain or loss on sale is determined.
Agency
securities
interest-only mortgage-backed
represent the right to receive a specified portion of the
contractual interest flows of the underlying outstanding
principal balance of specific Agency mortgage-backed
securities.
interest-only mortgage-backed
securities in the Company’s portfolio as of December
31, 2013 and 2012 had net unrealized gains (losses) of
$78.1 million and ($141.1) million and an amortized
cost of $1.0 billion and $797.1 million, respectively.
Agency
F-19
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5.
ACQUISITION OF CREXUS
On April 17, 2013, the Company, through its wholly-
owned
subsidiary CXS Acquisition Corporation
obtained control of CreXus pursuant to the merger
agreement dated January 30, 2013. CreXus owned a
portfolio of commercial real estate assets which are now
owned by the Company. Following the acquisition,
CXS Acquisition Corporation was renamed Annaly
Commercial Real Estate Group, Inc.
The business combination was accounted for under the
acquisition method of accounting in accordance with
ASC 805, Business Combinations, (“ASC 805”).
Accordingly, goodwill was measured as the excess of
the aggregate of the acquisition-date fair value of the
consideration transferred and the acquisition-date fair
value of the Company’s previously held equity interest
in CreXus over the fair value, at acquisition date, of the
identifiable assets acquired net of assumed liabilities.
The
the aggregate
consideration and preliminary fair value of the assets
acquired and liabilities assumed recognized at the
acquisition date:
summarizes
following
table
Cash consideration transferred
Fair value of equity interest in CreXus held before the business combination
Re cognized amounts of identifiable asse ts acquire d and liabilitie s assume d
Cash and cash equivalents
Commercial real estate investments
Accrued interest receivable
Other assets
Mortgages payable
Participation sold
Accounts payable and accrued expenses
Total identifiable net assets
Goodwill
April 17, 2013
(dollars in thousands)
876,267
$
106,521
982,788
$
$
151,843
796,950
3,485
5,617
(19,376)
(14,352)
(12,729)
911,438
71,350
982,788
$
result of remeasuring the fair value of its equity interest
in CreXus held before the business combination.
Under ASC 805, merger-related transaction costs (such
as advisory, legal, valuation and other professional fees)
are not included as components of consideration
transferred but are accounted for as expenses in the
periods in which the costs are incurred. Transaction
costs of $7.3 million were incurred during 2013 and
were included in other general and administrative
expenses in the Consolidated Statements of Operations
and Comprehensive Income (Loss).
final goodwill
The Company recorded $71.4 million of goodwill
during the second quarter of 2013 associated with the
acquisition of CreXus in the Consolidated Statements of
Financial Condition. The Company recorded a $0.4
million adjustment to goodwill during the second half
the
of 2013. The
Consolidated Statements of Financial Condition may
differ from that reflected herein as a result of future
measurement period adjustments. In management’s
opinion, the goodwill represents the synergies that will
result from integrating CreXus’ commercial real estate
platform into the Company, which the Company
believes is complementary to its existing business and
return profile.
recorded on
The acquisition-date fair value of the previously held
equity interest in CreXus excluded the estimated fair
value of the control premium that resulted from the
merger transaction. The Company recognized a loss of
$18.9 million during the second quarter of 2013 as a
F-20
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6.
COMMERCIAL REAL ESTATE INVESTMENTS
At December 31, 2013, commercial real estate investments were composed of the following:
CRE Debt and Preferred Equity Investments
Outstanding Principal Carrying Value
Percentage of Loan Portfolio(1)
Dece mber 31, 2013
Senior mortgages
Subordinate notes
Mezzanine loans
Preferred equity
Subtotal
Net origination fees
Net investment in CRE Debt and Preferred Equity Investments
(1) Based on outstanding principal.
$
$
669,512
41,059
626,883
249,769
1,587,223
(dollars in thousands)
669,949
41,408
628,357
249,145
1,588,859
(4,890)
1,583,969
$
$
$
42.2%
2.6%
39.5%
15.7%
100%
Senior Mortgages Subordinate Notes Mezzanine Loans Preferred Equity
Total
December 31, 2013
$
$
$
Beginning principal balance, net of loss reserves
Purchases/advances (principal)
Sales (principal)
Remaining premium (discount)
Principal payments
Transfers
Allowance for loan losses
Net carrying value (excluding origination fees)
100,907
594,143
(13,750)
458
(24,309)
12,500
-
669,949
$
(dollars in thousands)
41,293
-
-
350
(235)
-
-
41,408
545,109
184,704
-
1,476
(90,432)
(12,500)
-
628,357
$
39,769
210,000
-
(624)
-
-
-
249,145
$
727,078
988,847
(13,750)
1,660
(114,976)
-
-
$
1,588,859
$
$
$
Internal CRE Debt and Preferred Equity Investment Ratings
Investment Type
Outstanding Principal
Percentage of CRE Debt and
Preferred Equity Portfolio
Internal Ratings
Performing Loans Watch List Loans Workout Loans
(dollars in thousands)
December 31, 2013
$
$
$
Senior mortgages
Subordinate notes
Mezzanine loans
Preferred equity
669,512
41,059
626,883
249,769
1,587,223
644,039
41,059
620,883
249,769
1,555,750
25,473
-
6,000
-
31,473
-
$
-
-
-
$
-
$
$
$
42.2%
2.6%
39.5%
15.7%
100.00%
F-21
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Total Commercial Real Estate Investment
Real estate held for investment, at amortized cost
Land
Buildings and improvements
Subtotal
Less: accumulated depreciation
Total real estate held for investment at amortized cost, net
Real estate held for sale at fair value
Total investment in commercial real estate, net
Net carrying value of CRE Debt and Preferred Equity Investments
Total commercial real estate investments
December 31, 2013
(dollars in thousands)
$
6,639
31,100
37,739
(877)
36,862
23,270
60,132
1,583,969
1,644,101
$
7.
FAIR VALUE MEASUREMENTS
follows
fair value guidance
in
The Company
accordance with GAAP to account for its financial
instruments. The fair value of a financial instrument is
the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
The Company designates its financial instruments as
available for sale or trading depending upon the type of
instrument and the Company’s intent and ability to hold
such instrument to maturity. Instruments classified as
available for sale and trading are reported at fair value
on a recurring basis. Instruments classified as held-to-
maturity are reported at amortized cost, with an
estimation of the fair value of such instruments
performed on a non-recurring, generally quarterly basis.
GAAP requires classification of the instruments into a
three-level hierarchy based on the priority of the inputs
to the valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). If
the inputs used to measure the financial instruments fall
within different
the
categorization is based on the lowest level input that is
significant to the fair value measurement of the
instrument. Financial assets and liabilities recorded at
fair value on the Consolidated Statements of Financial
Condition or disclosed
the related notes are
in
categorized based on the inputs to the valuation
techniques as follows:
the hierarchy,
levels of
Level 1– inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets and
liabilities in active markets.
Level 2 – inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially
the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are
unobservable and significant to overall fair value.
the valuation
is a description of
The following
methodologies used for instruments carried at fair
value. These methodologies are applied to assets and
liabilities across the three level fair value hierarchy,
with
the
appropriate level.
the observability of
inputs determining
U.S. Treasury securities and investments in affiliates are
valued using quoted prices for identical instruments in
active markets. Agency mortgage-backed securities,
Agency debentures, interest rate swaps, swaptions and
other derivatives are valued using quoted prices,
including dealer quotes, or internally estimated prices
for similar assets using internal models. The Company
incorporates
common market pricing methods,
including a spread measurement to the Treasury curve
as well as underlying characteristics of the particular
security including coupon, prepayment speeds, periodic
and life caps, rate reset period and expected life of the
security in its estimates of fair value. Management
reviews the fair values generated by the internal models
to determine whether prices are reflective of the current
its
market. Management
estimates of the fair value derived using internal models
by comparing its results to independent prices provided
by dealers in the securities and/or third party pricing
services. Certain liquid asset classes, such as Agency
fixed-rate pass-throughs, may be priced using
indirectly corroborates
F-22
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
independent sources such as quoted prices for TBA
securities.
The Agency mortgage-backed securities, interest rate
swap and swaption markets are considered to be active
markets such that participants transact with sufficient
frequency and volume to provide transparent pricing
information on an ongoing basis. The liquidity of the
Agency mortgage-backed securities, interest rate swaps
and swaptions markets and the similarity of the
Company’s securities to those actively traded enable the
Company to observe quoted prices in the market and
utilize those prices as a basis for formulating fair value
measurements. Consequently,
the Company has
classified Agency mortgage-backed securities, interest
rate swaps, swaptions, TBA derivatives and MBS
options as Level 2 inputs in the fair value hierarchy.
The following table presents the estimated fair values of
financial instruments measured at fair value on a
recurring basis.
At December 31, 2013
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Assets:
U.S. Treasury securities
Agency mortgage-backed securities
Agency debentures
Investment in affiliates
Interest rate swaps
Other derivatives
Total Assets
Liabilities:
U.S. Treasury securities sold, not yet purchased
Interest rate swaps
Other derivatives
Total Liabilities
$ - $ -
$ 1,117,915
-
70,388,949
- 2,969,885
-
- 559,044
3,487 143,238
$ 1,260,849 $ 74,061,116
1,117,915
$
70,388,949
2,969,885
139,447
559,044
146,725
$ - $ 75,321,965
139,447
-
-
-
-
-
1,918,394
439
$ 1,918,833
-
- 1,141,828
55,079
$ 1,196,907
-
-
-
1,918,394
1,141,828
55,518
$ - $ 3,115,740
At December 31, 2012
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Assets:
U.S. Treasury securities
Agency mortgage-backed securities
Agency debentures
Investment in affiliates
Other derivatives
Total Assets
Liabilities:
U.S. Treasury securities sold, not yet purchased
Interest rate swaps
Total Liabilities
GAAP requires disclosure of fair value information
about financial instruments, whether or not recognized
in the financial statements, for which it is practical to
estimate the value. In cases where quoted market prices
are not available, fair values are based upon discounted
cash flows using market yields or other valuation
methodologies. Considerable judgment is necessary to
interpret market data and develop estimated fair values.
Accordingly, fair values are not necessarily indicative
of
the Company would realize on
disposition of the financial instruments. The use of
the amount
$ 752,076
$ - $ -
- 123,963,207
- 3,009,568
-
234,120
7,955 1,875
$ 994,151 $ 126,974,650
752,076
$
123,963,207
3,009,568
234,120
9,830
$ - $ 127,968,801
-
-
-
-
495,437
$ 495,437
-
- 2,584,907
$ 2,584,907
-
-
495,437
2,584,907
$ - $ 3,080,344
different market
estimation
methodologies could have a material effect on the
estimated fair value amounts.
assumptions
or
The carrying value of short term instruments, including
repurchase
cash and cash equivalents,
agreements and repurchase agreements whose term is
less than twelve months, and securities borrowed and
securities loaned, generally approximates fair value due
to the short term nature of the instruments.
reverse
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F-23
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Instruments held-for-investment are recorded at their
principal balance outstanding, plus any premiums or
less discounts that are amortized or accreted over the
estimated life of the instrument.
Commercial real estate debt and preferred equity held
for investment are carried at their outstanding principal
balance, net of an unamortized origination fee, premium
or discount, less a reserve for estimated losses. The
estimated fair value of commercial real estate debt and
preferred equity investments takes into consideration
expected changes in interest rates and changes in the
underlying collateral cash flows. The fair value of
commercial real estate debt and preferred equity
investments is based on the investment’s contractual
cash flows and estimated changes in the yield curve.
The fair value also reflects consideration of changes in
credit risk since the investment was originated or
purchased.
Estimates of fair value of corporate debt require the use
of judgments and inputs including, but not limited to,
the enterprise value of the borrower (i.e., an estimate of
the total fair value of the borrower's debt and equity),
the nature and realizable value of any collateral, the
borrower’s ability to make payments when due and its
earnings history. Management also considers factors
that affect the macro and local economic markets in
which the borrower operates.
The fair value of repurchase agreements with remaining
maturities greater than one year or with embedded
optionality are valued as structured notes, with term to
maturity, LIBOR rates and the Treasury curve being
primary determinants of estimated fair value.
The fair value of mortgages payable is calculated using
the estimated yield of a new par loan to value the
remaining terms in place. A par loan is created using the
identical terms of the existing loan; however the coupon
is derived by using the original spread against the
interpolated treasury. The fair value of mortgages
payable also reflects consideration of the value of the
underlying collateral and changes in credit risk from the
time the debt was originated.
The fair value of a participation sold is based on the
estimated fair value of the underlying loan.
The fair value of convertible senior notes is determined
using end of day quoted prices in active markets.
The following table summarizes the estimated fair value
for all financial assets and liabilities as of December 31,
2013 and 2012.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Financial assets:
Cash and cash equivalents
Reverse repurchase agreements
Securities borrowed
U.S. Treasury securities
Agency mortgage-backed securities
Agency debentures
Investment in affiliates
Commercial real estate debt and preferred equity
Corporate debt
Interest rate swaps
Other derivatives
Financial liabilities:
U.S. Treasury securities sold, not yet purchased
Repurchase agreements
Securities loaned
Convertible Senior Notes
Mortgages payable
Participation sold
Interest rate swaps
Other derivatives
December 31, 2013
December 31, 2012
Level in
Fair Value
Hierarchy
Carrying
Value
Fair Value
Carrying
Value
Fair Value
(dollars in thousands)
1
1
1
1
2
2
1
3
2
2
1,2
1
1,2
1
1
2
3
2
1,2
$ 552,436 $ 552,436
100,000 100,000 1,811,095
2,582,893 2,582,893 2,160,942
1,117,915 1,117,915 752,076
70,388,949 123,963,207
70,388,949
2,969,885 2,969,885 3,009,568
139,447 139,447 234,120
1,583,969 1,581,836
117,687 118,362 63,944
559,044 559,044
146,725 146,725 9,830
$ 615,789 $ 615,789
1,811,095
2,160,942
752,076
123,963,207
3,009,568
234,120
-
64,271
-
9,830
-
-
$ 1,918,394
$1,918,394
61,781,001
62,134,133 102,785,697
2,527,668 2,527,668 1,808,315
825,262 870,199 825,541
19,332
14,065
1,141,828 1,141,828 2,584,907
55,518
$ 495,437 $ 495,437
103,332,832
1,808,315
899,192
-
-
2,584,907
-
19,240
14,050
-
-
55,518
-
8. REPURCHASE AGREEMENTS
The Company had outstanding $61.8 billion and $102.8
billion of repurchase agreements with weighted average
borrowing rates of 2.33% and 1.53%, after giving effect
to the Company’s interest rate swaps, and weighted
average remaining maturities of 204 days and 191 days
as of December 31, 2013 and 2012, respectively.
Investment Securities and U.S. Treasury securities
pledged as collateral under these repurchase agreements
and interest rate swaps had an estimated fair value and
accrued interest of $67.9 billion and $222.1 million,
respectively, at December 31, 2013 and $109.2 billion
and $363.8 million, respectively, at December 31, 2012.
At December 31, 2013 and 2012, the repurchase
agreements had the following remaining maturities and
weighted average rates:
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days
Total
December 31, 2013
December 31, 2012
Repurchase
Agreements
Weighted
Average Rate
Repurchase
Agreements
Weighted
Average Rate
$ -
21,171,574
13,373,921
3,592,266
4,010,334
19,632,906
$ 61,781,001
(dollars in thousands)
0.00% $ -
33,191,448
0.36%
28,383,851
0.43%
8,602,680
0.44%
4,804,671
0.52%
1.29%
27,803,047
0.68% $ 102,785,697
0.00%
0.50%
0.45%
0.42%
0.57%
1.03%
0.63%
F-25
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and
reverse
agreements
repurchase
Repurchase
agreements with the same counterparty and the same
maturity are presented net
the Consolidated
Statements of Financial Condition when the terms of
the agreements permit netting. The following table
summarizes the gross amounts of reverse repurchase
in
agreements and repurchase agreements, amounts offset
in accordance with netting arrangements and net
amounts of
reverse
repurchase agreements as presented in the Consolidated
Statements of Financial Condition as of December 31,
2013 and 2012.
repurchase agreements and
December 31, 2013
December 31, 2012
Reverse Repurchase
Agreements
Repurchase
Agreements
Reverse Repurchase
Agreements
Repurchase
Agreements
(dollars in thousands)
Gross Amounts
Amounts Offset
Netted Amounts
$2,524,980
(2,424,980)
$100,000
$64,205,981
(2,424,980)
$61,781,001
$3,650,053
(1,838,958)
$1,811,095
$104,624,655
(1,838,958)
$102,785,697
9. DERIVATIVE INSTRUMENTS
strategy,
risk management
In connection with the Company’s investment/market
rate
the Company
economically hedges a portion of its interest rate risk by
entering into derivative financial instrument contracts,
which include interest rate swaps, swaptions and U.S.
Treasury futures contracts. The Company also enters
into TBA derivatives and MBS options to economically
hedge its exposure to market risks. The purpose of
using derivatives is to manage overall portfolio risk
with the potential to generate additional income for
distribution to stockholders. These derivatives are
subject to changes in market value resulting from
changes in interest rates, volatility, Agency mortgage-
backed security spreads to U.S. Treasuries and market
liquidity. The use of derivatives also creates exposure to
credit risk relating to potential losses that could be
recognized if the counterparties to these instruments fail
to perform their obligations under the stated contract.
Additionally, the Company may have to pledge cash or
assets as collateral for the derivative transactions, the
amount which may vary based on the market value,
notional amount and remaining term of the derivative
contract. In the event of a default by the counterparty,
its
the Company could have difficulty obtaining
Investment Securities pledged as collateral as well as
receiving payments in accordance with the terms of the
derivative contracts. None of the Company’s derivative
transactions have been designated as hedging
instruments for accounting purposes.
The table below summarizes fair value information
liabilities as of
about our derivative assets and
December 31, 2013 and 2012:
F-26
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivatives Instruments
Balance Sheet Location
Assets:
Interest rate swaps
Interest rate swaptions
TBA derivatives
MBS options
U.S. Treasury futures
Liabilities:
Interest rate swaps
Interest rate swaptions
TBA derivatives
MBS options
U.S. Treasury futures
Interest rate swaps, at fair value
Other derivative contracts, at fair value
Other derivative contracts, at fair value
Other derivative contracts, at fair value
Other derivative contracts, at fair value
Interest rate swaps, at fair value
Other derivative contracts, at fair value
Other derivative contracts, at fair value
Other derivative contracts, at fair value
Other derivative contracts, at fair value
December 31, 2013 December 31, 2012
(dollars in thousands)
$ -
$ 559,044
110,361
-
20,693 1,875
12,184
-
3,487 7,955
$ 705,769 $ 9,830
$ 1,141,828 $ 2,584,907
-
24,662
-
13,779
-
16,638
439
-
$ 1,197,346 $ 2,584,907
The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2013:
Maturity
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted Average
Current Notional
Weighted Average Pay
Rate
(dollars in thousands)
Weighted Average
Receive Rate
Weighted Average
Years to Maturity
$
$
24,286,000
8,865,410
15,785,500
3,490,000
52,426,910
1.83%
2.02%
2.37%
3.62%
2.14%
0.18%
0.19%
0.23%
0.20%
0.20%
1.98
4.19
7.66
19.93
5.26
The following table summarizes certain characteristics of the Company’s interest rate swaptions at December 31,
2013:
Current Underlying
Notional
We ighted Average
Underlying Pay
Rate
Weighte d Average
Underlying Receive
Rate
We ighted Average
Unde rlying Years to
Maturity
Weighted Ave rage Months
to Expiration
Long
Short
$
$
5,150,000
1,000,000
3.07%
3M LIBOR
(dollars in thousands)
3M LIBOR
2.83%
10.10
5.96
4.26
23.71
The following table summarizes certain characteristics of the Company’s TBA derivatives as of December 31, 2013:
December 31, 2013
Purchase and sale contracts for
derivative TBAs
Notional
Cost Basis
Market Value
Net Carrying Value
(dollars in thousands)
Purchase contracts
Sale contracts
Net TBA derivatives
$ 2,625,000 $ 2,733,682 $ 2,722,324 $ (11,357)
18,271
(3,875,000) (3,923,213) (3,904,941)
$ 6,914
$ (1,250,000) $ (1,189,531) $ (1,182,617)
Derivative contracts may contain legally enforceable
provisions that allow for netting or setting off
receivables and payables with each counterparty.
Beginning on September 30, 2013, the Company
F-27
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
elected to present derivative contracts on a gross basis
the Consolidated Statements of Financial
on
Condition. Prior to September 30, 2013, the Company
presented the fair value of derivative contracts net, by
counterparty. The following tables present information
about our derivative assets and liabilities that are
subject to such provisions and can potentially be offset
on our Consolidated Statements of Financial
Condition as of December 31, 2013 and 2012,
respectively.
December 31, 2013
Assets:
Gross Amounts Amounts Eligible for Offset
Net Amounts
(dollars in thousands)
Interest rate swaps, at fair value
Interest rate swaptions, at fair value
TBA derivatives, at fair value
MBS options, at fair value
U.S. Treasury futures, at fair value
$ 150,491
$ 559,044 $ (408,553)
85,699
110,361 (24,662)
20,693 (9,775)
10,918
12,184 (3,292) 8,892
3,487 (439) 3,048
Liabilities:
Interest rate swaps, at fair value
Interest rate swaptions, at fair value
TBA derivatives, at fair value
MBS options, at fair value
U.S. Treasury futures, at fair value
$ 733,275
$ 1,141,828 $ (408,553)
24,662 (24,662)
-
13,779 (9,775) 4,004
13,346
16,638 (3,292)
-
439 (439)
December 31, 2012
Assets:
Gross Amounts Amounts Eligible for Offset
Net Amounts
(dollars in thousands)
Interest rate swaps, at fair value
TBA derivatives, at fair value
U.S. Treasury futures, at fair value
$ 26,020 $ (26,020)
1,875
7,955
$ -
- 1,875
- 7,955
Liabilities:
Interest rate swaps, at fair value
$ 2,610,927 $ (26,020)
$ 2,584,907
The effect of interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss) is as
follows:
Location on Consolidated Statements of Operations and Comprehensive Income (Loss)
Realized Gains (Losses) on
Termination of Interest Rate Swaps
Unrealized Gains (Losses) on
Interest Rate Swaps
Realized Gains (Losses) on
Interest Rate Swaps
For the Years Ended:
December 31, 2013
December 31, 2012
December 31, 2011
$
$
$
(908,294)
(893,769)
(882,395)
(101,862)
$
$
(2,385)
$
-
$
$
$
2,002,200
(32,219)
(1,815,107)
(dollars in thousands)
The weighted average pay rate on the Company’s
interest rate swaps at December 31, 2013 was 2.14%
and the weighted average receive rate was 0.20%. The
weighted average pay rate at December 31, 2012 was
2.21% and the weighted average receive rate was
0.24%.
the
The effect of other derivative contracts on
Company’s Consolidated Statements of Operations and
Comprehensive Income (Loss) is as follows:
F-28
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Ye ar Ende d De ce mbe r 31, 2013
De rivative Instrume nts Re alize d Gain (Loss) Unre alize d Gain (Loss)
(dollars in thousands)
Amount of Gain/(Loss) Re cognize d in
Ne t Gains (Losse s) on Trading Asse ts
Net TBA derivatives (1)
Net interest rate swaptions
$
33,728
$
6,630
$
40,358
$
(2,697)
$
(15,467)
$
(18,164)
U.S. Treasury futures
$
(38,514)
$
(2,851)
$
$
(41,365)
(19,171)
(1) Includes options on TBA securities.
to
Certain of the Company’s derivative contracts are
International Swaps and Derivatives
subject
Association Master Agreements
(“ISDA”) which
contain provisions that grant counterparties certain
rights with respect to the applicable ISDA upon the
occurrence of (i) negative performance that results in a
decline in net assets in excess of specified thresholds or
dollar amounts over set periods of time, (ii) the
Company’s failure to maintain its REIT status, (iii) the
Company’s failure to comply with limits on the amount
of leverage, and (iv) the Company’s stock being
delisted from the New York Stock Exchange (NYSE).
Upon the occurrence of any one of items (i) through
(iv), the counterparty to the applicable ISDA has a right
to terminate the ISDA in accordance with its provisions.
The aggregate fair value of all derivative instruments
with the aforementioned features that are in a net
liability
is
approximately $492 million, which represents the
maximum amount the Company would be required to
pay upon
fully
collateralized.
at December 31,
termination. This
position
amount
2013
is
it enters primarily
trading
In connection with RCap’s proprietary
activities,
into U.S. Treasury,
Eurodollar, federal funds, German government and U.S.
equity index and currency futures and options contracts.
RCap invests in futures and options contracts for
economic hedging purposes to reduce exposure to
changes in yields of its U.S. Treasury securities and for
speculative purposes to achieve capital appreciation.
The use of futures and options contracts creates
exposure to credit risk relating to potential losses that
could be recognized if the counterparties to these
instruments fail to perform their obligations under the
contracts. RCap uses appropriately licensed FCMs to
execute its orders to buy and sell futures and options
contracts. RCap’s derivative contracts are presented in
the Consolidated Statements of Financial Condition as
Other derivatives, at fair value.
10. CONVERTIBLE SENIOR NOTES
In 2010, the Company issued $600.0 million in
aggregate principal amount of its 4% convertible senior
notes due 2015 (“4% Convertible Senior Notes”) for net
proceeds of approximately $582.0 million. The
Company has repurchased $492.5 million in aggregate
principal amount of its 4% Convertible Senior Notes as
of December 31, 2013. Interest on the 4% Convertible
Senior Notes is paid semi-annually at a rate of 4% per
year and the 4% Convertible Senior Notes will mature
on February 15, 2015 unless repurchased or converted
earlier. The 4% Convertible Senior Notes are
convertible
into shares of Common Stock at a
conversion rate for each $1,000 principal amount of 4%
Convertible Senior Notes. The initial conversion rate
was 46.6070, which was equivalent to an initial
conversion price of approximately $21.4560 per share
of Common Stock. The conversion rate at December
31, 2013 was 79.7379, which is equivalent to a
conversion price of approximately $12.5411 per share
of Common Stock. The conversion rate is subject to
adjustment in certain circumstances. There is no limit
on the total number of shares of Common Stock that the
Company would be required to issue upon a conversion.
intrinsic value of
in Additional paid-in capital on
The
the contingent beneficial
conversion feature was $93.2 million and $75.8 million
at December 31, 2013 and 2012, respectively, which is
the
reflected
Company’s Consolidated Statements of Financial
Condition, and reduces the recorded liability on the 4%
Convertible Senior Notes. The unamortized contingent
beneficial conversion feature of the 4% Convertible
Senior Notes at December 31, 2013 and 2012 of $26.9
million and $22.7 million, respectively, is recognized in
interest expense over the remaining life of the notes.
In May 2012, the Company issued $750.0 million in
aggregate principal amount of its 5% convertible senior
notes due 2015 (“5% Convertible Senior Notes”) for net
proceeds of approximately $727.5 million. Interest on
the 5% Convertible Senior Notes is paid semi-annually
at a rate of 5% per year and the 5% Convertible Senior
Notes will mature on May 15, 2015 unless repurchased
F-29
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
or converted earlier. The 5% Convertible Senior Notes
are convertible into shares of Common Stock at a
conversion rate for each $1,000 principal amount of 5%
Convertible Senior Notes. The initial conversion rate
and conversion rate at December 31, 2013 was 52.7969,
which was equivalent to an initial conversion price of
approximately $18.94 per share of Common Stock,
subject to adjustment in certain circumstances. Upon
conversion, the Company will pay or deliver, as the
case may be, cash, shares of Common Stock or a
combination of cash and shares of Common Stock, at
the Company’s sole discretion. There is no limit on the
total number of shares of Common Stock that the
Company would be required to issue upon a conversion.
At issuance, the Company determined that the 5%
Convertible Senior Notes included an equity component
of $11.7 million, which is reflected in Additional paid-
in capital on the Company’s Consolidated Statements of
Financial Condition, and reduces the recorded liability
on the 5% Convertible Senior Notes. The $11.7 million
discount to the principal amount of the Convertible
Senior Notes is recognized in interest expense over the
remaining life of the notes. At December 31, 2013 and
2012, $5.4 million and $9.3 million, respectively, of the
discount had not been reflected in interest expense.
The 4% Convertible Senior Notes due 2015 and the 5%
Convertible Senior Notes due 2015 rank pari-passu with
each other. They are each a general corporate obligation
and therefore rank junior to collateralized debt of the
Company with respect to secured collateral.
The 4% Convertible Senior Notes and
the 5%
Convertible Senior Notes rank senior to the 7.875%
Series A Cumulative Redeemable Preferred Stock,
7.625% Series C Cumulative Redeemable Preferred
Stock and 7.50% Series D Cumulative Redeemable
Preferred Stock. The 7.875% Series A Cumulative
Redeemable Preferred Stock, 7.625% Series C
Cumulative Redeemable Preferred Stock and 7.50%
Series D Cumulative Redeemable Preferred Stock rank
pari-passu with each other.
The 7.875% Series A Cumulative Redeemable
Preferred Stock, 7.625% Series C Cumulative
Redeemable Preferred Stock and 7.50% Series D
Cumulative Redeemable Preferred Stock rank senior to
the common stock of the Company.
11. COMMON STOCK AND PREFERRED
STOCK
(A) Common Stock
During the year ended December 31, 2013, 166,000
options were exercised for an aggregate exercise price
of $2.2 million. During the year ended December 31,
2012, 603,000 options were exercised for an aggregate
exercise price of $8.4 million. During the year ended
December 31, 2011, 679,000 options were exercised for
an aggregate exercise price $9.0 million, respectively.
During the year ended December 31, 2013, we raised
$2.9 million, by issuing 219,000 shares, through the
Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2012, we raised
$2.8 million, by issuing 170,000 shares, through the
Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2011, we raised
$455.5 million by issuing 26.2 million shares through
the Direct Purchase and Dividend Reinvestment
Program, respectively.
During the year ended December 31, 2012, 1.3 million
shares of Series B Preferred Stock were converted into
4.0 million shares of common stock. During the year
ended December 31, 2011, 320,000 shares of Series B
Preferred Stock were converted into 906,000 shares of
common stock.
Agency
Distribution
On March 19, 2012, the Company entered into six
Agreements
separate
(“Distribution Agency Agreements”) with each of
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Credit Suisse Securities (USA) LLC, Goldman, Sachs
& Co., J.P. Morgan Securities LLC, Morgan Stanley &
Co. LLC and RCap Securities, Inc. (together, the
Agents). Pursuant to the terms of the Distribution
Agency Agreements, the Company may sell from time
to time through the Agents, as its sales agents, up to
125,000,000 shares of the Company’s common stock.
The Company did not make any sales under the
Distribution Agency Agreements during the years
ended December 31, 2013 and 2012.
On May 16, 2012, the Company amended its charter
through the filing of articles supplementary to its
charter to reclassify 12,650,000 shares of authorized
shares of Common Stock as 7.625% Series C
Cumulative Redeemable Preferred Stock (“Series C
Preferred Stock”).
In May 2012, the Company issued 12,000,000 shares of
Series C Preferred Stock, with a par value of $0.01 per
share and a liquidation preference of $25.00 per share
plus accrued and unpaid dividends (whether or not
declared).
On September 13, 2012, the Company amended its
charter through the filing of articles supplementary to
F-30
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
its charter to reclassify 18,400,000 shares of authorized
shares of Common Stock as 7.50% Series D Cumulative
Redeemable Preferred Stock (“Series D Preferred
Stock”).
In September 2012, the Company issued 18,400,000
shares of Series D Preferred Stock, with a par value of
$0.01 per share and a liquidation preference of $25.00
per share plus accrued and unpaid dividends (whether
or not declared).
of
the
the
effectiveness
Following
articles
supplementary to its charter the Company’s authorized
shares of capital stock, par value of $0.01 per share,
consists of 1,956,937,500 shares classified as Common
Stock, 7,412,500 shares classified as 7.875% Series A
Cumulative Redeemable Preferred Stock, 4,600,000
shares classified as 6.00% Series B Cumulative
shares
Convertible Preferred Stock, 12,650,000
classified as 7.625% Series C Cumulative Redeemable
Preferred Stock and 18,400,000 shares classified as
7.50% Series D Cumulative Redeemable Preferred
Stock.
On October 16, 2012, the Company announced that its
board of directors (“Board of Directors”) has authorized
the repurchase of up to $1.5 billion of its outstanding
common shares over a 12 month period. All common
shares purchased are part of a publicly announced plan
in open-market transactions. During the year ended
December 31, 2012,
repurchased
approximately 27.8 million shares of its outstanding
common stock for $397.1 million, of which $141.1
million had not settled at December 31, 2012. During
the year ended December 31, 2013, the Company did
not repurchase any shares of its outstanding common
stock.
the Company
(B) Preferred Stock
At December 31, 2013 and 2012, the Company had
issued and outstanding 7,412,500 shares of Series A
Cumulative Redeemable Preferred Stock (“Series A
Preferred Stock”), with a par value of $0.01 per share
and a liquidation preference of $25.00 per share plus
accrued and unpaid dividends (whether or not declared).
The Series A Preferred Stock is entitled to a dividend at
a rate of 7.875% per year based on the $25.00
liquidation preference before the common stock is
entitled to receive any dividends. The Series A
Preferred Stock is redeemable at $25.00 per share plus
accrued and unpaid dividends (whether or not declared)
exclusively at the Company's option commencing on
April 5, 2009 (subject to the Company's right under
limited circumstances to redeem the Series A Preferred
Stock earlier in order to preserve its qualification as a
F-31
REIT). The Series A Preferred Stock is senior to the
Company's common stock and is on parity with the
Series C Preferred Stock and Series D Preferred Stock
with respect to dividends and distributions, including
distributions upon liquidation, dissolution or winding
up. The Series A Preferred Stock generally does not
have any voting rights, except if the Company fails to
pay dividends on the Series A Preferred Stock for six or
more quarterly periods (whether or not consecutive).
Under such circumstances, the Series A Preferred
Stock, together with the Series C Preferred Stock and
Series D Preferred Stock, will be entitled to vote to elect
two additional directors to the Board, until all unpaid
dividends have been paid or declared and restricted for
payment. In addition, certain material and adverse
changes to the terms of the Series A Preferred Stock
cannot be made without the affirmative vote of holders
of at least two-thirds of the outstanding shares of Series
A Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock. Through December 31, 2013, the
Company had declared and paid all required quarterly
dividends on the Series A Preferred Stock.
At December 31, 2013 and 2012, the Company had
issued and outstanding 12,000,000 shares of Series C
Preferred Stock, with a par value of $0.01 per share and
a liquidation preference of $25.00 per share plus
accrued and unpaid dividends (whether or not declared).
The Series C Preferred Stock is entitled to a dividend at
a rate of 7.625% per year based on the $25.00
liquidation preference before the common stock is
to receive any dividends. The Series C
entitled
Preferred Stock is redeemable at $25.00 per share plus
accrued and unpaid dividends (whether or not declared)
exclusively at the Company’s option commencing on
May 16, 2017 (subject to the Company’s right under
limited circumstances to redeem the Series C Preferred
Stock earlier in order to preserve its qualification as a
REIT or under limited circumstances related to a
change of control of the Company). The Series C
Preferred Stock is senior to the Company’s common
stock and is on parity with the Series A Preferred Stock
and Series D Preferred Stock with respect to dividends
and
upon
including
liquidation, dissolution or winding up. The Series C
Preferred Stock generally does not have any voting
rights, except if the Company fails to pay dividends on
the Series C Preferred Stock for six or more quarterly
periods (whether or not consecutive). Under such
circumstances, the Series C Preferred Stock, together
with the Series A Preferred Stock and Series D
Preferred Stock, will be entitled to vote to elect two
additional directors to the Board, until all unpaid
dividends have been paid or declared and restricted for
payment. In addition, certain material and adverse
changes to the terms of the Series C Preferred Stock
distributions,
distributions
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
cannot be made without the affirmative vote of holders
of at least two-thirds of the outstanding shares of Series
C Preferred Stock and Series A Preferred Stock and
Series D Preferred Stock. Through December 31, 2013,
the Company had declared and paid all required
quarterly dividends on the Series C Preferred Stock.
dividends to Series A Preferred stockholders totaling
approximately $14.6 million or $1.97 per share, Series
C Preferred stockholders totaling approximately $22.9
million or $1.91 per share, Series D Preferred
stockholders totaling approximately $34.5 million or
$1.88 per share.
to
right under
the Company’s
At December 31, 2013 and 2012, the Company had
issued and outstanding 18,400,000 shares of Series D
Preferred Stock, with a par value of $0.01 per share and
a liquidation preference of $25.00 per share plus
accrued and unpaid dividends (whether or not declared).
The Series D Preferred Stock is entitled to a dividend at
a rate of 7.50% per year based on the $25.00 liquidation
preference before the common stock is entitled to
receive any dividends. The Series D Preferred Stock is
redeemable at $25.00 per share plus accrued and unpaid
dividends (whether or not declared) exclusively at the
Company’s option commencing on September 13, 2017
(subject
limited
circumstances to redeem the Series D Preferred Stock
earlier in order to preserve its qualification as a REIT or
under limited circumstances related to a change of
control of the Company). The Series D Preferred Stock
is senior to the Company’s common stock and is on
parity with the Series A Preferred Stock and Series C
Preferred Stock with
to dividends and
distributions, including distributions upon liquidation,
dissolution or winding up. The Series D Preferred Stock
generally does not have any voting rights, except if the
Company fails to pay dividends on the Series D
Preferred Stock for six or more quarterly periods
(whether
such
circumstances, the Series D Preferred Stock, together
with the Series A Preferred Stock and Series C
Preferred Stock, will be entitled to vote to elect two
additional directors to the Board, until all unpaid
dividends have been paid or declared and restricted for
payment. In addition, certain material and adverse
changes to the terms of the Series D Preferred Stock
cannot be made without the affirmative vote of holders
of at least two-thirds of the outstanding shares of Series
D Preferred Stock. Through December 31, 2013, the
Company had declared and paid all required quarterly
dividends on the Series D Preferred Stock.
consecutive). Under
respect
not
or
(C) Distributions to Stockholders
During the year ended December 31, 2013, the
Company declared dividends to common stockholders
totaling $1.4 billion, or $1.50 per common share, of
which $284.2 million, or $0.30 per common share, was
paid to stockholders on January 31, 2014. During the
year ended December 31, 2013, the Company declared
F-32
During the year ended December 31, 2012, the
Company declared dividends to common stockholders
totaling $2.0 billion or $2.05 per share, of which $432.2
million were paid to stockholders on January 29, 2013.
During the year ended December 31, 2012, the
Company declared dividends to Series A Preferred
stockholders totaling approximately $14.6 million or
$1.97 per share, Series B Preferred stockholders totaling
approximately $289,000 or $0.375 per share, Series C
Preferred stockholders totaling approximately $14.3
million or $1.19 per share, Series D Preferred
stockholders totaling approximately $10.4 million or
$0.56 per share.
During the year ended December 31, 2011, the
Company declared dividends to common stockholders
totaling $2.2 billion or $2.44 per share, of which $552.8
million were paid to stockholders on January 27, 2012.
During the year ended December 31, 2011, the
Company declared dividends to Series A Preferred
stockholders totaling approximately $14.6 million or
$1.97 per share, and Series B Preferred stockholders
totaling approximately $2.3 million or $1.50 per share,
which were paid to stockholders on January 3, 2012.
12.
GOODWILL
At December 31, 2013 and 2012, goodwill totaled $94.8
million and $55.4 million, respectively. In 2013, the
Company recorded a $32.4 million reduction of
goodwill related to Merganser, which was comprised of
a $24.0 million impairment charge based on market
information that became available to the Company and
an $8.4 million reduction resulting from the sale of the
net assets and operations of the entity. The Company
also recorded $71.8 million of additional goodwill
associated with the acquisition of CreXus in 2013.
There was no goodwill impairment for the year ended
December 31, 2012.
13.
NET INCOME PER COMMON SHARE
The following table presents a reconciliation of net
income and shares used in calculating basic and diluted
earnings per share for the years ended December 31,
2013, 2012 and 2011.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended
December 31, 2013 December 31, 2012 December 31, 2011
(dollars in thousands, except per share data)
$344,461
71,968 39,530 16,854
$1,735,900
$3,729,698
3,657,730 1,696,370
67,056 27,843
327,607
-
$3,724,786
$1,724,213
$327,607
947,337,915
972,902,459
874,212,039
48,219,111
32,852,598
306,899
995,557,026
1,005,755,057
874,518,938
$3.86
$3.74
$1.74
$1.71
$0.37
$0.37
the 2010 Equity Incentive Plan. The Company had
previously adopted a long term stock incentive plan for
executive officers, key employees and non-employee
directors (the Prior Plan). The Prior Plan authorized the
Compensation Committee of the Board of Directors to
grant awards, including non-qualified options as well as
incentive stock options as defined under Section 422 of
the Code. The Prior Plan authorized the granting of
options or other awards for an aggregate of the greater
of 500,000 shares or 9.5% of the diluted outstanding
shares of the Company’s common stock, up to a ceiling
of 8,932,921 shares. No further awards will be made
under the Prior Plan, although existing awards remain
effective.
Stock options were issued at the market price on the
date of grant, subject to an immediate or four year
vesting in four equal installments with a contractual
term of 5 or 10 years.
The Company has issued and outstanding the following
stock options as of December 31, 2013 and 2012:
Net income
Less: Preferred stock dividends
Net income (loss) available to common shareholders, prior
to adjustment for dilutive potential common shares, if
necessary
Add: Interest on Convertible Senior Notes, if dilutive
Net income available to common shareholders, as
adjusted
Weighted average shares of common stock outstanding-
basic
Add: Effect of dilutive stock options and Convertible
Senior Notes, if dilutive
Weighted average shares of common stock outstanding-
diluted
Net income (loss) per share available (related) to common
share:
Basic
Diluted
Options to purchase 3.5 million shares of common stock
were outstanding and considered anti-dilutive as their
exercise price and option expense exceeded the average
stock price for the year ended December 31, 2013.
Options to purchase 2.8 million shares of common stock
were outstanding and considered anti-dilutive as their
exercise price and option expense exceeded the average
stock price for the year ended December 31, 2012.
Options to purchase 0.6 million shares of common
stock, were outstanding and considered anti-dilutive as
their exercise price and option expense exceeded the
average stock price for the year ended December 31,
2011.
14.
LONG-TERM STOCK INCENTIVE PLAN
The Company adopted the 2010 Equity Incentive Plan,
which authorizes the Compensation Committee of the
Board of Directors to grant options, stock appreciation
rights, dividend equivalent rights, or other share-based
awards, including restricted shares up to an aggregate of
25,000,000 shares, subject to adjustments as provided in
F-33
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Options outstanding at the beginning of year
Granted
Exercised
Forfeited
Expired
Options outstanding at the end of period
Options exercisable at the end of the period
For the Years Ended
December 31, 2013
December 31, 2012
Weighted Average
Exercise Price
Number of Shares
5,618,686
$ 15.74
- -
(166,375) 13.25
(1,513,934) 16.22
(356,625) 17.91
$ 15.44
3,581,752
$ 15.44
3,581,752
Weighted Average
Exercise Price
Number of Shares
6,216,805
$ 15.57
7,500 17.11
13.98
(603,169)
16.15
(2,450)
- -
$ 15.74
5,618,686
$ 16.06
4,988,124
The weighted average remaining contractual term was
approximately 3.8 years for stock options outstanding
and exercisable as of December 31, 2013. As of
there was no unrecognized
December 31, 2013,
compensation cost related to nonvested share-based
compensation awards.
The weighted average remaining contractual term was
approximately 4.3 years for stock options outstanding
and approximately 4.0 years
for stock options
exercisable as of December 31, 2012. As of December
31, 2012, there was approximately $0.7 million of total
unrecognized compensation cost related to nonvested
share-based compensation awards.
15.
INCOME TAXES
For the year ended December 31, 2013 the Company
was qualified to be taxed as a REIT under Code
Sections 856 through 860. As a REIT, the Company is
not subject to federal income tax to the extent that it
distributes its taxable income to its stockholders. To
maintain qualification as a REIT, the Company must
distribute at least 90% of its annual REIT taxable
income to its stockholders and meet certain other
requirements such as assets it may hold, income it may
generate and its stockholder composition. It is generally
the Company’s policy to distribute 100% of its REIT
taxable income. To the extent there is any undistributed
REIT taxable income at the end of a year, the Company
distributes such shortfall within the next year as
permitted by the Code. For years prior to 2013, the
Company retained the amount of taxable income
attributable
remuneration
deductions disallowed for tax purposes pursuant to
Section 162(m) of the Code (“Section 162(m)”). As a
result of the externalization of management effective as
of July 1, 2013, the Company does not expect to be
subject to the Section 162(m) disallowance for the 2013
tax year.
employee
certain
to
The state and local tax jurisdictions for which the
Company is subject to tax-filing obligations recognize
F-34
the Company’s status as a REIT, and therefore, the
Company generally does not pay income tax in such
jurisdictions. The Company may, however, be subject
to certain minimum state and local tax filing fees and
our TRSs are subject to federal, state and local taxes.
During the year ended December 31, 2013, the
Company recorded $8.2 million of income tax expense
for income attributable to its TRSs.
During the year ended December 31, 2012, the
Company recorded $13.8 million of income tax expense
for income attributable its TRSs. During the year ended
December 31, 2012, the Company also recorded $22.1
million of income tax expense for a portion of earnings
retained based on Section 162(m) limitations.
During the year ended December 31, 2011, the
Company recorded $14.9 million of income tax expense
for income attributable to its TRSs. During the year
ended December 31, 2011, the Company also recorded
$44.1 million of income tax expense for a portion of
earnings retained based on Section 162(m) limitations.
The Company’s effective tax rate differs from its
combined federal, state and city corporate statutory tax
rate primarily due
the deduction of dividend
distributions required to be paid under Code Section
857(a). Thus, the Company pays no tax on its REIT
taxable income.
to
The Company’s 2012, 2011 and 2010 federal, state and
local tax returns remain open for examination.
16.
CONTINGENCIES
LEASE COMMITMENTS AND
Commitments
The Company has a non-cancelable lease for office
space which commenced in May 2002 and expires in
December 2014. FIDAC has a lease for office space
which commenced in October 2010 and expires in
February 2016. The lease expense for the years ended
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2013, 2012, and 2011 were $2.3 million,
$2.5 million and $1.9 million, respectively. The
Company’s aggregate future minimum lease payments
total $2.5 million. The following table details the lease
payments.
Year Ending December 31,
2014
2015
2016
2017
Later years
The Company had no material unfunded
commitments as of December 31, 2013 and 2012.
loan
Contingencies
From time to time, the Company is involved in various
claims and legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate
disposition of these matters will not have a material
effect on
financial
the Company’s consolidated
statements and therefore no accrual was required as of
December 31, 2013 and 2012.
17. RISK MANAGEMENT
risk.
Interest
The primary risks to the Company are liquidity and
investment/market
rates are highly
sensitive to many factors, including governmental
monetary and tax policies, domestic and international
economic and political considerations and other factors
beyond the Company’s control. Changes in the general
level of interest rates can affect net interest income,
which is the difference between the interest income
earned on interest earning assets and the interest
expense incurred in connection with the interest bearing
liabilities, by affecting the spread between the interest
earning assets and interest bearing liabilities. Changes
in the level of interest rates can also affect the value of
the interest earning assets and the Company’s ability to
realize gains from the sale of these assets. A decline in
the value of the interest earning assets pledged as
collateral for borrowings under repurchase agreements
the
and derivative
counterparties demanding additional collateral pledges
or liquidation of some of the existing collateral to
reduce borrowing levels.
contracts
could
result
in
The Company may seek to mitigate the potential
rate
financial
impact by entering
interest
into
Lease Commitments
(dollars in thousands)
$ 2,295
159
26
-
-
$ 2,480
agreements such as interest rate swaps, interest rate
swaptions and other hedges. As of December 31, 2013
and 2012, the Company entered into interest rate swaps
to pay a fixed rate and receive a floating rate of interest,
with a total notional amount of $52.4 billion and $46.9
billion, respectively.
Weakness in the mortgage market, the shape of the
yield curve and changes in the expectations for the
volatility of future interest rates may adversely affect
the performance and market value of the Company’s
investments.
the
This could negatively
Company’s book value. Furthermore, if many of the
Company’s lenders are unwilling or unable to provide
additional financing, the Company could be forced to
sell
inopportune
time when prices are depressed. The Company has
established policies and procedures for mitigating risks,
including conducting scenario analyses and utilizing a
range of hedging strategies.
its Investment Securities at an
impact
The payment of principal and interest on the Freddie
Mac and Fannie Mae Agency mortgage-backed
securities are guaranteed by those respective agencies
and the payment of principal and interest on Ginnie
Mae Agency mortgage-backed securities are backed by
the full faith and credit of the U.S. government.
interest on Agency debentures are
Principal and
the debenture.
guaranteed by
the agency
Substantially all of
Investment
Securities have an actual or implied “AAA” rating.
issuing
the Company’s
The Company faces credit risk on the portions of its
portfolio which are not Agency mortgage-backed
securities and Agency debentures or U.S. Treasury
securities. The Company is exposed to credit risk on
CRE Debt and Preferred Equity Investments and
corporate debt. The Company is exposed to risk of loss
F-35
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
if an issuer, borrower or a counterparty fails to perform
its obligations under contractual terms. The Company
has established policies and procedures for mitigating
credit risk, including reviewing and establishing limits
for credit exposure, limiting transactions with specific
counterparties, maintaining qualifying collateral and
continually
of
the
assessing
counterparties, borrowers and issuers.
creditworthiness
and length of time of impairment. As of December 31,
2013, the Company’s investment in Chimera was in an
unrealized gain position. As of December 31, 2012,
management determined that its investment in Chimera
was not considered
to be other-than-temporarily
impaired as the Company had the intent and ability to
retain its investments for a period of time sufficient to
allow for any anticipated recovery in market value.
18.
RCAP REGULATORY REQUIREMENTS
Advisory fees
RCap is subject to regulations of the securities business
that include but are not limited to trade practices, use
and safekeeping of funds and securities, capital
structure, recordkeeping and conduct of directors,
officers and employees.
As a self-clearing, registered broker dealer, RCap is
to maintain minimum net capital by
required
FINRA. As of December 31, 2013 RCap had a
minimum net capital requirement of $0.2 million. RCap
consistently operates with capital in excess of its
regulatory capital requirements. RCap’s regulatory net
capital as defined by SEC Rule 15c3-1, as of December
31, 2013 was $391.5 million with excess net capital of
$391.3 million.
19.
RELATED PARTY TRANSACTIONS
Investment
Security
in Affiliate, Available-For-Sale Equity
At December 31, 2013, the Company’s available-for-
sale equity securities represented shares of Chimera
Investment Corporation
(“Chimera”), which are
reported at
fair value. The Company owned
approximately 45.0 million shares of Chimera at a fair
value of approximately $139.4 million at December 31,
2013 and approximately 45.0 million shares of Chimera
at a fair value of approximately $117.4 million at
December 31, 2012. At December 31, 2013 and 2012,
the investment in Chimera had an unrealized gain of
$0.6 million and an unrealized loss of $21.5 million,
respectively. The Company also held shares of CreXus
prior to its acquisition during the second quarter of
2013. The Company owned approximately 9.5 million
shares of CreXus at a fair value of approximately
$116.7 million at December 31, 2012. At December 31,
2012, the investment in CreXus had an unrealized loss
of $8.7 million. Upon its acquisition of CreXus during
the second quarter of 2013, the Company recorded an
$18.9 million loss on its investment in CreXus.
The Company evaluates the near-term prospects of its
current investment in Chimera in relation to the severity
For the year ended December 31, 2013, the Company
recorded advisory fees from Chimera and CreXus, prior
to its acquisition, totaling $31.1 million. For the year
ended December 31, 2012, the Company recorded
advisory fees from Chimera and CreXus totaling $64.5
million. At December 31, 2013 the Company had an
amount receivable from Chimera of $6.8 million and at
the Company had amounts
December 31, 2012,
receivable from Chimera and CreXus of $14.1 million.
Management Agreement
into
a Management Agreement
On June 26, 2013, the Company and the Manager
entered
(the
“Management Agreement”), effective as of July 1, 2013
and applicable for the entire 2013 calendar year,
pursuant to which the Company’s management is
conducted by the Manager through the authority
delegated to it in the Management Agreement and
pursuant to the policies established by the Board of
Directors (the “Externalization”). Subject at all times to
the supervision and direction of the Company’s Board
of Directors, the Manager is responsible for, among
other things, (i) managing the Company’s investment
portfolio, including purchasing and selling Company
assets; (ii) recommending alternative forms of capital
raising; (iii) supervising the Company’s financing and
hedging activities; (iv) day
to day management
functions; and
(v) such other supervisory and
management services and activities relating to the
Company’s assets and operations as may be appropriate
or may be requested by the Board of Directors.
Pursuant to the terms of the Management Agreement,
the Company pays the Manager a monthly management
fee in an amount equal to 1/12th of 1.05% of
stockholders’ equity, as defined in the Management
Agreement, for its management services. Effective July
1, 2013, a majority of the Company’s employees were
terminated by the Company and were hired by the
Manager. The Company has a limited number of
employees following the Externalization, all of whom
are employees of the Company’s subsidiaries for
reasons. All
regulatory or corporate efficiency
F-36
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
fee was $167.4 million, which included $49.2 million
related to compensation expense for the employees of
the Company’s subsidiaries.
The Management Agreement may be amended or
modified by agreement between the Company and the
the Management
Manager. The
Agreement expires on December 31, 2014 and will be
automatically renewed for a one year term each
anniversary date thereafter unless previously terminated
pursuant to the terms of the Management Agreement.
There is no termination fee for a termination of the
Management Agreement by either the Company or the
Manager.
term of
initial
compensation expenses associated with such retained
employees reduce the management fee. The Company
pays directly, or reimburses the Manager, for all of the
Company’s expenses and all the Manager’s documented
expenses incurred on the Company’s behalf, other than
compensation and benefits related to any and all
personnel of the Manager and costs of certain insurance
with respect to such personnel. Pursuant to a pro forma
calculation that computed the management fee as
though it was in effect beginning January 1, 2013, the
Company paid the Manager an amount equal to the pro
forma calculation minus the actual compensation paid
to the Company’s and its subsidiaries’ employees from
January 1, 2013 to June 30, 2013. For the year ended
December 31, 2013, the compensation and management
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F-37
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
20.
SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of summarized quarterly results of operations for the years ended December 31, 2013
and 2012.
Total interest income
Less: Total interest expense
Net interest income
Total other income (loss)
Less: Total general and administrative expenses
Income before income taxes
Less: Income taxes
Net income (loss)
Less: Dividends on preferred stock
Net income (loss) available (related) to common
shareholders
Net income (loss) available (related) per share to common
shareholders:
Basic
Diluted
Total interest income
Less: Total interest expense
Net interest income
Total other income (loss)
Less: Total general and administrative expenses
Income before income taxes
Less: Income taxes
Net income (loss)
Less: Dividends on preferred stock
Net income (loss) available (related) to common
shareholders
Net income (loss) available (related) per share to common
shareholders:
Basic
Diluted
For the Quarters Ended
December 31, 2013 September 30, 2013
June 30, 2013
March 31, 2013
(dollars in thousands, expect per share data)
$ 771,249 $ 697,160 $ 712,936 $ 737,217
177,590
137,393 145,476 164,255
559,627
633,856
548,681
551,684
452,944 (299,925) 1,154,755
368,370
65,131 51,912
56,294
58,744
1,030,506 193,015 1,638,305
876,085
92 5,807
1,757
557
870,278
1,028,749 192,458 1,638,213
17,992 17,992
17,992
17,992
$ 1,010,757
$ 174,466 $ 1,620,221 $ 852,286
$ 1.07
$ 1.71 $ 0.90
$ 1.03 $ 0.18 $ 1.64 $ 0.87
$ 0.18
For the Quarters Ended
December 31, 2012 September 30, 2012
June 30, 2012
March 31, 2012
(dollars in thousands, expect per share data)
$ 756,661
$ 761,265
185,491 181,893 166,443
571,170
719,881
579,372
163,282 (277,689) (734,828)
40,084
63,004
694,368 238,679 (79,503)
(6,127)
13,921
700,495 224,758 (91,159)
9,367
19,717
$ 886,324 $ 854,895
133,345
721,550
264,633
64,556 67,915
918,268
11,656 16,462
901,806
6,508 3,938
$ 680,778
$ 215,391 $ (97,667) $ 897,868
$ 0.22 $ (0.10) $ 0.92
$ 0.70
$ 0.68 $ 0.22 $ (0.10) $ 0.89
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Signatures
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York,
State of New York.
Date: February 27, 2014
ANNALY CAPITAL MANAGEMENT, INC.
By: /s/ Wellington J. Denahan
Wellington J. Denahan
(Chief Executive Officer, and authorized officer of registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
/s/ Wellington J. Denahan
Wellington J. Denahan
/s/ Glenn A. Votek
Glenn A. Votek
/s/ Kevin P. Brady
Kevin P. Brady
/s/ Jonathan D. Green
Jonathan D. Green
/s/ Michael E. Haylon
Michael E. Haylon
/s/ Kevin G. Keyes
Kevin G. Keyes
/s/ John A. Lambiase
John A. Lambiase
/s/ E. Wayne Nordberg
E. Wayne Nordberg
/s/ John H. Schaefer
John H. Schaefer
/s/ Donnell A. Segalas
Donnell A. Segalas
Title
Chairman of the Board of Directors and
Chief Executive Officer
(principal executive officer)
Date
February 27, 2014
Chief Financial Officer
(principal financial officer of the registrant)
February 27, 2014
Director
Director
Director
February 27, 2014
February 27, 2014
February 27, 2014
President and Director
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
Director
Director
Director
Director
II-1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Ratio of Earnings To Combined Fixed Charges And Preferred Stock Dividends and Ratio of Earnings To Fixed
Charges (Unaudited)
The following table sets forth the calculation of our ratio of earnings to combined fixed charges and preferred stock
dividends for the years shown:
Exhibit 12.1
2013
For the Ye ars Ende d De ce mbe r 31,
2011
(dollars in thousands)
2010
2012
2009
Net income before income taxes and noncontrolling interest
Add: Fixed charges (interest expense)(1)
Earnings as adjusted
Fixed charges (interest expense) + preferred stock dividend
Ratio of earnings to combined fixed charges and preferred stock
dividends
Ratio of earnings to fixed charges
(1) Fixed charges include realized gains (losses) on interest rate swaps.
3,737,911 1,771,812
402,372 1,299,769 1,996,104
1,533,008 1,560,941 1,362,721 1,163,332 1,295,762
5,270,919 3,332,753 1,765,093 2,463,101 3,291,866
1,604,976 1,600,471 1,379,575 1,181,365 1,314,263
3.28
3.44
2.08
2.14
1.28
1.30
2.08
2.12
2.50
2.54
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Subsidiaries of Registrant
Exhibit 21.1
Fixed Income Discount Advisory Company, Delaware corporation
•
• RCap Securities, Inc., Maryland corporation
• Annaly Middle Market Lending LLC, Delaware limited liability company
• Annaly Commercial Real Estate Group, Inc., Maryland corporation
• Annaly CRE L LLC, Delaware limited liability company
• Annaly CRE LLC, Delaware limited liability company
• NLY 2014-FL1 Depositor LLC, Delaware limited liability company
• Annaly CRE Sub Holding LLC, Delaware limited liability company
• Annaly CRE Sub Holding 2014-FL1 LLC, Delaware limited liability company
• Annaly CRE Holdings LLC, Delaware limited liability company
• ACREG SF PE I LLC, Delaware limited liability company
• ACREG SF PE II LLC, Delaware limited liability company
• ACREG E66 PE I LLC, Delaware limited liability company
• ACREG PA PE I LLC, Delaware limited liability company
• Annaly MD PE I LLC, Delaware limited liability company
• CreXus S Holdings (Holdings Co) LLC, Delaware limited liability company
• CHPHC Holding Company LLC, Delaware limited liability company
• CHPHC Hotel I LLC, Delaware limited liability company
• CHPHC Hotel II LLC, Delaware limited liability company
• CHPHC Hotel III LLC, Delaware limited liability company
• CHPHC Hotel V LLC, Delaware limited liability company
• CHPHC Hotel VII LLC, Delaware limited liability company
• CHPHC Hotel VIII LLC, Delaware limited liability company
• CHPHC Hotel IX LLC, Delaware limited liability company
• CHPHC Hotel X LLC, Delaware limited liability company
• Annaly Net Lease Holdings LLC, Delaware limited liability company
• Crexus AZ Holdings 1 LLC, Delaware limited liability company
• Crexus NV Holdings 1 LLC, Delaware limited liability company
Shannon Funding LLC, Delaware limited liability company
•
• Truman Insurance Company LLC, Missouri limited liability company
•
•
FIDAC FSI LLC, Delaware limited liability company
FIDAC Housing Cycle Fund LLC, Delaware limited liability company
•
FHC Master Fund Ltd., Cayman Islands exempted company
• Annaly Funding LLC, Delaware limited liability company
• Annaly Funding TRS LLC, Delaware limited liability company
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333-178214 and No. 333-186465
on Forms S-3 and Registration Statement No. 333-169923 on Form S-8 of our report dated February 27, 2014,
with respect to the consolidated financial statements of Annaly Capital Management, Inc. and Subsidiaries and the
effectiveness of internal control over financial reporting of Annaly Capital Management, Inc. and Subsidiaries
included in this Annual Report (Form 10-K) of Annaly Capital Management, Inc. and Subsidiaries for the year
ended December 31, 2013.
/s/ Ernst and Young LLP
New York, New York
February 27, 2014
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333-178214 and No. 333-186465
on Forms S-3 and Registration Statement No. 333-169923 on Form S-8 of our report dated February 28, 2012,
relating to the consolidated financial statements of Annaly Capital Management, Inc., appearing in this Annual
Report on Form 10-K of Annaly Capital Management, Inc. for the year ended December 31, 2013.
Exhibit 23.2
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2014
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CERTIFICATIONS
Exhibit 31.1
I, Wellington J. Denahan, certify that:
1.
I have reviewed this annual report on Form 10-K of Annaly Capital Management, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
d)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 27, 2014
/s/Wellington J. Denahan
Chairman and Chief Executive Officer
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CERTIFICATIONS
Exhibit 31.2
I, Glenn A. Votek, certify that:
1.
I have reviewed this annual report on Form 10-K of Annaly Capital Management, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
d)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 27, 2014
/s/Glenn A. Votek
Chief Financial Officer (Principal Financial Officer)
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Exhibit 32.1
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K of Annaly Capital Management, Inc. (the “Company”) for the
period ended December 31, 2013 to be filed with the Securities and Exchange Commission on or about the date
hereof (the “Report”), I, Wellington J. Denahan, Chief Executive Officer of the Company, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates of, and for the periods covered
by, the Report.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.
/s/ Wellington J. Denahan
Wellington J. Denahan
Chairman and Chief Executive Officer
February 27, 2014
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Exhibit 32.2
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K of Annaly Capital Management, Inc. (the “Company”) for the
period ended December 31, 2013 to be filed with the Securities and Exchange Commission on or about the date
hereof (the “Report”), I, Glenn A. Votek, Chief Financial Officer of the Company, certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates of, and for the periods covered
by, the Report.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.
/s/ Glenn A. Votek
Glenn A. Votek
Chief Financial Officer (Principal Financial Officer)
February 27, 2014
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS, NEW YORK, NY 10036
WWW.ANNALY.COM
Our website is www.annaly.com. We make available on this website under “Investor Relations - SEC Filings,” free of charge, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably
practicable after we electronically file or furnish such materials to the SEC.