2014
AnnuAl
RepoRt
DeAR Fellow ShAReholDeRS,
the past year has strongly supported the old saying “May you live in interesting times.” As our shareholders know, we
invest a large portion of our capital in the most liquid assets in the world, in fact, the very same assets that have been the
favored tool of monetary policy for the past five years. As I have stated many times on earnings calls, we look forward
to the end of our Central Banks overarching presence in the marketplace and all the opportunities it will bring. however,
I thought it would be instructive to summarize some of the absurd statistics that have resulted from global monetary
policies.
»
»
Since the collapse of lehman Brothers in 2008 there have been approximately 550 global central bank rate
cuts, the equivalent of one every three business days.(1)
the Federal Reserve’s monetary base represents roughly 25% of u.S. GDp.(1)
» Global central bank assets at $22.5 trillion represent a sum larger than the combined GDps of the u.S.
and Japan.(1)
»
In its 300 years of history, the Bank of england’s base rate has never been lower than the current .50% it
is today.(1)
» Approximately 83% of the world’s equity market capitalization is supported by zero interest rate policies.
(1)
» Approximately 52% of global government debt is yielding 0% or less.(1)
»
Six of the G7 countries have 10 year sovereign bonds trading at record low yields, with uS treasury bond
yields just slightly higher.(2)
» Nestle, in a first for a private corporation, saw its longer term debt trade at a negative yield to investors.(1)
We are living in a world where liquidity is abundant and real, as opposed to the financially engineered pre-crisis kind that
proved to be quite fragile. As a result, investment returns are slim and compensation for risk taking is at an all-time low.
This lack of return does not discriminate. It impacts global fixed income investors, corporate leaders looking for the next
region in which to commit capital and our future capital providers—savers. For large pension funds that need to meet
future obligations and are expecting a 7.5% return to help them do it, the current market offerings fall well short of that
goal. For corporate America, share buybacks have been the investment of choice at the expense of expenditures on plants
& equipment, research & development or long-term capital projects that could lead to higher paying jobs.
(1) Source: BofA Merrill lynch Global Investment Strategy.
(2) Source: Bloomberg, oeCD.
1
1
Annaly Capital Management, Inc. 2014 Annual Report
I mention these conditions because I think it’s important for our shareholders to understand the world in which this
management team is operating. Yet, irrespective of the strength in the equity markets and lack of return in the debt
markets, Annaly Capital Management still managed to outperform the S&p 500 Index by a wide margin in 2014. In a
world of microscopic yields, we are happy to be able to deliver double digit yielding cash dividends to our shareholders.
I am incredibly proud of my management team who, under less than ideal circumstances, continue to deliver shareholder
value while also maintaining a fairly conservative and opportunistic posture. we look forward to doing it again in 2015
and beyond.
In closing, I would like to thank our Board of Directors for their ongoing commitment to this great company, you—the
shareholders for your continued interest and ownership of our company and finally, all the employees who help make
my job that much easier in this unique environment.
SInCeRelY,
wellington J. Denahan
Chairman and Chief Executive Officer
March 17, 2015
Annaly Capital Management, Inc. 2014 Annual Report
2
550% Cumulative total return sinCe inCeption in 1997
700%
600%
500%
400%
300%
200%
100%
0%
(100%)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Annaly Capital Management, Inc.
S&p 500
Bloomberg Mortgage ReIt Index
S&p Financials
Source: Bloomberg, weekly, october 10, 1997 through December 31, 2014.
sinCe 1997, annaly has paid over $12 billion in dividends to shareholders
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
)
s
n
o
i
l
l
i
m
$
(
s
d
n
e
d
i
v
i
D
3
$1,209
$1,494
$2,043
$2,109
$1,589
$1,414
$1,109
$3
$15
$18
$17
$79
$220 $179
$246 $142
$122
$361
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Dividends Declared in Current Year
Cumulative Dividends Declared in prior Years
Annaly Capital Management, Inc. 2014 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 18 year period, we have paid cumulative dividends
exceeding $12 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.
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. As a ReIt we are required to meet certain asset and income tests including the following:
»
Invest at least 75% of our total assets in real estate assets
» Derive at least 75% of our gross income from real estate related sources
» Derive at least 95% of our gross income from the above mentioned real estate related sources, as well as other
“passive” forms of income such as dividends and interest from non-real estate sources
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 to our REIT compliance and our exemption from the Investment Company Act of 1940;
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 of financing
sources, our corporate structure and our cost efficiencies.
(1) Economic net interest income is a Non-GAAP financial measure that is composed of GAAP net interest income adjusted for realized gains or losses on interest rate swaps.
Annaly Capital Management, Inc. 2014 Annual Report
4
our investment strAteGY
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, commercial real estate assets and corporate debt. our principal business objective
is to generate net income for distribution to our stockholders from our 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 and hedges. Under our investment policy, at least 75% of our total assets are comprised of high-
quality mortgage-backed securities and short-term investments. As part of our current diversification strategy, we may
allocate up to 25% of our stockholders’ equity to assets other than Agency mortgage-backed securities. 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 investment strategy is driven by prudent asset selection and capital allocation to achieve attractive risk adjusted
returns. Our investment strategy involves our traditional investment in Agency mortgage-backed securities (MBS)
coupled with investments in more credit focused asset classes, most notably commercial real estate. we have built a
strong and flexible operating platform to support our investment strategy that can be efficiently leveraged as the portfolio
expands. this focus represents a key step forward in our strategic evolution.
the commercial real estate expansion is a natural extension of our broad asset management expertise. we sponsored and
managed a publicly-traded commercial mortgage REIT formerly known as CreXus Investment Corp. (CreXus). We later
acquired CreXus during the second quarter of 2013 and renamed it Annaly Commercial Real Estate Group (ACREG).
ACReG is a fully integrated commercial real estate lending and investing platform with a $1.7 billion real estate portfolio as
of December 31, 2014. ACReG specializes in originating and acquiring commercial real estate debt including commercial
mortgage loans, commercial mortgage-backed securities, B-notes, mezzanine loans, preferred equity and other commercial
real estate-related debt investments. We also acquire real property for current cash flow, long-term appreciation and
earnings growth. we invest in a variety of property types across primary, secondary and tertiary markets nationwide.
We believe we are uniquely positioned to efficiently navigate through a variety of market environments via multiple
investment alternatives.
5
Annaly Capital Management, Inc. 2014 Annual Report
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 (Board) 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 key risks to which we are subject. our risk management framework
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 risks managed by our management risk committees are described below:
»
»
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.
the key risk parameters we use to guide our risk management activities are described below:
»
»
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. 2014 Annual Report
6
corporAte GovernAnce
our 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 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 comprised of seven independent directors and two non-independent directors. Each of our Board committees
is solely comprised of independent directors. we have appointed a lead independent director to facilitate communication
between the Board, management and major shareholders and perform such duties and responsibilities as the Board may
determine.
our boArd of directors/GovernAnce committee membership
Wellington J. Denahan: Chairman and Chief Executive Officer
Kevin G. Keyes: president
independent directors
Francine J. Bovich: Former Managing Director, Morgan Stanley Investment Management
Audit Committee
Kevin P. Brady: Chief Executive Officer, ARMtech, LLC
Audit Committee Chair
nominating/Corporate Governance Committee
Risk Committee
Jonathan D. Green: Former Vice Chairman, the Rockefeller Group
lead Independent Director
Risk Committee Chair
Compensation Committee
Michael E. Haylon: Managing Director, Conning Asset Management
Audit Committee
Risk Committee
E. Wayne Nordberg: Chairman, hollow Brook wealth Management, llC
nominating/Corporate Governance Committee Chair
Compensation Committee
John H. Schaefer: Former President and Chief Operating Officer, Morgan Stanley Global Wealth Management
Audit Committee
Compensation Committee
Risk Committee
Donnell A. Segalas: Chief Executive Officer and Managing Partner, Pinnacle Asset Management, L.P.
Compensation Committee Chair
nominating/Corporate Governance Committee
7
Annaly Capital Management, Inc. 2014 Annual Report
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.
Annaly Capital Management, Inc. 2014 Annual Report
8
Annaly Capital Management, Inc. 2014 Annual Report
SECU
UNI
URITIES AN
ITED STAT
ND EXCHA
ASHINGTON, D
TES
ANGE COM
D.C. 20549
WA
N
MMISSION
FO
ORM 10
0-K
[X] ANNU
UAL REPORT
T PURSUANT
TO SECTION
N 13 OR 15 (d)
OF THE SEC
CURITIES EXC
CHANGE ACT
T OF 1934
FOR THE
E FISCAL YE
EAR ENDED:
DECEMBER
31, 2014
[ ] TRAN
NSITION REPO
ORT PURSUA
ANT TO SECT
TION 13 OR 1
1934
5 (d) OF THE
OR
SECURITIES
S EXCHANGE
E ACT OF
FOR
R THE TRANS
ITION PERIO
OD FROM ____
_____________
_ TO ________
__________
COMMISSION
C
N FILE NUMB
7
BER: 1-13447
AN
NNALY
(Ex
CAPITA
xact Name of Re
AL MAN
egistrant as Spec
ENT, INC
NAGEME
ter)
cified in its Chart
C.
(State or other
(
D
MARYLAND
f incorporation
jurisdiction of
or organizatio
on)
22-34
(IRS Employ
479661
yer Identificati
ion No.)
1211 AV
VENUE OF TH
N
NEW YORK, N
ddress of princi
(Ad
HE AMERICA
NEW YORK
ipal executive
AS
offices)
…. …..
100
(Zip Co
36 ……
ode) ……..
0
(212) 696-0100
(
ncluding area c
hone number, in
istrant’s teleph
code)
(Regi
Securities r
registered purs
suant to Section
n 12(b) of the A
Act:
Title of Ea
ach Class
Common S
Stock, par valu
ue $.01 per shar
re
7.875% Se
eries A Cumula
ative Redeemab
ble Preferred S
Stock
7.625% Se
eries C Cumula
ative Redeemab
ble Preferred S
Stock
7.50% Seri
ies D Cumulat
ive Redeemabl
le Preferred St
ock
Nam
me of Each Exch
hange on Whic
ch Registered
New York
k Stock Exchan
nge
New York
k Stock Exchan
nge
New York
k Stock Exchan
nge
New York
k Stock Exchan
nge
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)
(Do not check if a smaller reporting company)
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, 2014, the aggregate market value of the voting stock held by non-affiliates of the Registrant was
approximately $10.8 billion.
The number of shares of the Registrant’s Common Stock outstanding on February 20, 2015 was 947,675,799.
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, 2014. 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.
2014 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Exhibit Index
Financial Statements
Signatures
PAGE
1
10
34
34
34
34
35
38
39
73
73
73
73
76
77
77
77
77
77
78
78
81
II-1
i
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. 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 section titled “Glossary of Terms” located
at the end of Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.” 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………………………………………………….………………………………………… 6
Capital Structure………………………………………………….…………………………………… 6
Risk Management………………………………………………….…………………………………… 7
Management Agreement………………………………………………….…………………………… 7
Executive Officers………………………………………………….…………………………………… 7
Employees………………………………………………….…………………………………………… 8
Regulatory Requirements………………………………………………….…………………………… 8
Competition………………………………………………….…………………………………………… 8
Distributions………………………………………………….………………………………………… 9
Available Information………………………………………………….……………………………… 9
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1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
Business Overview
We are a leading mortgage real estate investment
trust (or 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 ticker 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.
Our business operations are primarily comprised of
the following:
Year Formed Description
Business Operations
Annaly, the parent company
(NYSE: NLY)
Annaly Commercial Real Estate Group, Inc.
(ACREG)
RCap Securities, Inc.
(RCap)
Fixed Income Discount Advisory Company
(FIDAC)
Annaly Middle Market Lending LLC
(MML)
Shannon Funding LLC
(Shannon)
We believe that our business objectives are supported
by our size and conservative financial posture relative
to the industry, the extensive experience of our
risk
Manager’s
management
and
diversification of financing sources, our corporate
structure and our cost efficiencies.
comprehensive
availability
employees,
approach,
the
a
Investment Strategy
pass-through
We own a portfolio of real estate related investments,
including mortgage
certificates,
collateralized mortgage obligations (CMOs), Agency
callable debentures, other securities representing
interests in or obligations backed by pools of
mortgage loans, commercial real estate assets and
corporate debt. Our principal business objective is to
for distribution
generate net
to our
income
investments. Under our
stockholders from our
and
securities
securities
in acquiring,
Invests primarily in various types of Agency
mortgage-backed
related
derivatives to hedge these investments.
Wholly-owned subsidiary that was acquired
the second quarter of 2013 and
during
specializes
financing and
managing commercial mortgage loans and
other commercial real estate debt, commercial
mortgage-backed
other
and
commercial real estate-related assets.
Wholly-owned subsidiary that operates as a
broker-dealer, and
the
Financial Industry Regulatory Authority (or
FINRA).
Wholly-owned subsidiary that operates as a
SEC Registered Investment Advisor and
manages an affiliated REIT for which it earns
fee income.
Wholly-owned subsidiary that engages in
corporate middle market lending transactions.
Wholly-owned
acquires
subsidiary
residential mortgage
loans and provides
warehouse financing to residential mortgage
originators in the United States.
is a member of
that
investment policy, at least 75% of our total assets are
high-quality mortgage-backed
comprised
securities and short-term investments. High quality
securities are:
of
•
•
•
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,
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
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
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
risk parameters to guide our investment management
activities:
Description
Leverage
Capital buffer
Risk Parameter
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 seek to 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 seek to 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.
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 acquire
assets by offering our debt or equity securities in
exchange for the assets.
3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
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:
• 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;
4
• The
impact of
to our REIT
the asset
compliance and our exemption from the
Investment Company Act of 1940; and
• The capital requirements associated with the
purchase and financing of the asset.
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
Targeted Asset Class
Description
Agency mortgage-backed securities
To-be-announced forward contracts (or TBAs)
Agency debentures
Commercial real estate
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
loan maturities 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. TBA contracts
specify a few basic characteristics of the agency
mortgage-backed securities, such as the coupon rate, the
issuer, and the approximate face value of the bonds to be
delivered, with the actual bonds to be delivered only
identified 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
commercial
estate debt
Through our subsidiary ACREG, we originate and
including
acquire
commercial mortgage loans, commercial mortgage-
backed securities, B-notes, mezzanine loans, preferred
equity and other commercial real estate-related debt
investments. We also acquire real property for current
cash flow, long-term appreciation and earnings growth.
In implementing this strategy, we continually evaluate
potential acquisition opportunities. These acquisitions
may come through joint venture interests or from other
equity investments. Although we continuously review
our acquisition pipeline, there is not a specific metric
that are under
to acquisitions
that we apply
consideration, and our analysis may vary based on
property type, transaction structure and other factors.
Other mortgage related investments
Corporate debt
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, including Agency risk sharing
transactions issued by Fannie Mae and Freddie Mac and
similarly structured transactions arranged by third party
market participants.
Through our subsidiary MML, we invest a small
percentage of our assets directly in the ownership of
corporate loans for middle market companies.
5
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
that
future
We generally hold assets we acquire until maturity. We
rates and mortgage
believe
interest
prepayment
to predict.
rates are very difficult
Therefore, we seek to acquire assets which we believe
will provide attractive returns over a broad range of
interest rate and prepayment scenarios.
Our Portfolio
Our portfolio composition as of December 31, 2014
and 2013 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)
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
for our stockholders while
risk-adjusted returns
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
repurchase
securitizations,
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 finance our Agency mortgage-backed securities
with repurchase agreements. We enter 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, 2014, we had $71.4
billion of repurchase agreements outstanding.
Our borrowings pursuant to repurchase transactions
have maturities that range from overnight to greater
than four 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, 2014, the weighted average days to
maturity was 141 days.
6
2014
96.2%
1.6%
2.0%
0.0%
0.2%
2013
93.7%
4.0%
2.1%
0.0%
0.2%
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.
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 levels required by lenders when
we pledge assets to secure borrowings and our
international market
assessment of domestic and
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,
securitized debt of
convertible
consolidated VIE,
sold and
mortgages payable (which are non-recourse to us,
subject to customary carveouts) as presented on our
Consolidated Statements of Financial Condition.
loan participation
senior notes,
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 and
capital at December 31, 2014 and 2013.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
2014
5.4:1
15.1%
2013
5.0:1
15.1%
equity, as defined in the Management Agreement, for
its management services.
Debt-to-equity ratio
Capital ratio
Risk Management
Risk is a natural element of the business and related
activities that we conduct. Effective risk management
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
We have entered into a management agreement with
the Manager pursuant to which our management is
conducted by the Manager through the authority
delegated to it in the Management Agreement and
pursuant to the policies established by our board of
directors. The management agreement was effective as
of July 1, 2013 and applicable for the entire 2013
calendar year and was amended on November 5, 2014
(the management agreement, as amended, is referred to
as “Management Agreement”).
Pursuant to the terms of the Management Agreement,
we pay the Manager a monthly management fee in an
amount equal to 1/12th of 1.05% of our stockholders’
least
The Management Agreement provides for a two year
term ending December 31, 2016 with automatic two-
two-thirds of our
year renewals unless at
independent directors or the holders of a majority of
our outstanding shares of common stock elect to
terminate the agreement in their sole discretion and for
any or no reason. At any time during the term or any
renewal term we may deliver to the Manager written
notice of our intention to terminate the Management
Agreement. We must designate a date not less than one
year from the date of the notice on which the
terminate. The
Management Agreement will
Management Agreement also provides
the
Manager may terminate the Management Agreement
by providing to us prior written notice of its intention
to terminate the Management Agreement no less than
one year prior to the date designated by the Manager
on which the Manager would cease to provide services
or such earlier date as determined by us in our sole
discretion.
that
The Management Agreement may be amended or
modified by agreement between us and the Manager.
There is no termination fee for a termination of the
Management Agreement by either us or the Manager.
Executive Officers
Our executive officers are provided and compensated
by our Manager. The following table sets forth certain
information as of February 25, 2015 concerning our
executive officers:
Name
Wellington J. Denahan
Kevin G. Keyes
Glenn A. Votek
R. Nicholas Singh
Age
51
47
56
56
Title
Chairman of the Board and Chief Executive Officer
President and Director
Chief Financial Officer
Chief Legal Officer and Secretary
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.
Denahan was appointed to serve as Co-Chief 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.
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
7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
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.
R. Nicholas Singh is Chief Legal Officer and Secretary
of Annaly and FIDAC. Mr. Singh joined 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.
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, 2014, our subsidiaries employed 25
employees. All compensation expenses associated with
the employees of our subsidiaries
the
the
information
fee. For
management
management, see the discussion in the “Management
Agreement” section.
reduce
about
taxable
income
is distributed
to our
that
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.
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 funds and securities, capital structure, 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.
financial
The financial services industry has been the subject of
intense regulatory scrutiny in recent years. Financial
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
institutions operate. The
within which
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 to implement the legislation,
as well as the development of market practices and
the
structures under
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 conform to developments in
the regulatory environment.
the regime established by
Competition
Regulatory Requirements
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
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. In acquiring our target assets, we will
financial
compete with
institutional
lenders, government entities and
investors, other
institutions,
8
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Business
Department, are charters for our Audit Committee,
Risk Committee, Compensation Committee, and
Nominating/Corporate Governance Committee, our
Corporate Governance Guidelines and our Code of
Business Conduct and Ethics governing our directors
the employees of our
and officers as well as
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
New York, New York 10036
Attn: Investor Relations
Telephone: 888-8ANNALY
E-mail: investor@annaly.com.
and
statements
information
The SEC also maintains a website that contains reports,
and other
proxy
information we file with the SEC at www.sec.gov.
Copies of
information
these reports, proxy and
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.
certain other mortgage REITs. For a full discussion of
the risks associated with competition see the “Risks
Related to Our Investing, Portfolio Management and
Financing Activities” section in Item 1A. “Risk
Factors.”
Distributions
As a requirement for maintaining REIT status, we will
distribute to 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.
Available Information
Our website is www.annaly.com. We make available
on this website under “Investors - 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.
Also posted on our website, and available in print upon
request of any stockholder to our Investor Relations
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9
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. 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
results of operations could be
condition and
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………………………………………… 10
Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets and Other
18
Equity Ownership of Real Estate Assets………………………………………………………………………………
Risks Related to Our Relationship with Our Manager………………………………………………….………………… 25
Risks Related to Our Taxation as a REIT………………………………………………….…………………………… 26
Risks of Ownership of Our Common Stock………………………………………………….………………………… 31
Regulatory Risks………………………………………………….…………………………………………………… 33
Risks Related to Our Investing, Portfolio
Management and Financing Activities
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.
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 assets other than Agency mortgage-backed
securities.
current operations,
including credit
from
Such endeavors may involve significant risks and
uncertainties,
risk, diversion of
expenses
management
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.
We expect our leverage to vary with market 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. Leverage,
which is fundamental to our investment strategy,
creates significant risks.
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;
interest rate volatility increases; or
the availability of financing
decreases.
the market
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
these
treatment would allow
agreements to avoid the automatic stay provisions of
the Bankruptcy Code and to liquidate the collateral
under these agreements without delay.
lenders under
the
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 or
the market value of our portfolio holdings declines, 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
us at acceptable rates; or
our lenders require that we provide additional
collateral to cover our borrowings.
11
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
time when prices are
depressed.
inopportune
Failure to effectively manage our liquidity would
adversely affect our results and financial condition.
Our ability to meet cash needs depends on many
factors, several of which are beyond our control.
Ineffective management of liquidity levels could cause
us to be unable to meet certain financial obligations.
Potential conditions that could impair our liquidity
include: unwillingness or inability of any of our
potential lenders to provide us with or renew financing,
calls on margin, additional capital requirements, a
the financial markets or declining
disruption
confidence in our reputation or in financial markets in
general. These conditions could force us to sell our
assets at inopportune times or otherwise cause us to
potentially revise our strategic business initiatives.
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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.
The Federal Reserve owns approximately $1.7 trillion
of Agency mortgage-backed securities as of December
31, 2014. The Federal Reserve's existing policy is to
reinvest 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 mortgage-backed
securities, yields on Agency mortgage-backed securities
will be lower and refinancing volumes will be higher
large scale
than would have been absent
their
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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-backed securities, the pricing of our
Agency mortgage-backed securities portfolio may be
adversely affected.
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.
In September 2008, 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.
that
Shortly after Fannie Mae and Freddie Mac were placed
in federal conservatorship, the Secretary of the U.S.
the guarantee payment
Treasury suggested
structure of Fannie Mae and Freddie Mac should be re-
examined. The future roles of Fannie Mae and Freddie
Mac could be significantly reduced and the nature of
their guarantees could be eliminated or considerably
limited relative to 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. If
Fannie Mae or Freddie Mac were eliminated, or their
structures were to change radically, we would not be
able to acquire Agency mortgage-backed securities
from these entities, which could adversely affect our
business operations.
The U.S. Government's efforts
to encourage
refinancing of certain loans may affect prepayment
rates
in mortgage-backed
loans
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 has
encouraged the 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
could
potentially have a negative impact on our income and
operating results, particularly in connection with loans
or Agency mortgage-backed securities purchased at a
premium or our interest-only securities.
securities,
efforts
such
for mortgages and
Volatile market conditions
the broader
mortgage-related assets as well as
financial markets can result
in a significant
contraction in liquidity for mortgages and mortgage-
related assets, which may adversely affect the value of
the assets in which we invest.
Our results of operations are materially affected by
conditions in the markets for mortgages and mortgage-
related assets,
including Agency mortgage-backed
securities, as well as the broader financial markets and
the economy generally.
in
Significant adverse changes
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
12
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
assets.
for
are
larger
additional
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
and have
substantially
considerably greater financial, technical, marketing and
other resources than we do. Other REITs with
investment objectives that overlap with ours may elect
to raise significant amounts of capital, which may
create
investment
competition
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 that 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.
in
the
increase
interest payments on our
An
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
borrowings. If the interest payments on our borrowings
increase relative to the interest we earn on our interest
earning assets, our profitability may be adversely
affected.
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 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.
These indices generally reflect short-term interest rates.
The interest rates on our borrowings similarly vary with
changes in an objective index. 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
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13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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 U.S. generally accepted accounting
principles (GAAP). For a discussion of the assessment
of OTTI, see the section titled “Significant Accounting
Policies” in the Notes to the Consolidated Financial
Statements included in Item 15 “Exhibits, Financial
Statement Schedules.” The determination as to whether
an other-than-temporary impairment exists and, if so,
the
consider other-than-temporarily
impaired 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 impairments constitute
material estimates that are susceptible to significant
change.
amount we
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 GAAP, we
the premiums on our mortgage-backed
amortize
14
securities over the life of the related mortgage-backed
securities. If the mortgage loans securing 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
securities
typically have the same effect as prepayments because
of the underlying Agency guarantee.
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 in the housing
and financial markets, general 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.
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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 these transactions expose us to credit risk in the
event of default of our counterparty or, in certain
instances, our counterparty’s customers. There is no
assurance that any such losses would not materially and
adversely impact our revenues, financial condition and
earnings.
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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) purchase or write put
or call options on TBA securities and invest in other
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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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
and liquidity risks.
The CFTC has and continues to issue new rules
regarding swaps and swaptions, under the authority
granted to it pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act, or Dodd-Frank.
These new rules change, but do not eliminate, the risks
we face in our hedging activities.
Most swaps that we enter into must be cleared by a
Derivatives Clearing Organization, or DCO. DCOs are
subject to regulatory oversight, use extensive risk
management processes, and might receive “too big to
fail” support from the government in the case of
insolvency. We access the DCO through several
Futures Commission Merchants, or FCMs. For any
cleared swap, we bear the credit risk of both the DCO
and the relevant FCM, in the form of potential late or
unrecoverable payments, potential difficulty or delay in
accessing collateral that we have posted, and potential
loss of any positive market value of the swap position.
In the event of a default by the DCO or FCM, we also
bear market risk, because the asset being hedged is no
longer effectively hedged.
Most swaps must be cleared through a DCO. Most
swaps must be or are traded on a Swap Execution
Facility. We bear additional fees for use of the DCO.
We also bear fees for use of the Swap Execution
Facility, and bear increased risk of trade errors. Because
the standardized swaps available on Swap Execution
Facilities and cleared through DCOs are not as
the
customizable as
implementation of Dodd-Frank, we may bear additional
basis risk from hedge positions that do not exactly
reflect the interest rate risk on the asset being hedged.
the swaps available before
Futures transactions are subject to risks analogous to
those of cleared swaps, except
that for futures
transactions we bear a higher risk that collateral we
have posted is unavailable to us if the FCM defaults.
Some derivatives transactions, such as swaptions, are
not currently required to be cleared through a DCO.
Therefore, we bear the credit risk of the dealer with
which we executed the swaption. TBA contracts are
also not cleared, and we bear the credit risk of the
dealer.
are
subject
transactions
to margin
Derivative
requirements. The relevant contract or clearinghouse
rules dictate the method of determining the required
amount of margin, the types of collateral accepted, and
the timing required to meet margin calls. Additionally,
for cleared swaps and futures, FCMs may have the right
to require more margin than the clearinghouse requires.
The requirement to meet margin calls can create
liquidity risks, and we bear the cost of funding the
margin that we post. Also, as discussed above, we bear
credit risk if a dealer, FCM, or clearinghouse is holding
collateral we have posted.
Generally, we attempt to retain the ability to close out
of a hedging position or create an offsetting position.
However, in some cases we may not be able to do so at
economically viable prices, or we may be unable to do
so without consent of the counterparty. Therefore, in
some situations a derivative position can be illiquid,
forcing us to hold it to its maturity or scheduled
termination date.
Regulations relating to derivatives continue to be issued
and come into effect. Ongoing regulatory change in this
area could increase costs, increase risks, and adversely
affect our business and results of operations.
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
to be
unsuccessful. Furthermore, any valuations of our assets
that are based on valuation models may prove to be
faulty models and data may prove
15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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-
residential mortgage-backed
backed securities or
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
to errors; (ii)
simplifying assumptions
information about collateral may be
incorrect,
incomplete, or misleading; (iii) collateral or bond
historical performance (such as 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
incorrect
assumptions as to what has occurred since the date
information was last updated.
the models may contain
lead
that
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.
All valuation models rely on correct market data inputs.
If incorrect market data is entered into even a well-
founded valuation model, the resulting 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.
Accounting rules related to certain of our transactions
are highly complex and involve significant judgment
in accounting
and assumptions, and changes
treatment may adversely affect our profitability and
impact our financial results.
rules
for valuations of
financial
Accounting
instruments, mortgage loan sales and securitizations,
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
affected by our
adversely
shares
determinations
fair value of our
the
investments, whether in the applicable period or in the
future. Additionally, such valuations may fluctuate over
short periods of time.
could be
regarding
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, if their respective
systems experience failure, interruption, cyber-attacks,
or security breaches.
16
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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. Although we have not
detected a breach to date, other financial services
institutions have reported breaches of their systems,
some of which have been significant. Even with all
reasonable security efforts, not every breach can be
prevented or even detected. It is possible that we have
experienced an undetected breach, and it is likely that
other financial institutions have experienced more
breaches than have been detected and reported. There is
no assurance that we, or the third parties that facilitate
our business activities, have not or will not experience a
breach. It is difficult to determine what, if any, negative
impact may directly
specific
interruption or cyber-attacks or security breaches of our
networks or systems (or the networks or systems of
third parties that facilitate our business activities) or any
failure to maintain performance, reliability and security
of our technical infrastructure, but such computer
malware, viruses, and computer hacking and phishing
attacks may negatively affect our operations.
from any
result
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
facilities until a sufficient portfolio is accumulated. As
a result, we would be subject to the risk that we would
not be able to acquire, during the 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 sufficient eligible
assets 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 the non-investment grade 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
17
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.
Securitizations expose us to additional risks.
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 interests of
the 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 that we will be able to access 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.
Counterparties may require us to enter into restrictive
covenants relating to our operations that may inhibit
our ability
increase
revenues.
to grow our business and
If or when we obtain debt financing, lenders (especially
in the case of credit facilities) may impose restrictions
on us that would affect our ability to incur additional
debt, make certain allocations or acquisitions, reduce
liquidity below certain levels, make distributions to our
stockholders, redeem debt or equity securities and
impact our flexibility 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 or consolidations, grant
liens and enter into 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
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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.
We invest in securities in the developing Agency risk
transfer sector that are subject to mortgage credit risk
We invest in securities in the developing Agency risk
transfer sector (“CRT Sector”). The CRT Sector is
comprised of the risk sharing transactions issued by
Fannie Mae (“CAS”) and Freddie Mac (“STACR”), and
similarly structured transactions arranged by third party
market participants. The securities issued in the CRT
Sector are designed to synthetically transfer mortgage
credit risk from Fannie Mae and Freddie Mac to private
investors. Currently, CAS and STACR transactions are
structured as unsecured and unguaranteed bonds issued
by Fannie Mae or Freddie Mac, respectively, whose
principal payments are determined by the delinquency
and prepayment experience of a reference pool of
mortgages originated and guaranteed by Fannie Mae or
Freddie Mac, respectively, in a particular quarter.
Transactions arranged by third party market participants
in the CRT Sector are similarly structured to reference a
specific pool of loans that have been securitized by
Fannie Mae or Freddie Mac and synthetically transfer
mortgage credit risk related to those loans to the
purchaser of the securities. The holder of the securities
in the CRT Sector has the risk that the borrowers may
default on their obligations to make full and timely
payments of principal and interest. Investments in
securities in the CRT Sector could cause us to incur
losses of income from, and/or losses in market value
relating to, these assets if there are defaults of principal
and/or interest on the pool of mortgages referenced in
the transaction.
Risks Related To Commercial Real Estate
Debt, Preferred Equity Investments, Net Lease
Real Estate Assets and Other Equity
Ownership of 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.
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
terrorism,
acts of God, including earthquakes, hurricanes,
floods and other natural disasters, which may
result in uninsured losses;
acts of war or
the
consequences of terrorist attacks, such as those
that occurred on September 11, 2001;
adverse changes
economic and market conditions;
changes in governmental laws and regulations,
fiscal policies and zoning ordinances and the
related costs of 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.
in national and
local
and
state
federal,
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
18
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
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,
•
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in
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regional or
regional or
from comparable
local
industry
and
changes
in national,
economic conditions or specific
including
segments,
securitization markets;
declines in regional or local real estate values;
declines
rental or
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
that
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 in governmental laws and 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
increase operating
types of
laws
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•
bankruptcy proceedings.
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 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 fair market value of the related mortgaged
properties;
the borrower’s equity in the related mortgaged
properties;
significant
mortgaged properties;
the borrower’s financial condition;
the operating history and occupancy level of
tenant rollover at
the related
•
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19
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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the
relevant
government
in competition
the related mortgaged property;
reductions
applicable
in
assistance/rent subsidy programs;
changes in zoning or tax laws;
in
changes
location;
changes in rental rates in the relevant 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
related mortgage-backed
payments due on
securities. The prices of
lower credit quality
commercial mortgage-backed securities are generally
less sensitive to interest rate changes than more highly
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 support in
the securitization structure may be insufficient to
the
20
protect us against loss of our principal on these
securities.
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 the risks associated with
significant concentration. Significant losses related to
our B-Notes would result in operating losses for us and
may limit our ability to make distributions to our
stockholders.
The mezzanine loan assets that we acquire involve
greater risks of loss than senior loans.
loans secured by a pledge of
We acquire mezzanine loans, which take the form of
subordinated
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 loan-to-value ratios
than conventional 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
to our
limit our ability
stockholders.
to make distributions
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
We are subject to additional risks associated with loan
participations.
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
respect
loan documentation,
enforcement proceedings upon a default and the
institution
foreclosure
proceedings. Similarly, certain participants may be able
to take actions to which we object but to which we will
be bound if our participation interest represents a
minority interest. We may be adversely affected by this
lack of control.
control
over,
and
of,
Construction loans involve an increased risk of loss.
We 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 the 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.
in
of
the
costs
significant
losses. 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
renovation,
result
refurbishment or expansion by a borrower under a
mortgaged property involves risks of cost overruns and
non-completion. Estimates
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
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.
rehabilitation
exceeding
costs
Geographic concentration exposes investors to greater
risk of default and loss.
21
Repayments by borrowers and the market value of the
related assets could be affected by economic 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
travel,
events often
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.
experience disruptions
in
Inadequate property insurance coverage could have
an adverse impact on our operating results.
losses due
to risks
Assets may suffer casualty
(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
if
loan documents.
reconstruction or major repairs are required following a
casualty, changes in laws that have occurred since the
Moreover,
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
time of original construction may materially impair the
borrower’s ability to effect such 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
be covered by terrorism insurance. Therefore, 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
22
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,
exercise our remedies (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.
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
to repay our loan at maturity 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 loss that
may adversely impact our financial performance.
Our assets may become non-performing and sub-
performing assets in the future, which are subject to
increased risks relative to performing loans.
too highly
leveraged, decreasing
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
income
being
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 the principal of the loan. Even if a
the
restructuring were successfully accomplished,
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
borrower may not be able or willing to maintain the
restructured payments or refinance the restructured
mortgage upon maturity.
the
lender
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
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.
the applicable
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 anticipated priority and
the maintenance of
interests.
perfection of
security
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
underlying property will further reduce the proceeds
and increase our loss.
liquidation of
the
including
mortgage holder or property owner,
responsibility for tax 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.
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,
tenant's financial condition has become
where a
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
financial
of
performance could be materially adversely affected.
circumstances, our
foregoing
the
Lease
and
terminations may adversely affect our revenue.
expirations,
defaults
lease
lease
Whole loan mortgages are also subject to “special
hazard” risk (property damage caused by hazards, such
as earthquakes or environmental hazards, not covered
to
by standard property
bankruptcy risk (reduction in a borrower’s mortgage
debt by a bankruptcy court). In addition, claims may be
assessed against us on account of our position as
insurance policies), and
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
addition, lease defaults or lease terminations by one or
more significant tenants or the failure of tenants under
23
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
to obtain
replacement tenants.
lease concessions
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.
We may not control the special servicing of the
mortgage loans included in 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.
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 loans to the loan purchaser. Our commercial
mortgage loan sale agreements will require us to
repurchase or substitute loans in the event we breach a
representation or warranty given to the loan purchaser.
24
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
to a
our securitizations. The remedies available
purchaser of mortgage loans are generally broader than
those available to us against the originating broker or
correspondent. 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 repurchase activity could
adversely affect our cash flow, results of operations,
financial condition and business prospects.
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 are acquiring are of a
different type or class than property we have had
experience owning directly, including properties such
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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.
Financial covenants could adversely affect our ability
to conduct our business.
The mortgages on our properties generally contain
customary negative covenants that limit our ability to
further mortgage the properties, to enter into material
leases or other agreements or materially modify
existing leases or other agreements without lender
consent, to access cash flow in certain circumstances,
and to discontinue insurance coverage, among other
things. These
restrictions could adversely affect
operations, and our ability to pay debt obligations. In
addition, in some instances guaranties given as further
security for these mortgage loans contain affirmative
covenants to maintain a minimum net worth and
liquidity.
Joint venture investments could be adversely affected
by our lack of sole decision-making authority and
reliance upon a co-venturer's financial condition.
the possibility
We co-invest with third parties through joint ventures.
Although we generally retain control and decision-
making authority in a joint venture relationship, in
some circumstances (such as major decisions) we may
not be permitted to exercise sole decision-making
authority regarding such joint venture or the subject
property. Investments in joint ventures may involve
risks not present were a third party not involved,
that co-venturers might
including
become bankrupt or otherwise fail to fund their share of
required capital contributions. Additionally, our co-
venturers might at any time have economic or other
business interests or goals which are inconsistent with
our business interests or goals, and we may in certain
circumstances be liable for the actions of our co-
venturers. Consequently, actions by any such co-
venturer might result in subjecting properties owned by
the joint venture to additional risk, although these risks
are mitigated by transaction structure and the terms and
conditions of agreements governing the relationship.
to
regard
interests with
the management
Because the Manager is owned by members of our
management,
agreement was
developed by related parties. Although our independent
directors, who were responsible for protecting our and
our stockholders’
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.
The Manager
is owned by members of our
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 if the management agreement is terminated
or the Manager’s key personnel are no longer
available to us.
The Manager is responsible for making all of our
investment decisions. We believe that the successful
investment and financing
implementation of our
strategies depend upon the experience of certain of the
Manager’s officers and employees. None of these
individuals’ continued service is guaranteed. If the
management agreement
these
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
Risks Related to Our Relationship with Our
Manager
The management fee is payable regardless of our
performance.
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.
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
25
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. 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 entitlement to substantial 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.
The fee structure of the management agreement may
limit the Manager’s ability to retain access to its key
personnel.
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 the
manager to provide 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
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.
the Internal Revenue
Furthermore, Congress and
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 equity. 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.
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
We have certain distribution requirements, which
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
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26
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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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
To
this distribution
that we satisfy
requirement, but distribute less than 100% of our
taxable income, we will be subject 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 intend to
make distributions to our stockholders to comply with
the REIT qualification requirements of the Code.
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 terms, sell investments
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.
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 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 to 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.
The stock and securities of our
taxable REIT
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 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.
27
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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.
If interest accrues on an indebtedness owed by a TRS to
its parent REIT at a rate 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 had interest accrued on
the indebtedness at a 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.
28
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 derived by a REIT from
dealer property or inventory, we may hold some of our
subsidiary
assets
corporations that will be subject to corporate level
income tax at regular rates.
through our TRSs or other
Complying with REIT requirements may cause us to
forgo otherwise attractive opportunities.
To remain qualified as a REIT for federal income tax
purposes, we must continually satisfy tests 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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
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.
suffering
adverse
and
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
requirements, ultimately jeopardizing our 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.
Complying with REIT requirements may limit our
ability to hedge effectively and may cause us to incur
tax liabilities.
29
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 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
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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% tax does not apply to
gains from the sale of property that is held through a
TRS or other 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
transaction
to
characterization.
prohibited
avoid
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,
30
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
test, any gain
of
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 not binding on the IRS, and no
assurance can be given
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 TBAs and is conditioned
upon fact-based representations and 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.
the 75% REIT gross
income
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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Dividends payable by REITs generally do not qualify
for the reduced tax rates on dividend income from
regular corporations.
Qualified dividend income payable to U.S. stockholders
that are individuals, trusts and estates is subject to the
reduced maximum tax rate applicable to capital gains.
Dividends payable by REITs, however, generally are
not eligible for the reduced rates. The more favorable
rates applicable to regular corporate qualified dividends
could cause investors who are individuals, trusts and
estates to perceive investments in REITs to be relatively
less attractive than investments in the stocks of non-
REIT corporations that pay dividends, which could
adversely affect the value of the shares of REITs,
including our common stock. Tax rates could be
changed in future legislation.
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:
•
•
•
•
•
actual or anticipated variations in our quarterly
operating results or business 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;
31
•
•
•
•
•
•
•
•
•
in market valuations of similar
capital commitments;
changes
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
securities convertible into, or exchangeable or
exercisable for, our shares of common stock.
the press or
investment
in
Holders of our shares of common stock will be subject
the risk of volatile market prices and wide
to
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 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.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
that individual or entity 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.
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
32
triggered by a fundamental change could discourage a
potential acquirer.
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 require us 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.
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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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
Generally, the cumulative net income we report over
the life of an asset will be the same for GAAP and tax
purposes, although
income
recognition over the life of the asset could be materially
different. Differences exist in 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.
Regulatory Risks
Loss of Investment Company Act exemption would
adversely affect us.
investment company under
We intend to conduct our business so as not to become
regulated as an
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 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 rules and regulations
promulgated under the Investment Company Act.
interpretation
that “whole pool
We rely on an
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.
On August 31, 2011, the SEC issued a concept release
titled “Companies Engaged
the Business of
and Mortgage-Related
Acquiring Mortgages
in
33
to
related
Section
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
potential
outcomes of the SEC’s actions are unclear as is the
SEC’s timetable for its review and actions.
3(c)(5)(C). The
by Section
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.
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.
in
Changes
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
laws and regulations, as well as their 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
these laws and regulations pertain specifically to
REITs.
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 New York, New York
10036, telephone 212-696-0100. This office is leased
under a non-cancelable lease expiring September 30,
2025.
For a description of
the commercial real estate
properties we own as part of our investment portfolio,
refer to section titled “Schedule III – Real Estate and
Accumulated Depreciation” of Item 15 “Exhibits,
Financial Statement Schedules.”
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.
34
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. 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 20,
2015, we had 947,675,799 shares of common stock
issued
and outstanding which were held by
approximately 432,000 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
the cash dividends
tape and
declared per share of our common stock.
First quarter
Second quarter
Third quarter
Fourth quarter
High
$11.51
$11.87
$11.95
$11.65
Low
$9.92
$10.78
$10.66
$10.68
2014
Close
$10.97
$11.43
$10.68
$10.81
Common Dividends
Declared Per Share
$0.30
$0.30
$0.30
$0.30
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
On February 20, 2015, the last reported sale price of our
common stock on the New York Stock Exchange was
$10.72 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 date of
issuance of our preferred stock through December 31,
2014, 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, 2009 to December
31, 2014 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, 2009. Upon written request we will
provide stockholders with a list of the REITs included in
the BBG REIT Index.
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35
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases
Of Equity Securities
250
225
200
175
150
125
100
75
50
25
0
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
Annaly Capital Management, Inc.
S&P 500 Index
BBG Reit Index
Annaly Capital Management,
S&P 500 Index
BBG Reit Index
12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014
119
198
154
119
115
123
122
135
139
121
117
121
100
100
100
107
176
137
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.
36
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. 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
The 2010 Equity Incentive Plan
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
immediate or four year vesting in four equal 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.
The following table provides information as of December 31, 2014 concerning shares of our common stock authorized
for issuance under the Incentive Plans.
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)
2,259,335 15.35 28,156,221
-
- -
2,259,335 15.35 28,156,221
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37
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 6. Selected Financial Data
ITEM 6.
SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction
with the more detailed information contained in the
and
Financial
and Notes
Statements
thereto
“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:
2014
2013
2012
2011
2010
For the Years Ended December 31,
Interest income
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)
Net income (loss) attributable to noncontrolling
interest
Net income (loss) attributable to Annaly
Dividends on preferred stock
Net income (loss) available (related) to common
stockholders
Net income (loss) per share available (related) to
common stockholders:
(dollars in thousands, except per share data)
$ 3,579,618 $ 2,683,134
$ 2,632,647 $ 2,918,562 $ 3,259,145
667,172 480,326 428,225
624,714
512,659
2,293,848
2,119,988
2,591,973 3,099,292 2,254,909
1,676,144 (584,602) (2,459,576) (783,293)
(2,747,604)
232,081 235,559 237,344 171,847
209,338
(836,954)
3,737,911
1,771,812 402,372 1,299,769
-
5,325 8,213 35,912
3,729,698
(842,279)
- - 1,140 2,945
35,434
59,051
1,735,900 344,461 1,267,280
(196)
-
- -
-
(842,083)
71,968
3,729,698
71,968
1,735,900 344,461 1,267,280
18,033
16,854
39,530
$ (914,051)
$ 3,657,730 $ 1,696,370 $ 327,607 $ 1,249,247
Basic
Diluted
$ (0.96) $ 3.86 $ 1.74 $ 0.37 $ 2.12
$ (0.96) $ 3.74 $ 1.71 $ 0.37 $ 2.04
Weighted average number of common shares
outstanding:
Basic
Diluted
Other Financial Data:
Total assets
6.00% Series B Cumulative Convertible Preferred
Stock
Total equity
Dividends declared per common share
947,539,294
947,539,294
947,337,915 972,902,459 874,212,039 588,192,659
1,005,755,057 874,518,938 625,307,174
995,557,026
$
88,355,367
$
81,922,460
$
133,452,295
$
109,630,002
$
83,026,590
$
-
$
$
13,333,781
1.20
$
-
$
$
12,405,055
1.50
$
-
$
$
15,924,444
2.05
$
$
$
32,272
15,760,642
2.44
$
$
$
40,032
9,864,900
2.65
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special Note Regarding Forward-Looking Statements
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 corporate debt, our
"believe,"
"expect,"
"will,"
ability to consummate any contemplated investment
opportunities and other corporate transactions, changes
in governmental 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
associated with
the business of our subsidiaries,
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 section titled
“Glossary of Terms” located at the end of this Item 7 for
definitions of commonly used terms in this annual report
on Form 10-K.
39
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Page
Overview……………………………………………………………………………………………41
Business Environment…………………………………………………………………………… 41
Economic Environment……………………………………………………………………………41
Financial Regulatory Reform…………………………………………………………………… 42
Results of Operations…………………………………………………………………………… 42
Net Income (Loss) Summary…………………………………………………………………… 42
Non-GAAP Financial Measures………………………………………………………………… 44
Core Earnings Summary………………………………………………………………………… 44
Economic Interest Expense and Economic Net Interest Income………………………………… 45
Interest Income and Average Yield on Interest Earning Assets……………………………………45
Economic Interest Expense and Average Cost of Interest Bearing Liabilities…………………… 46
Economic Net Interest Income……………………………………………………………………47
Other Income (Loss)…………………………………………………………………………… 47
General and Administrative Expenses…………………………………………………………… 49
Unrealized Gains and Losses…………………………………………………………………… 49
Net Income (Loss) and Return on Average Equity……………………………………………… 50
Financial Condition……………………………………………………………………………… 50
Investment Securities…………………………………………………………………………… 50
Contractual Obligations………………………………………………………………………… 52
Off-Balance Sheet Arrangements………………………………………………………………… 53
Capital Management………………………………………………………………………………53
Stockholders’ Equity…………………………………………………………………………… 54
Common and Preferred Stock…………………………………………………………………… 54
Distributions to Stockholders…………………………………………………………………… 54
Leverage and Capital………………………………………………………………………………55
Risk Management…………………………………………………………………………………55
Risk Appetite…………………………………………………………………………………… 55
Governance……………………………………………………………………………………… 56
Description of Risks………………………………………………………………………………57
Liquidity Risk Management……………………………………………………………………… 57
Funding…………………………………………………………………………………………57
Excess Liquidity……………………………………………………………………………… 58
Maturity Profile…………………………………………………………………………………59
Liquidity Management Policies…………………………………………………………………60
Stress Testing………………………………………………………………………………… 61
Investment/Market Risk Management…………………………………………………………… 61
Credit and Counterparty Risk Management……………………………………………………… 62
Operational Risk Management…………………………………………………………………… 63
Compliance, Regulatory and Legal Risk Management…………………………………………… 63
Critical Accounting Policies………………………………………………………………………64
Valuation of Financial Instruments……………………………………………………………… 64
Agency Mortgage-backed Securities and Debentures………………………………………… 64
Interest Rate Swaps…………………………………………………………………………… 64
Revenue Recognition………………………...……………………………………………………64
Use of Estimates………………………...……………………………………………………… 64
Glossary of Terms………………………...………………………………………………………66
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40
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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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
and hedging activities. For a full discussion of our
business, refer to the section titled “Business Overview”
of Item 1 “Business.”
Business Environment
We maintained the size of our Agency mortgage-backed
securities portfolio in the fourth quarter of 2014 and
remain cautious as the Federal Reserve (or Fed) ceased
adding to their Agency mortgage backed securities
portfolio in October of this year. The Fed has concluded
the third round of their asset purchasing program known
as Quantitative Easing 3 (QE3), and increases in the
federal funds target rate are expected to begin in
2015. Furthermore, the recent decline in longer term
interest rates has increased mortgage prepayment risk
which may adversely impact MBS cash flows.
Economic Environment
Economic growth, as measured by real gross domestic
product (or GDP), recovered from a seasonally-adjusted
annualized decline of 2.1% in the first quarter of 2014 to
subsequently grow 4.6% and 5.0% in the second and
third quarters of 2014, respectively, according to the
Bureau of Economic Analysis. The year-over-year
growth rate of 2.7% was slightly below the 3.1% growth
rate in 2013. The components were mixed but generally
positive, with consumer spending and private investment
growing at approximately the same pace as 2013. The
persistent fall in oil prices as well as continued
employment gains through the fourth quarter of 2014
provides optimism for U.S. growth in the coming
quarters.
The Fed currently conducts monetary policy with a dual
mandate: full employment and price stability. The
employment situation improved vastly in 2014, with
average monthly employment gains of 260,000 through
December 2014 compared to 199,000 per month in 2013,
according to the Bureau of Labor Statistics. The
unemployment rate continued to decline, down to 5.6%
in December 2014 compared to 6.7% in December 2013.
to
relative
long-term averages.
This is only slightly above the Fed’s own estimate of the
mandate-consistent unemployment rate, which was
placed at 5.2-5.5% as of December 17, 2014. However,
labor market slack remains in long-term unemployment,
the part-time employment share and those out of the
labor force who desire a job, all of which remain
elevated
Inflation
remained below the Fed’s 2% target for the entirety of
the year, as measured by the Personal Consumer
Expenditure Chain Price Index (or PCE), and weakened
in the fourth quarter of 2014 as oil prices suffered sharp
declines. The headline PCE measure fell to 0.8% year-
over-year in December 2014, down from December 2013
and 1.6% in June 2014, and is expected to fall further as
the decline in energy prices take effect. The more stable
core PCE measure, which excludes food and energy
prices, also remained below target at 1.3% year-over-
year in December 2014, unchanged from December
2013. The Federal Open Market Committee (FOMC or
the Committee) has noted that “inflation persistently
below its 2% objective could pose risks to economic
performance,” and believes the current level of inflation
below target is due to “transitory effects of lower energy
prices and other factors” and expects inflation to rise
gradually toward 2%.
its
existing
The FOMC has aimed to support its dual mandate
through both keeping its target rate at the zero lower
bound and conducting open market operations, or
Quantitative Easing (or QE). QE3 was announced on
September 13, 2012, as the FOMC statement indicated
they would begin making monthly purchases of Agency
mortgage-backed securities at the initial pace of $40
billion. In addition, the FOMC announced that it would
maintain
accommodative policy of
reinvesting principal payments from its holdings of
Agency mortgage-backed securities purchases into new
Agency mortgage-backed securities as part of
its
stimulus. Two meetings later, on December 12. 2012, the
FOMC announced it would also begin purchasing
longer-term Treasury securities at a monthly pace of $45
billion. This program was open-ended in nature, stating
as its intent “to support a stronger economic recovery
and to help ensure that inflation, over time, is at the rate
most consistent with its dual mandate.” To further
enhance their accommodative policy, at their December
12, 2012, meeting, the FOMC gave “forward guidance”
on their future policy rate increases as follows: “the
Committee expects that a highly accommodative stance
of monetary policy will remain appropriate for a
considerable time after the asset purchase program ends
and the economic recovery strengthens.”
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
41
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
billion each, therefore purchasing $40 billion in U.S.
Treasuries and $35 billion in Agency mortgage-backed
securities per month beginning in January 2014. The Fed
kept this “taper” in place throughout the year, reducing
monthly purchases by a total of $10 billion during each
meeting in 2014, eventually ending their program by
reducing purchases by the final combined $15 billion at
their October 28-29, 2014 meeting. Simultaneous to the
release of their September 17, 2014 statement, the
FOMC released their “policy normalization principles
and plans,” in which they stated their intention to reduce
their
ceasing
reinvestments only after their first rate hike and that they
currently do not anticipate selling agency mortgage-
backed securities as part of their normalization process.
primarily
holdings
security
by
than normal (as measured by
Markets had muted reactions to the gradual lessening of
stimulus, with financial conditions remaining more
accommodative
the
Bloomberg Financial Conditions Index). Longer-term
rates declined throughout the year, largely driven by
inflation expectations and
declining market-based
inflation risk premium, in large part owing to significant
declines in oil prices. The mortgage basis, or spread
between the 30-year Agency mortgage-backed security
current coupon and 10-year U.S. Treasury, remained
stable throughout the year amidst muted volatility.
The following table summarizes interest rates as of each
date presented:
30-Year mortgage current coupon
Mortgage basis
10-Year U.S. Treasury rate
LIBOR:
1-Month
6-Month
As of December 31,
2013
2012
2014
2.83%
66 bps
2.17%
0.17%
0.36%
3.61%
58 bps
3.03%
0.17%
0.35%
2.23%
47 bps
1.76%
0.21%
0.51%
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 numerous legislative
initiatives introduced 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.
Results of Operations
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
“Special Note Regarding Forward-Looking Statements”)
and in Part I, Item 1A. “Risk factors”.
Net Income (Loss) Summary
The following table presents summarized financial
information related to our results of operations as of and
for the years ended December 31, 2014, 2013 and 2012.
42
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Interest income
Interest expense
Net interest income
Other income (loss)
General and administrative expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Net income (loss) attributable to noncontrolling interest
Net income (loss) attributable to Annaly
Dividends on preferred stock
Net income (loss) available (related) to common stockholders
Net income (loss) per share available (related) to common stockholders:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
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Non-GAAP financial measures (1):
Economic interest expense
Economic net interest income
Core earnings
Core earnings per average basic common share
Other information:
Asset portfolio at period-end
Average total assets
Average equity
Leverage at period-end (2)
Capital ratio
Net interest margin
Net interest spread
Return on average total assets
Return on average equity
Constant prepayment rate
Common stock book value per share
2014
2013
As of and for the Years Ended December 31,
2012
(dollars in thousands, except per share data)
$ 2,632,647 $ 2,918,562 $ 3,259,145
624,714 667,172
512,659
2,293,848
2,119,988
2,591,973
1,676,144 (584,602)
(2,747,604)
232,081 235,559
209,338
3,737,911
(836,954)
1,771,812
8,213 35,912
5,325
(842,279)
1,735,900
3,729,698
- -
(196)
1,735,900
(842,083)
71,968
39,530
$ 3,657,730 $ 1,696,370
$ (914,051)
3,729,698
71,968
$ (0.96) $ 3.86 $ 1.74
$ (0.96) $ 3.74 $ 1.71
947,539,294
947,539,294
947,337,915 972,902,459
1,005,755,057
995,557,026
$ 1,338,019 $ 1,533,008 $ 1,560,941
$ 1,294,628 $ 1,385,554 $ 1,698,204
$ 1,147,739 $ 1,222,959 $ 1,537,732
$ 1.14 $ 1.21 $ 1.54
$ 84,828,267 $ 75,120,622 $ 127,036,719
$ 85,446,307 $ 107,355,670 $ 126,649,002
$ 12,972,683 $ 13,968,979 $ 16,206,642
6.5:1
11.9%
1.45%
1.27%
1.37%
10.71%
20%
$ 15.85
5.0:1
15.1%
1.31%
1.09%
3.47%
26.70%
14%
$ 13.10 $ 12.13
5.4:1
15.1%
1.52%
1.21%
(0.99%)
(6.49%)
8%
See “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts.
Includes repurchase agreements, Convertible Senior Notes and non-recourse securitized debt, loan participation and mortgages payable.
(1)
(2)
This Management Discussion and Analysis section
contains analysis and discussion of non-GAAP
measurements. See “Non-GAAP Financial Measures”
for further information.
2014 Compared with 2013
GAAP
Net income (loss) was ($842.3) million, which includes
($0.2) million attributable to a noncontrolling interest, or
($0.96) per average basic common share, for the year
ended December 31, 2014 compared to $3.7 billion, or
$3.86 per average basic common share, for the same
period in 2013. We attribute the majority of the change
in net income (loss) to the change in unrealized gains
(losses) on interest rate swaps which resulted in a loss of
$948.8 million for the year ended December 31, 2014
compared to a gain of $2.0 billion for the same period in
2013. The change in the fair value of interest rate swaps
was primarily attributable to the downward trend in
interest rates experienced during
the year ended
December 31, 2014 compared to the rise in interest rates
experienced during the same period in 2013. The change
in unrealized gains (losses) on interest rate swaps were
partially offset by the reversal of unrealized losses in
connection with interest rate swap positions that were
terminated in 2014, which resulted in a $677.5 million
increase in realized losses on the termination of interest
rate swaps for the year ended December 31, 2014
compared to the same period in 2013.
Non-GAAP
Core earnings were $1.1 billion, or $1.14 per average
basic common share, for the year ended December 31,
2014, a decrease of $75.2 million compared to $1.2
billion, or $1.21 per average basic common share, for the
same period in 2013. We attribute the majority of the
change to a decline in interest income of $285.9 million,
primarily attributable to a decline in average Interest
Earning Assets, partially offset by lower amortization
43
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
expense and a decline in economic interest expense of
$195.0 million, primarily attributable to a decline in
average Interest Bearing Liabilities and swap notional
amounts, for the year ended December 31, 2014
compared to the same period in 2013.
2013 Compared with 2012
GAAP
Net income (loss) increased $2.0 billion to $3.7 billion,
or $3.86 per average basic common share for the year
ended December 31, 2013, compared to $1.7 billion, or
$1.74 per average basic common share, for the year
ended December 31, 2012. We attribute the majority of
the increase 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
interest rates
experienced during the year ended December 31, 2013.
the rise
in
to
Non-GAAP
Core earnings were $1.2 billion, or $1.21 per average
basic common share, for the year ended December 31,
2013, a decrease of $314.8 million compared to $1.5
billion, or $1.54 per average basic common share, for the
same period in 2012. We attribute the majority of the
decrease to a decline in economic net interest income of
$312.7 million from 2012, primarily attributable to a
decline in average Interest Earning Assets.
Non-GAAP Financial Measures
The non-GAAP measurements include the following:
•
•
•
•
core earnings;
core earnings per average basic common share;
economic interest expense; and
economic net interest income.
Core earnings represents a non-GAAP measure and is
defined as net income (loss) excluding gains or losses on
44
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 gains and losses on trading assets, impairment losses,
GAAP net income (loss) attributable to noncontrolling
interest and certain other non-recurring gains or losses.
interest
We believe that core earnings, core earnings per average
basic common share, economic interest expense and
income provide meaningful
economic net
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
transactions and GAAP adjustments
that are not
necessarily indicative of our current investment portfolio
and operations.
Our presentation of non-GAAP financial measures 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 non-GAAP
financial measures 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 non-
GAAP financial measures should not be viewed in
isolation and are not a substitute for net income (loss),
net income (loss) per basic share available (related) to
common stockholders, interest expense and net interest
income computed in accordance with GAAP.
Core Earnings
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, 2014, 2013 and 2012 and details with
respect to reconciling the aforementioned line items on a
non-GAAP basis:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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GAAP net income (loss)
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
Other non-recurring expense (1)
GAAP net income (loss) attributable to noncontrolling interest
Core earnings
2014
For the Years Ended December 31,
2013
(dollars in thousands, except per share data)
$ (842,279) $ 3,729,698 $ 1,735,900
2012
779,333 101,862 2,385
(2,002,200) 32,219
948,755
(403,045) (432,139)
(93,716)
- 162,340
-
245,495 (1,509) (22,910)
86,172
- 23,987
- 18,896
23,783
(244,730) 59,937
-
-
- -
196
- -
$
1,147,739
$
1,222,959
$
1,537,732
GAAP net income (loss) per average basic common share
Core earnings per average basic common share
$
$
(0.96)
1.14
$
$
3.86
1.21
$
$
1.74
1.54
(1) Represents a one-time payment made by FIDAC to Chimera Investment Corp. (Chimera) to resolve issues raised in derivative demand letters sent to Chimera’s
board of directors. This amount is included as a component of Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
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 interest income and reducing
it by realized losses on interest rate swaps, which
represents interest expense on interest rate swaps. 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 respect
to reconciling the aforementioned line items on a non-
GAAP basis for each respective period:
GAAP Inte re st
Expe nse
Add: Re alize d
Losse s on
Inte re st Rate
Swaps (1)
Economic
Inte re st
Expe nse
GAAP Ne t
Inte re st Income
(dollars in thousands)
Le ss: Re alize d
Losse s on
Inte re st Rate
Swaps (1)
Economic Ne t
Inte re st Income
$ 512,659 $ 825,360 $ 1,338,019
$ 624,714 $ 908,294 $ 1,533,008
$ 667,172 $ 893,769 $ 1,560,941
$ 2,119,988 $ 825,360 $ 1,294,628
$ 2,293,848 $ 908,294 $ 1,385,554
$ 2,591,973 $ 893,769 $ 1,698,204
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
(1)
Interest expense related to our interest rate swaps is recorded in realized gains (losses) on interest rate swaps on the Consolidated Statements of Operations and
Comprehensive Income (Loss).
Interest Income and Average Yield on Interest Earning
Assets
the Constant
Prepayment speeds, as reflected by
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 weighted
average experienced CPR on our Agency mortgage-
backed securities portfolio for the periods presented.
Years Ended
December 31, 2014
December 31, 2013
December 31, 2012
CPR
8%
14%
20%
45
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
We had average Interest Earning Assets of $85.2 billion,
$105.4 billion and $117.3 billion, and the average yield
on Interest Earning Assets was 3.09%, 2.77%, and 2.78%
for the years ended December 31, 2014, 2013 and 2012,
respectively.
2014 Compared with 2013
Interest income was $2.6 billion for the year ended
December 31, 2014, a decrease of $0.3 billion compared
to $2.9 billion for the same period in 2013. The decline
was primarily due to a $20.2 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, 2014 compared to the same period in 2013.
2013 Compared with 2012
Interest income was $2.9 billion for the year ended
December 31, 2013, a decrease of $0.4 billion compared
to $3.3 billion for the same period in 2012. The decline
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.
Economic Interest Expense and the Average Cost of
Interest Bearing Liabilities
Our largest expense is the average 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
Comprehensive Income (Loss). The table below shows
our average Interest Bearing Liabilities and average cost
of Interest Bearing Liabilities as compared to average
one-month and average six month LIBOR and economic
interest expense for the periods presented.
Cost of Funds on Average Interest Bearing Liabilities
Average
Interest Bearing
Liabilities
Interest
Bearing
Liabilities at
Period End
Economic
Interest
Expense (1)
Average
Cost of
Interest
Bearing
Liabilities
Average
One-
Month
LIBOR
(dollars in thousands)
Average
Six-
Month
LIBOR
Average One-
Month LIBOR
Relative to Average
Six-Month LIBOR
Average Cost of
Interest Bearing
Liabilities Relative
to Average One-
Month LIBOR
Average Cost of
Interest Bearing
Liabilities Relative
to Average Six-
Month LIBOR
$ 70,983,100 $ 72,481,614 $1,338,019
$ 91,182,731 $ 67,066,390 $1,533,008
$ 105,914,990 $1,560,941
$ 103,362,717
1.88%
1.68%
1.51%
0.16%
0.19%
0.24%
0.33%
0.41%
0.69%
(0.17%)
(0.22%)
(0.45%)
1.72%
1.49%
1.27%
1.55%
1.27%
0.82%
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
(1) Economic interest expense includes interest expense on interest rate swaps.
2014 Compared with 2013
Economic interest expense, including interest expense on
interest rate swaps, for the year ended December 31,
2014 decreased by $195.0 million when compared to the
year ended December 31, 2013, primarily due to the
in average Interest Bearing
$20.2 billion decline
Liabilities and lower swap interest expense on lower
average notional balances for the year ended December
31, 2014 compared to the same period in 2013, partially
offset by a 20 basis point increase in cost of Interest
Bearing Liabilities.
2013 Compared with 2012
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
in average Interest Bearing
$12.2 billion decline
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,
increased swap
expense.
largely attributable
to
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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
increasing or decreasing
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
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 December 31, 2014 and 2013, 98% and 99%,
respectively, 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, 2014, the term to maturity of our
repurchase agreements ranged from one day to five
years. Additionally, we have entered into borrowings
giving the counterparty the right to call the balance prior
to maturity. At December 31, 2014 and 2013, the
weighted average cost of funds for all of our borrowings
was 1.65% and 2.37%, respectively, including the effect
of the interest rate swaps, 4% Convertible Senior Notes
due 2015 and 5% Convertible Senior Notes due 2015
the Convertible Senior Notes) and
(collectively,
securitized debt of consolidated VIE, and the weighted
average days to maturity was 142 days and 208 days,
respectively.
Economic Net Interest Income
The table below shows our average Interest Earning
Assets, total interest income, average yield on Interest
Earning Assets, average Interest Bearing Liabilities,
economic interest expense, average cost of Interest
Bearing Liabilities, economic net interest income, net
interest spread and net interest margin for the periods
presented.
Economic Net Interest Income
Average
Interest
Earning
Assets (1)
Total
Interest
Income
Average Yield
on Interest
Earning Assets
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
$ 85,170,734
$ 2,632,647
$ 105,375,229 $ 2,918,562
$ 117,274,876 $ 3,259,145
3.09%
2.77%
2.78%
Economic
Interest
Expense (2)
Average
Interest
Bearing
Liabilities
(dollars in thousands)
$1,338,019
$ 70,983,100
$ 91,182,731
$1,533,008
$ 103,362,717 $1,560,941
Average Cost
of Interest
Bearing
Liabilities
Economic
Net
Interest
Income (3)
Net
Interest
Spread
Net
Interest
Margin
1.88%
1.68%
1.51%
$1,294,628
$1,385,554
$1,698,204
1.21% 1.52%
1.09% 1.31%
1.27% 1.45%
(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.
2014 Compared with 2013
Economic net interest income totaled $1.3 billion for the
year ended December 31, 2014, a decrease of $90.9
million compared to the same period in 2013. We
attribute the majority of the change to a decline in
interest income, primarily attributable to a decline in
average Interest Earning Assets $20.2 billion, partially
offset by a lower amortization expense, which reflects
lower estimated prepayment speeds on our Agency
mortgage-backed securities portfolio, and a decline in
economic interest expense, primarily attributable to a
decline in average Interest Bearing Liabilities of $20.2
billion and lower swap interest expense on lower average
notional balances, for the year ended December 31, 2014
compared to the same period in 2013.
2013 Compared with 2012
Economic net interest income totaled $1.4 billion for the
year ended December 31, 2013, a decrease of $312.6
million compared to the same period in 2012. The
decline was primarily due to a lower net interest rate
spread for the year ended December 31, 2013 compared
to the same period in 2012. Our average Interest Earning
Assets decreased by $11.9 billion during the year ended
December 31, 2013 compared to the same period in
2012.
Other Income (Loss)
Other income (loss) is largely comprised of net gains
(losses) on interest rate swaps, investment advisory
income, net gains (losses) on disposal of investments,
dividend income from affiliates, net gains (losses) on
trading assets, net unrealized gains (losses) on interest-
only Agency mortgage-backed securities and other
income (loss). These components of other income (loss)
for the years ended December 31, 2014, 2013 and 2012
were as follows:
47
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
2014
For the Years Ended December 31,
2013
(dollars in thousands)
2012
Net gains (losses) on interest rate swaps (1)
Investment advisory income
Net gains (losses) on disposal of investments
Dividend income from affiliates
Net gains (losses) on trading assets
Net unrealized gains (losses) on interest-only
Agency mortgage-backed securities
Other income (loss)
$ (2,553,448) $ 992,044 $ (928,373)
31,343
82,138
43,643
93,716 403,045 432,139
25,189
28,336
18,575
(245,495) 1,509 22,910
(86,172) 244,730 (59,937)
(12,737) 15,481 525
(1)
Includes realized gains (losses) on interest rate swaps, realized gains (losses) on termination of interest rate swaps and unrealized gains (losses)
on interest rate swaps.
2014 Compared with 2013
The aggregate net gains (losses) on interest rate swaps
were ($2.6) billion for the year ended December 31,
2014 compared to $992.0 million for the same period in
2013. The change was primarily attributable to changes
in unrealized gains (losses) reflecting the downward
trend in interest rates during the year ended December
31, 2014 compared to rising interest rates for the same
period in 2013. The changes in unrealized gains (losses)
were partially offset by the reversal of unrealized losses
in connection with interest rate swap positions that were
terminated in 2014, which resulted in higher realized
losses on termination of interest rate swaps during the
year ended December 31, 2014 compared to the same
period in 2013.
Investment advisory income decreased $12.3 million to
$31.3 million for the year ended December 31, 2014,
primarily due to lower advisory fees from affiliates and
the sale of Merganser Capital Management, Inc. (or
Merganser) , a registered investment advisor specializing
in managing fixed income securities, to a third party in
October 2013.
For the year ended December 31, 2014, we disposed of
Investment Securities with a carrying value of $22.5
billion for an aggregate net gain of $94.5 million. 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.
Dividend income from affiliates increased $6.6 million
to $25.2 million for the year ended December 31, 2014,
due to a $9.0 million special dividend from our
investment in Chimera recognized during the first quarter
of 2014, partially offset by CreXus Investment Corp. ( or
CreXus) declaring a dividend during the first quarter of
2013 but not during the same period in 2014 as a result
of its acquisition. Chimera is and CreXus was managed
by our wholly-owned subsidiary FIDAC.
Net gains (losses) on trading assets was ($245.5) million
for the year ended December 31, 2014 compared to $1.5
million for the same period in 2013. The change was
primarily attributable to higher net losses from interest
rate swaptions.
Net unrealized gains (losses) on interest-only Agency
mortgage-backed securities was ($86.2) million for the
year ended December 31, 2014 compared to $244.7
million for the same period in 2013. The change was
primarily attributable to the downward trend in interest
rates experienced in 2014 compared to rising interest
rates in 2013.
Other income (loss) was ($12.7) million for the year
ended December 31, 2014 compared to $15.5 million for
the same period in 2013. The change was primarily
attributable to a one-time payment made in 2014 by
FIDAC to Chimera to resolve issues raised in derivative
demand letters sent to Chimera’s board of directors.
2013 Compared with 2012
The aggregate net gains (losses) on interest rate swaps
were $992.0 million for the years ended December 31,
2013 compared to ($928.4) million for the same period
in 2012. The change was primarily attributable to the rise
in interest rates experienced in 2013.
Investment advisory income decreased $38.5 million to
$43.6 million for the year ended December 31, 2013,
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
primarily due to lower advisory fees from affiliates.
For the year ended December 31, 2013, we disposed of
Investment Securities with a carrying value of $56.8
billion for an aggregate net gain of $424.1 million.
Dividend income from affiliates decreased $9.8 million
to $18.6 million for the year ended December 31, 2013,
primarily due to CreXus declaring a dividend for only
the first quarter of 2013 as a result of its acquisition.
Net unrealized gains (losses) on interest-only Agency
mortgage-backed securities was $244.7 million for the
year ended December 31, 2013 compared to ($59.9)
million for the same period in 2012. The change was
primarily attributable to rising interest rates experienced
in 2013.
General and Administrative Expenses
General and administrative (or G&A) expenses consists
of compensation expense, the management fee and other
expenses.
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
Total G&A
Expenses
Total G&A
Expenses/Average Assets
Total G&A
Expenses/Average Equity
$ 209,338
$ 232,081
$ 235,559
(dollars in thousands)
0.24%
0.22%
0.19%
1.61%
1.66%
1.45%
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
2014 Compared with 2013
G&A expenses decreased $22.7 million to $209.3
million for the year ended December 31, 2014 compared
to the same period in 2013. The decline was attributable
to a lower management fee and a decline in other general
and administrative expenses, primarily brokerage
expenses, in 2014.
2013 Compared with 2012
G&A expenses decreased $3.5 million to $232.1 million
for the year ended December 31, 2013 compared to the
same period in 2012. The decrease was primarily due to
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.
Unrealized Gains and Losses
With our available-for-sale accounting treatment on our
Agency mortgage-backed securities which represent the
largest portion of assets on balance sheet, 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 amortized cost accounting. As a result, comparisons
with companies that use amortized 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
As of December 31,
2014
2013
(dollars in thousands)
$ 950,072 $ 600,034
(745,189)
(3,348,967)
$ 204,883 $ (2,748,933)
Unrealized gain
Unrealized loss
Net unrealized gain (loss)
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
investment
reduce borrowing capacity under our
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49
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 fair value of these securities being below amortized
cost for the year ended December 31, 2014 is solely due
to market conditions and not the quality of the assets.
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
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 (Loss) and Return on Average Equity
We recorded a net loss of $842.3 million, which includes
a $0.2 million net loss attributable to a noncontrolling
interest, for the year ended December 31, 2014 and net
income of $3.7 billion and $1.7 billion for the years
ended December 31, 2013 and 2012, respectively. Our
return (loss) on average equity was (6.49%), 26.70% and
10.71% for the years ended December 31, 2014, 2013
and 2012, 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
9.98%
9.92%
10.48%
0.24%
0.31%
0.51%
(15.16%)
18.25%
1.22%
0.10%
(0.06%)
0.17%
(0.24%)
(1.66%)
(1.45%)
(0.04%)
(0.06%)
(0.22%)
(6.49%)
26.70%
10.71%
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
Economic net interest income includes interest expense on interest rate swaps.
(1)
(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 $88.4 billion and $81.9 billion as of
December 31, 2014 and 2013, respectively. The change
was primarily due to an $11.2 billion increase in Agency
mortgage-backed securities partially offset by a $1.6
billion decrease in Agency debentures.
Investment Securities
Substantially all of our Agency mortgage-backed
securities at December 31, 2014 and 2013 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 on
the Consolidated Statements of Financial Condition.
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, 2014,
and 2013 we had on our Consolidated Statements of
Financial Condition a total of $19.6 million and $25.7
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
$5.4 billion and $4.6 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 $8.3
billion and $21.7 billion for the years ended December
31, 2014 and 2013, respectively. The weighted average
experienced prepayment speed for the years ended
December 31, 2014 and 2013 was 8% and 14%,
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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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
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 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.
Decembe r 31, 2014 Dece mbe r 31, 2013
(dollars in thousands)
Agency Mortgage-Backed Securities and Agency Debentures:
Principal Amount
Net Premium
Amortized Cost
Amortized Cost/Principal Amount
Carrying Value
Carrying Value / Principal Amount
Weighted Average Coupon Rate
Weighted Average Yield
$ 77,391,804 $ 71,430,069
4,118,679
3,558,168
81,510,483 74,988,237
104.98%
81,711,172 72,238,708
101.13%
3.62%
2.89%
105.58%
3.69%
2.81%
105.32%
Adjustable-Rate Agency Mortgage-Backed Securities and Agency Debentures:
Principal Amount
Weighted Average Coupon Rate
Weighted Average Yield
Weighted Average Term to Next Adjustment
Weighted Average Lifetime Cap
Principal Amount at Period End as % of Total
Investment Securities
$ 3,870,609 $ 6,719,599
2.81%
2.80%
33 Months
6.44%
2.82%
2.73%
35 Months
7.95%
5.00%
9.41%
Fixed-Rate Agency Mortgage-Backed Securities and Agency Debentures:
Principal Amount
Weighted Average Coupon Rate
Weighted Average Yield
Principal Amount at Period End as % of Total
Investment Securities
$ 73,521,195 $ 64,710,470
3.71%
2.90%
3.73%
2.82%
95.00%
90.59%
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 Yield
$ 8,008,538 $ 7,374,675
1,041,990
1,230,471
1,041,990
1,230,471
14.13%
15.36%
1,120,126
1,222,434
15.19%
15.26%
3.82%
4.00%
9.00%
7.29%
At December 31, 2014 and 2013, 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.
51
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Adjustable-Rate Agency Mortgage-Backed Securities and Agency Debentures by Index
December 31, 2014
Weighted average term to next adjustment
Weighted average annual period cap
Weighted average lifetime cap at September 30, 2014
Investment principal value as percentage of Investment
Securities at December 31, 2014
Twelve
Month
Libor
50 mo.
12-
Month
Moving
Average
1 mo.
11th
District
Six-
Cost of
Month
Funds
Libor
4 mo.
1 mo.
1.75% 2.00% - -
11.28% 9.58% 9.15% 10.71% 10.72% 4.28%
1-Year
Treasury
Index
12 mo.
2.00% -
Other
Indices (1)
22 mo.
0.19% 2.73% 0.13% 0.18% 0.12%
1.65%
(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, 2013
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
12-
Month
Moving
Ave rage
1 mo.
11th
District
Cost of
Funds
1 mo.
Twe lve
Month
Libor
40 mo.
Six-
Month
Libor
4 mo.
1.78% 2.00% - -
11.20% 9.81% 7.36% 10.80% 10.74% 2.36%
1-Year
Tre asury
Inde x
18 mo.
2.00% -
Other
Indices (1)
34 mo.
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.
Contractual Obligations
The following table summarizes the effect on our
liquidity and cash flows from contractual obligations for
repurchase agreements, Convertible Senior Notes,
repurchase agreements and
interest expense on
Convertible Senior Notes,
securitized debt of
consolidated VIE, mortgages payable, participation sold,
the non-cancelable office
leases and employment
agreements as of December 31, 2014. The table does not
include the effect of net interest rate payments on our
interest rate swap agreements. The net swap payments
will fluctuate based on monthly changes in the receive
rate. As of December 31, 2014, the interest rate swaps
had a net negative fair value of $1.5 billion.
Within One
Year
One to Three
Years
Three to
Five Years
More than
Five Years
Total
(dollars in thousands)
$60,562,124 $ 10,699,802
Repurchase agreements
Interest expense on repurchase agreements(1)
231,706 178,285
857,541 -
Convertible Senior Notes (principal)
14,600 -
Interest expense on Convertible Senior Notes
Securitized debt of consolidated VIE (principal) 153,954 106,746
Mortgages payable (principal)
Participation sold (principal)
Long-term operating lease obligations
Total
$ 100,000 $ - $71,361,926
3,863 - 413,854
- - 857,541
- - 14,600
- - 260,700
103,950 146,431
334 18,772 23,375
- 13,434
-
13,138
296
888
37,477
22,291
7,129
7,169
$61,821,443 $ 11,023,912 $ 134,367 $ 126,241 $73,105,963
We had no material unfunded loan commitments as of
December 31, 2014.
In the coming periods, we expect to continue to finance
our Agency mortgage-backed securities in a manner that
is largely consistent with our current operations via
repurchase agreements. We may use Federal Home Loan
52
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Bank of Des Moines (FHLB Des Moines) advances,
securitization structures, mortgages payable or other term
financing structures to finance certain of our assets.
During the year ended December 31, 2014, we received
$8.3 billion from principal repayments and $22.7 billion
in cash from disposal of Investment Securities. 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.
Off-Balance Sheet Arrangements
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
other contractually narrow or limited purposes. Further,
of
we
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.
obligations
guaranteed
have
any
not
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 our risk
appetite.
Economic capital is our internal quantification of the
risks inherent in our business and considers the amount
of capital we need as a buffer to protect against risks. 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.
investment/market,
The major risks impacting capital applicable to us are
liquidity,
counterparty,
operational, and other risks such as compliance, legal
and regulatory risks. For further discussion of the risks
we are subject to, please see Part I, Item 1A. “Risk
Factors” of our most recent annual report on Form 10-K.
credit,
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. Our 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
our risk appetite.
Our objective is to maintain an active ICAAP that
reflects sound governance, requires active assessment
and reporting of internal capital adequacy, incorporates
stress testing based on internal and external factors and
identifies potential capital actions to ensure our capital
and available financial resources remain in excess of
internal capital requirements.
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.
53
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Stockholders’ Equity
The following table provides a summary of total stockholders’ equity as of December 31, 2014 and 2013:
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
December 31,
2014
2013
(dollars in thousands)
177,088
$
$
177,088
290,514 290,514
445,457 445,457
9,476 9,474
14,786,509
14,765,761
204,883 (2,748,933)
(2,585,436) (534,306)
12,405,055
$
13,328,491
$
Common and Preferred Stock
The following table provides a summary of options activity for the periods presented:
Options
Exercised
Aggregate
Exercise Price
Shares Issued
Through Direct
Purchase
Amount Raised from Direct
Purchase and Dividend
Reinvestment Program
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
-
166,000
603,000
-
$
2.2
8.4
(dollars in millions)
210,000
219,000
170,000
$
2.4
2.9
2.8
During the year ended December 31, 2012, 1.3 million
shares of 6.00% Series B Cumulative Convertible
Preferred Stock (or Series B Preferred Stock) were
converted into 4.0 million shares of common stock.
In March 2012, we entered into six separate Distribution
Agency Agreements
(or 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 (together,
the Agents). Pursuant to the terms of the Distribution
Agency Agreements, we may sell from time to time
through
to
125,000,000 shares of our common stock. We did not
the Distribution Agency
make any sales under
Agreements during the years ended December 31, 2014,
2013 and 2012.
the Agents, as our sales agents, up
Distributions to Stockholders
Our policy is to distribute 100% of our REIT taxable
income. To the extent there is any undistributed REIT
taxable income at the end of a year, we distribute such
shortfall within the next year as permitted by the Code.
REIT taxable income will differ from GAAP net income
the
timing differences,
(loss) due
amortization/accretion of premiums/discounts
from
purchases of Investment Securities and unrealized gains
(losses) included in net income (loss).
such as
to
We seek to generate income for distribution to our
stockholders, typically by earning a spread between the
yield on our assets and the cost of our borrowings. Our
REIT taxable income, which serves as the basis for
distributions to our stockholders, is generated primarily
from this spread income.
54
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
The following table provides a summary of dividend distribution activity for the periods presented:
Dividends declared to common stockholders
Dividends declared per common share
Dividends paid to common stockholders after period end
Dividends paid per common share after period end
Date of dividends paid to common stockholders after period end
Dividends declared to Series A Preferred stockholders
Dividends declared per Series A Preferred share
Dividends declared to Series B Preferred stockholders
Dividends declared per Series B Preferred share
Dividends declared to Series C Preferred stockholders
Dividends declared per Series C Preferred share
Dividends declared to Series D Preferred stockholders
Dividends declared per Series D Preferred share
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
to secure borrowings and our
we pledge assets
international market
assessment of domestic and
conditions.
including
factors,
various
upon
loan participation
Our debt-to-equity ratio (including securitized debt of
sold and
consolidated VIE,
mortgages payable which are non-recourse to us,
subject to customary carveouts) at December, 31, 2014
and 2013 was 5:4:1 and 5.0:1, respectively. Our capital
ratio, which represents our ratio of stockholders’ equity
to total assets, was 15.1% and 15.1% at December 31,
2014 and 2013, respectively.
Risk Management
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For the Ye ars Ende d:
De ce mbe r 31, 2014 De ce mbe r 31, 2013 De ce mbe r 31, 2012
(dollars in thous ands, e xce pt pe r s hare data)
$
$
$
$
$
$
$
$
$
$
$
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1.20
284,293
0.30
January 29, 2015
14,593
$
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$
$
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$
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$
22,875
$
1.91
$
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$
1.88
1,420,856
1.50
284,230
0.30
January 31, 2014
14,593
$
1.97
$
$
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$
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22,875
$
1.91
$
34,500
$
1.88
1,989,690
2.05
432,153
0.45
January 29, 2013
14,593
1.97
289
0.375
14,297
1.19
10,351
0.56
$
$
$
$
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$
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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
risk
success of Annaly. The objective of our
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 Annaly 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 Appetite
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 to key parameters to
guide our risk management activities. For a full
discussion of our risk parameters, refer to the section
titled “Business Overview” of Item 1 “Business.”
55
ANNALY C
Item 7. M
CAPITAL MAN
Management’
NAGEMENT, IN
’s Discussion
NC. AND SUBS
n and Analysi
IDIARIES
is
Governanc
ce
Risk mana
through the
framework
ongoing fo
related ex
directors e
primarily t
and Board
responsible
structure,
guidelines
capital, liq
for oversi
accounting
practices,
evaluation
function.
ns with our b
agement begin
oversight of the
e review and o
tive managem
k, and execut
risk managem
ormulation of
managing risk
xecution in m
oversight of
exercises its
oard Risk Com
through the Bo
mittee (or BAC
d Audit Comm
ght of our
e for oversi
risk manag
gement and
s, our risk to
and policies
nding. The BA
quidity and fun
quality and
ight of the
ontrols and fi
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in
ndependent a
including
nd oversight of
and review, an
oard of direct
e risk managem
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ment practices
k. The board
risk managem
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C). The BRC
risk governa
risk assessm
olerance and
AC is respons
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ensure the app
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nagement com
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porting and Dis
t and
risk
f our manag
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bilities for risk
hese committee
propriate perso
process. Thre
e been estab
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resp
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management
A
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oversight or
k management
es are reviewe
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to p
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risk managem
for
ponsible
erprise Risk C
the
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are
the
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d regularly
aged in the
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provide a
ment. The
risk
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Financial
our
mittee.
Aud
lines
perf
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with
dit Services is
s to the BAC
forming our in
ependently as
hin the risk man
an independen
C. Audit Serv
nternal audit a
sessing and
anagement fram
nt function with
vices is respo
activities, whic
validating key
mework.
h reporting
onsible for
ch includes
y controls
56
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. 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
of a robust enterprise wide risk management framework.
We have identified the following primary categories that
we utilize 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 by 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 management practices
consist of the following primary elements:
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 an escalation
protocol.
financing
sources are
repurchase
Our primary
agreements and various forms of equity. Through the
judicious use of leverage, we maintain excess liquidity
through investing in high quality unencumbered assets,
which serve as our capital buffer.
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. We have not at the present time
57
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 repos 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. Should prepayment speeds on the mortgages
underlying our Agency mortgage-backed securities
and/or market interest rates suddenly increase leading
to market value declines, resulting margin calls may
cause an adverse change in our liquidity position.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
total financial
At December 31, 2014, we had
instruments and cash pledged as collateral
for
repurchase agreements and interest rate swaps of $77.0
billion. The weighted
haircut was
approximately 4% 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,
2014 compared to the year ended December 31, 2013,
average
and our counterparties did not materially alter any
requirements, including required haircuts, related to the
collateral we pledge under repurchase agreements and
interest rate swaps during the year ended December 31,
2014.
The table below presents our quarterly average and
quarter-end
reverse
repurchase agreement balances outstanding for the
periods presented:
repurchase
agreement
and
Repurchase Agreements
Average Daily
Amount Outstanding
Ending Amount
Outstanding
Reverse Repurchase Agreements
Average Daily
Amount Outstanding
Ending Amount
Outstanding
(dollars in thousands)
$ 72,117,895 $ 71,361,926
69,610,722
70,372,218
64,543,949
61,781,001
69,211,309
81,397,335
100,322,942
71,312,473
70,133,219
64,443,248
67,509,177
76,265,080
93,250,767
106,440,476
$ 10,870 $ 100,000
- -
-
444,375
100,000
31,074
171,234
4,933,465
227,640
379,042
345,470
217,693
2,569,531
3,425,546
Quarters Ended:
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
At December 31, 2014, the repurchase agreements outstanding had weighted average remaining maturities of 141 days
and the following remaining maturities and weighted average rates:
Repurchase
Agreements
December 31, 2014
Weighted
Average Rate
(dollars in thousands)
% of Total
$ -
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days(1)
Total
28,354,167
17,336,469
4,040,677
2,945,495
18,685,118
$ 71,361,926
(1) Approximately 15% of the total repurchase agreements had a remaining maturity over 1 year.
0.00%
0.35%
0.43%
0.38%
0.50%
1.24%
0.61%
0.0%
39.7%
24.3%
5.7%
4.1%
26.2%
100.0%
Excess Liquidity
Our primary source of liquidity 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 available to support
potential collateral obligations and funding needs.
Assets are considered encumbered if pledged as
collateral against an existing liability, and therefore no
longer available to support additional funding. An asset
is considered unencumbered if it has not been pledged
the
or securitized. The following
carrying amount of our encumbered and unencumbered
financial assets as of December 31, 2014:
table provides
58
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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Financial Assets:
Cash and cash equivalents
Investments, at fair value:(1)
Agency mortgage-backed securities
Agency debentures
Commercial real estate debt and preferred equity
Corporate debt
Total financial assets
Encumbered
Assets
Unencumbered
Assets
Total
(dollars in thousands)
$
1,584,701
$
156,543
$
1,741,244
74,006,480
1,368,350
398,634
-
$
77,358,165
8,290,488
-
1,119,531
166,464
9,733,026
$
82,296,968
1,368,350
1,518,165
166,464
87,091,191
$
(1) 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
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
is monitored
financing arrangements (including certain collateral
currently supporting existing financial arrangements).
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 following table presents our liquid
assets as a percentage of total assets as of December 31,
2014.
Liquid Assets
Cash and cash equivalents
Investment Securities(2)
Total liquid assets
Percentage of liquid assets to total assets
Carrying Value (1)
(dollars in thousands)
$
1,741,244
83,665,318
$
85,406,562
96.66%
(1) Carrying value represents the market value of assets. The assets listed in this table include $77.0 billion of assets that have been pledged as collateral against existing
liabilities as of December 31, 2014. Please refer to the Encumbered and Unencumbered Assets table for related information.
(2)
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.
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 flows from our assets, liabilities and
derivatives. The following table illustrates the expected
maturities and cash flows of our assets, 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 use the stated maturities or prepayment
expectations
that exhibit prepayment
characteristics. Cash and cash equivalents are included
in the ‘within 3 months’ maturity bucket, as they are
typically held for a short period of time.
for assets
With respect to each maturity bucket, our maturity gap
is considered negative when the amount of maturing
liabilities exceeds the amount of maturing assets. A
negative gap increases our liquidity risk as we must
enter into future liabilities.
Our interest rate sensitivity gap is the difference
between Interest Earning Assets and Interest Bearing
59
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Liabilities maturing or re-pricing within a given time
period. Unlike the calculation of maturity gap, interest
rate sensitivity gap includes the effect of our interest
rate swaps. 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
interest
interest rates may affect net
rate sensitivity gap was determined
changes in overall market rates or conditions, changes
in
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
in
interest
accordance with the contractual terms of the assets and
liabilities, except for 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 effects of interest rate swaps,
which effectively lock in our financing costs for a
longer term are also reflected in our interest rate
sensitivity gap. The interest rate sensitivity of our assets
and
table below could vary
substantially based on actual prepayment experience.
liabilities
the
in
Less than 3
Months
3-12 Months
More than 1 Year
to 3 Years
3 Years and
Over
Total
Financial Assets:
Cash and cash equivalents
Reverse repurchase agreements
Agency Mortgage-backed securities (principal)
Agency debentures (principal)
Corporate debt (principal)
Commercial real estate debt and preferred equity
(principal)
Total financial assets
Financial Liabilities:
Repurchase agreements
Convertible Senior Notes (principal)
Securitized debt of consolidated VIE (principal)
Participation sold (principal)
Total financial liabilities
$
1,741,244
100,000
3,648
(dollars in thousands)
$ - $ - $ -
-
- -
38,184
1,521,631
- - -
- -
10,036
$
1,741,244
100,000
75,982,999
1,408,805
168,015
74,419,536
1,408,805
157,979
28,457
1,873,349
$
511,510
549,694
$
684,946
2,216,613
$
296,059
76,282,379
$
1,520,972
80,922,035
$
$
$
$
$
49,731,313
107,541
-
76
49,838,930
10,830,811
750,000
153,954
220
11,734,985
10,699,802
-
106,746
13,138
10,819,686
100,000
-
-
-
100,000
$
71,361,926
857,541
260,700
13,434
72,493,601
$
$
$
$
$
Maturity gap
$
(47,965,581)
$
(11,185,291)
$
(8,603,073)
$
76,182,379
$
8,428,434
Cumulative maturity gap
$
(47,965,581)
$
(59,150,872)
$
(67,753,945)
$
8,428,434
Interest rate sensitivity gap
$
(15,682,226)
$
(10,118,428)
$
(11,556,723)
$
45,785,811
$
8,428,434
Cumulative rate sensitivity gap
$
(15,682,226)
$
(25,800,654)
$
(37,357,377)
$
8,428,434
Cumulative rate sensitivity gap as a % of
total rate sensitive assets
(19.38%)
(31.88%)
(46.16%)
10.42%
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.
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.
Liquidity Management Policies
liquidity
We utilize a comprehensive liquidity policy structure to
inform our
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
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 escalation protocol, with various liquidity ratings
influencing management actions with
to
respect
contingency planning and potential related actions.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Stress Testing
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.
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 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 potential realization of gains or losses from the sale
of these assets. We may utilize a variety of financial
instruments, including interest rate swaps, swaptions,
options, futures and other hedges, in order to limit the
adverse 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. Scenarios are run to capture our
sensitivity to changes in interest rates, spreads and the
shape of the yield curve. We also consider the
assumptions affecting our analysis such as those related
to 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 (inclusive of derivative instruments), should
interest rates increase or decrease by 25, 50 or 75 basis
points, and the effect of portfolio market value if
mortgage option-adjusted spreads increase or decrease
by 5, 15 or 25 basis points (assuming shocks are
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, 2014 and various estimates regarding
prepayments and all activities are made at each level of
rate shock. Actual results could differ significantly from
these estimates.
Estimated
Change as a
% on
NAV(2)(3)
1.3%
1.8%
1.4%
-
(2.0%)
(4.7%)
(8.0%)
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
MBS Spread Shock
-25 Basis Points
-15 Basis Points
-5 Basis Points
Base Interest Rate
+5 Basis Points
+15 Basis Points
+25 Basis Points
Projected Percentage
Change in Economic Net
Interest Income (1)
(10.6%)
(3.5%)
(1.9%)
-
1.2%
2.6%
2.6%
Estimated Change in
Portfolio Market Value
1.2%
0.7%
0.2%
-
(0.2%)
(0.7%)
(1.1%)
Estimated Percentage
Change in Portfolio Value (2)
0.2%
0.3%
0.2%
-
(0.3%)
(0.7%)
(1.2%)
Estimated Change as a %
on NAV(2)(3)
7.7%
4.6%
1.6%
-
(1.4%)
(4.4%)
(7.4%)
Scenarios include Investment Securities, repurchase agreements and interest rate swaps only. Economic net interest income includes interest expense on interest rate swaps.
(1)
(2)
(3) NAV represents book value of equity.
Scenarios include Investment Securities and derivative instruments.
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61
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Credit and Counterparty Risk Management
Key risk parameters have been established to 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. We are 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. We are exposed to risk of loss if an issuer,
borrower or counterparty fails to perform its contractual
obligations. We have established policies and
including
procedures
for mitigating credit
risk,
investment
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
the appropriate committee. Once a
approved by
is made, our ongoing
commercial
surveillance process includes regular reviews, analysis
and oversight of
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 estimates of provision for loss. Our portfolio
composition as of December 31, 2014 and December
31, 2013 was as follows:
investments by our
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
Including TBAs held for delivery.
(1)
(2) Net of unamortized origination fees.
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.
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 amount loaned to us plus interest due to the
counterparty and the fair value of the collateral pledged
by us to the lender including accrued interest receivable
on such collateral.
If
2014
96.2%
1.6%
2.0%
0.0%
0.2%
2013
93.7%
4.0%
2.1%
0.0%
0.2%
We also use interest rate swaps and other derivatives to
manage interest rate risk. Under these agreements, 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. Additionally, we would
be exposed to a loss to a derivative counterparty to the
that our unrealized gains on derivative
extent
instruments exceeds the amount of the counterparty’s
securities or cash pledged to us.
We monitor our exposure to counterparties across
several dimensions including by type of arrangement,
collateral
ratings and
geography.
type, counterparty
type,
The following table summarizes our exposure to
counterparties by geography as of December 31, 2014:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Country
Number of
Counterparties
Repurchase
Agreement
Financing
Interest Rate
Swaps at Fair
Value
(dollars in thousands)
Exposure (1)
North America
Europe
Asia (non-Japan)
Japan
Total
49,751,635
17,710,251
627,059
3,272,981
71,361,926
(1) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement financing and unrealized loss on
2,993,453
943,289
34,339
190,091
4,161,172
(1,157,868)
(375,193)
-
-
17
10
1
4
32
$
$
(1,533,061)
$
$
$
$
swaps for each counterparty.
Operational Risk Management
to uncertainty
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
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 proper
incompatible duties, activity-level
segregation of
internal controls over
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.
reporting,
financial
Compliance, Regulatory and Legal Risk Management
factual matters
analysis of various
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
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 us. We maintain a process to actively
monitor both actual and potential legal action that may
increasing attention
receive
to
affect us. Our risk management framework is 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 risk is also under the
oversight of the Enterprise Risk Committee.
As a result of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, the U.S. Commodity
Futures Trading Commission (or CFTC) gained
jurisdiction over the regulation of interest rate swaps.
The CFTC has asserted that this causes the operators of
mortgage real estate investment trusts that use swaps as
part of their business model to fall within the statutory
definition of Commodity Pool Operator (or CPO), and,
absent relief from the Division or the Commission, to
register as CPOs. On December 7, 2012, as a result of
numerous requests for no-action relief from the CPO
registration requirement for operators of mortgage real
estate investment trusts, the Division of Swap Dealer
and Intermediary Oversight of the CFTC issued no-
action relief entitled “No-Action Relief from the
Commodity Pool Operator Registration Requirement
for Commodity Pool Operators of Certain Pooled
Investment Vehicles Organized as Mortgage Real
Estate Investment Trusts” that permits a CPO to
receive relief by filing a claim to perfect the use of the
relief. A claim submitted by a CPO will be effective
upon filing, so long as the claim is materially complete.
The conditions that must be met to claim the relief are
that the mortgage real estate investment trust relate to
initial margin and premiums requirements, net income
derived annually from commodity interest positions
that are not qualifying hedging transactions, marketing
63
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
of interests in the mortgage real estate investment trust
to the public, and identification of the entity as a
mortgage real estate investment trust in its federal tax
filings with the Internal Revenue Service. While we
disagree that the CFTC’s position that mortgage real
estate investment trusts that use swaps as part of their
business model fall within the statutory definition of a
CPO, we have submitted a claim for the relief set forth
in the no-action relief entitled “No-Action Relief from
Pool Operator Registration
the Commodity
Requirement for Commodity Pool Operators of Certain
Pooled Investment Vehicles Organized as Mortgage
Real Estate Investment Trusts” and believe we meet
the criteria for such relief set forth therein.
Critical Accounting Policies and Estimates
Our critical accounting policies which require us to
make significant judgments or estimates are described
below.
For more information on these critical
accounting policies and other significant accounting
policies, see “Significant Accounting Policies” in the
Notes to the Consolidated Financial Statements.
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 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 market, the
Treasury curve and the underlying characteristics of the
individual securities, which may include coupon,
periodic and life caps, reset dates and the expected life
of the security. Prepayment rates are difficult to
predict and are a significant estimate requiring
judgment in the valuation of Agency mortgage-backed
securities. All internal market values are compared to
external pricing sources and/or dealer quotes
to
determine reasonableness. Additionally, securities
used as collateral for repurchase agreements are priced
daily
sufficient
collateralization, providing additional verification of
our internal pricing.
counterparties
ensure
by
to
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,
64
agreements with
certain
we have negotiated
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
derivative contract to calculate the amount of collateral
required, providing additional verification of our
recorded fair value of the interest rate swaps.
Revenue Recognition
speed projections
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 purchase
of the Investment Securities are amortized or accreted
into interest income over the projected lives of the
securities using the interest method. We use a third-
party supplied model to project prepayment speeds.
Our prepayment
incorporate
underlying loan characteristics (e.g., coupon, term,
original loan size, original loan to value, etc.) and
market data, including interest rate and home price
index forecasts and expert judgment. Prepayment
speeds vary according to the type of investment,
conditions in the financial markets and other factors
and cannot be predicted with any certainty.
Adjustments are made for actual prepayment activity as
it relates to calculating the effective yield. Gains or
losses on investment securities are recorded on trade
date based on the average cost of the security.
Consolidation of Variable Interest Entities
the activities
identify explicit and
Determining whether an entity has a controlling
financial interest in a VIE requires significant judgment
related to assessing the purpose and design of the VIE
and determination of
that most
significantly impact its economic performance. We
must also
implicit variable
interests in the entity and consider our involvement in
both the design of the VIE and its ongoing activities.
To determine whether consolidation of the VIE is
required, we must apply judgment to assess whether we
have the power to direct the most significant activities
of the VIE and whether we have either the rights to
receive benefits or obligation to absorb losses that
could be potentially significant to the VIE.
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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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.
Amortization
the process of
systematically reducing a recognized asset or liability
(e.g., a purchase premium or discount for a debt
security) with an offset to earnings.
refers
also
to
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.
typically
benchmarks.
looks
to U.S. Treasury securities as
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.
B-Note
Subordinate mortgage notes and/or
mortgage loan participations.
subordinate
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 is used (no
matter what the actual denominations are); (3) Bonds
are long-term securities with an original 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.
B
Basis Point (BPs)
One hundredth of one percent, used in expressing
differences in interest rates. One basis point is 0.01%
of yield. For example, a bond’s yield that changed from
3.00% to 3.50% would be said to have moved 50 basis
points.
Benchmark
A bond or an index referencing a basket of bonds
whose terms are used for comparison with other bonds
of similar maturity. The global financial market
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.
Collateral
Securities, cash or property pledged by a borrower or
66
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
party to a derivative contract to secure payment of a
loan or derivative. If the borrower fails to repay the
loan or defaults under the derivative contract, the
secured party may take ownership of the collateral.
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.
Collateralized Mortgage Obligation (CMO)
A multiclass bond backed by a pool of mortgage pass-
through securities or mortgage loans.
Coupon
The interest rate on a bond that is used to compute the
amount of interest due on a periodic basis.
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 swaps, 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.
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.
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.
Core Earnings and Core Earnings Per Basic Share
Non-GAAP measure that 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
gains and losses on trading assets, impairment losses,
net income (loss) attributable to noncontrolling interest
and certain other non-recurring gains or losses.
Corporate Debt
by
Non-government
corporations. Long-term corporate debt can be issued
as bonds or loans.
instruments
issued
debt
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.
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).
Discount Price
When the dollar price is below face value, it is said to
be selling at a discount.
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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 realized 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 realized 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 Deposit Insurance Corporation (FDIC)
An independent agency created by the U.S. Congress
to maintain stability and public confidence in the
insuring deposits,
system by
nation's
examining and supervising financial institutions for
safety and soundness and consumer protection, and
managing receiverships.
financial
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.
legally binding agreement
Futures Contract
A
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
represents an obligation of both counterparties, one to
deliver and the other to accept delivery. A futures
contract is part of a class of financial instruments called
derivatives.
G
GAAP
Accounting principles generally accepted in the United
States of America.
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 (execution price) is
below the market price of the underlying security.
securitized debt of
Interest Bearing Liabilities
Refers to repurchase agreements, convertible senior
notes,
consolidated VIE,
participation sold, FHLB Des Moines advances, U.S.
Treasury securities sold, not yet purchased and
securities loaned. Average Interest Bearing Liabilities
is based on daily balances.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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. Average
Interest Earning Assets is based on daily balances.
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
investment holdings declines. Diversifying,
income
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
some
predetermined dollar principal, which is called the
notional principal amount. For example, one party will
pay fixed and receive a variable rate.
interest payments on
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. The
swaption agreement will specify whether the buyer of
the swaption will be a fixed-rate receiver or a fixed-rate
payer.
Internal Capital Adequacy Assessment Program
(ICAAP)
The ongoing assessment and measurement of risks, and
the amount of capital which is necessary to hold
against those risks. The objective is to ensure that a
firm is appropriately capitalized relative to the risks in
its business.
International Swaps and Derivatives Association
(ISDA) Master Agreement
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
69
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 and economic returns.
Leverage Ratio
Calculated as total debt to total stockholders' equity.
For purposes of calculating this ratio total debt includes
repurchase agreements, Convertible Senior Notes and
non-recourse securitized debt of consolidated VIE, loan
participation sold and mortgages payable.
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 and the
floating-rate legs of interest rate swaps.
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.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Monetary Policy
Action taken by the Board of Governors of the Federal
Reserve System to influence the money supply or
interest rates.
Operational Risk
Risk to earnings, capital, reputation or business arising
from inadequate or failed internal processes or systems,
human factors or external events.
Mortgage-Backed Security (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 Equity Yield
income, excluding
Calculated using GAAP net
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.
Net Interest Margin
Represents annualized economic net interest income,
inclusive of interest expense on interest rate swaps,
divided by average Interest Earning Assets.
Net Interest Spread
Calculated by taking the average yield on interest
earning assets minus the average cost of interest
bearing liabilities, including the net interest payments
on interest rate swaps.
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.
Original Face
The face value or original principal amount of a
security on its issue date.
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.
Over-The-Counter (OTC) Market
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
Principal and Interest
The term used to refer to regularly scheduled payments
or prepayments of principal and payments of interest
on a mortgage or other security.
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Prepayment
The unscheduled partial or complete payment of the
principal amount outstanding on a mortgage loan or
other debt before it is due.
Risk Appetite Statement
Defines the types and levels of risk we are willing to
take in order to achieve our business objectives, and
reflects our risk management philosophy.
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.
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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Rate Reset
The adjustment of the interest rate on a floating-rate
security according to a prescribed formula.
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.
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.
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.
To-Be-Announced Securities (TBAs)
A contract for the purchase or sale of a mortgage-
backed security to be delivered at a predetermined
price, face amount, issuer, coupon and stated maturity
on an agreed-upon future date but does not include a
specified pool number and number of pools.
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.
Reverse Repurchase Agreement
Refer to Repurchase Agreement. From the customer's
perspective, the customer provides a collateralized loan
to the seller.
Total Return Swap
A derivative instrument where one party makes
payments at a predetermined rate (either fixed or
variable) while receiving a return on a specific asset
71
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 on 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.
(generally an equity index, loan or bond) held by the
counterparty.
U
Unencumbered Assets
Assets on our balance sheet which have not been
pledged as collateral against an existing liability.
U.S. Government-Sponsored Enterprise (GSE)
Obligations
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.
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.
72
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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
in providing
(2) were effective
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, 2014 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
the Company
Management of
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
executive and principal financial officers and effected
73
by the Company’s board of directors, management and
other personnel
to provide reasonable assurance
regarding the reliability of financial reporting and the
for external
financial statements
preparation of
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
changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
The Company’s management assessed the effectiveness
of the Company’s internal control over financial
reporting as of December 31, 2014. In making this
assessment, the Company’s management used criteria
set forth by the Committee of Sponsoring Organizations
of the Treadway Commission’s (or COSO) Internal
Control-Integrated Framework (2013).
Based on management’s assessment management
believes that as of December 31, 2014, the Company’s
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.
74
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, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 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, 2014, 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,
2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2014 of Annaly Capital Management Inc. and Subsidiaries and
our report dated February 26, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, NY
February 26, 2015
75
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 9B. OTHER INFORMATION
None.
76
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, 2014. 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, 2014.
We have adopted a Code of Business Conduct and
Ethics within the meaning of Item 406(b) of Regulation
S-K. This Code of Business Conduct and Ethics
ITEM 11. EXECUTIVE COMPENSATION
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, 2014.
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, 2014.
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, 2014.
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, 2014.
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, 2014.
77
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
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
78
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Exhibits, Financial Statement Schedules
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4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
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10.2
10.3
10.4
10.5
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21.1
23.1
31.1
31.2
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 with the Securities and Exchange Commission
on July 2, 2013).*
Amendment No. 1 to Management Agreement, dated as of November 5, 2014, by and between
the Registrant and Annaly Management Company LLC (incorporated by reference from
Exhibit 10.1 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission
on November 6, 2014).*
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.
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
79
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
Exhibits, Financial Statement Schedules
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
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 †
32.1
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
*
filed as Exhibits to this Form 10-K.
Exhibit Numbers 10.1, 10.3, 10.4 and 10.5 are management contracts or compensatory plans required to be
†
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, 2014 and December 31, 2013; (ii) Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 2014, 2013 and 2012; (iii) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2014, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the years ended December
31, 2014, 2013 and 2012; 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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80
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2014 AND 2013 AND FOR
THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
Consolidated Statements of Financial Condition
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Description of Business
Note 2.
Basis of Presentation
Note 3.
Significant Accounting Policies
Note 4.
Agency Mortgage-backed Securities
Note 5.
Acquisition of Crexus
Note 6.
Commercial Real Estate Investments
Note 7.
Fair Value Measurements
Note 8.
Secured Financing
Note 9.
Derivative Instruments
Note 10. Convertible Senior Notes
Note 11. Common Stock and Preferred Stock
Note 12.
Interest Income and Interest Expense
Note 13. Goodwill
Note 14. Net Income (Loss) per Common Share
Note 15. Long-term Stock Incentive Plan
Note 16.
Income Taxes
Note 17. Lease Commitments and Contingencies
Note 18. Risk Management
Note 19. RCAP Regulatory Requirements
Note 20. Related Party Transactions
Note 21. Summarized Quarterly Results (Unaudited)
Page
F-1
F-2
F-3
F-5
F-6
F-8
F-8
F-8
F-16
F-17
F-18
F-22
F-25
F-26
F-29
F-30
F-32
F-32
F-32
F-33
F-34
F-34
F-35
F-35
F-35
F-37
81
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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, 2014 and 2013, and the related consolidated statements of
comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December
31, 2014. 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, 2014 and 2013, and
the consolidated results of their operations and their cash flows for each of the three years in the period ended December
31, 2014, 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,
2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
February 26, 2015
F-1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. 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 (including cash pledged as collateral of $1,584,701 and $371,790, respectively)
Reverse repurchase agreements
Securities borrowed
Investments, at fair value:
U.S. Treasury securities (including pledged assets of $0 and $1,113,027, respectively)
Agency mortgage-backed securities (including pledged assets of $74,006,480 and $63,897,873, respectively)
Agency debentures (including pledged assets of $1,368,350 and $2,931,261, respectively)
Investment in affiliates
Commercial real estate debt and preferred equity(1)
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 $10,402 and $6,839, 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
Convertible Senior Notes
Securitized debt of consolidated VIE
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,
947,643,079 and 947,432,862 issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
December 31, December 31,
2014
2013
$
1,741,244
100,000
-
$
552,436
100,000
2,582,893
-
81,565,256
1,368,350
143,045
1,518,165
210,032
166,464
1,010,094
278,489
10,402
94,781
75,225
5,499
68,321
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
$
88,355,367
$
81,922,460
$
-
71,361,926
-
264,984
845,295
260,700
146,553
13,693
180,501
284,293
1,608,286
8,027
47,328
$
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
75,021,586
69,517,405
177,088
177,088
290,514
290,514
445,457
445,457
9,476
14,786,509
204,883
(2,585,436)
9,474
14,765,761
(2,748,933)
(534,306)
13,328,491
12,405,055
5,290
-
13,333,781
12,405,055
$
88,355,367
$
81,922,460
(1)
Includes senior securitized mortgages of consolidated VIE with a carrying value of $398.6 million and $0 at
December 31, 2014 and 2013, respectively.
See notes to consolidated financial statements.
F-2
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
For The Years Ended December 31,
2014
2013
2012
Net interest income:
Interest income
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
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
Income taxes
Net income (loss)
Net income (loss) attributable to noncontrolling interest
Net income (loss) attributable to Annaly
Dividends on preferred stock
Net income (loss) available (related) to common
stockholders
Statement continued on following page.
$
2,632,647
512,659
2,119,988
$
(825,360)
(779,333)
(948,755)
(2,553,448)
31,343
93,716
-
25,189
(245,495)
(86,172)
-
-
(12,737)
(194,156)
(2,747,604)
155,560
53,778
209,338
(836,954)
5,325
(842,279)
(196)
(842,083)
71,968
2,918,562
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
167,366
64,715
232,081
3,737,911
8,213
3,729,698
-
3,729,698
71,968
$
3,259,145
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)
190,702
44,857
235,559
1,771,812
35,912
1,735,900
-
1,735,900
39,530
$
(914,051)
$
3,657,730
$
1,696,370
F-3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Net income (loss) per share available (related) to common
stockholders:
Basic
Diluted
$
$
(0.96)
(0.96)
$
$
3.86
3.74
$
$
1.74
1.71
Weighted average number of common shares outstanding:
Basic
Diluted
947,539,294
947,539,294
947,337,915
995,557,026
972,902,459
1,005,755,057
Dividends declared per share of common stock
$
1.20
$
1.50
$
2.05
Net income (loss)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for net (gains) losses included in net
income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income (loss) attributable to noncontrolling
interest
Comprehensive income (loss) attributable to Annaly
(94,475)
2,953,816
2,111,537
(196)
2,111,733
$
$
(842,279)
$
3,729,698
$
1,735,900
3,048,291
(5,378,089)
(424,086)
(5,802,175)
(2,072,477)
-
482,765
(438,511)
44,254
1,780,154
-
$
(2,072,477)
$
1,780,154
(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-4
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012
(dollars in thousands, except per share data)
7.875% Series A
Cumulative
Redee mable
Preferred Stock
7.625% Serie s
C Cumulative
Redee mable
Preferre d Stock
7.50% Se ries D
Cumulative
Redeemable
Pre ferred Stock
Common
Stock
Par
Value
Additional Paid-In
Capital
Accumulate d
Other
Compre hensive
Income (Loss)
Accumulated
Deficit
Total
stockholde rs’
e quity
Noncontrolling
Intere st
BALANCE, De cember 31, 2011
Net income (loss) attributable to Annaly
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
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, De cember 31, 2012
Net income (loss) attributable to Annaly
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
BALANCE, De cember 31, 2013
Net income (loss) attributable to Annaly
Net income (loss) attributable to noncontrolling interest
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for net (gains) losses included in net income (loss)
Stock compensation expense
Net proceeds from direct purchase and dividend reinvestment
Contingent beneficial conversion feature on 4% Convertible Senior Notes
Contributions from noncontrolling interest
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, $1.20 per share
177,088
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
177,088
-
-
-
-
-
-
-
-
-
-
-
-
177,088
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
290,514
-
-
-
-
-
-
-
-
-
290,514
-
-
-
-
-
-
-
-
-
-
-
-
290,514
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
445,457
-
-
-
-
-
-
-
-
445,457
-
-
-
-
-
-
-
-
-
-
-
-
445,457
-
-
-
-
-
-
-
-
-
-
-
-
BALANCE, De cember 31, 2014
177,088
290,514
445,457
See notes to consolidated financial statements.
F-5
9,702
-
-
-
6
-
40
2
-
-
-
-
-
-
(278)
-
-
-
-
-
-
9,472
-
-
-
2
(2)
2
-
-
-
-
-
-
9,474
-
-
-
-
-
2
-
-
-
-
-
-
9,476
15,068,870
3,008,988
-
-
-
8,432
5,584
32,232
2,792
61,725
11,717
(248)
-
-
(53,558)
(396,772)
-
-
-
-
-
-
-
482,765
(438,511)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,740,774
3,053,242
-
-
-
2,202
2,549
2,853
17,383
-
-
-
-
-
14,765,761
-
-
-
-
1,072
2,368
17,308
-
-
-
-
-
14,786,509
-
(5,378,089)
(424,086)
-
-
-
-
-
-
-
-
-
(2,748,933)
-
-
3,048,291
(94,475)
-
-
-
-
-
-
-
-
204,883
(2,504,006)
1,735,900
-
-
-
-
-
-
-
-
-
-
-
-
-
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)
(842,083)
-
-
-
-
-
-
-
(14,593)
(22,875)
(34,500)
(1,137,079)
(2,585,436)
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)
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
(842,083)
-
3,048,291
(94,475)
1,072
2,370
17,308
-
(14,593)
(22,875)
(34,500)
(1,137,079)
13,328,491
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(196)
-
-
-
-
-
5,486
-
-
-
-
5,290
Total
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)
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
(842,083)
(196)
3,048,291
(94,475)
1,072
2,370
17,308
5,486
(14,593)
(22,875)
(34,500)
(1,137,079)
13,333,781
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from ope rating activitie s:
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 financing costs
Amortization of net origination fees and costs, net
Amortization of contingent beneficial conversion feature and equity component of Convertible
Senior Notes
Depreciation expense
Net gain on sale of commercial real estate
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
Proceeds from repurchase agreements of RCap
Payments on repurchase agreements of RCap
Proceeds from reverse repurchase agreements
Payments on reverse repurchase agreements
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 inve sting 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 purchases of corporate debt
Proceeds from corporate debt called
Principal payments on corporate debt
Acquisition of CreXus
Origination of commercial real estate investments, net
Proceeds from sales of commercial real estate held for sale
Principal payments on commercial real estate investments
Purchase of investments in real estate
Earn out payment
Proceeds from derivatives
Proceeds from sales of equity securities
Payment on disposal of subsidiary
Net cash provided by (used in) investing activities
Statement continued on following page.
2014
For The Years Ende d December 31,
2013
2012
$
(842,279)
$
3,729,698
$
1,735,900
664,379
616
1,390
9,951
(4,917)
37,341
3,205
(2,748)
(94,476)
-
1,072
-
-
-
-
948,755
86,172
245,495
881,680,774
(875,782,907)
107,898,578
(107,898,578)
23,888,955
(21,306,062)
41,939,298
(44,466,966)
3,159,253
(3,920,425)
(134,284)
8,596
(2,657)
(21,376)
(3,563)
-
34,889
987
6,128,468
(38,626,689)
22,654,547
8,312,784
-
(136,953)
-
88,909
-
(246,833)
26,019
316,082
(190,743)
-
-
-
-
(7,802,877)
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)
1,453,216,892
(1,471,279,777)
450,898,777
(449,187,682)
263,155,068
(263,577,019)
484,836,546
(484,117,193)
142,054,631
(141,019,615)
(133,023)
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
1,470,801
-
4,080
6,965
-
18,017
-
-
(432,139)
162,340
5,584
-
-
(1,177)
-
32,219
59,937
(20,525)
733,739,097
(727,275,192)
402,606,536
(403,556,765)
74,361,498
(75,593,708)
185,657,591
(184,654,177)
64,028,348
(64,746,420)
(10,173)
-
(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)
F-6
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Cash flows from financing activities:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
Proceeds from issuance of securitized debt
Payment of deferred financing cost
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
Proceeds from mortgages payable
Principal payments on participation sold
Principal payments on mortgages payable
Contributions from noncontrolling interests
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.
195,370,377
(191,687,319)
260,700
(6,382)
-
-
-
-
-
2,370
-
127,325
(309)
(47)
5,486
-
(1,208,984)
2,863,217
1,188,808
552,436
381,641,327
(404,583,138)
-
-
2,204
-
-
-
-
2,855
-
-
(200)
-
-
(141,149)
(1,640,748)
(24,718,849)
(63,353)
615,789
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
(378,409)
994,198
$
1,741,244
$
552,436
$
615,789
$
$
$
$
$
$
$
3,307,238
25,189
27,780
496,033
812,108
8,314
$
$
$
$
$
$
$
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
$
$
1,010,094
264,984
$
$
1,193,730
764,131
$
$
290,722
8,256,957
$
$
2,953,816
$
$
(5,802,175)
$
$
44,254
284,293
$
$
-
$
17,308
$
-
284,230
$
$
-
$
17,383
$
-
$
$
$
$
432,154
32,272
61,725
11,717
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 and 2012
1. DESCRIPTION OF BUSINESS
certificates,
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.
The Company is externally managed by Annaly
Management Company LLC (the “Manager”).
The Company’s business operations are primarily
comprised of the following:
- Annaly, the parent company, which invests primarily
in various
types of Agency mortgage-backed
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
was acquired during the second quarter of 2013
financing and
which specializes
managing commercial real estate 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 (“MML”)
(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
F-8
amended, and regulations promulgated thereunder (the
“Code”).
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
Principles of Consolidation – The consolidated
financial statements
the
include
Company and
its wholly-owned subsidiaries. All
intercompany balances and transactions have been
eliminated in consolidation.
the accounts of
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
right to receive benefits from the VIE that could
potentially be significant to the VIE.
To assess whether the Company has the power to direct
the activities of a VIE that most significantly impact the
VIE’s economic performance, the Company considers
all facts and circumstances, including the Company’s
role in establishing the VIE and the Company’s
ongoing rights and responsibilities. This assessment
includes first, identifying the activities that most
significantly impact the VIE’s economic performance;
and second, identifying which party, if any, has power
over those activities. In general, the parties that make
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
the most significant decisions affecting the VIE or have
the right to unilaterally remove those decision makers
are deemed to have the power to direct the activities of
a VIE.
To assess whether the Company has the obligation to
absorb losses of the VIE or the right to receive benefits
from the VIE that could potentially be significant to the
VIE, the Company considers all of its economic
interests, including debt and equity investments and
other arrangements deemed to be variable interests in
the VIE. This assessment requires that the Company
applies
these
interests, in the aggregate, are considered potentially
significant to the VIE. Factors considered in assessing
significance include: the design of the VIE, including
its capitalization structure; subordination of interests;
payment priority; relative share of interests held across
various classes within the VIE’s capital structure; and
the reasons why the interests are held by the Company.
in determining whether
judgment
The Company performs ongoing reassessments of
the facts and circumstances
whether changes
regarding the Company’s involvement with a VIE
causes
the Company’s consolidation conclusion
regarding the VIE to change.
in
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 to conduct 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
the form of cash on margin with
collateral
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 approximately $1.6 billion and
$371.8 million at December 31, 2014 and December
31, 2013, respectively.
in
Fair Value Measurements – The Company reports
various financial instruments at fair value. A complete
discussion of the methodology utilized by the Company
to estimate
financial
instruments is included in these Notes to Consolidated
Financial Statements.
fair value of certain
the
certificates,
mortgage pass-through
collateralized
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”). These Agency
mortgage-backed securities may
forward
for Agency mortgage-backed securities
contracts
purchases or sales of a generic pool, on a to-be-
announced basis (“TBA securities”). The Company also
invests in Agency debentures issued by the Federal
Home Loan Banks, Freddie Mac and Fannie Mae.
include
Agency mortgage-backed securities and Agency
debentures are referred to herein as “Investment
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
portfolio. Investment Securities are classified as
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, including TBA
securities that meet the regular-way securities scope
exception from derivative accounting. Realized gains
and losses on sales of Investment Securities are
determined using the average cost method.
that are compared
inverse
The Company elected the fair value option for Agency
interest-only mortgage-backed securities. Interest-only
interest-only securities are
securities and
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 are measured at fair
value with changes in fair value recorded as Net
unrealized gains (losses) on interest-only Agency
mortgage-backed
the Company’s
Consolidated Statements of Comprehensive Income
(Loss). The interest-only securities are included in
Agency mortgage-backed securities at fair value on the
accompanying Consolidated Statements of Financial
Condition.
securities
in
Revenue Recognition – The revenue recognition policy
by asset class is discussed below.
Agency Mortgage-Backed Securities and Agency
Debentures – The Company invests primarily in
Interest income from coupon payments is accrued based
on the outstanding principal amounts of the Investment
Securities and their contractual terms. Premiums and
the
discounts associated with
the purchase of
F-9
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Investment Securities are amortized or accreted into
interest income over the projected lives of the securities
using the interest method. The Company uses a third-
party supplied model to project prepayment speeds. The
Company’s prepayment speed projections incorporate
underlying loan characteristics (e.g., coupon, term,
original loan size, original loan to value, etc.) and
market data, including interest rate and home price
index forecasts. Adjustments are made for actual
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, 2014 and December 31,
2013.
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,
losses reported as a
with unrealized gains and
component of other comprehensive income (loss).
Equity securities classified as trading are reported at
fair value, based on market quotes, with unrealized
the Consolidated
gains and
Statements of Comprehensive Income (Loss) as Net
gains (losses) on trading assets. Dividends are recorded
in earnings based on the declaration date.
reported
losses
in
the
intent
to net settle
Derivative Instruments – The Company may use a
variety of derivative instruments to economically hedge
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”), TBA
securities with
(“TBA
derivatives”), options on TBA securities (“MBS
options”) and U.S. Treasury and Eurodollar 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. Derivatives are
accounted for
the Financial
in accordance with
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 Comprehensive Income (Loss). None of
transactions have been
the Company’s derivative
designated as hedging instruments for accounting
purposes.
F-10
Some derivative agreements contain provisions that
allow for netting or setting off by counterparty;
however, the Company elected to present related assets
and liabilities on a gross basis in the Consolidated
Statements of Financial Condition.
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
agreements may or may not be cleared through a
derivatives clearing organization (“DCO”). Uncleared
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 DCO’s market values.
Interest rate swaptions - Interest rate swaptions are
purchased/sold 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 interest rates in
the future. They are not centrally cleared. The
premium paid/received for interest rate swaptions is
reported as an asset/liability in the Consolidated
Statement of Financial Condition. The difference
between the premium and the fair value of the swaption
is reported in Net gains (losses) on trading assets in the
Consolidated Statements of Comprehensive Income
(Loss). If a swaption expires unexercised, the realized
gain (loss) on the swaption would be equal to the
premium received/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 - 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
(losses) on
the Consolidated
trading assets
Statements of Comprehensive Income (Loss).
in
MBS Options – MBS options are generally options on
TBA contracts, which help manage mortgage market
risks and volatility while providing the potential to
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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 Statements of Comprehensive Income
(Loss).
in
on
the
rates
interest
Futures Contracts - Futures contracts are derivatives
that track the prices of specific assets. Short sales of
futures contracts help mitigate the potential impact of
changes
portfolio
performance. The Company maintains margin accounts
which are settled daily with Futures Commission
Merchants (“FCMs”). 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 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 Statements of 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 recognized for the years
ended December 31, 2014, 2013 and 2012.
the Company reviews
Loan Loss Reserves – To determine if loan loss
allowances are required on investments in corporate
the monthly and/or
debt,
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
amounts
interest
(e.g.
and
would be recorded. No allowance for loan losses was
deemed necessary as of December 31, 2014 and 2013.
with
securities
Repurchase Agreements – The Company finances the
acquisition of a significant portion of its Agency
repurchase
mortgage-backed
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
Reverse
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 meet the criteria to 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
acquisitions
Capital
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 purchase prices of FIDAC, Merganser
and CreXus were allocated to the assets acquired,
including
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.
intangible assets, and
identifiable
that
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
impairment, a
there may be an
indicates
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
test for goodwill utilizes a
F-11
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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implied fair value of goodwill is compared to its
an
carrying value. The Company
impairment charge for the amount by which the
carrying amount of goodwill exceeds its fair value.
recognizes
Intangible assets with an estimated useful life are
amortized over their expected useful lives.
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
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 subject 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 (“TRSs”). 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
uncertain 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, 2014 and 2013.
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 Investments
Commercial Real Estate Loans – The Company's
commercial real estate loans are comprised of fixed-rate
and adjustable-rate loans. Commercial real estate loans
are designated as held for investment and are carried at
their outstanding principal balance, net of unamortized
origination fees and costs, premiums or discounts, less a
reserve for estimated losses if necessary. The difference
between the principal amount of a loan and proceeds at
acquisition is recorded as either a discount or premium.
Origination fees and costs, premiums and discounts are
amortized or accreted into interest income over the
estimated life of the loan.
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 unamortized origination fees and costs,
premiums or discounts, less a reserve for estimated
losses
fees and costs,
premiums and discounts are amortized or accreted into
interest
the
investment.
if necessary. Origination
the estimated
income over
life of
Allowance for Losses – The Company evaluates the
need for a loss reserve on its commercial real estate
loans and preferred equity interests held for investment
(collectively referred to as “CRE Debt and Preferred
Equity Investments”). 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,
F-12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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
inherently
future economic events, which are
subjective, the amounts ultimately realized may differ
materially from the carrying value as of the reporting
date.
Company’s
investment. The
The Company may be exposed to various levels of
credit risk depending on the nature of its investments
and the nature of the assets underlying the investments
and credit enhancements, if any, supporting its assets.
The Company’s core investment process includes
procedures related to the initial approval and periodic
monitoring of credit risk and other risks associated with
each
investment
underwriting procedures include evaluation of the
underlying borrowers’ ability to manage and operate
their respective 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, which may include, but is not limited to, net
operating income (“NOI”), debt service coverage ratios,
property debt yields (net cash flow or NOI divided by
the amount of outstanding indebtedness), loan per unit
and rent rolls relating to each of the Company’s CRE
Debt and Preferred Equity Investments, and may
consider other factors management deems important.
Management also reviews market pricing to determine
each borrower’s ability to refinance their respective
assets at the maturity of each 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 each subject property is located.
In connection with the quarterly surveillance review
process, loans are assigned an internal rating of
“Performing”, “Watch List”, “Defaulted-Recovery” or
“Impaired”. Loans that are deemed to be Performing
meet all present contractual obligations and do not
qualify for Watch List designation. Watch List loans
are defined as Performing loans that are significantly
lagging expectations and default
is considered
imminent. Defaulted–Recovery loans are currently in
default; however full recovery of contractual principal
and interest is expected. Impaired loans may or may not
be in default, impairment is anticipated, and a loan loss
provision has been recognized to reflect expected
losses.
F-13
Investments in Commercial Real Estate – Investments
in commercial real estate are carried at historical cost
less accumulated depreciation. Historical cost includes
all costs necessary to bring the asset to the condition
and location necessary for its intended use, including
financing during the construction period. Costs directly
related
to be business
combinations are expensed. Ordinary repairs and
maintenance which are not reimbursed by tenants are
expensed as
replacements and
improvements that extend the useful life of the asset are
capitalized and depreciated over their useful life.
to acquisitions deemed
incurred. Major
Investments in commercial 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
30-40 years
2-10 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”) or UCC/deed in
lieu of foreclosure (herein collectively referred to as a
foreclosure) constitutes a business and whether business
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.
Investments in commercial 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. Real estate held for sale 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 reclassified to income (loss) from
discontinued operations in the Consolidated Statements
of Comprehensive Income (Loss).
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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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 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 CRE Debt and Preferred Equity
Investments are amortized or accreted into interest
income over the projected lives of the CRE Debt and
Preferred Equity Investments using the interest method.
Broker Dealer Activities
In January 2014, RCap ceased its trading activity in
U.S. Treasury securities, derivatives and securities
borrowed and loaned transactions.
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
sufficient,
collateral is valued daily, and RCap will require
counterparties to deposit additional collateral, when
All reverse repurchase activities are
necessary.
transacted under master repurchase agreements that
give RCap the right, in the event of default, to liquidate
the underlying collateral
remains
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F-14
collateral held and
receivables and payables with the same counterparty.
instances,
in some
to offset
Securities
financings.
Securities Borrowed and Loaned Transactions – RCap
recorded securities borrowed and loaned transactions as
borrowed
collateralized
transactions required RCap to provide the counterparty
with collateral in the form of cash, or other securities.
RCap received collateral in the form of cash or other
securities for securities loaned transactions. RCap
monitored 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 were recorded at
contract value. For these transactions, the rebates
accrued by RCap were recorded as interest income or
expense.
U.S. Treasury Securities – RCap traded in U.S.
Treasury securities for its proprietary portfolio, which
consisted of long and short positions on U.S Treasury
notes and bonds. U.S. Treasury securities were
classified as trading investments and were recorded on
the trade date at cost. Changes in fair value were
reflected in Net gains (losses) on trading assets in the
Company’s Consolidated Statement of Comprehensive
Income (Loss). Interest income or expense on U.S.
Treasury notes and bonds was accrued based on the
outstanding principal amount of those investments and
their stated terms.
federal
into U.S.
Derivatives - RCap entered primarily
Treasury, Eurodollar,
funds, German
government and U.S. equity index and currency futures
and options contracts. RCap maintained a margin
account which was 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 were reflected in Net gains (losses) on trading
assets in the Company’s Consolidated Statements of
(Loss). Unrealized gains
Comprehensive
(losses) were excluded from net income (loss) in
arriving at cash flows from operating activities in the
Consolidated Statements of Cash Flows.
Income
Recent Accounting Pronouncements
The following table provides a brief description of
could
recent
potentially have a material effect on the Company’s
consolidated financial statements:
pronouncements
accounting
that
Description
Date of Adoption
Effect on the financial statements or other
significant matters
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Standard
Standards that are not yet adopted
ASU 2015-02 Consolidation (Topic 810)
Amendments to the Consolidation Analysis
ASU 2015-01 Income Statement -
Extraordinary and Unusual Items (Subtopic
225-20 )
ASU 2014-16 Derivatives and Hedging (Topic
815) Determining Whether the Host Contract in
a Hybrid Financial Instrument Issued in the
Form of a Share is More Akin to Debt or Equity
ASU 2014-15, Presentation of Financial
Statements – Going Concern (Subtopic 205-
04) Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going
Concern
ASU 2014-13, Consolidation (Topic 810)
Measuring the Financial Assets and the
Financial Liabilities of a Consolidated
Collateralized Financing Entity .
ASU 2014-11, Repurchase-to-Maturity
Transactions, Repurchase Financings, and
Disclosure .
This update affects the following areas of the consolidation
analysis: limited partnerships and similar entities, evaluation of fees
paid to a decision maker or service provider as a variable interest and
in determination of the primary beneficiary, effect of related parties
on the primary beneficiary determination and for certain investment
funds.
This update eliminates from GAAP the concept of extraordinary
items.
This ASU provides additional guidance for evaluating whether
conversion rights, redemption rights, voting rights, liquidation rights
and dividend payment preferences and other features embedded in a
share, including preferred stock, contain embedded derivatives
requiring bifurcation. The update requires that an entity determine
the nature of the host contract by considering all stated and implied
terms and features in a hybrid instrument.
This ASU requires management to evaluate whether there are
conditions or events, considered in the aggregate, that raise
substantial doubt about the Company’s ability to continue as a
going concern within one year after the date the financial statements
are issued.
This Update provides a practical expedient to measure the fair value
of the financial assets and financial liabilities of a consolidated
collateralized financing entity, which the reporting entity has elected
to or is required to measure on a fair value basis.
This update makes limited amendments to the guidance in ASC 860
on accounting for certain repurchase agreements.
ASU 2014-09, Revenue from Contracts with
Customers
ASU 2014-08, Presentation of Financial
Statements (Topic 205) and Property, Plant
and Equipment (Topic 360) Reporting
Discontinued Operations and Disclosures of
Disposals of Components of an Entity
ASU 2014-04 Receivables–Troubled Debt
Restructurings by Creditors, Reclassification
of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure
Standards that were adopted
ASU 2014-17 Business Combinations (Topic
805): Pushdown Accounting
ASU 2013-02, Comprehensive Income:
Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income
ASU 2011-11, Balance Sheet: Disclosures
about Offsetting Assets and Liabilities
This guidance applies to contracts with customers to transfer goods
or services and contracts to transfer nonfinancial assets unless
those contracts are within the scope of other standards (for example,
lease transactions).
This ASU raises the threshold for a disposal to be treated as
discontinued operations.
This Update 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
This amendment provides an acquired entity with the option to
apply push down accounting in its separate financial statements
upon occurrence of an event in which an acquirer obtains control of
the acquired entity.
This update requires the provision of information about the amounts
reclassified out of accumulated other comprehensive income by
component. In addition, it requires presentation of 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
Under this update, the Company is required to disclose both gross
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 agreement similar to a
master netting arrangement. The scope includes derivatives, sale
and repurchase agreements and reverse sale and repurchase
agreements and securities borrowing and securities lending
arrangements.
F-15
January 1, 2016 (early
adoption permitted)
Not expected to have a significant impact on the
consolidated financial statements
January 1, 2016 (early
adoption permitted)
Not expected to have an impact on the
consolidated financial statements.
January 1, 2016 (early
adoption permitted)
Not expected to have an impact on the
consolidated financial statements.
January 1, 2017 (early
adoption permitted)
Not expected to have an impact on the
consolidated financial statements.
January 1, 2015 (early
adoption permitted)
Not expected to have an impact on the
consolidated financial statements.
January 1, 2015,
except for the
disclosure
requirements for
transactions
accounted for as
secured borrowings,
which are required to
be presented for
interim periods
beginning after
March 15, 2015
January 1, 2017
Will impact disclosures only and will not have a
significant impact on the consolidated financial
statements.
Not expected to have a significant impact on the
consolidated financial statements.
January 1, 2015 (early
adoption permitted)
Not expected to have a significant impact on the
consolidated financial statements.
January 1, 2015
Not expected to have a significant impact on the
consolidated financial statements.
November 18, 2014 Did not have a significant impact on the
consolidated financial statements.
January 1, 2014
Did not have a significant impact on the
consolidated financial statements.
January 1, 2014
Did not have a significant impact on the
consolidated financial statements.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. 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, 2014 and 2013 which were carried at their fair value:
December 31, 2014
Freddie Mac
Fannie Mae
Ginnie Mae
(dollars in thousands)
Total
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
$
$
$
$
27,906,221
1,951,798
(8,985)
29,849,034
313,761
(322,094)
29,840,701
47,979,778
3,396,368
(8,857)
51,367,289
660,230
(424,800)
51,602,719
97,000
20,560
(358)
117,202
8,010
(3,376)
121,836
$
$
$
$
Fixed Rate
$
Adjustable Rate
(dollars in thousands)
$
$
Total
78,250,313
847,615
(732,533)
78,365,395
3,083,212
134,386
(17,737)
3,199,861
$
$
$
81,333,525
982,001
(750,270)
81,565,256
December 31, 2013
Freddie Mac
Fannie Mae
Total
$
$
$
Ginnie Mae
(dollars in thousands)
$
$
$
$
$
24,458,925
1,627,966
(9,533)
26,077,358
227,423
(1,267,106)
25,037,675
68,784,424
538,556
(3,040,153)
66,282,827
43,564,657
2,970,813
(11,568)
46,523,902
456,057
(1,781,683)
45,198,276
3,964,277
154,769
(12,924)
4,106,122
Fixed Rate
$
Adjustable Rate
(dollars in thousands)
$
$
Total
$
$
$
120,739
27,085
(383)
147,441
9,845
(4,288)
152,998
72,748,701
693,325
(3,053,077)
70,388,949
75,982,999
5,368,726
(18,200)
81,333,525
982,001
(750,270)
81,565,256
68,144,321
4,625,864
(21,484)
72,748,701
693,325
(3,053,077)
70,388,949
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
the
payments and prepayments of principal on
underlying mortgages. The following table summarizes
the Company’s Agency mortgage-backed securities as
of December 31, 2014 and 2013, according to their
estimated weighted average life classifications:
Weighted Average Life
Less than one year
Greater than one year through five years
Greater than five years through ten years
Greater than ten years
Total
December 31, 2014
December 31, 2013
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
(dollars in thousands)
$
$
$
43,248
42,222,114
39,018,833
281,061
81,565,256
42,831
41,908,586
39,098,352
283,756
81,333,525
65,584
50,046,013
14,915,716
5,361,636
70,388,949
$
64,561
51,710,059
15,292,973
5,681,108
72,748,701
$
$
$
$
F-16
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The weighted average lives of the Agency mortgage-
backed securities at December 31, 2014 and 2013 in the
table above are based upon projected principal
prepayment rates. The actual weighted average lives of
the Agency mortgage-backed securities could be longer
or shorter than projected.
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, 2014 and 2013.
December 31, 2014
December 31, 2013
Estimated
Fair Value
Gross
Unrealized
Losses
Less than 12 Months
12 Months or More
Total
$
4,613,599
35,175,194
39,788,793
$
(36,959)
$
(713,311)
$
(750,270)
Estimated
Number of
Securities
Fair Value
(dollars in thousands)
205
302
507
47,677,197
6,102,283
53,779,480
$
$
Gross
Unrealized
Losses
Number of
Securities
(2,569,474)
$
583
(483,603) 55
638
$
(3,053,077)
Agency
principal balance of specific Agency mortgage-backed
securities.
interest-only mortgage-backed
securities in the Company’s portfolio as of December
31, 2014 and 2013 had net unrealized gains (losses) of
($8.0) million and $78.1 million and an amortized cost
of $1.2 billion and $1.0 billion, respectively.
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
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-
than-temporarily
the Company
impaired because
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, 2014, the
Company disposed of $20.6 billion of Agency
mortgage-backed securities, resulting in a realized gain
of $179.7 million. 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. 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
F-17
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Cash consideration transferred
Fair value of equity interest in CreXus held before the business combination
Recognized amounts of identifiable assets acquired and liabilities assumed
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
$
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 recognized
additional goodwill of $0.4 million during the second
half of 2013. In management’s opinion, the goodwill
represents the synergies that resulted from integrating
CreXus’ commercial real estate platform into the
Company, which
is
complementary to its existing business and return
profile.
the Company
believes
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
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 expensed 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 Comprehensive Income (Loss).
6.
COMMERCIAL REAL ESTATE INVESTMENTS
At December 31, 2014 and 2013, commercial real estate investments were composed of the following:
CRE Debt and Preferred Equity Investments
December 31, 2014
December 31, 2013
Outstanding
Principal
Carrying
Value (1)
Percentage
of Loan
Portfolio(2)
(dollars in thousands)
Outstanding
Principal
Carrying
Value (1)
Percentage
of Loan
Portfolio(2)
Senior mortgages
Senior securitized mortgages(3)
Subordinate notes
Mezzanine loans
Preferred equity
Total
$
$
384,304
399,541
-
522,474
214,653
1,520,972
383,895
398,634
-
522,731
212,905
1,518,165
$
$
25.2%
26.3%
0.0%
34.4%
14.1%
100.0%
$
669,512
-
41,059
626,883
249,769
1,587,223
$
667,299
-
41,408
628,102
247,160
$
1,583,969
42.2%
0.0%
2.6%
39.5%
15.7%
100.0%
$
(1) Carrying value includes unamortized origination fees of $3.0 million and $4.9 million as of December 31, 2014 and December 31, 2013, respectively.
(2) Based on outstanding principal.
(3) Assets of consolidated VIE.
F-18
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
December 31, 2014
Senior
Mortgages
Senior
Securitized
Mortgages (1)
Subordinate
Notes
Mezzanine
Loans
Preferred
Equity
Total
Beginning balance
Originations & advances (principal)
Principal payments
Sales (principal)
Amortization & accretion of (premium) discounts
Net (increase) decrease in origination fees
Amortization of net origination fees
Transfers
Allowance for loan losses
Net carrying value
Beginning balance
Originations & advances (principal)
Principal payments
Sales (principal)
Amortization & accretion of (premium) discounts
Net (increase) decrease in origination fees
Amortization of net origination fees
Transfers
Allowance for loan losses
Net carrying value
Assets of consolidated VIE.
(1)
$
$
667,299
127,112
(12,756)
-
(138)
(2,427)
2,783
(397,978)
-
383,895
(dollars in thousands)
$
$
41,408
-
(41,059)
-
(349)
-
-
-
-
$
-
628,102
122,742
(227,151)
-
(1,093)
(478)
609
-
-
522,731
$
-
-
-
-
-
(116)
772
397,978
-
398,634
$
247,160
-
(35,116)
-
108
-
753
-
-
212,905
$
1,583,969
249,854
(316,082)
-
(1,472)
(3,021)
4,917
-
-
$
1,518,165
$
$
$
Senior
Mortgages
Senior
Securitized
Mortgages (1)
$
101,473
590,039
(24,333)
(13,750)
(109)
$
-
-
-
-
-
December 31, 2013
Subordinate
Notes
Mezzanine
Loans
Preferred
Equity
Total
(dollars in thousands)
$
41,851
$
-
(235)
-
547,068
184,704
(90,431)
-
$
39,060
210,000
-
-
$
729,452
984,743
(114,999)
(13,750)
(208)
(484)
85
151
1,328
12,500
-
667,299
$
-
-
-
-
$
-
-
-
-
-
41,408
$
(285)
30
(12,500)
-
628,102
$
(2,118)
133
-
-
247,160
$
(716)
(2,252)
1,491
-
-
$
1,583,969
384,304
399,541
-
522,474
214,653
1,520,972
669,512
41,059
626,883
249,769
1,587,223
Internal CRE Debt and Preferred Equity Investment Ratings
Investment Type
Outstanding Principal
Percentage of CRE Debt and
Preferred Equity Portfolio
December 31, 2014
Performing
(dollars in thousands)
Internal Ratings
Watch List
Defaulted-Recovery
Workout
$
$
$
$
25.2%
26.3%
0.0%
34.4%
14.1%
100.0%
$
371,331
390,291
-
522,474
214,653
1,498,749
$
-
$
9,250
-
-
-
9,250
$
12,973
-
-
-
-
12,973
(2)
-
$
-
-
-
-
$
-
Senior mortgages
Senior securitized mortgages(1)
Subordinate notes
Mezzanine loans
Preferred equity
Investment Type
Outstanding Principal
Percentage of CRE Debt and
Preferred Equity Portfolio
December 31, 2013
Performing
(dollars in thousands)
Internal Ratings
Watch List
Defaulted-Recovery
Workout
Senior mortgages
Subordinate notes
Mezzanine loans
Preferred equity
$
$
(1) Assets of consolidated VIE.
(2) Relates to one loan on nonaccrual status.
(3) Includes one loan on non-accrual status with a carrying value of $12.9 million.
Real Estate Acquisitions
In November 2014, a joint venture, in which the
Company has a 90% interest, acquired eleven retail
$
644,039
41,059
620,883
249,769
1,555,750
$
-
$
-
-
-
$
-
$
$
25,473
-
6,000
-
31,473
(3)
-
$
-
-
-
$
-
properties located in New York, Ohio and Georgia.
The purchase price was funded with cash and a new
$104.0 million, ten-year, 4.03% fixed-rate interest-
only mortgage loan.
42.2%
2.6%
39.5%
15.7%
100.0%
F-19
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The following table summarizes acquisitions of real
estate held for investment during the year ended
December 31, 2014:
Date of Acquisition
Type
Location
(dollars in thousands)
Purchase
Price
Remaining Lease
Term (Years) (1)
April 2014
June 2014
November 2014
Single-tenant retail
Multi-tenant retail
Multi-tenant retail
Tennessee
Virginia
New York, Ohio, Georgia
$
$
$
19,000
17,743
154,000
8
7
4.6
(1) Does not include extension options.
The aforementioned acquisitions were accounted for
using the acquisition method of accounting. The
Company incurred approximately $2.3 million of
transaction costs in connection with the acquisitions,
the year ended
which were expensed during
December 31, 2014 and are reflected in Other general
and administrative expenses in the accompanying
Consolidated Statements of Comprehensive Income
(Loss).
The following table presents the aggregate allocation
of the purchase price:
Purchase Price Allocation:
Land
Buildings
Site improvements
Tenant Improvements
Real estate held for investment
Intangible assets (liabilities):
Leasehold intangible assets
Above market lease
Below market lease value
Total purchase price
Tennessee
Virginia
Joint Venture
Total
(dollars in thousands)
$
3,503
11,960
1,349
-
16,812
$
6,394
10,862
1,184
-
18,440
4,288
-
(2,100)
19,000
$
3,218
-
(3,915)
17,743
$
$
21,581
97,133
12,952
9,601
141,267
22,555
5,463
(15,285)
154,000
$
$
31,478
119,955
15,485
9,601
176,519
30,061
5,463
(21,300)
190,743
$
The weighted average amortization period
for
intangible assets and liabilities is 4.25 years. Above
market leases and leasehold intangible assets are
included in Other assets and below market leases are
included in Accounts payable and other liabilities in the
Consolidated Statements of Financial Condition. The
Total Commercial Real Estate Investment
fair value of the 10% non-controlling interest in the
joint venture at the acquisition date was $15.4 million.
The fair value of the acquisition and the related non-
controlling interest was determined based on the
purchase price.
December 31, 2014
December 31, 2013
(dollars in thousands)
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
F-20
$
$
38,117
176,139
214,256
(4,224)
210,032
-
210,032
1,518,165
1,728,197
6,639
31,100
37,739
(877)
36,862
23,270
60,132
1,583,969
1,644,101
$
$
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Depreciation expense was $3.2 million and $0.9
million for the year ended December 31, 2014 and
2013, respectively and is included in General and
administrative expenses in the Consolidated Statements
of Comprehensive Income (Loss). The table below
presents the minimum future rentals on noncancelable
leases of the Company’s commercial real estate
investments as of December 31, 2014.
The minimum rental amounts due under the leases are
generally either subject to scheduled fixed increases or
adjustments. The leases generally also require that the
tenants reimburse us for certain operating costs.
Approximate future minimum rents to be received over
the next five years and thereafter for non-cancelable
operating leases in effect at December 31, 2014 for the
consolidated properties, including consolidated joint
venture properties are as follows (in thousands):
Rental Income
De ce mber 31, 2014
(dollars in thousands)
$
2015
2016
2017
2018
2019
Later years
20,299
18,285
15,661
13,388
11,050
51,087
129,770
$
Mortgage loans payable as of December 31, 2014 and 2013, were as follows:
Property
Mortgage
Carrying Value
Mortgage
Principal
Interest Rate
Fixed/Floating
Rate
Maturity
Date
Priority
December 31, 2014
Joint Venture
Tennessee
Virginia
Arizona
Nevada
$
$
103,950
12,350
11,025
16,709
2,519
146,553
103,950
12,350
11,025
16,600
2,505
146,430
$
$
(dollars in thousands)
4.03%
4.01%
3.58%
3.50%
Fixed
Fixed
Fixed
Fixed
Floating (1)
3.45%
9/6/2019 First liens
6/6/2019 First liens
12/6/2024 First liens
1/1/2017 First liens
3/29/2017 First liens
(1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).
Property
Mortgage
Carrying Value
Mortgage
Principal
Interest Rate
Fixed/Floating
Rate
Maturity
Date
Priority
December 31, 2013
Arizona
Nevada
$
16,762
$
16,600
2,570
2,550
3.45%
$
19,332
$
19,150
(dollars in thousands)
3.50%
Fixed
Floating (1)
1/1/2017 First liens
3/29/2017 First liens
(1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).
F-21
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The following table details future mortgage loan principal payments as of December 31, 2014:
Years Ending December 31,
Mortgage Loan Principal
Payments
(dollars in thousands)
$
2015
2016
2017
2018
2019
Later years
VIE
Securitization
January 2014,
In
the Company closed NLY
Commercial Mortgage Trust 2014-FL1 (the “Trust”), a
$399.5 million securitization financing transaction
which provides permanent, non-recourse financing
collateralized by floating-rate first mortgage debt
investments originated or co-originated by
the
Company and is not subject to margin calls. A total of
$260.7 million of investment grade bonds were issued
by the Trust, representing an advance rate of 65.3% at
a weighted average coupon of LIBOR plus 1.74% at
closing. The Company is using the proceeds to
originate commercial real estate investments. The
Company retained bonds rated below investment grade
and the only interest-only bond issued by the Trust,
which are referred to as the subordinate bonds.
The Company incurred approximately $4.3 million of
costs in connection with the securitization that have
been capitalized and are being amortized to interest
expense. Deferred financing costs are included in
the accompanying Consolidated
in
Other assets
Statements of Financial Condition.
to
those payments
The Trust is structured as a pass-through entity that
receives principal and interest on the underlying
the
collateral and distributes
certificate holders. The Trust is a VIE and the
Company is the primary beneficiary as a result of its
ability to replace the special servicer without cause
through its ownership interest in the subordinate bonds.
The Company’s exposure to the obligations of the VIE
is generally limited to the Company’s investment in the
Trust. Assets of the Trust may only be used to settle
obligations of the Trust. Creditors of the Trust have no
recourse to the general credit of the Company. The
Company is not contractually required to provide and
has not provided any form of financial support to the
334
399
18,372
-
23,375
103,950
146,430
$
Trust. No gain or loss was recognized upon initial
consolidation of the Trust.
As of December 31, 2014 the carrying value of the
Trust’s assets was $398.6 million, net of $0.9 million
of unamortized origination fees, which are included in
Commercial real estate debt and preferred equity in the
accompanying Consolidated Statements of Financial
Condition. As of December 31, 2014, the carrying
value of the Trust’s liabilities was $260.7 million,
classified as Securitized debt in the accompanying
Consolidated Statements of Financial Condition.
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.
identical assets or
GAAP requires classification of financial 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
liabilities
(Level 1) and the lowest priority to unobservable inputs
(Level 3). If the inputs used to measure the financial
instruments fall within different levels of the hierarchy,
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:
F-22
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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 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.
The following is a description of the valuation
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 observability of inputs determining the
appropriate level.
U.S. Treasury securities and investment 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 or
internally estimated prices for similar assets using
internal models. The Company incorporates common
spread
market pricing methods,
including
a
to
the Treasury curve as well as
measurement
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
market. Management
its
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
independent sources such as quoted prices for TBA
securities.
indirectly corroborates
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.
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S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
December 31, 2014
(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:
$ - $ - $ - $ -
- 81,565,256
- 81,565,256
- 1,368,350
- 1,368,350
- 143,045
143,045
- 75,225
- 75,225
- 5,499
5,382
117
$ - $ 83,157,375
$ 83,014,213
$ 143,162
-
U.S. Treasury securities sold, not yet purchased
Interest rate swaps
Other derivatives
Total Liabilities
$ - $ - $ - $ -
- 1,608,286
- 1,608,286
- 8,027
3,769 4,258
$ - $ 1,616,313
$ 3,769 $ 1,612,544
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
-
-
139,447
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
$ 1,918,394
- 1,141,828
439
55,079
$ 1,918,833 $ 1,196,907
$ - $ - $ 1,918,394
- 1,141,828
- 55,518
$ - $ 3,115,740
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
different market
estimation
methodologies could have a material effect on the
estimated fair value amounts.
the amount
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
The estimated fair value of commercial real estate debt
into
and
investments
preferred
equity
takes
consideration changes in credit spreads and interest
rates from the date of origination or purchase to the
reporting date. The fair value also reflects consideration
of asset-specific maturity dates and other items that
could have an impact on the fair value as of the
reporting date.
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.
F-24
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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 carrying value of participation sold is based on the
loan’s amortized cost. The fair value of participation
sold is based on the fair value of the underlying related
commercial loan.
The fair value of convertible senior notes is determined
using end of day quoted prices in active markets.
The fair value of securitized debt of consolidated VIE is
determined using the average of external vendor pricing
services.
The following table summarizes the estimated fair
value for financial assets and liabilities as of December
31, 2014 and 2013.
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
Securitized debt of consolidated VIE
Mortgages payable
Participation sold
Interest rate swaps
Other derivatives
December 31, 2014
December 31, 2013
Level in
Fair Value
Hierarchy
Carrying
Value
Fair Value
Carrying
Value
(dollars in thousands)
Fair Value
1
1
1
1
2
2
1
3
2
2
1,2
1
1,2
1
1
2
2
3
2
1,2
$ 1,741,244 $ 1,741,244
100,000
100,000 100,000
- 2,582,893
- 1,117,915
81,565,256 70,388,949
1,368,350 2,969,885
143,045 139,447
1,528,444 1,583,969
166,056 117,687
75,225 559,044
5,499 146,725
$ 552,436 $ 552,436
100,000
2,582,893
1,117,915
70,388,949
2,969,885
139,447
1,581,836
118,362
559,044
146,725
-
-
81,565,256
1,368,350
143,045
1,518,165
166,464
75,225
5,499
$ - $ - $ 1,918,394 $ 1,918,394
62,134,133
71,587,222 61,781,001
71,361,926
2,527,668
- 2,527,668
-
870,199
863,470 825,262
262,061
-
19,240
146,611 19,332
14,050
13,655 14,065
1,141,828
1,608,286 1,141,828
55,518
8,027 55,518
845,295
260,700
146,553
13,693
1,608,286
8,027
-
8.
SECURED FINANCING
The Company had outstanding $71.4 billion and $61.8
billion of repurchase agreements with weighted average
borrowing rates of 1.62% and 2.33%, after giving effect
to the Company’s interest rate swaps, and weighted
average remaining maturities of 141 days and 204 days
as of December 31, 2014 and 2013, respectively.
At December 31, 2014 and 2013, the repurchase
agreements had the following remaining maturities and
weighted average rates:
F-25
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S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days(1)
Total
December 31, 2014
December 31, 2013
Repurchase
Agreements
Weighted
Average Rate
Repurchase
Agreements
Weighted
Average Rate
$ -
28,354,167
17,336,469
4,040,677
2,945,495
18,685,118
$ 71,361,926
0.00% $ -
21,171,574
0.35%
13,373,921
0.43%
3,592,266
0.38%
4,010,334
0.50%
19,632,906
1.24%
0.61% $ 61,781,001
0.00%
0.36%
0.43%
0.44%
0.52%
1.29%
0.68%
(1) Approximately 15% and 16% of the total repurchase agreements had a remaining maturity over 1 year as of December 31, 2014 and 2013,
respectively.
and
reverse
agreements
Repurchase
repurchase
agreements with the same counterparty and the same
the Consolidated
maturity are presented net
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
reverse
amounts of
repurchase agreements as presented in the Consolidated
Statements of Financial Condition as of December 31,
2014 and 2013.
repurchase agreements and
December 31, 2014
December 31, 2013
Reverse Repurchase
Agreements
Repurchase
Agreements
Reverse Repurchase
Agreements
Repurchase
Agreements
(dollars in thousands)
Gross Amounts
Amounts Offset
Netted Amounts
$
$
$
$
700,000
(600,000)
100,000
71,961,926
(600,000)
71,361,926
2,524,980
(2,424,980)
100,000
64,205,981
(2,424,980)
61,781,001
$
$
$
$
9. DERIVATIVE INSTRUMENTS
strategy,
risk management
In connection with the Company’s investment/market
the Company
rate
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 values 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 of 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,
the Company could have difficulty obtaining its
Investment Securities pledged as collateral as well as
receiving payments in accordance with the terms of the
derivative contracts.
The table below summarizes fair value information
about our derivative assets and
liabilities as of
December 31, 2014 and 2013:
F-26
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Derivatives Instruments
Balance Sheet Location
Assets:
Interest rate swaps
Interest rate swaptions
TBA derivatives
MBS options
Futures contracts
Liabilities:
Interest rate swaps
Interest rate swaptions
TBA derivatives
MBS options
Futures contracts
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, 2014 December 31, 2013
(dollars in thousands)
$ 75,225 $ 559,044
110,361
5,382
- 20,693
- 12,184
117 3,487
$ 80,724 $ 705,769
1,608,286 1,141,828
- 24,662
4,258 13,779
- 16,638
3,769
439
$ 1,616,313 $ 1,197,346
The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2014 and
2013:
Maturity
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted Average
December 31, 2014
Current
Notional (1)
Weighted Average Pay
Rate (2) (3)
(dollars in thousands)
Weighted Average
Receive Rate (2)
Weighted Average
Years to Maturity (2)
$
$
2,502,505
11,138,000
13,069,200
4,751,800
31,461,505
1.63%
2.06%
2.67%
3.58%
2.49%
0.17%
0.22%
0.23%
0.20%
0.22%
2.64
5.18
8.57
19.53
8.38
(1) Notional amount includes $500.0 million in forward starting pay fixed swaps.
(2)
(3) Weighted average fixed rate on forward starting pay fixed swaps was 3.25%.
Excludes forward starting swaps.
Maturity
Current
Notional
Weighted Average Pay
Rate
Weighted Average
Receive Rate
Weighted Average
Years to Maturity
December 31, 2013
(dollars in thousands)
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted Average
$
$
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, 2014
and 2013:
December 31, 2014
Current Underlying
Notional
Weighted Average
Underlying Pay
Rate
Long
Short
$
$
-
1,750,000
2.88%
-
December 31, 2013
Current Underlying
Notional
Weighted Average
Underlying Pay
Rate
Long
Short
$
$
5,150,000
1,000,000
3.07%
3M LIBOR
Weighted Average
Underlying Receive
Rate
(dollars in thousands)
3M LIBOR
-
Weighted Average
Underlying Receive
Rate
(dollars in thousands)
3M LIBOR
2.83%
Weighted Average
Underlying Years to
Maturity
Weighted
Average Months
to Expiration
9.17
-
3.59
-
Weighted Average
Underlying Years to
Maturity
Weighted
Average Months
to Expiration
10.10
5.96
4.26
23.71
F-27
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S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The following table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 2014 and
2013:
Purchase and sale contracts for
derivative TBAs
Purchase contracts
Sale contracts
Net TBA derivatives
Purchase and sale contracts for
derivative TBAs
Purchase contracts
Sale contracts
Net TBA derivatives
December 31, 2014
Notional
Implied Cost Basis
Implied Market Value
Net Carrying Value
(dollars in thousands)
$
-
(375,000) (375,430) (379,688) (4,258)
$ (375,000) $ (375,430) $ (379,688) $ (4,258)
$
-
$
-
$
-
December 31, 2013
Notional
Implied Cost Basis
Implied Market Value
Net Carrying Value
(dollars in thousands)
$
2,625,000
$
2,722,324
(3,875,000) (3,923,213) (3,904,941)
$ (1,250,000) $ (1,189,531) $ (1,182,617)
$
2,733,682
$
(11,357)
18,271
$ 6,914
The Company presents derivative contracts on a gross
basis on the Consolidated Statements of Financial
Condition. Derivative contracts may contain legally
enforceable provisions that allow for netting or setting
off receivables and payables with each counterparty.
following
tables present
information about
The
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, 2014 and 2013, respectively.
December 31, 2014
Assets:
Interest rate swaps, at fair value
Interest rate swaptions, at fair value
TBA derivatives, at fair value
MBS options, at fair value
Futures contracts, at fair value
Liabilities:
Interest rate swaps, at fair value
Interest rate swaptions, at fair value
TBA derivatives, at fair value
MBS options, at fair value
Futures contracts, at fair value
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Amounts Eligible for Offset
(dollars in thousands)
$ 75,225 $ (66,180)
5,382
$ - $ 9,045
- 5,382
-
- -
- - - -
- -
-
-
117 (117)
4,258
$ 1,608,286 $ (66,180) $ (869,302)
$ 672,804
- - - -
- - 4,258
- - - -
- 3,652
3,769 (117)
December 31, 2013
Assets:
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Amounts Eligible for Offset
(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
Futures contracts, at fair value
$ 559,044 $ (408,553)
110,361 (24,662)
20,693 (9,775)
12,184 (3,292)
3,487 (439)
$ - $ 150,491
- 85,699
- 10,918
- 8,892
- 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
Futures contracts, at fair value
$ 1,141,828 $ (408,553)
24,662
(24,662)
13,779 (9,775)
16,638 (3,292)
439 (439)
$ - $ 733,275
- -
- 4,004
- 13,346
- -
F-28
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Realized Gains (Losses) on
Interest Rate Swaps (1)
Location on Consolidated Statements of Comprehensive Income (Loss)
Realized Gains (Losses) on
Termination of Interest Rate Swaps
Unrealized Gains (Losses) on
Interest Rate Swaps
(dollars in thousands)
For the Years Ended:
December 31, 2014
December 31, 2013
December 31, 2012
Interest expense related to interest rate swaps is recorded in realized gains (losses) on interest rate swaps on the Consolidated Statements of Operations and
$
$
$
$
$
$
$
$
$
(948,755)
2,002,200
(32,219)
(779,333)
(101,862)
(2,385)
(825,360)
(908,294)
(893,769)
(1)
Comprehensive Income (Loss).
As of December 31, 2014,
the swap portfolio,
excluding forward starting swaps, had a weighted
average pay rate of 2.49% and a weighted average
receive rate of 0.22%. The weighted average pay rate at
December 31, 2013 was 2.14% and the weighted
average receive rate was 0.20%.
the
The effect of other derivative contracts on
Company’s Consolidated Statements of Comprehensive
Income (Loss) is as follows:
Derivative Instruments
Re alize d Gain (Loss) Unre alize d Gain (Loss) Ne t Gains (Losse s) on Trading Assets
Ye ars Ended De cembe r 31, 2014
Net TBA derivatives (1)
Net interest rate swaptions
U.S. Treasury futures
$
$
$
(dollars in thousands)
(60,091)
(121,345)
(30,056)
$
$
$
(12,763)
(20,167)
(6,701)
$
$
$
$
(72,854)
(141,512)
(36,757)
(251,123)
Year Ende d December 31, 2013
Derivative Instruments
Re alize d Gain (Loss) Unre alize d Gain (Loss)
(dollars in thousands)
Amount of Gain/(Loss) Recognize d in
Ne t Gains (Losse s) on Trading Assets
Net TBA derivatives (1)
Net interest rate swaptions
U.S. Treasury futures
$
$
33,728
(2,697)
$
$
6,630
(15,467)
$
$
40,358
(18,164)
$
(38,514)
$
(2,851)
$
$
(41,365)
(19,171)
(1) Includes options on TBA securities.
to
to
Certain of the Company’s derivative contracts are
subject
International Swaps and Derivatives
Association Master Agreements or other similar
agreements which may contain provisions that grant
the
counterparties certain rights with respect
applicable agreement upon the occurrence of certain
events such as (i) a decline in stockholders’ equity 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), or another default
under the agreement, the counterparty to the applicable
agreement has a right to terminate the agreement in
accordance with its provisions. The aggregate fair
the
value of all derivative
aforementioned features that are in a net liability
position at December 31, 2014 was approximately $1.5
instruments with
billion, which represents the maximum amount the
Company would be required to pay upon termination.
This amount is fully collateralized.
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, 2014. 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
into shares of Common Stock at a
convertible
conversion rate for each $1,000 principal amount of
4% Convertible Senior Notes. The initial conversion
F-29
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
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, 2014 was 88.7389, which is equivalent to a
conversion price of approximately $11.2690 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
The
the contingent beneficial
conversion feature was $110.5 million and $93.2
million at December 31, 2014 and 2013, respectively,
which is reflected in Additional paid-in capital on the
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, 2014 and 2013 of $10.8
million and $26.9 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 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, 2014 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.
an
included
At issuance, the Company determined that the 5%
Convertible Senior Notes
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, 2014 and 2013, $1.5
the
million and $5.4 million,
unamortized discount had not been reflected in interest
expense.
respectively, of
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
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 Convertible Preferred Stock,
12,650,000 shares 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.
(A) Common Stock
At December 31, 2014 and 2013, the Company had
issued and outstanding 947,643,079 and 947,432,862
shares of common stock, with a par value of $0.01 per
share.
No options were exercised during the year ended
December 31, 2014. 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.
F-30
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
During the year ended December 31, 2014, we raised
$2.4 million, by issuing 210,000 shares, through the
Direct Purchase and Dividend Reinvestment Program.
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, 2012, 1.3 million
shares of Series B Preferred Stock were converted into
4.0 million shares of common stock.
In October 2012, the Company announced that its
board of directors
(“Board of Directors”) had
authorized the repurchase of up to $1.5 billion of its
outstanding common shares over a 12 month period.
All common shares purchased were part of a publicly
announced plan in open-market transactions. The
repurchase plan expired in October 2013. There were
no purchases made by the Company under this
repurchase plan during the year ended December 31,
2013.
In March 2012, the Company entered into six separate
(“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 Securities, Inc. (together, the Agents).
Pursuant to the terms of the Distribution Agency
Agreements, the Company may sell from time to time
through
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, 2014 and 2013.
its sales agents, up
the Agents, as
(B) Preferred Stock
At December 31, 2014 and 2013, 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
REIT). Through December 31, 2014, the Company had
declared and paid all required quarterly dividends on
the Series A Preferred Stock.
At December 31, 2014 and 2013, 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 entitled to receive any dividends. The Series C
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
the Company). Through
change of control of
December 31, 2014, the Company had declared and
paid all required quarterly dividends on the Series C
Preferred Stock.
At December 31, 2014 and 2013, 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 to the Company’s right
under limited circumstances to redeem the Series D
Preferred Stock earlier
its
qualification as a REIT or under limited circumstances
related to a change of control of the Company).
Through December 31, 2014, the Company had
declared and paid all required quarterly dividends on
the Series D Preferred Stock.
to preserve
in order
(C) Distributions to Stockholders
During the year ended December 31, 2014, the
Company declared dividends to common stockholders
totaling $1.1 billion, or $1.20 per common share, of
which $284.3 million, or $0.30 per common share, was
paid to stockholders on January 29, 2015. During the
F-31
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
year ended December 31, 2014, the Company 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, 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
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, 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.
12.
EXPENSE
INTEREST INCOME AND INTEREST
The table below presents the components of the
Company’s interest income and interest expense for the
years ended December 31, 2014, 2013 and 2012.
Interest income:
Investment Securities
Commercial investment portfolio(1)
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
Securitized debt of consolidated VIE
Participation sold
Total interest expense
Net interest income
(1) Includes commercial real estate debt, preferred equity and corporate debt.
$
$
December 31,
2014
Years Ended December 31,
December 31,
2013
(dollars in thousands)
2,788,354
$
$
2,467,783
December 31,
2012
161,837
1,329
114
1,335
249
2,632,647
417,194
87,293
1,076
95
6,350
651
512,659
2,119,988
81,445
29,081
8,788
10,459
435
2,918,562
530,170
67,057
20,235
6,785
-
467
624,714
2,293,848
$
$
3,217,648
7,621
17,222
9,903
6,218
533
3,259,145
577,243
67,221
15,114
7,594
-
-
667,172
2,591,973
13.
GOODWILL
At December 31, 2014 and 2013, goodwill totaled
$94.8 million. 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.
14.
SHARE
NET INCOME (LOSS) PER COMMON
The following table presents a reconciliation of net
income (loss) and shares used in calculating basic and
diluted net income (loss) per share for the years ended
December 31, 2014, 2013 and 2012.
F-32
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
December 31, 2014
For the Years Ended
December 31, 2013
(dollars in thousands, except per share data)
December 31, 2012
Net income (loss) attributable to Annaly
Less: Preferred stock dividends
Net income (loss) per share available (related) to common
stockholders, prior to adjustment for dilutive potential common
shares, if necessary
Add: Interest on Convertible Senior Notes, if dilutive
Net income (loss) available to common stockholders, as adjusted
Weighted average shares of common stock outstanding-basic
Add: Effect of stock awards 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 2.3 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,
2014. 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.
15.
LONG-TERM STOCK INCENTIVE PLAN
The Company adopted the 2010 Equity Incentive Plan
(the “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 the 2010 Equity Incentive
(842,083)
3,729,698 1,735,900
71,968 71,968 39,530
(914,051)
3,657,730 1,696,370
- 67,056 27,843
3,724,786 1,724,213
972,902,459
(914,051)
947,539,294
947,337,915
-
947,539,294
48,219,111
995,557,026
32,852,598
1,005,755,057
$
$
(0.96)
(0.96)
$
$
3.86
3.74
$
$
1.74
1.71
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 following table sets forth activity related to the
Company’s stock options awarded under the Plan:
December 31, 2014
December 31, 2013
For the Years Ended
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
Exercise Price
Number of Shares
-
Number of Shares
3,581,752 $ 15.44 5,618,686 $ 15.74
- -
-
- - (166,375) 13.25
(1,016,667) 15.07 (1,513,934) 16.22
(305,750)
17.34 (356,625) 17.91
2,259,335 $ 15.35 3,581,752 $ 15.44
2,259,335 $ 15.35 3,581,752 $ 15.44
Exercise Price
The weighted average remaining contractual term was
approximately 3.1 years and 3.8 years for stock options
outstanding and exercisable as of December 31, 2014
and 2013, respectively.
As of December 31, 2014 and 2013, there was no
unrecognized compensation cost related to nonvested
share-based compensation awards.
F-33
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
16.
INCOME TAXES
For the year ended December 31, 2014 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 was not 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
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 as
well as certain excise, franchise or business taxes. The
Company’s TRSs are subject to federal, state and local
taxes.
During the year ended December 31, 2014, the
Company recorded $5.9 million of income tax expense
for income attributable to its TRSs.
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.
The Company’s 2013, 2012 and 2011 federal, state and
local tax returns remain open for examination.
17.
CONTINGENCIES
LEASE COMMITMENTS AND
Commitments
The Company had a non-cancelable lease for office
space which commenced in May 2002 and expired in
December 2014. In June 2014, the Company entered
into a non-cancelable lease for office space which
commenced in July 2014 and expires in September
2025. FIDAC has a lease for office space which
commenced in October 2010 and expires in February
2016. The lease expense for the years ended December
31, 2014, 2013, and 2012 were $3.0 million, $2.3
million and $2.5 million, respectively. The Company’s
aggregate future minimum lease payments total $37.5
million. The following table details the lease payments.
Years Ending December 31,
2015
2016
2017
2018
2019
Later years
Lease Commitments
(dollars in thousands)
$ 1,199
3,591
3,565
3,565
3,565
21,992
$ 37,477
The Company had no material unfunded
commitments as of December 31, 2014 and 2013.
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
F-34
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
material effect on the Company’s consolidated financial
statements.
18. RISK MANAGEMENT
risk.
Interest
The primary risks to the Company are liquidity and
rates are highly
investment/market
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
and derivative
the
counterparties demanding additional collateral pledges
or liquidation of some of the existing collateral to
reduce borrowing levels.
contracts
result
could
in
The Company may seek to mitigate the potential
financial
rate
agreements such as interest rate swaps, interest rate
swaptions and other hedges.
impact by entering
interest
into
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
the
investments. 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
inopportune
sell
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.
Principal and interest on Agency debentures are
guaranteed by the agency issuing the debenture.
Substantially all of
Investment
Securities have an actual or implied “AAA” rating.
the Company’s
F-35
The Company faces credit risk on the portions of its
portfolio which are not Agency mortgage-backed
securities, Agency debentures or U.S. Treasury
securities. The Company is exposed to credit risk on
CRE Debt and Preferred Equity
Investments,
investments in commercial real estate and corporate
debt. The Company is exposed to risk of loss if an
issuer, borrower, tenant or 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 assessing the creditworthiness of issuers,
borrowers, tenants and counterparties.
19.
RCAP REGULATORY REQUIREMENTS
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
required
to maintain minimum net capital by
FINRA. As of December 31, 2014 RCap had a
minimum net capital requirement of $0.3 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, 2014 was $399.8 million with excess net capital of
$399.5 million.
20.
RELATED PARTY TRANSACTIONS
Investment
Security
in Affiliate, Available-For-Sale Equity
At December 31, 2014, 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 $143.0 million at December 31,
2014 and approximately 45.0 million shares of Chimera
at a fair value of approximately $139.4 million at
December 31, 2013. The Company evaluates the near
term prospects of its current investment in Chimera in
time of
relation
impairment, if any. At December 31, 2014 and 2013,
the investment in Chimera had unrealized gains of $4.2
million and $0.6 million, respectively.
the severity and
length of
to
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common stock elect to terminate the agreement in their
sole discretion and for any or no reason. At any time
during the term or any renewal term the Company may
deliver to the Manager written notice of the Company’s
intention to terminate the Management Agreement. The
Company must designate a date not less than one year
from the date of the notice on which the Management
Agreement will terminate. The Management Agreement
also provides that the Manager may terminate the
Management Agreement by providing to the Company
prior written notice of its intention to terminate the
Management Agreement no less than one year prior to
the date designated by the Manager on which the
Manager would cease to provide services or such earlier
date as determined by the Company in its sole
discretion.
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 regulatory or corporate efficiency reasons. All
compensation expenses associated with such retained
employees reduce the management fee. 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
the actual
to
compensation paid
its
subsidiaries’ employees from January 1, 2013 to June
30, 2013.
the pro forma calculation minus
to
the Company’s and
The Management Agreement may be amended or
modified by agreement between the Company and the
Manager. There is no termination fee for a termination
of the Management Agreement by either the Company
or the Manager.
Other
During the year ended December 31, 2014, the
Company made a one-time payment totaling $23.8
million to Chimera to resolve issues raised in derivative
demand letters sent to Chimera’s board of directors.
This amount is included as a component of Other
income
the Company’s Consolidated
Statements of Comprehensive Income (Loss).
(loss)
in
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Advisory fees
For the year ended December 31, 2014, the Company
recorded advisory fees from Chimera totaling $31.3
million. In August 2014, the management agreement
between FIDAC and Chimera was amended and
restated to amend certain of the terms and conditions of
the prior agreement. Among other amendments to the
terms of the prior agreement, effective August 8, 2014,
the management fee was increased from 0.75% to
1.20% of Chimera’s gross stockholders’ equity (as
defined in the amended and restated management
agreement). For the year ended December 31, 2013, the
Company recorded advisory fees from Chimera and
totaling $31.1
CreXus, prior
million. At December 31, 2014 and 2013, the Company
had amounts receivable from Chimera of $10.4 million
and $6.8 million, respectively.
its acquisition,
to
Management Agreement
to which
The Company and the Manager have entered into a
management agreement pursuant
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”). The
management agreement was effective as of July 1, 2013
and applicable for the entire 2013 calendar year and
was amended on November 5, 2014 (the management
agreement, as amended, is referred to as “Management
Agreement”).
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. For the year
ended December 31, 2014 and 2013, the compensation
and management fee was $155.6 million (includes
$24.2 million related to compensation expense for the
employees of the Company’s subsidiaries) and $167.4
million (includes $49.2 million related to compensation
expense
the Company’s
subsidiaries). At December 31, 2014 and 2013, the
Company had amounts payable to the Manager of $11.0
million and $16.2 million, respectively.
the employees of
for
The Management Agreement provides for a two year
term ending December 31, 2016 with automatic two-
year renewals unless at
the
Company’s independent directors or the holders of a
majority of the Company’s outstanding shares of
two-thirds of
least
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F-36
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
21.
SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of summarized quarterly results of operations for the years ended December 31, 2014 and
2013.
Interest income
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: Net income attributable to noncontrolling interest
Less: Dividends on preferred stock
Net income (loss) available (related) to common
stockholders
Net income (loss) available (related) per share to common
stockholders:
Basic
Diluted
Interest income
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
stockholders
Net income (loss) available (related) per share to common
stockholders:
Basic
Diluted
For the Quarters Ended
December 31, 2014 September 30, 2014
June 30, 2014
(dollars in thousands, expect per share data)
March 31, 2014
$ 683,962 $ 655,901
$ 648,144
$ 644,640
124,971
134,512 127,069 126,107
513,632 517,571 557,855
530,930
(1,113,659) (109,013) (842,030) (682,902)
58,454 51,317 52,189 47,378
357,241 (336,364) (199,350)
(658,481)
(209) 2,385 (852)
4,001
(658,272)
354,856 (335,512) (203,351)
-
(196)
17,992 17,992 17,992 17,992
- -
$ (676,068)
$ 336,864 $ (353,504) $ (221,343)
$ (0.71)
$ (0.71)
$ 0.36 $ (0.37) $ (0.23)
$ 0.35 $ (0.37) $ (0.23)
For the Quarters Ended
December 31, 2013 September 30, 2013
June 30, 2013
(dollars in thousands, expect per share data)
March 31, 2013
$ 712,936 $ 737,217
$ 771,249
$ 697,160
177,590
137,393 145,476 164,255
559,627
633,856 551,684 548,681
452,944 (299,925) 1,154,755
368,370
56,294 58,744 65,131 51,912
1,030,506 193,015 1,638,305
876,085
1,757 557 92 5,807
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
$ 1.03
$ 0.18
$ 0.18
$ 1.71 $ 0.90
$ 1.64 $ 0.87
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F-37
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2014
(dollars in thousands)
Initial Cost to Company
Cost Capitalized
Subsequent to Acquisition
Gross Amounts Carried at
Close of Period 12/31/14
Location
Industrial - Phoenix - AZ
Industrial - Las Vegas - NV
Retail - Knoxville - TN
Retail - Newport News - VA
Retail - Amherst - NY
Retail - Cheektowaga - NY
Retail - Jamestown - NY
Retail - Penfield - NY
Retail - Loganville - GA
Retail - Chillicothe - OH
Retail - Irondequoit - NY
Retail - Orchard Park - NY
Retail - LeRoy - NY
Retail - Ontario - NY
Retail - Warsaw - NY
$
Number of
Properties Encumbrances
16,600
2,505
12,350
11,025
8,270
9,447
7,356
23,558
7,230
7,887
15,000
12,888
3,492
5,406
3,416
146,430
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
16
$
Land
$
Buildings and
Improvements
27,046
$
4,053
13,309
12,046
9,740
12,259
4,915
22,413
8,386
10,819
14,684
20,617
4,922
6,813
4,117
176,139
$
Improvement
s
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
Capitalized
Costs
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
6,011
628
3,503
6,394
2,131
1,961
820
4,121
3,217
1,262
2,438
4,204
374
575
478
38,117
Land
$
Total
$
Buildings and
Improvements
27,046
$
4,053
13,309
12,046
9,740
12,259
4,915
22,413
8,386
10,819
14,684
20,617
4,922
6,813
4,117
176,139
$
6,011
628
3,503
6,394
2,131
1,961
820
4,121
3,217
1,262
2,438
4,204
374
575
478
38,117
33,057
4,681
16,812
18,440
11,871
14,220
5,735
26,534
11,603
12,081
17,122
24,821
5,296
7,388
4,595
214,256
$
$
$
SCHEDULE III
Accumulated
Depreciation
(1,836)
$
(210)
(331)
(245)
(127)
(180)
(123)
(341)
(92)
(102)
(193)
(264)
(62)
(72)
(46)
(4,224)
$
Year of
Construction Date Acquired
1997-1999
1988
2002
1994
1986
1978
1997
1978
1996
1981
1972
1997, 2000
1997
1998
1998
4/18/2013
4/18/2013
4/1/2014
6/2/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
11/10/2014
Weighted-
Average
Depreciable
Life (in years)
32
39
36
37
30
27
31
26
31
28
29
34
30
33
31
The following table presents our real estate activity during the year ended December 31, 2014 (in thousands):
Beginning balance, January 1, 2014
$
60,132
Additions during the year:
Acquisitions
Total additions
Deductions during the year:
Carrying value of real estate sold
Depreciation
Total deductions
Ending balance, December 31, 2014
176,519
176,519
23,270
3,349
26,619
210,032
$
F-38
SCHEDULE IV
Schedule IV - Mortgage Loans on Real Estate
December 31, 2014
(dollars in thousands)
Face Amount
Carrying Amount
Interest Rate (2)
Libor Floor
Payment Terms Maturity Date (3)
Months to Open Period
(2% Penalty or Less)
Location Prior Liens (1)
Description
First Mortgages:
CA
Office
FL
Multi-Family
CA
Multi-Family
FL
Office
CA
Multi-Family
NY
Mixed
Retail (4)
CO
Panoramic View
NY
First Mortgages - Securitized:
IL
Multi-Family
CO
Hotel
AZ
Multi-Family
TX
Industrial
OH
Office
IN
Retail
GA
Hotel
OK
Office
LA
Hotel
LA
Hotel
Mezzanine Loans:
Retail
Office
Industrial
Retail
Mixed
Hotel
Office
Hotel
Office
Hotel
Hotel
Office
Office
Office
Retail
Hotel
Office
Office
Office
Office
Office
Multi-Family
Hotel
Office
Office
Hotel
Office
Preferred Equity:
Multi-Family
Multi-Family
Condo
Multi-Family
Mixed
Various
Various
Various
Various
OH
Various
NY
NY
GA
NY
Various
CA
MD
MD
MA
CA
NY
TX
GA
LA
CA
OH
CA
TX
CO
LA
TX
CA
CA
NY
MD
PA
-
$
-
-
-
-
-
13,931
-
$
65,000
26,000
13,000
12,166
8,000
230,000
17,164
12,973
$
LIBOR+3.00%
64,501
LIBOR+4.50%
26,000
12,951
LIBOR+4.70%
12,015 EURIBOR+5.00%
LIBOR+4.70%
7,970
10.00%
230,000
5.58%
17,485
Non-accrual
12,973
-
-
-
-
-
-
-
-
-
-
387,161
575,522
100,000
574,600
137,250
175,000
157,449
49,051
50,604
65,728
50,525
-
56,280
55,547
64,500
50,000
62,000
43,500
56,833
64,000
45,300
83,549
42,872
52,000
13,750
-
72,069
115,000
51,000
48,685
46,500
38,270
37,680
20,156
17,500
15,500
9,250
86,067
65,968
50,000
43,900
37,400
25,000
18,000
16,677
15,483
12,753
12,375
11,473
10,130
9,942
10,000
10,000
10,000
9,187
9,000
8,700
8,700
8,300
8,000
7,000
6,000
5,000
7,418
114,780
50,964
48,462
46,432
38,221
37,680
20,051
17,476
15,379
9,189
86,506
65,929
49,928
43,945
37,400
25,034
18,041
16,677
15,452
12,753
12,408
11,419
10,091
9,904
10,000
10,000
9,977
9,122
9,000
8,700
8,760
8,236
8,031
7,000
6,000
5,000
7,418
LIBOR+4.10%
LIBOR+5.45%
LIBOR+5.00%
LIBOR+5.40%
LIBOR+5.50%
LIBOR+5.75%
LIBOR+4.95%
LIBOR+5.75%
LIBOR+5.75%
LIBOR+6.5%
11.25%
LIBOR+8.75%
8.11%
7.71%
9.50%
LIBOR+9.95%
11.15%
LIBOR+9.83%
12.17%
LIBOR+11.61%
LIBOR+8.65%
LIBOR+26.33%
11.20%
11.70%
10.00%
10.25%
10.00%
9.50%
11.00%
10.75%
LIBOR+9.50%
10.25%
12.25%
10.10%
11.06%
13.50%
10.25%
N/A
0.25% Interest Only
0.25% Interest Only
0.20% Interest Only
Interest Only
0.20% Interest Only
Interest Only
Amortizing
IO/Sellout
N/A
N/A
N/A
0.20% Interest Only
0.25% Interest Only
0.25% Interest Only
1.00% Interest Only
0.25% Interest Only
0.92% Interest Only
0.20% Interest Only
0.25% Interest Only
1.00% Interest Only
0.25% Interest Only
N/A
N/A
N/A
N/A
N/A
N/A
Amortizing
0.75% Interest Only
Interest Only
Amortizing
Interest Only
0.20% Interest Only
Interest Only
1.00% Interest Only
Interest Only
1.00% Interest Only
0.16% Interest Only
0.25% Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
0.25% Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
361,304
70,468
181,000
371,420
26,000
4,109,213
$
83,385
31,500
51,000
39,770
9,000
1,520,972
$
82,767
31,266
50,688
39,253
8,931
1,518,165
$
10.00%
10.00%
12.00%
11.00%
11.00%
N/A
N/A
N/A
N/A
N/A
Interest Only
Interest Only
Interest Only
Interest Only
Interest Only
3/1/2019
5/9/2019
8/1/2019
12/6/2019
8/1/2019
6/30/2015
5/1/2017
12/1/2013
11/1/2017
11/9/2018
1/1/2018
8/10/2017
8/9/2018
11/9/2016
8/9/2018
9/6/2018
8/9/2018
10/1/2018
4/10/2017
1/20/2017
6/28/2022
12/1/2015
11/22/2023
2/14/2019
9/6/2021
9/8/2015
4/9/2015
9/8/2015
8/9/2019
3/1/2019
8/1/2017
8/1/2017
9/6/2023
2/6/2019
10/6/2018
9/1/2018
7/10/2015
10/29/2023
3/31/2019
12/1/2022
4/1/2017
12/1/2024
8/6/2018
8/9/2018
8/1/2018
9/16/2020
9/16/2020
11/21/2018
8/1/2022
11/27/2018
8
5
3
11
7
0
23
0
0
3
6
0
1
0
0
0
14
15
25
4
6
0
59
25
69
0
0
0
1
14
26
26
21
46
22
24
0
46
13
16
3
35
7
14
19
9
9
0
56
11
(1) Represents third-party priority liens.
(2) LIBOR represents the one month London Interbank Offer Rate, EURIBOR represents the one month Eurodollar deposit rate.
(3) Assumes all extension options are exercised.
(4) Includes senior position sold to third party that did not qualify for GAAP sale accounting. The Company’s economic interest is limited to a B-Note with an outstanding face of $3.8 million and a basis of approximately $1.9 million.
F-39
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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 26, 2015
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/ Francine J. Bovich
Francine J. Bovich
/s/ Jonathan D. Green
Jonathan D. Green
/s/ Michael E. Haylon
Michael E. Haylon
/s/ Kevin G. Keyes
Kevin G. Keyes
/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 26, 2015
Chief Financial Officer
(principal financial officer of the registrant)
February 26, 2015
Director
Director
Director
Director
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
President and Director
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
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
2014
For the Years Ended December 31,
2012
(dollars in thousands)
2013
2011
2010
Net income (loss) 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.
(836,954)
3,737,911 1,771,812
402,372 1,299,769
1,338,019 1,533,008 1,560,941 1,362,721 1,163,332
501,065 5,270,919 3,332,753 1,765,093 2,463,101
1,409,987 1,604,976 1,600,471 1,379,575 1,181,365
0.36
0.37
3.28
3.44
2.08
2.14
1.28
1.30
2.08
2.12
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 WF Parent LLC, Delaware limited liability company
• Annaly CRE WF 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 KLSF B Holder LLC, Delaware limited liability company
• Annaly CRE Sub Holding Investor LLC, Delaware limited liability company
• Annaly CRE Sub 2015-1 LLC, Delaware limited liability company
• ACREG Investment Holdings LLC, Delaware limited liability company
• ACREG Tops Holdings LLC, Delaware limited liability company
• ACREG Tops Investment LLC
• TK11 Venture LLC (90% owned subsidiary), Delaware limited liability
company
Irondequoit TK Owner LLC, Delaware limited liability company
Jamestown TK Owner LLC, Delaware limited liability company
• TK11 Holdings LLC, Delaware limited liability company
• Amherst TK Owner LLC, Delaware limited liability company
• Cheektowaga TK Owner LLC, Delaware limited liability company
•
•
• LeRoy TK Owner LLC, Delaware limited liability company
• Ontario TK Owner LLC, Delaware limited liability company
• Orchard Park TK Owner LLC, Delaware limited liability company
•
Penfield TK Owner LLC, Delaware limited liability company
• Warsaw TK Owner LLC, Delaware limited liability company
• Chillicothe TK Owner LLC, Delaware limited liability company
• Loganville TK Owner 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 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 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
• ACREG 3100 South Mall NL LLC, Delaware limited liability company
• ACREG 12151 Jefferson NL LLC, Delaware limited liability company
• ACREG AZO Portfolio NL LLC, Delaware limited liability company
Shannon Funding LLC, Delaware limited liability company
•
• Truman Insurance Company LLC, Missouri limited liability company
•
FIDAC Housing Cycle Fund LLC, Delaware limited liability company
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
•
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. 333-200811 and No. 333-186465
on Forms S-3 and Registration Statement No. 333-169923 on Form S-8 of our report dated February 26, 2015, 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, 2014.
/s/ Ernst and Young LLP
New York, New York
February 26, 2015
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 26, 2015
/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 26, 2015
/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
NEW YORK, NEW YORK 10036
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 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, 2014 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 26, 2015
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Exhibit 32.2
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 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, 2014 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 26, 2015
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.