2018 Annual Report Corp
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Diversified
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1
Annaly Capital Management Inc. 2018 Annual Report
Message from our Chairman, CEO and President
Dear Fellow Shareholders,
2018 was a year of transformation for Annaly. We successfully delivered on many of the key corporate goals we
communicated to you last year, and despite a difficult macro environment, reached a number of significant strategic
milestones made possible by the institutionalization and diversification of Annaly over the past five years. The progress
made in 2018 further establishes Annaly as a market leader and positions the Company to continue executing upon the
most integral components of our platform and strategy, which are outlined in the themes below.
DiversifieD
shareD Capital
MoDel
finanCing,
Capital &
liquiDity
The most important theme of 2018 was diversification. Annaly has transformed into a
diversified operating company built to capitalize on numerous strategic opportunities across
multiple complementary businesses. Since our diversification strategy began in 2014, Annaly
has broadly invested in over $10 billion of credit assets through continued development of
our platform, expanded institutional partnerships and corporate acquisitions.(1) As a result,
today each of our three credit businesses would rank among the top ten industry leaders in
their respective industry sectors by size on a standalone basis. As importantly, we have also
continued to diversify within our core Agency strategies along the way and now maintain
37 investment options across our four businesses – 3x more alternatives than the Company
had just a few years ago. A direct consequence of the breadth of our investment optionality
is our ability to grow opportunistically and rotate investments based on relative value, while
managing risk and our market share expansion in a sustainable way.
Diversification in the ways we access capital and the broadening of our financing alternatives
are equally important in driving our outperformance and capital efficiency. Since the beginning
of 2016, we have increased our capital base by $6.5 billion, more than half of which was sourced
from avenues besides common equity offerings, further illustrating our leadership in the capital
markets.(2) In January 2018, Annaly’s preferred equity offering priced at the lowest coupon ever
for a non-rated U.S. preferred issue, allowing us to retire higher cost preferred equity and lower
our overall cost of capital. Similarly, in January 2019, following one of the most volatile quarters
in history, Annaly was the first U.S. company to access the equity market, raising accretive
growth capital at highly attractive valuations. Many other market participants followed our
lead over the past few months; however, most have raised restorative capital at dilutive levels
after losing significant book value throughout 2018. The success of our capital markets offerings
is illustrated by our largest institutional shareholders growing with us; more specifically, global,
sovereign wealth and pension fund ownership of Annaly has increased by 40% since 2014.(3)
We continue to enhance our capital efficiency through non-recourse, dedicated financing
structures for each of our credit businesses – improving terms of existing arrangements,
increasing financing capacity and establishing new counterparty relationships. Specifically,
since the beginning of 2018, we added $2.4 billion of additional borrowing capacity across our
three credit businesses and expanded our financing diversification by establishing Annaly as a
repeat issuer in the residential and commercial securitization markets.(4) Throughout, we have
also remained measured and prudent in applying financing to Annaly’s four businesses. As of
year end 2018, our credit businesses were approximately 50% less levered than their respective
sector peers(5), and total firm leverage was nearly 20% lower than the Agency mREIT sector(6)
while we produced superior risk-adjusted returns. Our diversified, lower leveraged strategy
results in greater liquidity – $7.7 billion in unencumbered assets – uniquely positioning us to
take advantage of future market disruptions.
Note: Please refer to Glossary for defined terms and “Message from Chairman, CEO and President” in Endnotes section for footnoted information.
2
Annaly Capital Management Inc. 2018 Annual Report operational
effiCienCy
growth &
inCoMe
Message from our Chairman, CEO and President
Continuing to scale our differentiated operating platform has provided a foundation for growth,
diversification and efficiency that is unmatched in the industry. Since 2014, we have made
significant investments across our four businesses, adding expertise and depth to our investment
teams and best-in-class infrastructure to support our strategies. Notably, we have grown our
total number of IT professionals by over 40% during this time period. Our expanded in-house
technology capabilities have led to the development of proprietary portfolio analytics, financial
and capital allocation models, risk testing and accounting software, providing Annaly with distinct
competitive advantages and cost savings. Anticipating the evolving needs of our businesses and
recognizing the importance of differentiation and efficiency of scale has resulted in our diversified
“Yield Machine” that is 30x more efficient than the average S&P 500 company, 20x more efficient
than the average of other Yield Sectors in the equity market and 2x more efficient than the less
diversified mREIT sector when comparing operating expense to equity ratios.(7)
We have demonstrated, and the market has clearly validated, that size and scale drive performance.
2018 marked another successful year for Annaly and the execution of our long-term growth
strategy. We capitalized on a number of opportunities that continue to solidify Annaly’s brand
as a market leader. Since 2016, amidst a market backdrop with the Fed raising rates eight times
and the yield curve flattening by 86%, Annaly has grown its market capitalization 64%, while
delivering an additional $4.2 billion in cumulative dividends to shareholders.
Organically, we have continued to grow each of our four business platforms by expanding our
internal investment options and continuing to broaden our proprietary partnerships. Today,
Annaly has established over 20 strategic relationships with industry leading, dedicated partners
across our four businesses, which have resulted in improved efficiencies and increased origination
capabilities. These partnerships reflect the growth of Annaly’s footprint while also representing
increased scalability through access to proprietary deal or asset flow without adding incremental
cost to our shareholders. Our partnerships, coupled with our premier investment teams and access
to our approximate $15 billion balance sheet(8), enabled us to strategically grow our credit assets
to $7.7 billion at year end, a 330% increase since our diversification strategy began. A significant
driver of this growth is the $4.2 billion of investments across our three credit businesses in 2018,
an increase of approximately 65% year-over-year.(9)
In addition to our organic growth, expansion of partnerships and superior capital markets access,
Annaly remains well-positioned to continue to gain market share through further consolidation.
Within the mREIT and BDC sectors, we are prepared for opportunities created by the combination
of factors in the “consolidation equation.” The equation is essentially the direct correlation between
market volatility, liquidity issues, resulting underperformance and subsequent M&A activity –
demonstrated by our acquisition of Hatteras Financial Corp. in 2016 and most recently of MTGE
Investment Corp. in 2018, each initiated in the two most volatile quarters of the past three years.
As market conditions evolve, with challenging cycles and periods of volatility, inferior business
models will come under pressure, creating an environment where Annaly will again emerge as
an attractive partner.
Note: Please refer to Glossary for defined terms and “Message from Chairman, CEO and President” in Endnotes section for footnoted information.
3
Annaly Capital Management Inc. 2018 Annual Report Message from our Chairman, CEO and President
risk-aDjusteD
returns
Corporate
governanCe
huMan
Capital
The diversification and size of Annaly’s lower-levered capital base and investment businesses,
along with our prudent risk management processes, continue to drive outperformance of
Annaly’s total return. Since 2014, our total shareholder return of 83% is 1.2x higher than
mREITs, 1.3x higher than the S&P 500 and 2.3x higher than the Yield Sectors.(10) In addition
to our absolute returns, our proprietary model is producing higher cash flow margins than
most any other financial services company – our pre-tax margins of approximately 60% are
3x higher than the average for corporations in the Yield Sectors.(11)
Annaly’s stock has also displayed the stability of our model; over the past year, our beta has
been 50% lower than both the S&P 500 and the Yield Sector average. Additionally, our stock
trades with ~5x higher average daily trading volume than the median Yield Sector company
and ~10x the median mREIT.(12) Investors seeking attractive risk-adjusted returns appreciate
Annaly’s value as a safe, liquid, high margin, low beta vehicle that offers a premium yield in
a market starved for income.
Our dedication to corporate responsibility and governance also sets us apart from the
market – and undoubtedly is another contributor to Annaly’s historical outperformance.
We believe that continually evaluating the framework of our corporate responsibility and
governance practices ensures alignment and transparency, resulting in increased value to our
shareholders over the long term. In order to more specifically frame our efforts and illustrate
our industry leading commitment to governance, we recently published a comprehensive
narrative on our website detailing our commitment to ESG, which others are now, of course,
beginning to emulate. Our disclosure emphasizes our concentrated efforts across six critical
areas: Corporate Governance, Human Capital, Responsible Investments, Risk Management,
Ethics and Integrity and the Environment.
In 2018, we also announced two important governance enhancements: the decision to declassify
our Board initiating annual election of all Directors, along with adopting an enhanced Board
Refreshment Policy that contains both tenure and age limit provisions. Our commitment to
Board refreshment is further demonstrated by the election of four new independent directors
since the beginning of 2018, three of whom are women, which will bring the percentage of
women on the Board to 45% following the 2019 Annual Meeting of Stockholders(13), which is
nearly 2x higher than the average for the S&P 500.
Behind the achievements and successes highlighted in this letter, and in everything we do,
is the deep and varied expertise of our most important asset – our people. We have over 170
talented professionals, the largest number in the Company’s history, who have supported
our successful evolution from a mono-line Agency mortgage REIT to the Industry Innovator
we are today.(14) Annaly is One Firm, reflected in our strong corporate culture committed to
ownership, inclusion and investment in our employees. We are very proud of how hard we
work at the Company each day and how well we treat each other as partners, and in 2018 we
recorded the highest level of employee satisfaction since we initiated our annual employee
engagement survey in 2015.(15)
We continue to expand our initiatives focused on advancing diversity throughout the Firm,
which remains a key business priority. Annaly’s extensive ESG strategy has incorporated
careful attention to racial and gender diversity, which is more relevant in today’s market
than ever. In 2018, 47% of new hires identified as racially diverse, increasing overall firm
diversity to 32%, which is 60% higher than our industry based on Bureau of Labor Statistics
data.(16) Additionally, nearly 40% of new hires in 2018, 40% of Managing Director promotions
and 50% of additions to Annaly’s Operating Committee since 2015 have been women. In
recognition of these efforts, Annaly was named to the 2019 Bloomberg Gender-Equality Index
for the second consecutive year.
Note: Please refer to Glossary for defined terms and “Message from Chairman, CEO and President” in Endnotes section for footnoted information.
4
Annaly Capital Management Inc. 2018 Annual Report responsible
investMents
Message from our Chairman, CEO and President
Finally, our dedication to ESG principles, as well as our deep investment capabilities,
uniquely positions us to support the vitality of local communities and the economy. This
past year, we collaborated once again with Capital Impact Partners, a national mission-
driven non-profit community development financial institution, to launch our second social
impact joint venture, which is specifically aimed at supporting affordable housing and other
community development projects in Washington, D.C. This investment not only advances
our social impact investing strategy, but also further illustrates Annaly’s overall goal of being
a responsible steward of capital and commitment as an employer that contributes to our
neighborhoods, schools and businesses across the country.
As we look ahead, we will continue our diversified and complementary growth strategies and reward our shareholders
by taking advantage of opportunities in the market that are unique to Annaly. We are more prepared than ever to benefit
from our size, liquidity, optionality and operational efficiency. I am grateful for the confidence of our Board, which
has empowered us to be the industry leader we have become. I want to thank my fellow shareholders for the steadfast
commitment, support and trust of this management team. And, to each Annaly employee, I sincerely appreciate all of the
hard work and dedication, every day. We have so much opportunity in front of us.
Chairman, Chief Executive Officer & President
April 9, 2019
Note: Please refer to Glossary for defined terms and “Message from Chairman, CEO and President” in Endnotes section for footnoted information.
5
Annaly Capital Management Inc. 2018 Annual Report
2015
2016
2017
2018
s
e
n
o
t
s
e
l
i
M
c
i
g
e
t
a
r
t
S
Separated Chimera Investment
Corp.; began directly investing in
residential credit on balance sheet
Expanded ACREG with
new team that joined from a
leading real estate company
Diversified the Agency
portfolio through a ~$15bn
rotation into TBA Dollar Rolls
$1.4bn of residential credit assets
Established and expanded
on balance sheet after initiating
dedicated warehouse facility for
ARC platform
commercial first mortgages
Authorized share
repurchase plan
Granted access to 5-year
sunset period for Term FHLB
Financing (ending 2021)
$5.5bn of total credit assets on
balance sheet, up 25% from
prior year(1)
Closed and integrated $1.5bn
acquisition of Hatteras
Financial Corp.
Formed JV partnership on MSR
investments with a premier
sovereign wealth fund
$350mm ACREG credit
facility established
$300mm AMML credit
facility established
Announced
strategic
partnerships
across all four
investment
groups
Completed
sale of Pingora
Holdings L.P.
Raised gross proceeds
of $720mm through a
preferred equity offering
with the largest non-rated
preferred equity offering
in history in July(2)
Raised gross proceeds
of $1.7bn through
two separate common
equity offerings in
July and October(3)
$150mm AMML credit
facility established
$5.8bn of total credit
Initiated Business
assets on balance sheet, up
Performance
7% from prior year(1)
Management process
Announced inaugural
JV with Capital Impact
Partners for social
impact investing
Raised gross proceeds of
$425mm though a preferred
equity offering with the lowest
non-rated coupon preferred
equity in history in January
Expanded policy footprint in
DC; Published CRT paper
with the NY Fed(4)
Completed inaugural
residential whole loan
securitization of $328mm
in March
Closed and
integrated $906mm
acquisition of MTGE
Investment Corp.
Raised gross proceeds
of $251mm through
$600mm of capacity added
through two ACREG credit
the Company’s ATM
facilities with new counterparties;
sales program for its
Extended and improved terms of
common stock(5)
existing ACREG credit facility
Increased credit capital
allocation to 28%
Lowered average cost of
preferred capital from 7.62%
to 7.05%
Formed direct repo
relationships with key
counterparties
$7.7bn of total credit assets on
balance sheet, up 32% from
prior year(1)
Completed second
Raised gross proceeds
residential whole
of $877mm through a
Completed third
residential whole
$100mm of capacity added to
loan securitization of
common equity offering(3)
loan securitization of
AMML credit facility
$384mm in August
in September
$384mm in October
2019
YTD
Raised gross proceeds of
$840mm through a common
equity offering(3) in January
Completed fourth residential
whole loan securitization of
$394mm in January
Additional $200mm AMML
credit facility established
Closed $857mm managed CRE CLO in February
Declared 22nd consecutive $0.30 quarterly dividend
Note: Please refer to Glossary for defined terms and “Strategic Milestones” in Endnotes section for footnoted information.
6
Annaly Capital Management Inc. 2018 Annual ReportStrategic MilestonesInitiatives and achievements since 2015January
Separated Chimera Investment
Expanded ACREG with
Diversified the Agency
2015
Corp.; began directly investing in
new team that joined from a
portfolio through a ~$15bn
residential credit on balance sheet
leading real estate company
rotation into TBA Dollar Rolls
$1.4bn of residential credit assets
on balance sheet after initiating
ARC platform
Established and expanded
dedicated warehouse facility for
commercial first mortgages
Authorized share
repurchase plan
Granted access to 5-year
$5.5bn of total credit assets on
Closed and integrated $1.5bn
2016
sunset period for Term FHLB
balance sheet, up 25% from
acquisition of Hatteras
Financing (ending 2021)
prior year(1)
Financial Corp.
Formed JV partnership on MSR
investments with a premier
sovereign wealth fund
$350mm ACREG credit
facility established
$300mm AMML credit
facility established
2017
2018
Announced
strategic
partnerships
across all four
investment
groups
Completed
sale of Pingora
Holdings L.P.
Raised gross proceeds
of $720mm through a
preferred equity offering
with the largest non-rated
preferred equity offering
in history in July(2)
Raised gross proceeds
of $1.7bn through
two separate common
equity offerings in
July and October(3)
$150mm AMML credit
facility established
$5.8bn of total credit
assets on balance sheet, up
7% from prior year(1)
Initiated Business
Performance
Management process
Announced inaugural
JV with Capital Impact
Partners for social
impact investing
Raised gross proceeds of
$425mm though a preferred
Expanded policy footprint in
equity offering with the lowest
DC; Published CRT paper
non-rated coupon preferred
equity in history in January
with the NY Fed(4)
Completed inaugural
residential whole loan
securitization of $328mm
in March
Closed and
integrated $906mm
acquisition of MTGE
Investment Corp.
Raised gross proceeds
of $251mm through
the Company’s ATM
sales program for its
common stock(5)
$600mm of capacity added
through two ACREG credit
facilities with new counterparties;
Extended and improved terms of
existing ACREG credit facility
Increased credit capital
allocation to 28%
Lowered average cost of
Formed direct repo
$7.7bn of total credit assets on
preferred capital from 7.62%
relationships with key
balance sheet, up 32% from
to 7.05%
counterparties
prior year(1)
Completed second
residential whole
loan securitization of
$384mm in August
Raised gross proceeds
of $877mm through a
common equity offering(3)
in September
Completed third
residential whole
loan securitization of
$384mm in October
$100mm of capacity added to
AMML credit facility
2019
YTD
Raised gross proceeds of
Completed fourth residential
$840mm through a common
whole loan securitization of
equity offering(3) in January
$394mm in January
Additional $200mm AMML
credit facility established
Closed $857mm managed CRE CLO in February
Declared 22nd consecutive $0.30 quarterly dividend
Note: Please refer to Glossary for defined terms and “Strategic Milestones” in Endnotes section for footnoted information.
7
Annaly Capital Management Inc. 2018 Annual ReportJanuaryDecember Diversified Shared Capital Model
The Company’s diversified investment model provides unique optionality and scale, maximizing
our risk-adjusted returns while enhancing stability
4
Investment groups operating in cyclical, non-cyclical and
countercyclical markets with complementary cash flows
28%
of capital dedicated to credit assets at the end of 2018,
an increase from 11% in 2014
Annaly’s shared capital model acts as an inherent risk mitigant and consists of the following four investment groups:
The Annaly Agency Group invests in Agency MBS
collateralized by residential mortgages which are guaranteed
by Fannie Mae, Freddie Mac or Ginnie Mae
The Annaly Residential Credit Group invests in
Non-Agency residential mortgage assets within the
securitized product and whole loan markets
Assets(2)
Capital(3)
Sector Rank(4)
Strategy
Levered
Returns(5)
Assets(2)
Capital(3)
Sector Rank(4)
Strategy
Levered
Returns(5)
$105.3bn
$9.3bn
#1/5
Countercyclical /
Defensive
10%-12%
$2.5bn
$0.9bn
#5/12
Cyclical /
Growth
9%-12%
Age n c y
Resid
e
n
t
i
a
l
C
r
e
d
i
t
Assets: $113.0bn(2)
Market Cap: $14.6bn
C
o
R
m
e
m
a
l
E
ercial
state
M i d
d le M arket
L e n ding
Assets(2)
Capital(3)
Sector Rank(4)
Strategy
Levered
Returns(5)
Assets(2)
Capital(3)
Sector Rank(4)
Strategy
Levered
Returns(5)
$3.3bn
$1.3bn
#7/17
Cyclical /
Growth
9%-12%
$1.9bn
$1.4bn
#7/44
Non-Cyclical /
Defensive
10%-13%
The Annaly Commercial Real Estate Group originates and
invests in commercial mortgage loans, securities and other
commercial real estate debt and equity investments
The Annaly Middle Market Lending Group provides
financing to private equity backed middle market businesses
across the capital structure
Represents credit investment group
Note: Please refer to Glossary for defined terms and “Diversified Shared Capital Model” in Endnotes section for footnoted information.
8
Annaly Capital Management Inc. 2018 Annual Report
37
Available investment options is
nearly 3x more than in 2013(1)
60+
Dedicated investment professionals across
the four investment groups
Number of Available Investment Options(6)
Annaly has expanded the breadth of investment alternatives, allowing for seamless rotations based on relative value
36
37
29
26
16
13
2013
2014
2015
2016
2017
2018
Agency
ARC
ACREG
AMML
Note: Please refer to Glossary for defined terms and “Diversified Shared Capital Model” in Endnotes section for footnoted information.
9
Annaly Capital Management Inc. 2018 Annual Report Diversified Shared Capital Model | Agency
Representing 72% of Annaly’s dedicated capital, Annaly’s Agency business provides the
opportunity to generate attractive risk-adjusted returns through the highly liquid Agency
MBS market
11
Investment options available
to the Agency business
20+ Years
of average industry experience
across the Agency business
Competitive Advantages of Annaly’s Agency Business
Size, Scale and Liquidity of Platform
Optimized Financing
Largest Agency MBS portfolio
provides ample liquidity with
average monthly principal
paydowns of ~$1bn in 2018
Traditional wholesale repo,
proprietary broker-dealer, FHLB
membership(3) and direct repo
Hedging Diversity
Diversified and comprehensive
hedging strategy
Superior Relative Value
Analytics and Asset Selection
Prepayment Analytical Expertise
Since 2016, core ROE(4) per unit of
leverage has been 47% greater
on average than the Agency
Peer average
In-house proprietary analytics
that identify emerging
prepayment trends
Note: Please refer to Glossary for defined terms and “Diversified Shared Capital Model | Agency” in Endnotes section for footnoted information.
10
Annaly Capital Management Inc. 2018 Annual Report $105.3 Billion
of total Agency assets on balance sheet(1)
94%
Hedge ratio comprised of $70 billion of interest rate swaps,
$4 billion of swaptions and $19 billion of futures(2)
Agency Portfolio Breakdown
Pass Through Coupon Type
TBAs
13%
ARMs
5%
<=15/20-yr
Pools
High Quality
Spec
28%
Generic
13%
$9.3bn
of dedicated
equity
40+ WALA
14%
Med Quality
Spec
27%
Comparison of Hedging Alternatives
Instrument
Swaps, Eurodollar Futures, Treasury Futures
Swaptions
Mortgage Derivatives
Mortgage Servicing Rights
Expanded Asset Opportunity Set (i.e., DUS)
NLY
30-yr Pools
Agency Peers
4 Peers
3 Peers
2 Peers
1 Peer
0 Peers
Note: Please refer to Glossary for defined terms and “Diversified Shared Capital Model | Agency” in Endnotes section for footnoted information.
11
Annaly Capital Management Inc. 2018 Annual Report
Diversified Shared Capital Model | Credit
Representing 28% of Annaly’s dedicated capital, the three credit investment groups, Residential
Credit, Commercial Real Estate & Middle Market Lending, offset interest rate risk by diversifying
cash flows into predominantly floating-rate assets
$4.2 Billion
of loans and commercial assets originated or purchased in
2018(1), an increase of 65% year-over-year(2)
$2.4 Billion
of incremental financing capacity added across the three
credit investment groups since 2018(3)
Competitive Advantages of Annaly’s Credit Investment Groups
Direct origination and capital markets relationships
Multiple financing options
Proprietary partnerships complement
Natural hedge to the Agency portfolio
sourcing capabilities
Flexible capital to invest along the entire
capital structure
Product diversification within each
investment group
Strong in-house portfolio management teams
Ability to underwrite large transactions given size of
balance sheet and syndication capabilities
Solid track records
Annual Credit Assets Deployed(4)(5)
Deliberate growth in credit activity in 2018 was driven by expanding partnership channels in Residential Credit, enhancing our regional
origination presence in Commercial Real Estate and taking larger investment positions in Middle Market Lending
($ billions)
$2.3 | 301%
$0.4 | 142%
$1.9 | 365%
2015
$4.2 | 65%(2)
$1.4 | 82%
$1.2 | 126%
$1.6 | 76%
$2.2 | 123%
$0.8 | 86%
$0.5 | 2%
$0.9 | 1,304%
2017
2018
$1.0 | (58%)
$0.4 | 1%
$0.5 | (73%)
$0.1 | N/A
2016
ARC
ACREG
AMML
Totals ($bn) | YoY Increase
Note: Please refer to Glossary for defined terms and “Diversified Shared Capital Model | Credit” in Endnotes section for footnoted information.
12
Annaly Capital Management Inc. 2018 Annual Report 34
Deals closed in 2018 between
ACREG and AMML
100+
Institutional sponsor relationships across the three credit
investment groups since 2014
Credit Portfolio Overview
Residential
Credit
Whole Loan
39%
Prime Jumbo IO
1%
Prime Jumbo
8%
NPL
<1%
Subprime
12%
Agency CRT
16%
Private Label CRT
1%
Prime
17%
Alt A
6%
$1.3bn
of dedicated
capital
Credit CMBS
9%
Other(6)
3%
AAA CMBS
1%
ESG(7)
3%
Equity(8)
26%
2nd Lien
29%
Commercial
Real Estate
Middle
Market Lending
Mezzanine
26%
Whole Loan(9)
32%
1st Lien
71%
$0.9bn
of dedicated
capital
$1.4bn
of dedicated
capital
Note: Please refer to Glossary for defined terms and “Diversified Shared Capital Model | Credit” in Endnotes section for footnoted information.
13
Annaly Capital Management Inc. 2018 Annual Report Financing, Capital & Liquidity
Annaly’s deep and diverse financing sources across all investment groups are a complement to its
highly liquid Agency portfolio, providing the Company with unique competitive advantages
51%
Less levered(1) across our credit investment groups than the
average of the five largest peers in each sector
$1.5 Billion
of residential whole loan securitizations completed
through four transactions since the beginning of 2018(2)
Economic Leverage(4)(5)
Annaly operates at lower economic leverage across each investment group than the average of the five largest peers in each sector;
19% lower than Agency Peers, 67% lower than Hybrid Peers, 41% lower than Commercial Peers and 45% lower than MML Peers
8.7x
7.0x
4.8x
1.6x
ARC
Agency
Avg
2.0x
1.2x
Hybrid
Avg
ACREG
Commercial
Avg
0.4x
AMML(6)
0.7x
MML
Avg(6)
Financing and Liquidity Highlights
Established status as programmatic issuer and achieved financing diversification through four residential credit
securitizations totaling $1.5 billion since the beginning of 2018(2)
Closed $857mm managed CRE CLO in February 2019
Expanded direct repo relationships with key counterparties
$3.6 billion line with FHLB(7) provides attractive financing rates
Note: Please refer to Glossary for defined terms and “Financing, Capital & Liquidity” in Endnotes section for footnoted information.
14
Annaly Capital Management Inc. 2018 Annual Report $7.7 Billion
of unencumbered assets, exemplifying focus
on liquidity
$900 Million
of additional capacity added since 2018 through
three new credit facilities(3) and upsizing
of existing facilities
Unencumbered Assets(8)
Annaly’s liquidity is 5.6x higher than the five largest mREIT peers in each sector on average
($ billions)
$7.7
$4.8
$3.0
$1.7
$1.5
$1.4
$1.8
$0.6
$0.7
$1.0
$1.1
$0.6
$0.5
$0.2
A
B
C
D
A
Agency Peers
B
C
Hybrid Peers
D
E
A
D
C
B
Commercial Peers
$0.3
E
Note: Please refer to Glossary for defined terms and “Financing, Capital & Liquidity” in Endnotes section for footnoted information.
15
Annaly Capital Management Inc. 2018 Annual Report Operational Efficiency
Annaly benefits from its scale and efficiency, operating at significantly lower cost levels than peers
100+
Professionals provide best-in-class support to the
investment groups
40%+
Growth in number of IT professionals since 2014 has added
in-house development and modeling expertise, expanding
number of proprietary applications by over 4x
Technology
Cutting-edge digital transformation
Agile development
Proprietary applications leading analytics
Risk
Management
Legal,
Compliance &
Audit Services
Finance &
Treasury
Business
Operations
Sophisticated market risk capabilities
Deep credit skills
Hedging and financing expertise
Risk professionals embedded within the investment groups
Comprehensive risk governance framework
Robust compliance function and protocols
Independent internal audit function
Full service financial operations
Capital markets funding acumen
Sophisticated tax expertise
Strong internal controls environment
Self-clearing operations
Straight-through processing
Robust reporting and transparency
Note: Please refer to Glossary for defined terms and “Operational Efficiency” in Endnotes section for footnoted information.
16
Annaly Capital Management Inc. 2018 Annual Report 46%
Lower operating expenses as a percentage of core earnings
than the average of mREIT peers(1)
2x
More efficient operating expenses as a percentage of equity
than the average of mREIT peers(2)
Operating Expenses as % of Equity(2)
Annaly’s investment groups have continued to grow while operating significantly more efficiently than industry peers; the strength of our
operating platform supports our strategic initiatives and external growth
87.2%
54.8%
51.6%
Yield Sectors(3): 37.0%
27.3%
13.1%
5.9%
3.7%
1.8%
S&P 500
Consumer
Staples
Utilities
Select
Financials
MLPs
Equity REITs mREIT Peers
Note: Please refer to Glossary for defined terms and “Operational Efficiency” in Endnotes section for footnoted information.
17
Annaly Capital Management Inc. 2018 Annual Report Growth & Income
Annaly’s expertise across disciplines has enabled the Company to grow through
strategic acquisitions, the public markets and expanded origination capabilities
3
Transformational acquisitions since 2013, with a
combined deal value of $3.3 billion(1)
20+
Partnerships across our
four investment groups
Recent External Growth Activity
Common Equity Follow-On Offerings
$877 Million
Common Equity
Follow-On
$840 Million
Common Equity
Follow-On
September 2018
January 2019
Preferred Equity Offering
Consolidation
$425 Million
6.50% Series G
Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock
$906 Million
Acquisition of
MTGE Investment Corp.
January 2018
May 2018(3)
Note: Please refer to Glossary for defined terms and “Growth & Income” in Endnotes section for footnoted information.
18
Annaly Capital Management Inc. 2018 Annual Report 50%+
of capital raised since the beginning of 2016 was sourced
from avenues besides follow-on common equity offerings(2)
64%
Increase in market cap since 2015, while delivering
over $4.2 billion in shareholder distributions
Growth & Outperformance Over Time
Since January 2016, Annaly has grown its market cap by $5.7 billion, or 64%, and delivered over $4.2 billion in dividends to shareholders
amidst a market backdrop where the Fed has raised rates 8 times and the Treasury curve has flattened by 86%
121.8 bps
January 31, 2019
Total
Return(4)
Market
Cap
55%
$14.6bn
$14.6bn
$6.00
$5.00
$4.2bn
$4.00
2.25%-2.50%
2.00%-2.25%
$3.00
1.75%-2.00%
1.50%-1.75%
1.25%-1.50%
1.00%-1.25%
$8.9bn
0.25%-0.50%
0.75%-1.00%
0.50%-0.75%
$2.00
17.0 bps
$1.00
Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Feb-17 May-17 Au g-17 N ov-17 Feb-18 Apr-18 Jul-18 Oct-18
Jan-19
2s-10s Treasury Curve
Market Cap
Cum ulative Dividend s Declared(5)
Federal Fund s Rate(6 )
Note: Please refer to Glossary for defined terms and “Growth & Income” in Endnotes section for footnoted information.
19
Annaly Capital Management Inc. 2018 Annual Report Risk-Adjusted Returns
Diversification, prudent risk management and size continue to drive outperformance and stability
of Annaly’s total return
83%
Total shareholder return generated by Annaly with its
current investment teams since 2014(1)
4.1x
Higher Treynor Ratio than other
Yield Sectors(2)
Annaly’s beta is lower than the S&P 500, Yield Sectors and mREIT peers by 1.9x, 1.7x and 1.3x, respectively
Beta
1.00
1.11
0.99
Yield Sectors(2): 0.86
0.75
0.68
0.76
0.65
0.52
mREIT Peers
S&P 500
Equity REITs
Utilities
Consum er
Staples
Select
Financials
MLPs
Treynor Ratio
Performance vs. Beta
Annaly’s Treynor Ratio is more efficient than the S&P 500, Yield Sectors and mREIT peers by 2.6x, 4.1x and 1.5x, respectively
19.6
12.9
7.6
10.2
9.2
6.4
5.4
Yield Sectors(2): 4.8
mREIT Peers
S&P 500
Equity REITs
Utilities
Consum er
Staples
Select
Financials
(7.4)
MLPs
Note: Please refer to Glossary for defined terms and “Risk-Adjusted Returns” in Endnotes section for footnoted information.
20
Annaly Capital Management Inc. 2018 Annual Report 0.52
Beta, which over the last year, has been lower
than the Yield Sector average 100% of the time(3)
47%
Greater core ROE per unit of leverage
than the Agency Peer average(4)
Annualized Core ROE(4) per Unit of Economic Leverage
Since 2016, Annaly’s core ROE(4) per unit of leverage has been ~52bps, or 47%, greater on average than the Agency Peer average
1.75%
1.73%
1.65%
1.65%
1.60%
1.60%
1.58%
1.65%
1.62%
1.62%
1.64%
1.53%
0.45%
0.51%
0.48%
0.41%
0.53%
0.49%
0.40%
0.60%
0.56%
0.52%
0.69%
1.30%
1.20%
1.17%
1.13%
1.13%
1.10%
1.09%
1.14%
1.09%
1.07%
0.91%
0.60%
1.04%
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Annaly
Delta
Agency Peer Average
Note: Please refer to Glossary for defined terms and “Risk-Adjusted Returns” in Endnotes section for footnoted information.
21
Annaly Capital Management Inc. 2018 Annual Report Corporate Responsibility & Governance Milestones
Since 2015, Annaly has made significant enhancements to our corporate responsibility and
governance practices
s
e
n
o
t
s
e
l
i
M
e
c
n
a
n
r
e
v
o
G
&
y
t
i
l
i
b
i
s
n
o
p
s
e
R
e
t
a
r
o
p
r
o
C
2015
Introduced annual
employee engagement survey
Created Lead Independent
Director role
Initiated detailed succession
Launched extensive global investor
Kevin Keyes, President, named
planning process with Board
outreach campaign
Chief Executive Officer
2016
Adopted anti-pledging policy and four year
stock holding period for employees
Increased Board
Stock Ownership Guidelines
Adopted broad-based
Employee Stock
Ownership Guidelines(1)
Established management
Cybersecurity Committee
Adopted clawback policy for
Annaly for amounts paid to
external manager
2017
2018
Joined the
National
Association
of Corporate
Directors
Joined the
Council of
Institutional
Investors
Launched
Women’s
Interactive
Network,
represents over
30% of the firm
Announced
inaugural JV
with Capital
Impact Partners
for social impact
investing
Kevin Keyes,
CEO and
President, named
Chairman of the
Board
Refreshed
60% of Board
Committee
Designated
second Audit
Committee
Chairmanships
financial expert
NEOs
Publication of
voluntarily
Board Skills
increased stock
Matrix in Proxy
ownership
commitments
Hosted
inaugural
Investor Day
Established
Corporate
Responsibility
Committee of
the Board(2)
Recognized in the Bloomberg
Gender-Equality Index
Elected two additional
women to the Board
Established new Head of
Corporate Responsibility &
Government Relations to lead
Annaly’s ESG efforts
Enhanced corporate governance and
Established enhanced corporate
compensation disclosure (resulting
compliance function with
Adopted bylaw amendment to
in over ~94% favorable
a new hire to lead the Corporate
declassify the Board
Say-on-Pay vote)
Compliance Group
Focused on developing talent,
26 promotions
Enhanced parental
leave policy
Participated in the 2018
Women in the Workplace
survey conducted by
LeanIn.Org and McKinsey
Adopted enhanced Board
evaluation process, including
individual directors assessments and
periodic use of external facilitator
Adopted Board refreshment policy
Initiated an energy audit to
related to tenure and retirement age
track and monitor impact and
of Independent Directors
energy usage
2019
YTD
Recognized in Bloomberg
Gender-Equality Index for second
consecutive year
Announced 2nd JV with Capital Impact
Partners for social impact investing
Added third Audit Committee
financial expert
Added two new Independent
Added extensive disclosure
Directors – Continuing Directors are
on the Firm’s ESG efforts to the
45% women
corporate website
Note: Please refer to Glossary for defined terms and “Corporate Responsibility & Governance Milestones” in Endnotes section for footnoted information.
22
Annaly Capital Management Inc. 2018 Annual ReportJanuary
2015
2016
2017
2018
Introduced annual
employee engagement survey
Created Lead Independent
Director role
Initiated detailed succession
planning process with Board
Launched extensive global investor
outreach campaign
Kevin Keyes, President, named
Chief Executive Officer
Adopted anti-pledging policy and four year
Increased Board
stock holding period for employees
Stock Ownership Guidelines
Adopted broad-based
Employee Stock
Ownership Guidelines(1)
Established management
Cybersecurity Committee
Adopted clawback policy for
Annaly for amounts paid to
external manager
Joined the
National
Association
of Corporate
Directors
Joined the
Council of
Institutional
Launched
Women’s
Interactive
Network,
Announced
inaugural JV
with Capital
Impact Partners
Investors
represents over
for social impact
30% of the firm
investing
Kevin Keyes,
CEO and
President, named
Chairman of the
Board
Refreshed
60% of Board
Committee
Chairmanships
Designated
second Audit
Committee
financial expert
Publication of
Board Skills
Matrix in Proxy
NEOs
voluntarily
increased stock
ownership
commitments
Hosted
inaugural
Investor Day
Established
Corporate
Responsibility
Committee of
the Board(2)
Recognized in the Bloomberg
Elected two additional
Corporate Responsibility &
Gender-Equality Index
women to the Board
Government Relations to lead
Established new Head of
Annaly’s ESG efforts
Enhanced corporate governance and
compensation disclosure (resulting
in over ~94% favorable
Say-on-Pay vote)
Established enhanced corporate
compliance function with
a new hire to lead the Corporate
Compliance Group
Adopted bylaw amendment to
declassify the Board
Focused on developing talent,
Enhanced parental
Women in the Workplace
26 promotions
leave policy
Participated in the 2018
survey conducted by
LeanIn.Org and McKinsey
Adopted enhanced Board
evaluation process, including
individual directors assessments and
periodic use of external facilitator
Adopted Board refreshment policy
related to tenure and retirement age
of Independent Directors
Initiated an energy audit to
track and monitor impact and
energy usage
2019
YTD
Recognized in Bloomberg
Gender-Equality Index for second
consecutive year
Announced 2nd JV with Capital Impact
Partners for social impact investing
Added third Audit Committee
financial expert
Added two new Independent
Directors – Continuing Directors are
45% women
Added extensive disclosure
on the Firm’s ESG efforts to the
corporate website
Note: Please refer to Glossary for defined terms and “Corporate Responsibility & Governance Milestones” in Endnotes section for footnoted information.
23
Annaly Capital Management Inc. 2018 Annual ReportJanuaryDecember Corporate Governance
We are committed to maintaining robust governance practices that benefit the long-term interests
of our investors
11
Continuing Directors
72
Funds with ESG or SRI designations
own Annaly common stock(1)
Recent Changes to Corporate Governance
The Board appointed four new Independent Directors, enhancing
Board expertise in audit, government affairs and compensation and
governance best practices
Vicki Williams
Katie Beirne
Fallon
Kathy Hopinkah
Hannan
Thomas
Hamilton
Chief Human
Resources Officer for
NBCUniversal
Global Head of
Corporate Affairs for
Hilton Worldwide
Holdings Inc.
Former National
Managing Partner,
Global Lead Partner
for KPMG, LLP
Former Global
Head of Securitized
Product Trading &
Banking and Head of
Municipal Trading
and Banking at
Barclays Capital
The Board unanimously
amended its bylaws to declassify the Board
The amendment to the bylaws provides that Directors will be nominated for election
for one-year terms beginning with Annaly’s annual meeting of stockholders in
2019 and as Directors’ terms expire
The Board unanimously adopted an enhanced Director
refreshment policy
Policy requires that an Independent Director may not stand for re-election following
the earlier of the Director’s 12th anniversary of service or 73rd birthday
Board
Additions
2018–2019 YTD
Declassification
of Board of
Directors
December 2018
Refreshment
Policy for
Board of
Directors
October 2018
Note: Please refer to Glossary for defined terms and “Corporate Governance” in Endnotes section for footnoted information.
24
Annaly Capital Management Inc. 2018 Annual Report ~800
Institutional investors own Annaly, an increase of 16% since
our comprehensive marketing campaign was initiated in 2015
325+
1x1 investor meetings, inclusive of in-person meetings,
calls, conferences and NDRs, since 2015
Board of Directors
Independence
Gender Diversity
Tenure
82%
45%
>10 Years
4 Directors
<5 Years
4 Directors
9.6
years
5 to 10 Years
3 Directors
of Continuing Directors are
Independent
of Continuing Directors are
Women
Represents the average tenure of
Continuing Directors
2018–2019 Global Shareholder Engagement Efforts(2)
Outreach included approximately
Outreach included approximately
2018 Say-on-Pay vote resulted in
96%
79%
94%
of top 50 institutional investors
of institutional ownership
shareholder favorability
Note: Please refer to Glossary for defined terms and “Corporate Governance” in Endnotes section for footnoted information.
25
Annaly Capital Management Inc. 2018 Annual Report Human Capital
Our people are our greatest asset and we are committed to a culture of ownership, inclusion and
excellence that promotes our employees’ engagement, development and full potential
170
Full-time employees at Annaly; the largest number of
employees since inception(1)
44%
of Operating Committee and Managing Director
promotions since 2015 were women
Our culture is built upon six core values. These values are embedded in our professional and
personal conduct and are crucial to how we operate our business
Talent
Development
& Retention
Ownership
Culture
at Annaly
Diversity
Across
the Firm
100%
7%
100%
93%
of employees are eligible to participate
in 10 unique learning and development
programs across the Company
Voluntary turnover rate in 2018 compares
favorably to financial sector rates of 17%(3)
of the twelve employee engagement survey
category scores have shown improvement
since 2015(2)
of employees participated in the
Company’s 2018 annual employee
engagement survey(2)
100%
54%
0
95%
of employees subject to our voluntary
Stock Ownership Guidelines have met or
are on track to meet the guidelines
of Annaly employees
own Annaly stock(4)
Shares of Annaly stock have been
sold by current NEOs
of employees indicated their commitment
to exceeding shareholder expectations in
2018 employee engagement survey(2)
2x
45%
39%
47%
Selected as a member of the Bloomberg
Gender-Equality Index (2018 & 2019)
of Continuing Directors
are women
of new hires in 2018 identify as women
of new hires in 2018 identify as
racially diverse
Note: Please refer to Glossary for defined terms and “Human Capital” in Endnotes section for footnoted information.
26
Annaly Capital Management Inc. 2018 Annual Report 170
44%
Full-time employees at Annaly; the largest number of
of Operating Committee and Managing Director
employees since inception(1)
promotions since 2015 were women
75%
of additions to the Board of Directors
have been women
85%
Overall employee favorability score in 2018 engagement
survey(2), a 25% increase since 2015
Our culture is built upon six core values. These values are embedded in our professional and
personal conduct and are crucial to how we operate our business
Ownership
Accountability
Communication
Collaboration
Diversity &
Inclusion
Humility
Annaly’s Six Core Values:
Talent
Development
& Retention
Ownership
Culture
at Annaly
Diversity
Across
the Firm
100%
7%
100%
93%
of employees are eligible to participate
in 10 unique learning and development
programs across the Company
Voluntary turnover rate in 2018 compares
favorably to financial sector rates of 17%(3)
of the twelve employee engagement survey
category scores have shown improvement
since 2015(2)
of employees participated in the
Company’s 2018 annual employee
engagement survey(2)
100%
54%
0
95%
of employees subject to our voluntary
Stock Ownership Guidelines have met or
are on track to meet the guidelines
of Annaly employees
own Annaly stock(4)
Shares of Annaly stock have been
sold by current NEOs
of employees indicated their commitment
to exceeding shareholder expectations in
2018 employee engagement survey(2)
2x
45%
39%
47%
Selected as a member of the Bloomberg
Gender-Equality Index (2018 & 2019)
of Continuing Directors
are women
of new hires in 2018 identify as women
of new hires in 2018 identify as
racially diverse
Note: Please refer to Glossary for defined terms and “Human Capital” in Endnotes section for footnoted information.
27
Annaly Capital Management Inc. 2018 Annual Report Responsible Investments
We finance housing across the country and support the vitality of local communities and the
economy through our investments
750,000 Homes
For Americans and their families are financed by Annaly
across 50 states(1)
Over $1.5 Billion
Investments that support key pillars of the U.S. economy in
middle market businesses and commercial real estate(2)
Lower Loan Balance Mortgage
Self-Employed Borrowers
Credit Risk Transfers
Housing Investments
180,000 Loans
totaling $14.4 billion
to borrowers with lower loan balance
mortgages, typically financing homes
that are less than half the national
house price average(3)
3.7 million
additional homes
supported through Annaly’s
investment in CRT securities, which
are instruments that allow the
private sector to take credit risk from
Fannie Mae and Freddie Mac(5)
830 Loans
totaling $500 million
to self-employed, creditworthy
borrowers, including small business
owners that have challenges
accessing mortgage credit
from commercial banks due to
non-traditional income(4)
Commercial Investments(6)
Health Care
Economic Opportunity
$633 million
invested to support access to medical services and
equipment and streamline management of health care
related information
$297 million
invested to support the comprehensive needs of
communities, including affordable housing, education,
health care and retail grocery in food deserts(7)
Data & Technology
Sustainable Environment
$264 million
invested in companies that support technological
advancement and innovation, key drivers of the economy
of the future
$429 million
invested in environmentally friendly buildings
and businesses
Note: Please refer to Glossary for defined terms and “Responsible Investments” in Endnotes section for footnoted information.
28
Annaly Capital Management Inc. 2018 Annual Report 16
Community development projects in
underserved communities across the country supported
through our first social impact joint venture
Nearly 500k
Square feet in community development across
the U.S. employing 1,200 individuals through our first
social impact joint venture
Social Impact Joint Ventures
$25 Million(8)
$25 Million(9)
Joint Venture supporting community
development in underserved cities across
the country
Joint Venture supporting affordable housing
& other community development projects in
Washington, D.C.
Announced November 2017
Announced January 2019
Our First Social Impact Joint Venture Announced November 2017:
Nearly 500,000 square feet in community development projects employing 1,200 individuals
Nearly 3,000 students receiving charter school education, with 80% qualifying for free and
reduced-price lunches
Nearly 30,000 patients receiving care from community health centers and eldercare
residences with 3,420 elders and nearly 14,000 below the poverty line served
Over 40,000 people in low-income areas with access to healthy foods through retail grocery
and food production facilities
Note: Please refer to Glossary for defined terms and “Responsible Investments” in Endnotes section for footnoted information.
29
Annaly Capital Management Inc. 2018 Annual Report Board of Directors
Annaly’s highly qualified Board of Directors possesses a broad array of complementary skills
and experience
Director
Principal Occupation
Committees
Annaly Board of Directors
Kevin G. Keyes
Chairman, Chief Executive Officer and President
Annaly Capital Management, Inc.
Francine J. Bovich
Former Managing Director
Morgan Stanley Investment Management
Kevin P. Brady(1)
Chief Executive Officer
ARMtech, LLC
Wellington J. Denahan Former Executive Chairman
Katie Beirne Fallon
Annaly Capital Management, Inc.
Global Head of Corporate Affairs
Hilton Worldwide Holdings Inc.
Jonathan D. Green
Former Vice Chairman
Rockefeller Group
■ Nominating and Corporate Governance
(Chair)
■ Corporate Responsibility
■ Audit (Chair)
■ Nominating and Corporate Governance
■ Risk
■ Corporate Responsibility
■ Risk
■ Corporate Responsibility
■ Nominating and Corporate Governance
■ Corporate Responsibility (Chair)
■ Compensation
■ Risk
Thomas Hamilton
Kathy Hopinkah
Hannan
Michael Haylon
President, Chief Executive Officer and Owner
Construction Forms, Inc.
■ Audit
■ Risk
Former National Managing Partner,
Global Lead Partner
KPMG
Managing Director and Head of
Conning North America
Conning, Inc.
■ Audit
■ Nominating and Corporate Governance
■ Audit
■ Risk
E. Wayne Nordberg(1)
Chairman
Hollow Brook Wealth Management, LLC
■ Audit
■ Compensation
■ Nominating and Corporate Governance
John H. Schaefer
Former President and Chief Operating Officer
Morgan Stanley Global Wealth Management
■ Risk (Chair)
■ Audit
■ Compensation
Donnell A. Segalas
Chief Executive Officer and Managing Partner
Pinnacle Asset Management, L.P.
■ Compensation (Chair)
■ Corporate Responsibility
■ Nominating and Corporate Governance
Vicki Williams
Chief Human Resources Officer
NBCUniversal
■ Audit
■ Compensation
Note: Please refer to Glossary for defined terms and “Board of Directors” in Endnotes section for footnoted information.
30
Annaly Capital Management Inc. 2018 Annual Report Annaly Outperformance
Annaly has outperformed other yield options since its diversification
strategy began in 2014 both in terms of total return and yield
delivered to shareholders
Relative Performance of Yield Sectors
Total Shareholder Return
Dividend Yield
82.9%
67.6%
62.9%
62.3%
52.4%
44.1%
42.5%
(22.9%)
11.5%
10.6%
2.1%
4.1%
4.2%
3.2%
3.6%
8.3%
Annaly
mREITs
Equity REITs
S&P 500
Utilities
Select Financials
Consumer Staples
MLPs
82.9%
67.6%
62.9%
62.3%
52.4%
44.1%
42.5%
(22.9%)
Dec-13
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Annaly
mREITs
Equity REITs
S&P 500
Utilities
Select Financials
Consumer Staples
MLPs
Note: Please refer to Glossary for defined terms and “Annaly Outperformance” in Endnotes section for footnoted information.
31
Annaly Capital Management Inc. 2018 Annual Report (This page intentionally left blank.) UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-13447
ANNALY CAPITAL MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
MARYLAND
(State or other jurisdiction of incorporation or organization)
22-3479661
(IRS Employer Identification No.)
1211 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK
(Address of principal executive offices)
10036
(Zip Code)
(212) 696-0100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
7.625% Series C Cumulative Redeemable Preferred Stock
7.50% Series D Cumulative Redeemable Preferred Stock
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
8.125% Series H Cumulative Redeemable Preferred Stock
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
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
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files). Yes
No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
company
Emerging growth
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
At June 30, 2018, the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately
$11.9 billion, based on the closing sales price of the registrant’s common stock on such date as reported on the New York Stock
Exchange.
The number of shares of the registrant’s Common Stock outstanding on January 31, 2019 was 1,400,060,337.
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, 2018. Portions of such proxy statement are incorporated by reference into Part III of this Form
10-K.
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
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
No
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files). Yes
No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Emerging growth
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
At June 30, 2018, the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately
$11.9 billion, based on the closing sales price of the registrant’s common stock on such date as reported on the New York Stock
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, 2018. Portions of such proxy statement are incorporated by reference into Part III of this Form
Exchange.
10-K.
ANNALY CAPITAL MANAGEMENT, INC.
2018 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
company
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
The number of shares of the registrant’s Common Stock outstanding on January 31, 2019 was 1,400,060,337.
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Exhibit Index
Item 16.
Form 10-K Summary
Financial Statements
Signatures
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
PART I
ITEM 1. BUSINESS
“Annaly,” “we,” “us,” or “our” refers to Annaly Capital Management, Inc. and our wholly-owned subsidiaries, 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 Part II, 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.
The following description of our business should be read in conjunction with the Consolidated Financial Statements and the related
Notes thereto, and the information set forth under the heading “Special Note Regarding Forward-Looking Statements” in Item
7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
INDEX TO ITEM 1. BUSINESS
Page
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Business Overview
Acquisition of MTGE Investment Corp.
Investment Groups
Investment Strategy and Capital Allocation Policy
Our Portfolio and Capital Allocation
Risk Appetite Statement
Target Assets
Capital Structure and Financing
Operating Platform
Risk Management
Management Agreement
Executive Officers
Employees
Regulatory Requirements
Competition
Corporate Governance
Distributions
Available Information
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Business Overview
We are a leading diversified capital manager that invests in and finances residential and commercial assets. Our principal business
objective is to generate net income for distribution to our stockholders and to preserve capital through prudent selection of
investments and continuous management of our portfolio. We are a Maryland corporation founded in 1997 that has elected to be
taxed as a real estate investment trust (“REIT”). We are externally managed by Annaly Management Company LLC (“Manager”).
Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”
We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between
the yield on our assets and the cost of our borrowings and hedging activities.
Acquisition of MTGE Investment Corp.
As previously disclosed in our filings with the Securities Exchange Commission (“SEC”), the acquisition of MTGE Investment
Corp. (“MTGE” and such acquisition, the “MTGE Acquisition”), an externally managed hybrid mortgage REIT, closed on
September 7, 2018 for an aggregate consideration to MTGE common stockholders of $906.2 million, consisting of $455.9 million
in equity consideration and $450.3 million in cash consideration. Annaly issued 43.6 million common shares as part of the
consideration for the MTGE Acquisition.
Refer to the note titled “Acquisition of MTGE Investment Corp.” located in Item 15. “Exhibits, Financial Statement Schedules”
for additional details.
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Investment Groups
Our investment groups are comprised of the following:
Investment Groups
Annaly Agency Group
Annaly Residential Credit Group
Annaly Commercial Real Estate Group
Description
Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which
are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Invests in non-Agency residential mortgage assets within the securitized product and residential mortgage
loan markets.
Originates and invests in commercial mortgage loans, securities and other commercial real estate debt
and equity investments.
Annaly Middle Market Lending Group
Provides debt financing to private equity-backed middle market businesses across the capital structure.
We have made significant investments in our business as part of the diversification of our investment strategy. Our operating
platform has expanded in support of our diversification strategy, and has included investments in systems, infrastructure and
personnel. Our operating platform supports our investments in Agency assets as well as residential credit assets, commercial real
estate, residential mortgage loans, mortgage servicing rights (“MSRs”), and corporate loans. The diversity of our investment
alternatives provides us the flexibility to adapt to changes in market conditions and to take advantage of potential resulting
opportunities.
We believe that our business objectives are supported by our size and conservative financial posture relative to the industry, the
extensive experience of our Manager’s employees, the diversity of our investment strategy, a comprehensive risk management
approach, the availability and diversification of financing sources, our corporate structure and our operational efficiencies.
Investment Strategy and Capital Allocation Policy
We seek to generate net income for distribution to our stockholders and to preserve capital through prudent selection of investments
and continuous management of our portfolio. Under our capital allocation policy, subject to oversight by our board of directors
(“Board”), we may allocate our investments within our target asset classes as we determine to be appropriate from time to time.
Our Board may adopt changes to our capital allocation policy and targeted assets at its discretion.
The nature of our assets and our operations are intended to meet our REIT qualification requirements and our exemption from
registration as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”).
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Business Overview
We are a leading diversified capital manager that invests in and finances residential and commercial assets. Our principal business
objective is to generate net income for distribution to our stockholders and to preserve capital through prudent selection of
investments and continuous management of our portfolio. We are a Maryland corporation founded in 1997 that has elected to be
taxed as a real estate investment trust (“REIT”). We are externally managed by Annaly Management Company LLC (“Manager”).
Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”
We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between
the yield on our assets and the cost of our borrowings and hedging activities.
Acquisition of MTGE Investment Corp.
As previously disclosed in our filings with the Securities Exchange Commission (“SEC”), the acquisition of MTGE Investment
Corp. (“MTGE” and such acquisition, the “MTGE Acquisition”), an externally managed hybrid mortgage REIT, closed on
September 7, 2018 for an aggregate consideration to MTGE common stockholders of $906.2 million, consisting of $455.9 million
in equity consideration and $450.3 million in cash consideration. Annaly issued 43.6 million common shares as part of the
consideration for the MTGE Acquisition.
Refer to the note titled “Acquisition of MTGE Investment Corp.” located in Item 15. “Exhibits, Financial Statement Schedules”
for additional details.
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Investment Groups
Our investment groups are comprised of the following:
Investment Groups
Annaly Agency Group
Description
Annaly Residential Credit Group
Annaly Commercial Real Estate Group
loan markets.
and equity investments.
Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which
are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Invests in non-Agency residential mortgage assets within the securitized product and residential mortgage
Originates and invests in commercial mortgage loans, securities and other commercial real estate debt
Annaly Middle Market Lending Group
Provides debt financing to private equity-backed middle market businesses across the capital structure.
We have made significant investments in our business as part of the diversification of our investment strategy. Our operating
platform has expanded in support of our diversification strategy, and has included investments in systems, infrastructure and
personnel. Our operating platform supports our investments in Agency assets as well as residential credit assets, commercial real
estate, residential mortgage loans, mortgage servicing rights (“MSRs”), and corporate loans. The diversity of our investment
alternatives provides us the flexibility to adapt to changes in market conditions and to take advantage of potential resulting
opportunities.
We believe that our business objectives are supported by our size and conservative financial posture relative to the industry, the
extensive experience of our Manager’s employees, the diversity of our investment strategy, a comprehensive risk management
approach, the availability and diversification of financing sources, our corporate structure and our operational efficiencies.
Investment Strategy and Capital Allocation Policy
We seek to generate net income for distribution to our stockholders and to preserve capital through prudent selection of investments
and continuous management of our portfolio. Under our capital allocation policy, subject to oversight by our board of directors
(“Board”), we may allocate our investments within our target asset classes as we determine to be appropriate from time to time.
Our Board may adopt changes to our capital allocation policy and targeted assets at its discretion.
The nature of our assets and our operations are intended to meet our REIT qualification requirements and our exemption from
registration as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”).
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Our Portfolio and Capital Allocation
Our portfolio composition and capital allocation at December 31, 2018 and 2017 were as follows:
Investment Group
Residential
Annaly Agency Group (2)
Annaly Residential Credit Group (3)
Commercial
Annaly Commercial Real Estate Group (3)
Annaly Middle Market Lending Group
December 31, 2018
December 31, 2017
Percentage of
Portfolio
Capital
Allocation (1)
Percentage of
Portfolio
Capital
Allocation (1)
89%
4%
5%
2%
72%
10%
7%
11%
91%
3%
5%
1%
76%
11%
8%
5%
(1) Capital allocation represents the percentage of equity allocated to each category.
(2)
Includes MSRs.
Includes assets transferred or pledged to securitization vehicles.
(3)
Risk Appetite
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 our risk management philosophy. We engage in risk activities based on our core expertise
that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive
portfolio management, supported by a conservative liquidity and leverage posture.
The risk appetite statement asserts the following key risk parameters to guide our investment management activities:
Risk Parameter
Description
Portfolio composition
We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital
allocation policy.
Leverage
Liquidity risk
Interest rate risk
Credit risk
We generally expect to maintain an economic leverage ratio no greater than 10:1.
We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs even under adverse
market conditions.
We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative
instruments targeting both income generation and capital preservation.
We will seek to manage credit risk by making investments which conform within our specific investment policy
parameters and optimize risk-adjusted returns.
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 has reviewed and approved the investment and operating policies and strategies that support our risk appetite statement
established by our Manager and set forth in this Form 10-K. Our Board has the power to modify or waive these policies and
strategies to the extent that our Board, in its discretion, determines that the modification or waiver is in the best interests of our
stockholders. Among other factors, market developments which affect our policies and strategies or which change our assessment
of the market may cause our Board 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 or companies by offering our debt or equity securities in exchange for such opportunities.
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;
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ITEM 1. BUSINESS
• 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 registration under the Investment
Company Act; and
The capital requirements associated with the purchase
and financing of the asset.
We target the purchase and sale of the assets listed below 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.
Investment Group
Targeted Asset Class
Description
Annaly Agency Group
Annaly Residential
Credit Group
Agency mortgage-backed
securities
To-be-announced forward
contracts (“TBAs”)
Agency pass-through certificates issued or guaranteed by Freddie Mac, Fannie
Mae or Ginnie Mae. Other Agency MBS include collateralized mortgage
obligations (“CMOs”), interest-only securities and inverse floaters
Forward contracts for Agency pass-through certificates
Agency commercial mortgage-
backed securities
Pass-through certificates collateralized by commercial mortgages guaranteed by
Freddie Mac, Fannie Mae or Ginnie Mae
Mortgage Servicing Rights
(“MSRs”)
Rights to service a pool of residential loans in exchange for a portion of the
interest payments made on the loans
Residential mortgage loans
Residential mortgage loans that are not guaranteed by Freddie Mac, Fannie Mae
or Ginnie Mae
Residential mortgage-backed
securities
Securities collateralized by pools of residential loans that are not guaranteed by
one of the Agencies
Agency or private label credit
risk transfer securities (“CRT”)
Risk sharing transactions issued by Freddie Mac and Fannie Mae and similarly
structured transactions arranged by third party market participants, designed to
synthetically transfer mortgage credit risk to private investors
Commercial mortgage loans
Loans collateralized by commercial real estate properties
Annaly Commercial
Real Estate Group
Commercial mortgage-backed
securities
Mezzanine loans
Securities collateralized by pools of commercial mortgage loans
Loans collateralized by commercial real estate properties subordinate to first
mortgage loans
Real property
Commercial real estate properties that generate current cash flow
Annaly Middle Market
Lending Group
First lien middle market loans
Senior secured loans made to middle market companies that are the first to be
repaid in the event of a borrower default
Second lien middle market
loans
Senior secured loans to middle market companies that have a junior claim on
collateral to those of first lien loans
We believe that future interest rates and mortgage prepayment rates are very difficult to predict. Therefore, we seek to acquire
assets which we believe will provide attractive returns over a broad range of interest rate and prepayment scenarios.
Capital Structure and Financing
Our capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for
our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods
of market stress. To maintain our desired capital profile, we utilize a mix of debt and equity funding. Debt funding may include
the use of repurchase agreements, Federal Home Loan Bank (“FHLB”) advances, loans, securitizations, participation sold, lines
of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payable or other liabilities. Equity
capital primarily consists of common and preferred stock.
We finance our Agency mortgage-backed securities and residential credit investments primarily with repurchase agreements. We
also finance certain commercial real estate investments with repurchase agreements. We seek to diversify our exposure and limit
concentrations by entering into repurchase agreements with multiple counterparties. We enter into repurchase agreements 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. At December 31, 2018, we had $81.1 billion of repurchase agreements outstanding.
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4
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
• When applicable, the credit of the underlying
• The impact of the asset to our REIT compliance and
• The costs of financing, hedging and managing the
Company Act; and
borrower;
asset;
our exemption from registration under the Investment
• The capital requirements associated with the purchase
and financing of the asset.
We target the purchase and sale of the assets listed below 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.
Investment Group
Targeted Asset Class
Description
Agency mortgage-backed
securities
To-be-announced forward
contracts (“TBAs”)
Agency pass-through certificates issued or guaranteed by Freddie Mac, Fannie
Mae or Ginnie Mae. Other Agency MBS include collateralized mortgage
obligations (“CMOs”), interest-only securities and inverse floaters
Annaly Agency Group
Forward contracts for Agency pass-through certificates
Annaly Residential
Credit Group
securities
one of the Agencies
Agency commercial mortgage-
Pass-through certificates collateralized by commercial mortgages guaranteed by
backed securities
Freddie Mac, Fannie Mae or Ginnie Mae
Mortgage Servicing Rights
Rights to service a pool of residential loans in exchange for a portion of the
(“MSRs”)
interest payments made on the loans
Residential mortgage loans
or Ginnie Mae
Residential mortgage loans that are not guaranteed by Freddie Mac, Fannie Mae
Residential mortgage-backed
Securities collateralized by pools of residential loans that are not guaranteed by
Agency or private label credit
risk transfer securities (“CRT”)
Risk sharing transactions issued by Freddie Mac and Fannie Mae and similarly
structured transactions arranged by third party market participants, designed to
synthetically transfer mortgage credit risk to private investors
Commercial mortgage loans
Loans collateralized by commercial real estate properties
Commercial mortgage-backed
securities
Securities collateralized by pools of commercial mortgage loans
Mezzanine loans
mortgage loans
Loans collateralized by commercial real estate properties subordinate to first
Real property
Commercial real estate properties that generate current cash flow
Annaly Commercial
Real Estate Group
Annaly Middle Market
Lending Group
First lien middle market loans
Senior secured loans made to middle market companies that are the first to be
repaid in the event of a borrower default
Second lien middle market
Senior secured loans to middle market companies that have a junior claim on
loans
collateral to those of first lien loans
We believe that future interest rates and mortgage prepayment rates are very difficult to predict. Therefore, we seek to acquire
assets which we believe will provide attractive returns over a broad range of interest rate and prepayment scenarios.
Capital Structure and Financing
Our capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for
our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods
of market stress. To maintain our desired capital profile, we utilize a mix of debt and equity funding. Debt funding may include
the use of repurchase agreements, Federal Home Loan Bank (“FHLB”) advances, loans, securitizations, participation sold, lines
of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payable or other liabilities. Equity
capital primarily consists of common and preferred stock.
We finance our Agency mortgage-backed securities and residential credit investments primarily with repurchase agreements. We
also finance certain commercial real estate investments with repurchase agreements. We seek to diversify our exposure and limit
concentrations by entering into repurchase agreements with multiple counterparties. We enter into repurchase agreements 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. At December 31, 2018, we had $81.1 billion of repurchase agreements outstanding.
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Additionally, our wholly-owned subsidiary, Arcola Securities, Inc. (“Arcola”), provides direct access to bilateral and triparty
funding as a FINRA member broker-dealer. As an eligible institution, Arcola also raises funds through the General Collateral
Finance Repo service offered by the Fixed Income Clearing Corporation (“FICC”), with FICC acting as the central counterparty.
Since its inception in 2008, Arcola has provided us greater depth and diversity of repurchase agreement funding while also limiting
our counterparty exposure.
To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At December 31, 2018, the weighted
average days to maturity was 77 days.
We maintain access to FHLB funding through our captive insurance subsidiary Truman Insurance Company LLC (“Truman”).
We finance eligible Agency, residential and commercial investments through the FHLB. While a January 2016 Federal Housing
Finance Agency (“FHFA”) ruling requires captive insurance companies to terminate their FHLB membership, given the length
of its membership, Truman has been granted a five year sunset provision whereby its membership is scheduled to expire in February
2021. We believe our business objectives align well with the mission of the FHLB System. While there can be no assurances that
such steps will be taken, we believe it would be appropriate for there to be legislative action to permit Truman and similar captive
insurance subsidiaries to retain their membership status beyond the current sunset period.
We utilize diverse funding sources to finance our commercial investments. In addition to FHLB funding, we may utilize bilateral
borrowing facilities, securitization funding and, in the case of equity investments in commercial real estate, mortgage financing.
We utilize leverage to enhance the risk-adjusted returns generated for our stockholders. We generally expect to maintain an economic
leverage ratio of no greater than 10:1. 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 mix of assets, 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, lastly, our assessment of domestic and international market conditions. Since the financial crisis beginning in 2007, we have
maintained an economic leverage ratio below 8:1, which is generally lower than our leverage ratio had been prior to 2007. For
purposes of calculating this ratio, our economic leverage ratio is equal to the sum of Recourse Debt, TBA derivative and CMBX
notional outstanding and net forward purchases (sales) of investments divided by total equity.
Our target economic leverage ratio is determined under our capital management policy. Should our actual economic leverage ratio
increase above the target level, we will consider 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.
The following table presents our leverage, economic leverage and capital ratios as of the periods presented.
Leverage ratio
Economic leverage ratio
Capital ratio
December 31,
2018
December 31,
2017
6.3:1
7.0:1
12.1%
5.7:1
6.6:1
12.9%
Operating Platform
We maintain a flexible and scalable operating platform to support the management and maintenance of our diverse asset portfolio.
We have invested in our infrastructure to enhance resiliency, efficiency, cybersecurity, and leveragability while also ensuring
coverage of our target assets. Our information technology applications span the portfolio life-cycle including pre-trade analysis,
trade execution and capture, trade settlement and financing, monitoring, and financial accounting and reporting.
Technology applications also support our control functions including risk, compliance, middle- and back-office functions. We
have added breadth to our operating platform to accommodate diverse asset classes and drive automation-based efficiencies. Our
business operations include a centralized collateral management function that permits in-house settlement and self-clearing, thereby
creating greater control and management of our collateral. Through technology, we have also incorporated exception based
processing, critical data assurance and paperless workflows. Our infrastructure investment has driven operating efficiencies while
expanding the platform. Routine disaster recovery and penetration testing enhances our systems resiliency, security and recovery
of critical systems throughout the computing estate.
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5
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Risk Management
Risk is a natural element of our business. Effective risk management is of critical importance to the success of the firm. The
objective of our risk management framework is to identify, measure, monitor and control 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 titled “Risk Management” of Part II, Item 7. “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 (the
“Externalization”). The Management Agreement was effective as of July 1, 2013 and was amended on November 5, 2014 and
amended and restated on April 12, 2016 and August 1, 2018 (the management agreement, as amended and restated, is referred to
as the “Management Agreement”).
The Management Agreement’s current term ends on December 31, 2019 and will automatically renew for successive two-year
terms unless at least two-thirds of our 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 upon 365 days notice
(such notice, a “Termination Notice”). During any period between the date we deliver a Termination Notice (the “Notice Delivery
Date”) and the date designated by us as the date on which the Manager shall cease to provide management services (the “Termination
Date”), the Manager shall continue to perform its duties and obligations under the Management Agreement and cooperate with
us to execute an orderly transition to a new manager. If we elect to terminate the Management Agreement, we may elect to accelerate
the Termination Date to a date that is between seven and 90 days after the Notice Delivery Date. If we do not elect to do so, then
the Manager may elect to accelerate the Termination Date to the date that is 90 days after the Notice Delivery Date. If the Termination
Date is accelerated (such date, the “Accelerated Termination Date”) by either us or the Manager, we shall pay the Manager an
acceleration fee (the “Acceleration Fee”) in an amount equal to the average annual management fee earned by the Manager during
the 24-month period immediately preceding such Accelerated Termination Date multiplied by a fraction with a numerator of 365
minus the number of days from the Notice Delivery Date to the Accelerated Termination Date, and a denominator of 365. The
Management Agreement also provides that 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 365 days 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.
Under the Management Agreement, the Manager, subject to the supervision and direction of our Board, is responsible for (i) the
selection, purchase and sale of assets for our investment portfolio; (ii) recommending alternative forms of capital raising; (iii)
supervising our financing and hedging activities; and (iv) day to day management functions. The Manager also performs such
other supervisory and management services and activities relating to our assets and operations as may be appropriate. In exchange
for the management services, we pay the Manager a monthly management fee in an amount equal to 1/12th of 1.05% of our
stockholders’ equity (as defined in the Management Agreement), and the Manager is responsible for providing personnel to manage
us and paying all compensation and benefit expenses associated with such personnel. We do not pay the Manager any incentive
fees. In addition to the management fee, in August 2018, the Company began reimbursing the Manager for the cost of certain
legal, tax, accounting and other support and advisory services provided by employees of the Manager to the Company. Such
reimbursements are permitted pursuant to the terms of the Management Agreement provided the related costs are no greater than
those that would be payable to comparable third party providers.
The Management Agreement provides that during the term of the Management Agreement and, in the event of termination of this
Agreement by the Manager without cause, for a period of one year following such termination, the Manager will not, without our
prior written consent, manage, operate, join, control, participate in, or advise any person other than us without the prior written
consent of the Risk Committee of the Board.
The Management Agreement may be amended or modified by agreement between us and the Manager.
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6
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Risk Management
Risk is a natural element of our business. Effective risk management is of critical importance to the success of the firm. The
objective of our risk management framework is to identify, measure, monitor and control 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 titled “Risk Management” of Part II, Item 7. “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 (the
“Externalization”). The Management Agreement was effective as of July 1, 2013 and was amended on November 5, 2014 and
amended and restated on April 12, 2016 and August 1, 2018 (the management agreement, as amended and restated, is referred to
as the “Management Agreement”).
The Management Agreement’s current term ends on December 31, 2019 and will automatically renew for successive two-year
terms unless at least two-thirds of our 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 upon 365 days notice
(such notice, a “Termination Notice”). During any period between the date we deliver a Termination Notice (the “Notice Delivery
Date”) and the date designated by us as the date on which the Manager shall cease to provide management services (the “Termination
Date”), the Manager shall continue to perform its duties and obligations under the Management Agreement and cooperate with
us to execute an orderly transition to a new manager. If we elect to terminate the Management Agreement, we may elect to accelerate
the Termination Date to a date that is between seven and 90 days after the Notice Delivery Date. If we do not elect to do so, then
the Manager may elect to accelerate the Termination Date to the date that is 90 days after the Notice Delivery Date. If the Termination
Date is accelerated (such date, the “Accelerated Termination Date”) by either us or the Manager, we shall pay the Manager an
acceleration fee (the “Acceleration Fee”) in an amount equal to the average annual management fee earned by the Manager during
the 24-month period immediately preceding such Accelerated Termination Date multiplied by a fraction with a numerator of 365
minus the number of days from the Notice Delivery Date to the Accelerated Termination Date, and a denominator of 365. The
Management Agreement also provides that 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 365 days 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.
Under the Management Agreement, the Manager, subject to the supervision and direction of our Board, is responsible for (i) the
selection, purchase and sale of assets for our investment portfolio; (ii) recommending alternative forms of capital raising; (iii)
supervising our financing and hedging activities; and (iv) day to day management functions. The Manager also performs such
other supervisory and management services and activities relating to our assets and operations as may be appropriate. In exchange
for the management services, we pay the Manager a monthly management fee in an amount equal to 1/12th of 1.05% of our
stockholders’ equity (as defined in the Management Agreement), and the Manager is responsible for providing personnel to manage
us and paying all compensation and benefit expenses associated with such personnel. We do not pay the Manager any incentive
fees. In addition to the management fee, in August 2018, the Company began reimbursing the Manager for the cost of certain
legal, tax, accounting and other support and advisory services provided by employees of the Manager to the Company. Such
reimbursements are permitted pursuant to the terms of the Management Agreement provided the related costs are no greater than
those that would be payable to comparable third party providers.
The Management Agreement provides that during the term of the Management Agreement and, in the event of termination of this
Agreement by the Manager without cause, for a period of one year following such termination, the Manager will not, without our
prior written consent, manage, operate, join, control, participate in, or advise any person other than us without the prior written
consent of the Risk Committee of the Board.
The Management Agreement may be amended or modified by agreement between us and the Manager.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Executive Officers
Our executive officers are provided and compensated by our Manager. We do not employ or compensate our executive officers.
The following table sets forth certain information as of January 31, 2019 concerning our executive officers:
Name
Kevin G. Keyes
Glenn A. Votek
David L. Finkelstein
Timothy P. Coffey
Anthony C. Green
Age
Title
51
60
46
45
44
Chairman, Chief Executive Officer and President
Chief Financial Officer
Chief Investment Officer
Chief Credit Officer
Chief Corporate Officer, Chief Legal Officer and Secretary
Kevin G. Keyes serves as Annaly’s Chairman, Chief Executive Officer and President. Mr. Keyes has served as Chairman since
January 2018, Chief Executive Officer since September 2015 and President since October 2012. Previously, Mr. Keyes served as
Chief Strategy Officer and Head of Capital Markets of Annaly from September 2010 until October 2012. Prior to joining Annaly
as a Managing Director in 2009, Mr. Keyes worked for 20 years in senior Investment Banking and Capital Markets roles. From
2005 - 2009, Mr. Keyes served in senior management and business origination roles in the Global Capital Markets and Banking
Group at Bank of America Merrill Lynch. Prior to that, from 1997 - 2005 he worked at Credit Suisse First Boston in various Capital
Markets Origination roles, and from 1990 - 1997 at Morgan Stanley Dean Witter in the Mergers and Acquisitions Group and Real
Estate Investment Banking Group. Mr. Keyes is a member of the University of Notre Dame’s Campaign Cabinet, the President’s
Circle, the Student-Athlete Advisory Council and the Jesse Harper Council, as part of the Rockne Athletics Fund. He is a member
of the Wall Street Journal’s CEO Council and serves on the Board of Directors of the Rock and Roll Forever Foundation. Mr.
Keyes holds a B.A. in Economics and a B.S. in Business Administration (ALPA Program) from the University of Notre Dame.
Glenn A. Votek has served as Chief Financial Officer of Annaly since August 2013. Mr. Votek also served as Chief Financial
Officer of Fixed Income Discount Advisory Company (“FIDAC”), a former wholly-owned subsidiary of the Company, from
August 2013 until October 2015. Mr. Votek joined Annaly in May 2013 from CIT Group where he had been 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.
David L. Finkelstein has served as Chief Investment Officer of Annaly since November 2016. Mr. Finkelstein previously served
as Annaly’s Chief Investment Officer, Agency and RMBS beginning in February 2015 and as Annaly’s Head of Agency Trading
beginning in August 2013. Prior to joining Annaly in 2013, Mr. Finkelstein served for four years as an Officer in the Markets
Group of the Federal Reserve Bank of New York where he was the primary strategist and policy advisor for the MBS purchase
program. Mr. Finkelstein has over 20 years of experience in fixed income investment. Prior to the Federal Reserve Bank of New
York, Mr. Finkelstein held Agency MBS trading positions at Salomon Smith Barney, Citigroup Inc. and Barclays PLC. Mr.
Finkelstein received his B.A. in Business Administration from the University of Washington and his M.B.A. from the University
of Chicago, Booth School of Business. Mr. Finkelstein also holds the Chartered Financial Analyst® designation.
Timothy P. Coffey has served as Chief Credit Officer of Annaly since January 2016. Mr. Coffey served as Annaly’s Head of Middle
Market Lending from 2010 until January 2016. Mr. Coffey has over 20 years of experience in leveraged finance and has held a
variety of origination, execution, structuring and distribution positions. Prior to joining Annaly in 2010, Mr. Coffey served as
Managing Director and Head of Debt Capital Markets in the Leverage Finance Group at Bank of Ireland. Prior to that, Mr. Coffey
held positions at Scotia Capital, the holding company of Saul Steinberg’s Reliance Group Holdings, and SC Johnson International.
Mr. Coffey received his B.A. in Finance from Marquette University.
Anthony C. Green has served as Chief Corporate Officer of Annaly since January 2019 and as Chief Legal Officer and Secretary
of Annaly since March 2017. Mr. Green previously served as Annaly’s Deputy General Counsel from 2009 until February 2017.
Prior to joining Annaly, Mr. Green was a partner in the Corporate, Securities, Mergers & Acquisitions Group at the law firm K&L
Gates LLP. Mr. Green has over 18 years of experience in corporate and securities law. Mr. Green holds a B.A. in Economics and
Political Science from the University of Pennsylvania and a J.D. and LL.M. in International and Comparative Law from Cornell
Law School.
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.
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6
7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
At December 31, 2018, our subsidiaries had 8 employees and the Manager had 162 employees. For information about the
management fee, see the discussion in the “Management Agreement” section.
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Regulatory Requirements
We have elected, organized and 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 (the “Code”). So long as we qualify for taxation as a REIT, we generally
will not be subject to federal income tax on our taxable income that is distributed to our stockholders. Furthermore, substantially
all of our assets, other than our taxable REIT subsidiaries (“TRSs”), consists 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.
Arcola 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, Arcola is required to maintain minimum net capital by FINRA. Arcola
consistently operates with capital in excess of its regulatory capital requirements as defined by SEC Rule 15c3-1.
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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 Wall Street Reform and Consumer
Protection Act of 2010 (“Dodd-Frank Act”), which was enacted in July 2010, significantly altered the financial regulatory regime
within which financial institutions operate. The implications of the Dodd-Frank Act for our business depend to a large extent on
the rules that have been or will be adopted by the Federal Reserve Board, the FDIC, the SEC, the Commodity Futures Trading
Commission (“CFTC”) and other agencies to implement the legislation, as well as the development of market practices and
structures under the regime established by the legislation and the implementation of the rules. Other reforms have been adopted
or are being considered by other regulators and policy makers worldwide. We will continue to assess our business, risk management,
and compliance practices to conform to developments in the regulatory environment.
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Competition
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 investments. In acquiring our target assets, we will
compete with financial institutions, institutional investors, other lenders, government entities and certain other 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.”
Corporate Governance
We strive to conduct our business in accordance with the highest ethical standards and in compliance with applicable governmental
laws, rules and regulations. In 2018, our Board made a number of significant corporate governance enhancements further aligning
the Company’s interests with those of our stockholders. These enhancements included the amendment of the Company’s bylaws
to declassify our Board over a three-year period beginning with the Company’s annual meeting of stockholders in 2019, with all
directors standing for annual election by the Company’s annual meeting of stockholders in 2021. Our Board also adopted an
enhanced director refreshment policy, which provides that an independent director may not stand for re-election at the next annual
meeting of stockholders taking place at the end of his or her term following the earlier of his or her: (i) 12th anniversary of service
on our Board or (ii) 73rd birthday. Other notable governance practices and policies include:
•
•
Our Board is composed of a majority of independent
directors, and our Audit,
Compensation and
Nominating/Corporate Governance Committees are
composed exclusively of independent directors.
independent directors annually
select an
Our
independent director to serve as lead independent
director, although the lead independent director is
generally expected to serve more than one year.
• We have adopted a Code of Business Conduct and
Ethics, which sets forth the basic principles and
8
guidelines for resolving various legal and ethical
questions that may arise in the workplace and in the
conduct of our business. This code is applicable to our
directors, officers and employees as well as those of our
Manager and subsidiaries.
• We have adopted Corporate Governance Guidelines
which, in conjunction with the charters of our Board
committees, provide the framework for the governance
of our company.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
At December 31, 2018, our subsidiaries had 8 employees and the Manager had 162 employees. For information about the
management fee, see the discussion in the “Management Agreement” section.
Regulatory Requirements
We have elected, organized and 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 (the “Code”). So long as we qualify for taxation as a REIT, we generally
will not be subject to federal income tax on our taxable income that is distributed to our stockholders. Furthermore, substantially
all of our assets, other than our taxable REIT subsidiaries (“TRSs”), consists 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.
Arcola 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, Arcola is required to maintain minimum net capital by FINRA. Arcola
consistently operates with capital in excess of its regulatory capital requirements as defined by SEC Rule 15c3-1.
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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 Wall Street Reform and Consumer
Protection Act of 2010 (“Dodd-Frank Act”), which was enacted in July 2010, significantly altered the financial regulatory regime
within which financial institutions operate. The implications of the Dodd-Frank Act for our business depend to a large extent on
the rules that have been or will be adopted by the Federal Reserve Board, the FDIC, the SEC, the Commodity Futures Trading
Commission (“CFTC”) and other agencies to implement the legislation, as well as the development of market practices and
structures under the regime established by the legislation and the implementation of the rules. Other reforms have been adopted
or are being considered by other regulators and policy makers worldwide. We will continue to assess our business, risk management,
and compliance practices to conform to developments in the regulatory environment.
Competition
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 investments. In acquiring our target assets, we will
compete with financial institutions, institutional investors, other lenders, government entities and certain other 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.”
Corporate Governance
We strive to conduct our business in accordance with the highest ethical standards and in compliance with applicable governmental
laws, rules and regulations. In 2018, our Board made a number of significant corporate governance enhancements further aligning
the Company’s interests with those of our stockholders. These enhancements included the amendment of the Company’s bylaws
to declassify our Board over a three-year period beginning with the Company’s annual meeting of stockholders in 2019, with all
directors standing for annual election by the Company’s annual meeting of stockholders in 2021. Our Board also adopted an
enhanced director refreshment policy, which provides that an independent director may not stand for re-election at the next annual
meeting of stockholders taking place at the end of his or her term following the earlier of his or her: (i) 12th anniversary of service
on our Board or (ii) 73rd birthday. Other notable governance practices and policies include:
•
•
Our Board is composed of a majority of independent
directors, and our Audit,
Compensation and
Nominating/Corporate Governance Committees are
composed exclusively of independent directors.
Our
independent directors annually
select an
guidelines for resolving various legal and ethical
questions that may arise in the workplace and in the
conduct of our business. This code is applicable to our
directors, officers and employees as well as those of our
Manager and subsidiaries.
independent director to serve as lead independent
• We have adopted Corporate Governance Guidelines
director, although the lead independent director is
generally expected to serve more than one year.
which, in conjunction with the charters of our Board
committees, provide the framework for the governance
• We have adopted a Code of Business Conduct and
Ethics, which sets forth the basic principles and
of our company.
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• We have procedures by which any of our employees,
including employees of our Manager as well as those of
our subsidiaries, officers or directors may raise concerns
confidentially
conduct,
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accounting, internal controls or auditing matters with the
lead independent director, the independent directors, or
the chair of the Audit Committee or through our
company’s whistleblower phone hotline or e-mail inbox.
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• We have an Insider Trading Policy that prohibits our
directors, officers and employees, including employees
of our Manager, as well as those of our subsidiaries from
buying or selling our securities on the basis of material
nonpublic information and prohibits communicating
Distributions
material nonpublic information about our company to
others. Our Insider Trading Policy prohibits our officers
and employees, from (1) pledging our stock as collateral
for a loan or (2) engaging in any hedging transactions
with respect to our equity securities held by them.
•
Our Board has instituted expansive employee stock
ownership guidelines, pursuant to which more than 40%
of our employees, including employees of our Manager,
as well as those of our subsidiaries, are asked to purchase
predetermined amounts of Company common stock in
the open market.
In accordance with the requirements for maintaining REIT status, we intend to distribute to stockholders aggregate dividends
equaling at least 90% of our REIT taxable income (determined without regard to the deduction of dividends paid and by excluding
any net capital gain) for each taxable year and will endeavor to distribute at least 100% of our REIT taxable income so as not to
be subject to tax. Distributions of economic profits from our enterprise could be classified as return of capital due to differences
between book and tax accounting rules. 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.
8
9
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
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 any amendments to those reports as soon
as reasonably practicable after we electronically file or furnish such materials to the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the “Securities Exchange Act”).
Also posted on our website, and available in print upon request of any stockholder to our Investor Relations Department, are
charters for our Audit Committee, Compensation Committee, Nominating/Corporate Governance Committee, Risk Committee
and Public Responsibility Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics. 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
The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the
SEC at www.sec.gov.
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10
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
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 any amendments to those reports as soon
as reasonably practicable after we electronically file or furnish such materials to the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the “Securities Exchange Act”).
Also posted on our website, and available in print upon request of any stockholder to our Investor Relations Department, are
charters for our Audit Committee, Compensation Committee, Nominating/Corporate Governance Committee, Risk Committee
and Public Responsibility Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics. 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
SEC at www.sec.gov.
The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the
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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
condition and results of operations could be materially adversely affected. If this were to occur, the trading price of our stock could
decline significantly and you may lose all or part of your investment. Readers should not consider any descriptions of these factors
to be a complete set of all potential risks that could affect us.
INDEX TO ITEM 1A. RISK FACTORS
Risks Related to Our Investing, Portfolio Management and Financing Activities
Risks Related to Our Credit Assets
Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets
and Other Equity Ownership of Real Estate Assets
Risks Related to Our Residential Credit Business
Risks Related to Our Relationship with Our Manager
Risks Related to Our Taxation as a REIT
Risks of Ownership of Our Common Stock
Regulatory Risks
Page
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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 and
management determine all of our significant policies, including our investment, financing, capital and asset allocation 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 investment in new business strategies and new assets is inherently risky, and could disrupt our ongoing businesses.
To date, a significant portion of our total assets have consisted of Agency mortgage-backed securities which carry an implied or
actual “AAA” rating. Nevertheless, pursuant to the ongoing diversification of our assets, we also acquire assets of lower credit
quality.
While we remain committed to the Agency market and have grown our Agency assets, given the current environment, we believe
it is prudent to diversify a portion of our investment portfolio. For example, during 2018 we also focused on growth in our three
credit businesses, and expect that trend to continue during 2019. We invest in a range of targeted asset classes and continue to
explore new business strategies and assets and expect to continue to do so in the future.
Additionally, we may enter into or engage in various types of securitizations, transactions, services and other operating businesses
that are different than the types into which we have traditionally entered or engaged.
Such endeavors may involve significant risks and uncertainties, including credit risk, diversion of management from current
operations, expenses associated with these new investments, inadequate return of capital on our investments, and unanticipated
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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. The reasons our borrowing costs may
increase include, but are not limited to, the following:
•
•
•
short-term interest rates increase;
the market value of our investments decreases;
the “haircut” applied to our assets under the
repurchase agreements or other secured financing
arrangements we are party to increases;
•
•
interest rate volatility increases; or
the availability of financing in the market decreases.
Our leverage may cause margin calls and defaults and force us to sell assets under adverse market conditions.
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.
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 conditions. Additionally, in the event of our bankruptcy, our borrowings, which are generally made
under repurchase agreements, may qualify for special treatment under the U.S. Bankruptcy Code. This special treatment would
allow the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to liquidate the
collateral under these agreements without delay.
We may exceed our target leverage ratios.
We generally expect to maintain an economic leverage ratio of less than 10:1. However, we are not required to stay below this
economic 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 declines, our economic leverage ratio would increase. If we increase our
economic leverage 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.
Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition.
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. Furthermore, if any of our potential lenders or existing lenders is unwilling or unable to provide us
with financing or if we are not able to renew or replace maturing borrowings, we could be forced to sell our assets at an inopportune
time when prices are depressed. Our business, results of operations and financial condition may be materially adversely affected
by disruptions in the financial markets. We cannot assure you, under such extreme conditions, that these markets will remain an
efficient source of long-term financing for our assets. If our strategy is not viable, we will have to find alternative forms of
financing for our assets, which may not be available. Further, as a REIT, we are required to distribute annually at least 90% of
our REIT taxable income (subject to certain adjustments) to our stockholders and are, therefore, not able to retain significant
amounts of our earnings for new investments. We cannot assure you that any, or sufficient, funding or capital will be available to
us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, there may be a
negative impact on the market price of our common stock and our ability to make distributions to our stockholders. Moreover,
12
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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. The reasons our borrowing costs may
increase include, but are not limited to, the following:
•
•
•
short-term interest rates increase;
the market value of our investments decreases;
the “haircut” applied to our assets under the
repurchase agreements or other secured financing
arrangements we are party to increases;
•
•
interest rate volatility increases; or
the availability of financing in the market decreases.
Our leverage may cause margin calls and defaults and force us to sell assets under adverse market conditions.
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.
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 conditions. Additionally, in the event of our bankruptcy, our borrowings, which are generally made
under repurchase agreements, may qualify for special treatment under the U.S. Bankruptcy Code. This special treatment would
allow the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to liquidate the
collateral under these agreements without delay.
We may exceed our target leverage ratios.
We generally expect to maintain an economic leverage ratio of less than 10:1. However, we are not required to stay below this
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economic 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 declines, our economic leverage ratio would increase. If we increase our
economic leverage 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
•
our lenders require that we provide additional
collateral to cover our borrowings.
•
our lenders do not make funding available to us at
excessive risk;
acceptable rates; or
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. Furthermore, if any of our potential lenders or existing lenders is unwilling or unable to provide us
with financing or if we are not able to renew or replace maturing borrowings, we could be forced to sell our assets at an inopportune
time when prices are depressed. Our business, results of operations and financial condition may be materially adversely affected
by disruptions in the financial markets. We cannot assure you, under such extreme conditions, that these markets will remain an
efficient source of long-term financing for our assets. If our strategy is not viable, we will have to find alternative forms of
financing for our assets, which may not be available. Further, as a REIT, we are required to distribute annually at least 90% of
our REIT taxable income (subject to certain adjustments) to our stockholders and are, therefore, not able to retain significant
amounts of our earnings for new investments. We cannot assure you that any, or sufficient, funding or capital will be available to
us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, there may be a
negative impact on the market price of our common stock and our ability to make distributions to our stockholders. Moreover,
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our ability to grow will be dependent on our ability to procure additional funding. To the extent we are not able to raise additional
funds through the issuance of additional equity or borrowings, our growth will be constrained.
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, margin calls, additional
capital requirements, a disruption in the financial markets or declining 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.
Risk management policies and procedures may not adequately identify all risks to our businesses.
We have established and maintain risk management policies and procedures designed to support our risk framework, and to identify,
measure, monitor and control financial risks. Risks include market risk (interest rate, spread and prepayment), liquidity risk, credit
risk and operational risk. These policies and procedures may not sufficiently identify the full range of risks that we are or may
become exposed to. Any changes to business activities, including expansion of traded or illiquid products, may result in our being
exposed to different risks or an increase in certain risks. Any failure to identify and mitigate financial risks could result in an
adverse impact to our financial condition, business or results of operations. Additionally, as regulations and markets in which we
operate continue to evolve, our risk management policies and procedures may not always keep sufficient pace with those changes.
An increase or decrease in prepayment rates may adversely affect our profitability.
The mortgage-backed securities we acquire are backed by pools of mortgage loans. We receive payments, generally, from the
payments that are made on the underlying mortgage loans. We often purchase mortgage-backed securities that have a higher
coupon rate than the prevailing market interest rates. In exchange for a higher coupon rate, we typically pay a premium over par
value to acquire these mortgage-backed securities. In accordance with U.S. generally accepted accounting principles (“GAAP”),
we amortize the premiums on our mortgage-backed securities over the expected 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.
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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.
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Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition.
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.
Conversely, a decline in prepayment rates on our investments will reduce the amount of principal we receive and therefore reduce
the amount of cash we otherwise could have reinvested in higher yielding assets at that time, which could negatively impact our
future operating results.
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Volatile market conditions for mortgages and mortgage-related assets as well as the broader 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.
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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.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Significant adverse changes in financial market conditions can result in a deleveraging of the global financial system and the
forced sale of large quantities of mortgage-related and other financial assets. Concerns over economic recession, geopolitical
issues including events such as the United Kingdom’s decision to exit from the European Union, (commonly referred to as “Brexit”),
unemployment, the availability and cost of financing, the mortgage market and a declining real estate market or prolonged
government shutdown 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 and through the subsequent credit
and housing crisis, many traditional mortgage investors suffered severe losses in their residential mortgage portfolios and several
major market participants failed or were impaired, resulting in a significant contraction in market liquidity for mortgage-related
assets. This illiquidity negatively affected both the terms and availability of financing for all mortgage-related assets.
Further increased volatility and deterioration in the markets for mortgages and mortgage-related assets as well as the broader
financial markets may adversely affect the performance and market value of our Agency mortgage-backed securities. If these
conditions exist, 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.
Competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these
assets.
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, specialty finance companies, public and private funds, government entities, commercial and investment
banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially
larger and have considerably greater financial, technical, technological, 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 additional
competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that
may not be available to us. Many of our competitors are not subject to the operating constraints associated with REIT 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.
An increase in the interest payments on our borrowings relative to the interest we earn on our interest earning assets may
adversely affect our profitability.
We generally 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. A significant portion of our assets are longer-
term, fixed-rate interest earning assets, and a significant portion of our borrowings are shorter-term, floating-rate borrowings.
Periods of rising interest rates or a relatively flat or inverted yield curve could decrease or eliminate the spread between the interest
payments we earn on our interest earning assets and the interest payments we must make on our borrowings.
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 rate banks charge each other for short-
•
term Eurodollar loans.
• Treasury Rate. A monthly or weekly average yield
of benchmark U.S. Treasury securities, as published
by the Federal Reserve Board.
cost of borrowing
Secured Overnight Financing Rate. A measure of
the
cash overnight
collateralized by U.S. Treasury securities, as
published by the Federal Reserve Bank of New
York.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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Significant adverse changes in financial market conditions can result in a deleveraging of the global financial system and the
forced sale of large quantities of mortgage-related and other financial assets. Concerns over economic recession, geopolitical
issues including events such as the United Kingdom’s decision to exit from the European Union, (commonly referred to as “Brexit”),
unemployment, the availability and cost of financing, the mortgage market and a declining real estate market or prolonged
government shutdown 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 and through the subsequent credit
and housing crisis, many traditional mortgage investors suffered severe losses in their residential mortgage portfolios and several
major market participants failed or were impaired, resulting in a significant contraction in market liquidity for mortgage-related
assets. This illiquidity negatively affected both the terms and availability of financing for all mortgage-related assets.
Further increased volatility and deterioration in the markets for mortgages and mortgage-related assets as well as the broader
financial markets may adversely affect the performance and market value of our Agency mortgage-backed securities. If these
conditions exist, 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.
assets.
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Competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these
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, specialty finance companies, public and private funds, government entities, commercial and investment
banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially
larger and have considerably greater financial, technical, technological, 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 additional
competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that
may not be available to us. Many of our competitors are not subject to the operating constraints associated with REIT 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.
An increase in the interest payments on our borrowings relative to the interest we earn on our interest earning assets may
adversely affect our profitability.
We generally 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. A significant portion of our assets are longer-
term, fixed-rate interest earning assets, and a significant portion of our borrowings are shorter-term, floating-rate borrowings.
Periods of rising interest rates or a relatively flat or inverted yield curve could decrease or eliminate the spread between the interest
payments we earn on our interest earning assets and the interest payments we must make on our borrowings.
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 rate banks charge each other for short-
•
Secured Overnight Financing Rate. A measure of
term Eurodollar loans.
• Treasury Rate. A monthly or weekly average yield
of benchmark U.S. Treasury securities, as published
by the Federal Reserve Board.
the
cost of borrowing
cash overnight
collateralized by U.S. Treasury securities, as
published by the Federal Reserve Bank of New
York.
14
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.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is determined may
adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory
guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These
reforms may cause such benchmarks to perform differently than in the past, or have other consequences which cannot be predicted.
In particular, regulators and law enforcement agencies in the U.K. and elsewhere conducted criminal and civil investigations into
whether the banks that contributed information to the British Bankers’ Association (“BBA”) in connection with the daily calculation
of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA
member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged
manipulation of LIBOR. LIBOR is calculated by reference to a market for interbank lending that continues to shrink, as its based
on increasingly fewer actual transactions. This increases the subjectivity of the LIBOR calculation process and increases the risk
of manipulation. Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current
administrator of LIBOR), may result in changes to the manner in which LIBOR is determined or the establishment of alternative
reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading
or compelling banks to submit LIBOR rates after 2021.
It is likely that, over time, U.S. Dollar LIBOR will be replaced by the Secured Overnight Financing Rate (“SOFR”) published by
the Federal Reserve Bank of New York. However, the manner and timing of this shift is currently unknown. SOFR is an overnight
rate instead of a term rate, making SOFR an inexact replacement for LIBOR. There is currently no perfect way to create robust,
forward-looking, SOFR term rates. Market participants are still considering how various types of financial instruments and
securitization vehicles should react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will
transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same
alternative reference rate, in each case increasing the difficulty of hedging. Switching existing financial instruments and hedging
transactions from LIBOR to SOFR requires calculations of a spread. Industry organizations are attempting to structure the spread
calculation in a manner that minimizes the possibility of value transfer between counterparties, borrowers, and lenders by virtue
of the transition, but there is no assurance that the calculated spread will be fair and accurate or that all asset types and all types
of securitization vehicles will use the same spread. We and other market participants have less experience understanding and
modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging,
and risk management. The process of transition involves operational risks. It is also possible that no transition will occur for many
financial instruments, meaning that those instruments would continue to be subject to the weaknesses of the LIBOR calculation
process. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates
or any other reforms to LIBOR that may be implemented. Uncertainty as to the nature of such potential changes, alternative
reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend
is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or
results of operations. More generally, any of the above changes or any other consequential changes to LIBOR or any other
“benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or any further
uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the
value of and return on any securities based on or linked to a “benchmark.”
An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book
value.
Increases in interest rates may negatively affect the market value of our interest earning assets because in a period of rising interest
rates, the value of certain interest earning assets may fall and reduce our book value. For example, 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 a decline in the
market value of our interest earning assets.
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15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
We may experience declines in the market value of our assets resulting in us recording impairments, which may have an adverse
effect on our results of operations and financial condition.
A decline in the market value of our mortgage-backed securities or other assets may require us to recognize an “other-than-
temporary” impairment (“OTTI”) against such assets under GAAP. 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 OTTI exists and, if so, the amount we 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 OTTI constitute material estimates that are susceptible to significant
change.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, borrower, 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 or counterparty risk in the event of default of our counterparty or, in certain
instances, our counterparty’s customers. Such credit risk could be heightened in respect of our European counterparties due to
continuing uncertainty in the global finance market, including Brexit. There is no assurance that any such losses would not
materially and adversely impact our revenues, financial condition and earnings.
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, U.S. Treasury futures and other
derivative transactions to help us mitigate our interest rate and prepayment risks described above subject to maintaining our
qualification as a REIT and our 40 Act exemption. We have used interest rate swaps and options to enter into interest rate swaps
(commonly referred to as interest rate swaptions) to provide a level of protection against interest rate risks. We may also purchase
or sell TBAs on Agency mortgage-backed securities, purchase or write put or call options on TBAs and invest in other types of
mortgage derivatives, such as interest-only securities. No hedging strategy can protect us completely. Entering into interest rate
hedging may fail to protect or could adversely affect us because, among other things: interest rate hedging can be expensive,
particularly during periods of volatile interest rates; available hedges may not correspond directly with the risk for which protection
is sought; and the duration of the hedge may not match the duration of the related asset or liability. The expected transition from
LIBOR to alternative reference rates adds additional complication to our hedging strategies.
Our use of derivatives may expose us to counterparty and liquidity risks.
The Dodd-Frank Act, and regulations under it, have caused significant changes to the structure of the market for interest rate swaps
and swaptions. These new structures 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 (“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 (“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 or liability 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. We continue to bear risk of trade errors. Because
the standardized swaps available on Swap Execution Facilities and cleared through DCOs are not as customizable as the swaps
available before the implementation of Dodd-Frank Act, we may bear additional basis risk from hedge positions that do not exactly
reflect the interest rate risk on the asset being hedged.
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 and CMBX indexes are also not cleared, and we
bear the credit risk of the dealer.
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16
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
We may experience declines in the market value of our assets resulting in us recording impairments, which may have an adverse
effect on our results of operations and financial condition.
A decline in the market value of our mortgage-backed securities or other assets may require us to recognize an “other-than-
temporary” impairment (“OTTI”) against such assets under GAAP. 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 OTTI exists and, if so, the amount we 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 OTTI constitute material estimates that are susceptible to significant
change.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, borrower, 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 or counterparty risk in the event of default of our counterparty or, in certain
instances, our counterparty’s customers. Such credit risk could be heightened in respect of our European counterparties due to
continuing uncertainty in the global finance market, including Brexit. There is no assurance that any such losses would not
materially and adversely impact our revenues, financial condition and earnings.
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, U.S. Treasury futures and other
derivative transactions to help us mitigate our interest rate and prepayment risks described above subject to maintaining our
qualification as a REIT and our 40 Act exemption. We have used interest rate swaps and options to enter into interest rate swaps
(commonly referred to as interest rate swaptions) to provide a level of protection against interest rate risks. We may also purchase
or sell TBAs on Agency mortgage-backed securities, purchase or write put or call options on TBAs and invest in other types of
mortgage derivatives, such as interest-only securities. No hedging strategy can protect us completely. Entering into interest rate
hedging may fail to protect or could adversely affect us because, among other things: interest rate hedging can be expensive,
particularly during periods of volatile interest rates; available hedges may not correspond directly with the risk for which protection
is sought; and the duration of the hedge may not match the duration of the related asset or liability. The expected transition from
LIBOR to alternative reference rates adds additional complication to our hedging strategies.
Our use of derivatives may expose us to counterparty and liquidity risks.
The Dodd-Frank Act, and regulations under it, have caused significant changes to the structure of the market for interest rate swaps
and swaptions. These new structures 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 (“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 (“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 or liability 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. We continue to bear risk of trade errors. Because
the standardized swaps available on Swap Execution Facilities and cleared through DCOs are not as customizable as the swaps
available before the implementation of Dodd-Frank Act, we may bear additional basis risk from hedge positions that do not exactly
reflect the interest rate risk on the asset being hedged.
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 and CMBX indexes are also not cleared, and we
bear the credit risk of the dealer.
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Derivative transactions are subject to margin 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.
It is possible that new regulations could be issued governing the derivatives market, or that additional types of derivatives switch
to being executed on Swap Execution Facilities or cleared on a DCO. Ongoing regulatory change in this area could increase costs,
increase risks, and adversely affect our business and results of operations.
It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA
contracts, which could negatively affect our financial condition and results of operations.
From time to time, we enter into TBAs as an alternate means of investing in and financing Agency mortgage-backed securities.
A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security with a specified
issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement
dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier
month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of the expected net interest
income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone
as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month
price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the implied financing
is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll
income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed
security less an implied financing cost. Consequently, dollar roll transactions and such forward purchases of Agency securities
represent a form of off-balance sheet financing and increase our "at risk" leverage.
The economic return of a TBA dollar roll generally equates to interest income on a generic TBA-eligible security less an implied
financing cost, and there may be situations in which the implied financing cost exceeds the interest income, resulting in a negative
carry on the position. If we roll our TBA dollar roll positions when they have a negative carry, the positions would decrease net
income and amounts available for distributions to shareholders.
There may be situations in which we are unable or unwilling to roll our TBA dollar roll positions. The TBA transaction could have
a negative carry or otherwise be uneconomical, we may be unable to find counterparties with whom to trade in sufficient volume,
or we may be required to collateralize the TBA positions in a way that is uneconomical. Because TBA dollar rolls represent implied
financing, an inability or unwillingness to roll has effects similar to any other loss of financing. If we do not roll our TBA positions
prior to the settlement date, we would have to take physical delivery of the underlying securities and settle our obligations for
cash. We may not have sufficient funds or alternative financing sources available to settle such obligations. Counterparties may
also make margin calls as the value of a generic TBA-eligible security (and therefore the value of the TBA contract) declines.
Margin calls on TBA positions or failure to roll TBA positions could have the effects described in the liquidity risks described
above.
We use analytical models and data in connection with the valuation of our assets, and any incorrect, misleading or incomplete
information used in connection therewith would subject us to potential risks.
Given our strategies and the complexity of the valuation of our assets, we must rely heavily on analytical models (both proprietary
models developed by us and those supplied by third parties) and information and data supplied by our third party vendors and
servicers. Models and data are used to value assets or potential asset purchases and also in connection with hedging our assets.
When models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to
potential risks. For example, by relying on models and data, especially valuation models, we may be induced to buy certain assets
at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether.
Similarly, any hedging based on faulty models and data may prove to be unsuccessful. Furthermore, despite our valuation validation
processes our models may nevertheless prove to be incorrect.
Some of the risks of relying on analytical models and third-party data are particular to analyzing tranches from securitizations,
such as commercial or residential mortgage-backed securities. These risks include, but are not limited to, the following: (i) collateral
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on
simplifying assumptions that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii)
collateral or bond historical 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 the models may contain incorrect
assumptions as to what has occurred since the date information was last updated.
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.
Many of the models we use include LIBOR as an input. The expected transition away from LIBOR may require changes to models,
may change the underlying economic relationships being modeled, and may require the models to be run with less historical data
than is currently available for LIBOR.
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 and assumptions,
and changes in accounting treatment may adversely affect our profitability and impact our financial results. Additionally, our
application of GAAP may produce financial results that fluctuate from one period to another.
Accounting rules for valuations of investments, mortgage loan sales and securitizations, investment consolidations, acquisitions
of real estate and other aspects of our 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 was recorded. Accordingly, the value of our
common shares could be adversely affected by our determinations regarding the fair value of our investments, whether in the
applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.
We have made certain accounting elections which may result in volatility in our periodic net income, as computed in accordance
with GAAP. For example, changes in fair value of certain instruments are reflected in GAAP net income (loss) while others are
reflected in Other comprehensive income (loss).
We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could
significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability
to operate our business.
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. A disruption or breach could also lead to unauthorized access to and
release, misuse, loss or destruction of our confidential information or personal or confidential information of our employees or
third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation
and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements. 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. We may face increased
costs as we continue to evolve our cyber defenses in order to contend with changing risks. These costs and losses associated with
these risks are difficult to predict and quantify, but could have a significant adverse effect on our operating results. Additionally,
18
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on
simplifying assumptions that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii)
collateral or bond historical 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 the models may contain incorrect
assumptions as to what has occurred since the date information was last updated.
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.
Many of the models we use include LIBOR as an input. The expected transition away from LIBOR may require changes to models,
may change the underlying economic relationships being modeled, and may require the models to be run with less historical data
than is currently available for LIBOR.
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
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structured notes.
Accounting rules related to certain of our transactions are highly complex and involve significant judgment and assumptions,
and changes in accounting treatment may adversely affect our profitability and impact our financial results. Additionally, our
application of GAAP may produce financial results that fluctuate from one period to another.
Accounting rules for valuations of investments, mortgage loan sales and securitizations, investment consolidations, acquisitions
of real estate and other aspects of our 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 was recorded. Accordingly, the value of our
common shares could be adversely affected by our determinations regarding the fair value of our investments, whether in the
applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.
We have made certain accounting elections which may result in volatility in our periodic net income, as computed in accordance
with GAAP. For example, changes in fair value of certain instruments are reflected in GAAP net income (loss) while others are
reflected in Other comprehensive income (loss).
We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could
significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability
to operate our business.
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. A disruption or breach could also lead to unauthorized access to and
release, misuse, loss or destruction of our confidential information or personal or confidential information of our employees or
third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation
and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements. 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. We may face increased
costs as we continue to evolve our cyber defenses in order to contend with changing risks. These costs and losses associated with
these risks are difficult to predict and quantify, but could have a significant adverse effect on our operating results. Additionally,
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the legal and regulatory environment surrounding information privacy and security in the U.S. and international jurisdictions is
constantly evolving.
Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and we are from
time to time subject to such attempted attacks. We rely heavily on our financial, accounting and other data processing systems.
Although we have not detected a material cybersecurity breach to date, other financial services institutions have reported material
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. 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 result from any 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.
Our use of non-recourse securitizations may expose us to risks which could result in losses to us.
We utilize non-recourse securitizations of our assets in mortgage loans, especially loans that we originate, 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 potential 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 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. To the extent that we are unable to obtain financing for our assets, to the extent that we retain such assets in our portfolio,
our returns on investment and earnings will be negatively impacted.
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 in turn 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
or residential 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 to grow
our business and increase revenues.
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, or redeem debt or equity securities, and may impact our flexibility to determine our operating
policies and strategies. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and
our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of
additional collateral and enforce their interests against existing collateral. We may also be subject to cross-default and acceleration
rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default. 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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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.
Final rules issued by the FHFA relating to captive insurance company membership in the FHLB System prohibit us from
taking new advances or renewing existing advances that mature beyond February 19, 2021.
On January 12, 2016, the FHFA issued final rules (“FHFA Final Rules”) providing that captive insurance companies will no longer
be eligible for membership in the FHLB System. Because our wholly-owned subsidiary Truman was admitted as a member of
the FHLB of Des Moines (“FHLB Des Moines”) prior to September 2014, it is eligible under the FHFA Final Rules to remain as
a member of the FHLB Des Moines through February 19, 2021. In addition, under the FHFA Final Rules, the FHLB Des Moines
is permitted to allow advances that were outstanding prior to February 19, 2016 to remain outstanding until scheduled maturity,
however we are not permitted to increase our existing FHLB advances. It is possible for Congress or the FHFA to change the
FHFA Final Rules, but there is no assurance that they will do so. We may be forced to find alternative financing for assets currently
financed with FHLB Des Moines, which could result in increased financing cost; a decreased weighted average duration of
liabilities; and an increase in risks described above related to securitizations, credit facilities, and other types of borrowings. Some
of the assets in which we currently invest may become uneconomical if financing from FHLB Des Moines is no longer available,
and we may choose to exit certain investment strategies. Many of the assets currently financed with FHLB Des Moines are expected
to remain outstanding past the date on which advances are no longer available.
We may enter into new lines of business, acquire other companies or engage in other strategic initiatives, each of which may
result in additional risks and uncertainties in our businesses.
We may pursue growth through acquisitions of other companies or other strategic initiatives. To the extent we pursue strategic
investments or acquisitions, undertake other strategic initiatives or consider new lines of business, we will face numerous risks
and uncertainties, including risks associated with:
•
•
•
•
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the availability of suitable opportunities;
the level of competition from other companies that
may have greater financial resources;
our ability
the value, strengths,
to assess
weaknesses, liabilities and potential profitability of
potential acquisition opportunities accurately and
negotiate acceptable terms for those opportunities;
the required investment of capital and other
resources;
the lack of availability of financing and, if available,
the terms of any financings;
the possibility that we have insufficient expertise to
engage in such activities profitably or without
incurring inappropriate amounts of risk;
the diversion of management’s attention from our
core businesses;
the potential loss of key personnel of an acquired
business;
•
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with
regulatory
integrating operational
assumption of liabilities in any acquired business;
the disruption of our ongoing businesses;
the increasing demands on or issues related to the
combining or
and
management systems and controls;
compliance
additional
requirements;
costs associated with integrating and overseeing the
operations of the new businesses;
failure to realize the full benefits of an acquisition,
including expected synergies, cost savings, or sales
or growth opportunities, within the anticipated
timeframe or at all; and
in an acquired
post-acquisition deterioration
business that could result in lower or negative
earnings contribution and/or goodwill impairment
charges.
Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we
are currently exempt, and may lead to increased litigation and regulatory risk. Our strategy to increase investments in a line of
business, such as our middle market lending, residential credit or commercial real estate business, may lead to additional risks
and uncertainties. In addition, if a new or acquired business generates insufficient revenues or if we are unable to efficiently manage
our expanded operations, our results of operations will be adversely affected. Our strategic initiatives may include joint ventures,
in which case we will be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability,
losses or reputational damage relating to systems, controls and personnel that are not under our control.
We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment
accounts, including potential regulatory risks.
We have, and may in the future, sponsor, manage and serve as general partner and/or manager of new funds or investment accounts,
such as collateralized loan obligations (“CLO”). Such sponsorship and management of, and investment in, such funds and accounts
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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.
may involve risks not otherwise present with a direct investment in such funds, and accounts’ target investments, including, for
example:
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Final rules issued by the FHFA relating to captive insurance company membership in the FHLB System prohibit us from
taking new advances or renewing existing advances that mature beyond February 19, 2021.
On January 12, 2016, the FHFA issued final rules (“FHFA Final Rules”) providing that captive insurance companies will no longer
be eligible for membership in the FHLB System. Because our wholly-owned subsidiary Truman was admitted as a member of
the FHLB of Des Moines (“FHLB Des Moines”) prior to September 2014, it is eligible under the FHFA Final Rules to remain as
a member of the FHLB Des Moines through February 19, 2021. In addition, under the FHFA Final Rules, the FHLB Des Moines
is permitted to allow advances that were outstanding prior to February 19, 2016 to remain outstanding until scheduled maturity,
however we are not permitted to increase our existing FHLB advances. It is possible for Congress or the FHFA to change the
FHFA Final Rules, but there is no assurance that they will do so. We may be forced to find alternative financing for assets currently
financed with FHLB Des Moines, which could result in increased financing cost; a decreased weighted average duration of
liabilities; and an increase in risks described above related to securitizations, credit facilities, and other types of borrowings. Some
of the assets in which we currently invest may become uneconomical if financing from FHLB Des Moines is no longer available,
and we may choose to exit certain investment strategies. Many of the assets currently financed with FHLB Des Moines are expected
to remain outstanding past the date on which advances are no longer available.
We may enter into new lines of business, acquire other companies or engage in other strategic initiatives, each of which may
result in additional risks and uncertainties in our businesses.
We may pursue growth through acquisitions of other companies or other strategic initiatives. To the extent we pursue strategic
investments or acquisitions, undertake other strategic initiatives or consider new lines of business, we will face numerous risks
and uncertainties, including risks associated with:
the availability of suitable opportunities;
assumption of liabilities in any acquired business;
the level of competition from other companies that
the disruption of our ongoing businesses;
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may have greater financial resources;
our ability
to assess
the value, strengths,
weaknesses, liabilities and potential profitability of
potential acquisition opportunities accurately and
negotiate acceptable terms for those opportunities;
the required investment of capital and other
resources;
the lack of availability of financing and, if available,
the terms of any financings;
the possibility that we have insufficient expertise to
engage in such activities profitably or without
incurring inappropriate amounts of risk;
the diversion of management’s attention from our
core businesses;
business;
•
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the increasing demands on or issues related to the
combining or
integrating operational
and
management systems and controls;
compliance
with
additional
regulatory
requirements;
costs associated with integrating and overseeing the
operations of the new businesses;
failure to realize the full benefits of an acquisition,
including expected synergies, cost savings, or sales
or growth opportunities, within the anticipated
timeframe or at all; and
•
post-acquisition deterioration
in an acquired
business that could result in lower or negative
earnings contribution and/or goodwill impairment
the potential loss of key personnel of an acquired
charges.
Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we
are currently exempt, and may lead to increased litigation and regulatory risk. Our strategy to increase investments in a line of
business, such as our middle market lending, residential credit or commercial real estate business, may lead to additional risks
and uncertainties. In addition, if a new or acquired business generates insufficient revenues or if we are unable to efficiently manage
our expanded operations, our results of operations will be adversely affected. Our strategic initiatives may include joint ventures,
in which case we will be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability,
losses or reputational damage relating to systems, controls and personnel that are not under our control.
We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment
accounts, including potential regulatory risks.
We have, and may in the future, sponsor, manage and serve as general partner and/or manager of new funds or investment accounts,
such as collateralized loan obligations (“CLO”). Such sponsorship and management of, and investment in, such funds and accounts
•
•
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the possibility that investors in the funds/accounts
might become bankrupt or otherwise be unable to
meet their capital commitment obligations;
that operating and/or management agreements of a
fund/account may restrict our ability to transfer or
liquidate our interest when we desire or on
advantageous terms;
that our relationships with the investors will be
generally contractual in nature and may be
terminated or dissolved under the terms of the
agreements, or we may be removed as general
partner and manager (with or without cause), and in
•
•
such event, we may not continue to manage or invest
in the applicable fund/account;
that disputes between us and the investors may
result in litigation or arbitration that would increase
our expenses and prevent our officers and directors
from focusing their time and effort on our business
and result in subjecting the investments owned by
the applicable fund/account to additional risk; and
that we may incur liability for obligations of a fund/
account by reason of being its general partner or
manager.
Further, in relation to our operations, we have subsidiaries that are registered with the SEC as investment advisers under the
Investment Advisers Act. As a result, we are subject to the anti-fraud provisions of the Investment Advisers Act and to fiduciary
duties derived from these provisions that apply to our relationships with our managed companies. These provisions and duties
impose restrictions and obligations on us with respect to our dealings with our funds' investors and our investments, including,
for example, restrictions on agency, cross and principal transactions. We or our registered investment adviser subsidiaries will be
subject to periodic SEC examinations and other requirements under the Investment Advisers Act and related regulations primarily
intended to benefit advisory clients. These additional requirements relate to, among other things, maintaining an effective and
comprehensive compliance program, recordkeeping and reporting requirements and disclosure requirements. The Investment
Advisers Act generally grants the SEC broad administrative powers, including the power to limit or restrict an investment adviser
from conducting advisory activities in the event it fails to comply with federal securities laws. Additional sanctions that may be
imposed for failure to comply with applicable requirements under the Investment Advisers Act include the prohibition of individuals
from associating with an investment adviser, the revocation of registrations and other censures and fines.
Investments in MSRs may expose us to additional risks.
Our investments in MSRs may subject us to certain additional risks, including the following:
•
Investments in MSRs are highly illiquid and subject
to numerous restrictions on transfer and, as a result,
there is risk that we would be unable to locate a
willing buyer or get required approval to sell MSRs
in the future should we desire to do so.
• Our rights to the excess servicing spread are
subordinate to the interests of Fannie Mae, Freddie
to
Mac and Ginnie Mae, and are subject
extinguishment. Fannie Mae and Freddie Mac each
require approval of the sale of excess servicing
spreads pertaining to their respective MSRs. We
have entered into acknowledgment agreements or
subordination of interest agreements with them,
which acknowledge our subordinated rights.
• Changes in minimum servicing compensation for
agency loans could occur at any time and could
negatively impact the value of the income derived
from MSRs.
If we are not able to successfully manage these and other risks related to investing in MSRs, it may adversely affect our business,
results of operations and financial condition.
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 $1.6 trillion of Agency mortgage-backed securities as of December 31, 2018. Starting
in October 2017, the Federal Reserve has begun to phase out its policy of reinvesting principal payments from its holdings of
Agency mortgage-backed securities into new Agency mortgage-backed securities purchases, therefore causing a decline in Federal
Reserve security holdings over time. While it is very difficult to predict the impact of the Federal Reserve portfolio runoff on the
prices and liquidity of Agency mortgage-backed securities, returns on Agency mortgage-backed securities may be adversely
affected as private investors seek higher yields to purchase larger amounts of Agency mortgage-backed securities.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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 are
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 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 in an effort to
ensure their financial stability. In December 2017, FHFA and the U.S. Treasury Department announced that Fannie Mae and
Freddie Mac will each be allowed to retain $3.0 billion in capital reserve in order to cover ordinary income fluctuations.
Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury suggested
that the guarantee payment structure of Fannie Mae and Freddie Mac in the U.S. housing finance market 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 was eliminated, or their structures were to change in a material manner that is not compatible with
our business model, we would not be able to acquire Agency mortgage-backed securities from these entities, which could adversely
affect our business operations.
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The implementation of the Single Security Initiative may adversely affect our results and financial condition
The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac (the Enterprises), under the direction of the
Federal Housing Finance Agency (FHFA), the Enterprises’ regulator and conservator, to develop a common mortgage-backed
security (MBS) that will be issued by the Enterprises. The 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie
Mac includes the goal of developing a common MBS. The Single Security would finance the same types of fixed-rate mortgages
that currently back agency MBS eligible for delivery into the TBA market. The GSEs expect to complete the Single Security
initiative and issue the first Single Security in the second quarter of 2019 with the impact on forward trading in the TBA market
to commence in the first quarter of 2019. Our primary investments are Agency mortgage-backed securities. We may be adversely
impacted by the Single Security Initiative in ways including, but not limited to:
• The Single Security Initiative may introduce
uncertainty and/or negative impacts to the Agency
mortgage-backed market which
reduce our
liquidity, affect asset values or increase our
financing costs.
• Opting to convert legacy Freddie Mac positions to
the Uniform Mortgage-Backed Securities (UMBS)
will increase the number of delay days between
factor changes and payment which could negatively
impact liquidity.
• Our operational preparations may be insufficient,
impacts or missed
in operational
resulting
opportunities.
The U.S. Government’s efforts to encourage refinancing of certain loans may affect prepayment rates for mortgage loans in
mortgage-backed securities.
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. To the extent these and other economic stabilization or stimulus efforts are successful in increasing prepayment speeds for
residential mortgage loans, such efforts 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, interest-only securities or MSRs.
Risks Related To Our Credit Assets
We invest in securities in the credit risk transfer sector that are subject to mortgage credit risk.
We invest in securities in the credit risk transfer (“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
22
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac, on the one hand, and the federal
government, on the other, which could adversely affect the price of Agency mortgage-backed securities.
The interest and principal payments we expect to receive on the Agency mortgage-backed securities in which we invest are
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 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 in an effort to
ensure their financial stability. In December 2017, FHFA and the U.S. Treasury Department announced that Fannie Mae and
Freddie Mac will each be allowed to retain $3.0 billion in capital reserve in order to cover ordinary income fluctuations.
Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury suggested
that the guarantee payment structure of Fannie Mae and Freddie Mac in the U.S. housing finance market 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 was eliminated, or their structures were to change in a material manner that is not compatible with
our business model, we would not be able to acquire Agency mortgage-backed securities from these entities, which could adversely
affect our business operations.
The implementation of the Single Security Initiative may adversely affect our results and financial condition
The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac (the Enterprises), under the direction of the
Federal Housing Finance Agency (FHFA), the Enterprises’ regulator and conservator, to develop a common mortgage-backed
security (MBS) that will be issued by the Enterprises. The 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie
Mac includes the goal of developing a common MBS. The Single Security would finance the same types of fixed-rate mortgages
that currently back agency MBS eligible for delivery into the TBA market. The GSEs expect to complete the Single Security
initiative and issue the first Single Security in the second quarter of 2019 with the impact on forward trading in the TBA market
to commence in the first quarter of 2019. Our primary investments are Agency mortgage-backed securities. We may be adversely
impacted by the Single Security Initiative in ways including, but not limited to:
• The Single Security Initiative may introduce
• Opting to convert legacy Freddie Mac positions to
uncertainty and/or negative impacts to the Agency
mortgage-backed market which
reduce our
liquidity, affect asset values or increase our
• Our operational preparations may be insufficient,
resulting
in operational
impacts or missed
financing costs.
opportunities.
the Uniform Mortgage-Backed Securities (UMBS)
will increase the number of delay days between
factor changes and payment which could negatively
impact liquidity.
The U.S. Government’s efforts to encourage refinancing of certain loans may affect prepayment rates for mortgage loans in
mortgage-backed securities.
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. To the extent these and other economic stabilization or stimulus efforts are successful in increasing prepayment speeds for
residential mortgage loans, such efforts 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, interest-only securities or MSRs.
Risks Related To Our Credit Assets
We invest in securities in the credit risk transfer sector that are subject to mortgage credit risk.
We invest in securities in the credit risk transfer (“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. 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. The holder of the CRT may also bear the risk of the default
of the issuer of the security.
A prolonged economic slowdown or declining real estate values could impair the assets we may own and adversely affect our
operating results.
Our non-Agency mortgage-backed securities, mortgage loans, and mortgage loans for which we own the servicing rights, along
with our commercial real estate debt, preferred equity, and real estate assets 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.
Owners of Agency mortgage-backed securities are protected from the risk of default on the underlying mortgages by guarantees
from Fannie Mae, Freddie Mac or, in the case of the Ginnie Mae, the U.S. Government. However, we also acquire CRTs, non-
Agency mortgage-backed securities and residential loans, which are backed by residential real property but, in contrast to Agency
mortgage-backed securities, the principal and interest payments are not guaranteed by GSEs or the U.S. Government. Our CRT,
non-Agency mortgage-backed securities and residential loan investments are therefore particularly sensitive to recessions and
declining real estate values.
In the event of a default on one of our commercial mortgage loans or other commercial real estate debt or residential mortgage
loans that we hold in our portfolio or a mortgage loan underlying CRT or non-Agency mortgage-backed securities in our portfolio,
we bear the risk of loss as a result of the potential deficiency between the value of the collateral and the debt owed, as well as the
costs and delays of foreclosure or other remedies, and the costs of maintaining and ultimately selling a property after foreclosure.
Delinquencies and defaults on mortgage loans for which we own the servicing rights will adversely affect the amount of servicing
fee income we receive and may result in increased servicing costs and operational risks due to the increased complexity of servicing
delinquent and defaulted mortgage loans.
Geographic concentration exposes investors to greater risk of default and loss.
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 commercial and residential 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 or other real
estate debt secured by those properties. From time to time, regions of the United States experience significant real estate downturns
when others do 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, 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 collateral properties located
in coastal states may be more susceptible to hurricanes than properties in other parts of the country. As a result, areas affected by
such events often experience disruptions in travel, transportation and tourism, loss of jobs and an overall decrease in consumer
activity, and often a decline in real estate-related investments. There can be no assurance that the economies in such impacted
areas will recover sufficiently to support income producing real estate at pre-event levels or that the costs of the related clean-up
will not have a material adverse effect on the local or national economy.
Inadequate property insurance coverage could have an adverse impact on our operating results.
Commercial and residential real estate assets may suffer casualty losses due to risks (including acts of terrorism) that are not
covered by insurance or for which insurance coverage requirements have been contractually limited by the related loan documents.
Moreover, if reconstruction or major repairs are required following a casualty, changes in laws that have occurred since the time
of original construction may materially impair the borrower’s ability to effect such reconstruction or major repairs or may materially
increase the cost thereof.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
There is no assurance that borrowers have maintained or will maintain the insurance required under the applicable loan documents
or that such insurance will be adequate. In addition, since the residential 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
collateral property caused by acts of terror may not be covered by insurance and may 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 may 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 senior 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.
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Some of our loans may be backed or supported by individual or corporate guarantees from borrowers or their affiliates that are
not secured. If the guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and
guarantors that are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not
have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, we will only have recourse as an unsecured
creditor to the general assets of the borrower or guarantor, some or all of which may be pledged as collateral for other lenders.
There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be
available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer additional losses
that could have a material adverse effect on our financial performance.
Upon a borrower bankruptcy, we may not have full recourse to the assets of the borrower to satisfy our loan. In addition, certain
of our loans are subordinate to other debt. 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 holder 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 or sub-performing assets in the future, which are subject to increased risks relative
to performing loans.
Our assets may in the near or the long term become non-performing or sub-performing assets, which are subject to increased risks
relative to performing assets. Commercial loans and residential mortgage loans may become non-performing or sub-performing
for a variety of reasons that result in the borrower being unable to meet its debt service and/or repayment obligations, such as the
underlying property being too highly leveraged, the financial distress of the borrower, or in the case of a commercial loan, decreasing
income generated from the underlying property. 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 may 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 restructuring were successfully accomplished, the borrower
may not be able or willing to maintain the restructured payments or refinance the restructured loan upon maturity.
From time to time we may find it necessary or desirable to foreclose on loans we acquire or originate, and the foreclosure process
may be lengthy and expensive. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses
to payment against us (such as lender liability claims and defenses) even when such assertions may have no basis in fact or law,
in an effort to prolong the foreclosure action and force the lender into a modification of the loan or a favorable buy-out of the
borrower’s position. In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during
the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions
and further delaying the resolution of our claims. Foreclosure may create a negative public perception of the related property,
24
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
There is no assurance that borrowers have maintained or will maintain the insurance required under the applicable loan documents
or that such insurance will be adequate. In addition, since the residential 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
collateral property caused by acts of terror may not be covered by insurance and may 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 may 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 senior 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 or supported 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.
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There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be
available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer additional losses
that could have a material adverse effect on our financial performance.
Upon a borrower bankruptcy, we may not have full recourse to the assets of the borrower to satisfy our loan. In addition, certain
of our loans are subordinate to other debt. 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 holder 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 or sub-performing assets in the future, which are subject to increased risks relative
to performing loans.
Our assets may in the near or the long term become non-performing or sub-performing assets, which are subject to increased risks
relative to performing assets. Commercial loans and residential mortgage loans may become non-performing or sub-performing
for a variety of reasons that result in the borrower being unable to meet its debt service and/or repayment obligations, such as the
underlying property being too highly leveraged, the financial distress of the borrower, or in the case of a commercial loan, decreasing
income generated from the underlying property. 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 may 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 restructuring were successfully accomplished, the borrower
may not be able or willing to maintain the restructured payments or refinance the restructured loan upon maturity.
From time to time we may find it necessary or desirable to foreclose on loans we acquire or originate, and the foreclosure process
may be lengthy and expensive. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses
to payment against us (such as lender liability claims and defenses) even when such assertions may have no basis in fact or law,
in an effort to prolong the foreclosure action and force the lender into a modification of the loan or a favorable buy-out of the
borrower’s position. In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during
the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions
and further delaying the resolution of our claims. Foreclosure may create a negative public perception of the related property,
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resulting in a diminution of its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the
underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs
or delays involved in the foreclosure of a loan or a liquidation of the underlying property will further reduce the proceeds and thus
increase our loss. Any such reductions could materially and adversely affect the value of the commercial loans in which we invest.
Whether or not we have participated in the negotiation of the terms of a loan, there can be no assurance as to the adequacy of the
protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated
priority and perfection of the applicable security interests. Furthermore, claims may be asserted that might interfere with
enforcement of our rights. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The
liquidation proceeds upon sale of that real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to
us. Any costs or delays involved in the effectuation of a foreclosure of the loan or a liquidation of the underlying property will
further reduce the proceeds and increase our loss.
Whole loan mortgages are also subject to “special hazard” risk (property damage caused by hazards, such as earthquakes or
environmental hazards, not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower’s
mortgage debt by a bankruptcy court). In addition, claims may be assessed against us on account of our position as mortgage
holder or property owner, as applicable, including 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 be required to repurchase commercial or residential 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 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. In addition, we may be required to repurchase loans as a result of borrower
fraud or in the event of early payment default on a mortgage loan. Likewise, we may be required to repurchase or substitute loans
if we breach a representation or warranty in connection with our securitizations. The remedies available to a purchaser of mortgage
loans are generally broader than those available to us 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.
Our 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 acquiring a commercial or residential real estate debt asset, 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 us, 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 a commercial or residential real estate 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 properties underlying the assets we are acquiring are of a different
type or class than property we have had experience owning directly, including properties such as hotels. Accordingly, we may not
manage these properties as well as they might be managed by another owner, and our returns to investors could suffer. If we
foreclose on and come to own property, our financial performance and returns to investors could suffer.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Financial covenants could adversely affect our ability to conduct our business.
The commercial mortgages on our equity 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.
With respect to the long-term, fixed rate mortgage loans secured by certain of our healthcare properties and insured by the U.S.
Department of Housing and Urban Development (“HUD”), the approval of HUD is also required for certain actions. These
restrictions could adversely affect operations, and our ability to pay debt obligations. In addition, in some instances guaranties
given by Annaly entities as further security for these mortgage loans contain affirmative covenants to maintain a minimum net
worth and liquidity.
Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets.
Local governments have taken steps to consider how the power of eminent domain could be used to acquire residential mortgage
loans and there can be no certainty whether any mortgage loans sought to be purchased will be mortgage loans held in securitization
trusts and what purchase price would be paid for any such mortgage loans. Any such actions could have a material adverse effect
on the market value of our mortgage-backed securities, mortgage loans and MSRs. There is also no certainty as to whether any
such action without the consent of investors would face legal challenge, and, if so, the outcome of any such challenge.
Our investments in corporate loans and debt securities for middle market companies carry risks.
We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market companies,
and we expect our investments in this space to grow in 2019. Non-investment grade or unrated loans to middle market businesses
may carry more inherent risks than loans to larger, investment grade publicly traded entities. These middle market companies
generally have less access to public capital markets, and generally have higher financing costs. Such companies, particularly in
an economic slowdown or recession, may be in a weaker financial position, may need more capital to expand or compete, and
may be unable to obtain financing from their respective private capital providers, public capital markets or from traditional sources,
such as commercial banks. In an economic downturn, middle market loan obligors, which may be highly leveraged, may be unable
to meet their debt service requirements. Middle market businesses may have narrower product lines, be more vulnerable to
exogenous events and maintain smaller market shares than large businesses. Therefore, they may be more vulnerable to competitors’
actions and market conditions, as well as general economic downturns. Middle market businesses may have more difficulties
implementing enterprise resource plans and may face greater challenges integrating acquisitions than large businesses. These
businesses may also experience variations in operating results. The success of a middle market company may depend on the
management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or
more of these persons may have a material adverse impact on such middle market company and its ability to repay its obligations.
A deterioration in the value of our investments in corporate loans and debt securities for middle market companies could have an
adverse impact on our results of operations.
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 realization or upon a default of
mortgage loans. Real estate assets are subject to various risks, including:
•
•
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acts of God, including earthquakes, hurricanes,
floods and other natural disasters, which may result
in uninsured losses;
acts of war or terrorism, including the consequences
of terrorist attacks;
adverse changes in national and local economic and
market conditions;
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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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Financial covenants could adversely affect our ability to conduct our business.
The commercial mortgages on our equity 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.
With respect to the long-term, fixed rate mortgage loans secured by certain of our healthcare properties and insured by the U.S.
Department of Housing and Urban Development (“HUD”), the approval of HUD is also required for certain actions. These
restrictions could adversely affect operations, and our ability to pay debt obligations. In addition, in some instances guaranties
given by Annaly entities as further security for these mortgage loans contain affirmative covenants to maintain a minimum net
worth and liquidity.
Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets.
Local governments have taken steps to consider how the power of eminent domain could be used to acquire residential mortgage
loans and there can be no certainty whether any mortgage loans sought to be purchased will be mortgage loans held in securitization
trusts and what purchase price would be paid for any such mortgage loans. Any such actions could have a material adverse effect
on the market value of our mortgage-backed securities, mortgage loans and MSRs. There is also no certainty as to whether any
such action without the consent of investors would face legal challenge, and, if so, the outcome of any such challenge.
Our investments in corporate loans and debt securities for middle market companies carry risks.
We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market companies,
and we expect our investments in this space to grow in 2019. Non-investment grade or unrated loans to middle market businesses
may carry more inherent risks than loans to larger, investment grade publicly traded entities. These middle market companies
generally have less access to public capital markets, and generally have higher financing costs. Such companies, particularly in
an economic slowdown or recession, may be in a weaker financial position, may need more capital to expand or compete, and
may be unable to obtain financing from their respective private capital providers, public capital markets or from traditional sources,
such as commercial banks. In an economic downturn, middle market loan obligors, which may be highly leveraged, may be unable
to meet their debt service requirements. Middle market businesses may have narrower product lines, be more vulnerable to
exogenous events and maintain smaller market shares than large businesses. Therefore, they may be more vulnerable to competitors’
actions and market conditions, as well as general economic downturns. Middle market businesses may have more difficulties
implementing enterprise resource plans and may face greater challenges integrating acquisitions than large businesses. These
businesses may also experience variations in operating results. The success of a middle market company may depend on the
management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or
more of these persons may have a material adverse impact on such middle market company and its ability to repay its obligations.
A deterioration in the value of our investments in corporate loans and debt securities for middle market companies could have an
adverse impact on our results of operations.
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 realization or upon a default of
mortgage loans. Real estate assets are subject to various risks, including:
•
acts of God, including earthquakes, hurricanes,
•
changes in governmental laws and regulations,
floods and other natural disasters, which may result
acts of war or terrorism, including the consequences
fiscal policies and ordinances;
adverse changes in national and local economic and
property losses; and
fiscal policies and zoning ordinances and the related
costs of compliance with laws and regulations,
the potential for uninsured or under-insured
environmental conditions of the real estate.
•
•
•
•
in uninsured losses;
of terrorist attacks;
market conditions;
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Under various U.S. federal, state and 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.
The commercial loan 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 real 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,
•
•
•
•
•
•
•
•
•
•
changes in national, regional or local economic
conditions or specific industry segments, including
the credit and securitization markets;
declines in regional or local real estate values;
declines in regional or local 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 from comparable types of properties;
changes in laws that increase operating expenses or
limit rents that may be charged;
•
•
•
•
•
•
costs of remediation and liabilities associated with
environmental conditions;
the potential for uninsured or underinsured property
losses;
changes 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;
litigation and condemnation proceedings regarding
the properties; and
bankruptcy proceedings.
In the event of any default under a 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 (and other unpaid sums) under the 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. Workouts and/or foreclosure of a commercial real estate loan can be an expensive
and lengthy process, which could have a substantial negative effect on our anticipated return on such commercial real estate.
Commercial and non-Agency mortgage-backed securities we acquire may be subject to losses.
In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity
holder of the property, then by the holder of a mezzanine loan or B-Note, if any, then by the “first loss” subordinated security
holder generally, the “B-Piece” buyer, and then by the holder of a higher-rated security. In the event of default and the exhaustion
of any equity support, mezzanine loans or B-Notes, and any classes of securities junior to those that we acquire, we may not be
able to recover all of our capital in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued
by the originator, or if the values subsequently decline, less collateral is available to satisfy interest and principal payments due
on the related mortgage-backed securities. The prices of lower credit quality mortgage-backed securities are generally less sensitive
to interest rate changes than more highly rated 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 mortgage-backed securities because the ability of obligors of mortgages underlying 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 protect us against loss of our principal and interest on these securities.
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27
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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 related
mortgaged properties;
the fair market value of the related mortgaged
properties;
the borrower’s equity in the related mortgaged
properties;
significant tenant rollover at the related mortgaged
properties;
the borrower’s financial condition;
the operating history and occupancy level of the
related mortgaged properties;
•
•
•
•
•
•
•
•
•
reductions in applicable government assistance/rent
subsidy programs;
changes in zoning or tax laws;
changes in competition in the relevant 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
conditions; and
the availability of funds in the credit markets which
fluctuates over time.
economic
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and
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.
The B-Notes that we originate and 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 originate and acquire B-Notes. A B-Note is a mortgage loan interest 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 may be 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 and other subordinate debt positions that we originate and acquire involve greater risks of loss than
senior loans.
We originate and acquire mezzanine loans, which take the form of subordinated loans secured by a pledge of the ownership interests
by the entity that owns the interest in the entity owning the real property. We also make commercial real estate preferred equity
investments, which, unlike mezzanine loans, are generally not secured by a pledge of equity interests and may be less liquid
investments. Although as a holder of preferred equity we may protect our position with covenants that limit the activities of the
entity in which we hold an interest and protect our equity by obtaining a contractual right to control the underlying property or
force a sale after an event of default, should such a default occur, we would only be able to proceed against the entity in which
we hold an interest, and not the real property owned by such entity and ultimately underlying the investment. These types of
subordinate debt assets involve a higher degree of risk than senior mortgage lending secured by income-producing real property,
because the loan may become unsecured or unrecoverable as a result of foreclosure by the senior lender on its mortgage or the
exercise of remedies by a lender holding a mezzanine loan that is senior to our subordinate debt. In the event of a bankruptcy of
the entity providing the pledge of ownership interests as security for a mezzanine loan, 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, preferred equity investment, or debt senior to our loan, or in the event of a borrower bankruptcy, our subordinate debt will
28
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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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 related
mortgaged properties;
the fair market value of the related mortgaged
•
•
•
•
•
•
•
properties;
properties;
properties;
the borrower’s equity in the related mortgaged
commercial properties;
significant tenant rollover at the related mortgaged
conditions; and
the borrower’s financial condition;
the operating history and occupancy level of the
related mortgaged properties;
•
•
•
•
•
•
•
•
•
reductions in applicable government assistance/rent
subsidy programs;
changes in zoning or tax laws;
changes in competition in the relevant 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
prevailing general
and
regional
economic
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.
The B-Notes that we originate and 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 originate and acquire B-Notes. A B-Note is a mortgage loan interest 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 may be 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 and other subordinate debt positions that we originate and acquire involve greater risks of loss than
senior loans.
We originate and acquire mezzanine loans, which take the form of subordinated loans secured by a pledge of the ownership interests
by the entity that owns the interest in the entity owning the real property. We also make commercial real estate preferred equity
investments, which, unlike mezzanine loans, are generally not secured by a pledge of equity interests and may be less liquid
investments. Although as a holder of preferred equity we may protect our position with covenants that limit the activities of the
entity in which we hold an interest and protect our equity by obtaining a contractual right to control the underlying property or
force a sale after an event of default, should such a default occur, we would only be able to proceed against the entity in which
we hold an interest, and not the real property owned by such entity and ultimately underlying the investment. These types of
subordinate debt assets involve a higher degree of risk than senior mortgage lending secured by income-producing real property,
because the loan may become unsecured or unrecoverable as a result of foreclosure by the senior lender on its mortgage or the
exercise of remedies by a lender holding a mezzanine loan that is senior to our subordinate debt. In the event of a bankruptcy of
the entity providing the pledge of ownership interests as security for a mezzanine loan, 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, preferred equity investment, or debt senior to our loan, or in the event of a borrower bankruptcy, our subordinate debt 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 and preferred equity investments may have higher loan-to-value ratios than conventional mortgage loans, resulting in the
borrower having less equity in the property and increasing the risk of loss of principal. Further, any subordinate debt investment
may give rise to sudden liquidity needs in order for us to protect our position. Significant losses related to our mezzanine loans
and/or preferred equity positions would result in operating losses for us and may limit our ability to make distributions to our
stockholders.
We are subject to additional risks associated with loan participations and co-lending arrangements.
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 to amendment of loan documentation, enforcement proceedings upon a default and the institution of, and control
over, 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.
Construction loans involve an increased risk of loss.
We have in the past and may in the future 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.
If we do not have an adequate completion guarantee, risks of cost overruns and non-completion of renovation of the properties
underlying rehabilitation loans may result in significant losses. The renovation, refurbishment or expansion of a mortgaged property
by a borrower involves risks of cost overruns and non-completion. Estimates of the costs of improvements to bring an acquired
property up to standards established for the market position intended for that property may prove inaccurate. Other risks may
include rehabilitation costs exceeding original estimates, possibly making a project uneconomical, environmental risks and
rehabilitation and subsequent leasing of the property not being completed on schedule. If such renovation is not completed in a
timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income
and may not be able to make payments on our investment, which could result in significant losses.
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 and receive rents from tenants during the contracted term of such leases. Such leases include
space leases and operating 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, furthermore, may
authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would
be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain
amounts paid to us within 90 days prior to the tenant’s bankruptcy filing could be required to be returned to the tenant’s bankruptcy
estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease
that it intends to reject. In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially
or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than
the total contractual rental amount. Without regard to the manner in which the lease termination occurs, we are likely to incur
additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant.
With respect to a deterioration affecting an operating tenant of one or more of our healthcare properties, there can be no assurance
that we would be able to identify suitable replacement tenants or enter into leases with new tenants on terms as favorable to us as
the current leases or that we would be able to lease those properties at all. Our ability to reposition our properties with a suitable
replacement tenant or operator could be significantly delayed or limited by state licensing, receivership or other laws, as well as
by the Medicare and Medicaid change-of-ownership rules, and we could incur substantial additional expenses in connection with
any licensing, receivership or change-of-ownership proceedings. Our ability to locate and attract suitable replacement tenants also
could be impaired by the specialized healthcare uses or contractual restrictions on use of the properties, and we may be forced to
spend substantial amounts to adapt the properties to other uses. If we are not successful in identifying suitable replacements on a
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29
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
timely basis we may be required to fund certain expenses and obligations (e.g., real estate taxes, debt costs and maintenance
expenses) to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned. In
addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator,
which could adversely affect our business, results of operations and financial condition.
In any of the foregoing circumstances, our financial performance could be materially adversely affected.
Lease expirations, lease defaults and lease terminations may adversely affect our revenue.
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 expiring leases to elect to renew their leases, could cause us to
experience long periods of vacancy with no revenue from a facility and to incur substantial capital expenditures and/or lease
concessions to obtain replacement tenants.
The real estate investments we currently own and 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.
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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, for example, 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.
Joint venture investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-
venturer’s financial condition.
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, including the possibility that co-venturers might 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.
Risks Related To Our Residential Credit Business
Our investments in non-Agency mortgage-backed securities (including re-performing loans (“RPL”) / non-performing loans
(“NPL”) which we have acquired in recent periods) or other investment assets of lower credit quality, including our investments
in seasoned re-performing and non-performing residential whole loans, involve credit risk, which could materially adversely
affect our results of operations.
Our current investment strategy includes seeking growth in our residential credit business. The holder of a mortgage or mortgage-
backed securities assumes the risk that the related borrowers may default on their obligations to make full and timely payments
of principal and interest. Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities,
30
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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timely basis we may be required to fund certain expenses and obligations (e.g., real estate taxes, debt costs and maintenance
expenses) to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned. In
addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator,
which could adversely affect our business, results of operations and financial condition.
In any of the foregoing circumstances, our financial performance could be materially adversely affected.
Lease expirations, lease defaults and lease terminations may adversely affect our revenue.
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 expiring leases to elect to renew their leases, could cause us to
experience long periods of vacancy with no revenue from a facility and to incur substantial capital expenditures and/or lease
concessions to obtain replacement tenants.
The real estate investments we currently own and 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, for example, 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.
Joint venture investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-
venturer’s financial condition.
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, including the possibility that co-venturers might 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.
Risks Related To Our Residential Credit Business
Our investments in non-Agency mortgage-backed securities (including re-performing loans (“RPL”) / non-performing loans
(“NPL”) which we have acquired in recent periods) or other investment assets of lower credit quality, including our investments
in seasoned re-performing and non-performing residential whole loans, involve credit risk, which could materially adversely
affect our results of operations.
Our current investment strategy includes seeking growth in our residential credit business. The holder of a mortgage or mortgage-
backed securities assumes the risk that the related borrowers may default on their obligations to make full and timely payments
of principal and interest. Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities,
30
residential whole loans and other investment assets of lower credit quality. In general, non-Agency mortgage-backed securities
carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to principal or interest
by the U.S. Government, any federal agency or any federally chartered corporation. Non-investment grade, non-Agency securities
tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds. Higher-
than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-
backed securities or on our residential whole loan investments may adversely affect the value of those assets. Accordingly, defaults
in the payment of principal and/or interest on our non-Agency mortgage-backed securities, residential whole loan investments
and other investment assets of less-than-high credit quality would likely result in our incurring losses of income from, and/or
losses in market value relating to, these assets.
We have investments in non-Agency mortgage-backed securities collateralized by Alt A loans and may also have investments
collateralized by subprime mortgage loans, which, due to lower underwriting standards, are subject to increased risk of losses.
We have certain investments in non-Agency mortgage-backed securities backed by collateral pools containing mortgage loans
that were originated under underwriting standards that were less strict than those used in underwriting “prime mortgage loans.”
These lower standards permitted mortgage loans, often with LTV ratios in excess of 80%, to be made to borrowers having impaired
credit histories, lower credit scores, higher debt-to-income ratios and/or unverified income. Difficult economic conditions,
including increased interest rates and lower home prices, can result in Alt A and subprime mortgage loans having increased rates
of delinquency, foreclosure, bankruptcy and loss (including such as during the credit crisis of 2007-2008 and the housing crisis
that followed), and are likely to otherwise experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that
may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because
of higher delinquency rates and losses associated with Alt A and subprime mortgage loans, the performance of our non-Agency
mortgage-backed securities that are backed by these types of loans could be correspondingly adversely affected, which could
materially adversely impact our results of operations, financial condition and business.
Our investments may include subordinated tranches of non-Agency mortgage-backed securities, which are subordinate in right
of payment to more senior securities.
Our investments may include subordinated tranches of non-Agency mortgage-backed securities, which are subordinated classes
of securities in a structure of securities collateralized by a pool of mortgage loans and, accordingly, are the first or among the first
to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and
principal. Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic
conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and may not be
liquid investments.
We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential
whole loans if they breach representations and warranties, which could cause us to suffer losses.
When selling mortgage loans, sellers typically make customary representations and warranties about such loans. Residential
mortgage loan purchase agreements may entitle the purchaser of the loans to seek indemnity or demand repurchase or substitution
of the loans in the event the seller of the loans breaches a representation or warranty given to the purchaser. There can be no
assurance that a mortgage loan purchase agreement will contain appropriate representations and warranties, that we or the trust
that purchases the mortgage loans would be able to enforce a contractual right to repurchase or substitution, or that the seller of
the loans will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase agreements. The
inability to obtain or enforce an indemnity or require repurchase of a significant number of loans could adversely affect our results
of operations, financial condition and business.
Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure.
We may acquire residential whole loans that we purchase together with the related MSRs. We rely on unaffiliated servicing
companies to service and manage the mortgages underlying our Non-Agency mortgage-backed securities and our residential whole
loans. If a servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely
to make these payments, resulting in a higher frequency of default. If a servicer takes longer to liquidate non-performing mortgages,
our losses related to those loans may be higher than originally anticipated.
Any failure by servicers to service these mortgages and related real estate owned (“REO”) properties could negatively impact the
value of these investments and our financial performance. In addition, while we have contracted, and will continue to contract,
with unaffiliated servicing companies to carry out the actual servicing of the loans (including all direct interface with the borrowers),
we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation. In light of the current
regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers
for any failure to service the loans to the required standard.
When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our subsidiaries.
The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey can be lengthy and
expensive, and the delays and costs involved in completing a foreclosure, and then liquidating the property through sale, may
materially increase any related loss. Finally, at such time as title is taken to a foreclosed property, it may require more extensive
rehabilitation than we estimated at acquisition or a previously unknown environmental liability may be discovered that would
require expensive and time-consuming remediation.
Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial
condition.
MERSCORP, Inc. is a privately held company that maintains an electronic registry, referred to as the MERS System, that tracks
ownership of residential mortgage loans in the U.S., as well as the identity of the associated servicer and subservicer. Mortgage
Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, Inc., can serve as a nominee for the
owner of a mortgage loan and in that role initiate foreclosures and/or become the mortgagee of record for the loan in local land
records. We, or other parties with whom we contract to do business or from whom we acquire assets, may choose to use MERS
as a nominee. The MERS System is widely used by participants throughout the mortgage finance industry.
Over the last several years, there have been legal challenges disputing MERS’s legal standing to initiate foreclosures and/or act
as nominee in local land records.
It is possible that these challenges could negatively affect MERS’s ability to serve as the mortgagee of record in some jurisdictions.
In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and other legal documents
in connection with foreclosure proceedings. As a result, investigations by governmental authorities and others into a servicer’s
possible foreclosure process deficiencies may impact MERS. Failures by MERS to apply prudent and effective process controls
and to comply with legal and other requirements in the foreclosure process could pose operational, reputational and legal risks
that may materially and adversely affect our business, results of operations and financial condition.
With respect to mortgage loans we own, or which we have purchased and subsequently sold, we may be subject to liability for
potential violations of truth-in-lending or other similar consumer protection laws and regulations, which could adversely impact
our business and financial results.
Federal consumer protection laws and regulations regulate residential mortgage loan underwriting and originators’ lending
processes, standards, and disclosures to borrowers. These laws and regulations include, among others, the Consumer Financial
Protection Bureau’s “ability-to-repay” and “qualified mortgage” regulations. In addition, there are various other federal, state, and
local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators.
For example, the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) which was expanded under the Dodd
Frank Act, prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in
excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted,
or may enact, similar laws or regulations, which in some cases may impose restrictions and requirements greater than those in
place under federal laws and regulations. In addition, under the anti-predatory lending laws of some states, the origination of
certain residential mortgage loans, including loans that are classified as “high cost” loans under applicable law, must satisfy a net
tangible benefits test with respect to the borrower. This test, as well as certain standards set forth in the “ability-to-repay” and
“qualified mortgage” regulations, may be highly subjective and open to interpretation. As a result, a court may determine that a
residential mortgage loan did not meet the applicable standard or test even if the originator reasonably believed such standard or
test had been satisfied. Failure of residential mortgage loan originators or servicers to comply with federal consumer protection
laws and regulations could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these
loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some
violations included the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affected
residential mortgage loans, which could adversely impact our business and financial results.
We may not be able to obtain or maintain the governmental licenses required to operate our Residential Credit business and
we may fail to comply with various state and federal laws and regulations applicable to our business of acquiring residential
mortgage loans and servicing rights.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation. In light of the current
regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers
for any failure to service the loans to the required standard.
When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our subsidiaries.
The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey can be lengthy and
expensive, and the delays and costs involved in completing a foreclosure, and then liquidating the property through sale, may
materially increase any related loss. Finally, at such time as title is taken to a foreclosed property, it may require more extensive
rehabilitation than we estimated at acquisition or a previously unknown environmental liability may be discovered that would
require expensive and time-consuming remediation.
Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial
condition.
MERSCORP, Inc. is a privately held company that maintains an electronic registry, referred to as the MERS System, that tracks
ownership of residential mortgage loans in the U.S., as well as the identity of the associated servicer and subservicer. Mortgage
Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, Inc., can serve as a nominee for the
owner of a mortgage loan and in that role initiate foreclosures and/or become the mortgagee of record for the loan in local land
records. We, or other parties with whom we contract to do business or from whom we acquire assets, may choose to use MERS
as a nominee. The MERS System is widely used by participants throughout the mortgage finance industry.
Over the last several years, there have been legal challenges disputing MERS’s legal standing to initiate foreclosures and/or act
as nominee in local land records.
It is possible that these challenges could negatively affect MERS’s ability to serve as the mortgagee of record in some jurisdictions.
In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and other legal documents
in connection with foreclosure proceedings. As a result, investigations by governmental authorities and others into a servicer’s
possible foreclosure process deficiencies may impact MERS. Failures by MERS to apply prudent and effective process controls
and to comply with legal and other requirements in the foreclosure process could pose operational, reputational and legal risks
that may materially and adversely affect our business, results of operations and financial condition.
With respect to mortgage loans we own, or which we have purchased and subsequently sold, we may be subject to liability for
potential violations of truth-in-lending or other similar consumer protection laws and regulations, which could adversely impact
our business and financial results.
Federal consumer protection laws and regulations regulate residential mortgage loan underwriting and originators’ lending
processes, standards, and disclosures to borrowers. These laws and regulations include, among others, the Consumer Financial
Protection Bureau’s “ability-to-repay” and “qualified mortgage” regulations. In addition, there are various other federal, state, and
local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators.
For example, the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) which was expanded under the Dodd
Frank Act, prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in
excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted,
or may enact, similar laws or regulations, which in some cases may impose restrictions and requirements greater than those in
place under federal laws and regulations. In addition, under the anti-predatory lending laws of some states, the origination of
certain residential mortgage loans, including loans that are classified as “high cost” loans under applicable law, must satisfy a net
tangible benefits test with respect to the borrower. This test, as well as certain standards set forth in the “ability-to-repay” and
“qualified mortgage” regulations, may be highly subjective and open to interpretation. As a result, a court may determine that a
residential mortgage loan did not meet the applicable standard or test even if the originator reasonably believed such standard or
test had been satisfied. Failure of residential mortgage loan originators or servicers to comply with federal consumer protection
laws and regulations could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these
loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some
violations included the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affected
residential mortgage loans, which could adversely impact our business and financial results.
We may not be able to obtain or maintain the governmental licenses required to operate our Residential Credit business and
we may fail to comply with various state and federal laws and regulations applicable to our business of acquiring residential
mortgage loans and servicing rights.
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While we are not required to obtain licenses to purchase mortgage-backed securities, the purchase of residential mortgage loans
and certain business purpose mortgage loans in the secondary market may, in some circumstances, require us to maintain various
state licenses. Acquiring the right to service residential mortgage loans and certain business purpose mortgage loans may also, in
some circumstances, require us to maintain various state licenses even though we currently do not expect to directly engage in
loan servicing ourselves. As a result, we could be delayed in conducting certain business if we were first required to obtain a state
license. We cannot assure you that we will be able to obtain all of the licenses we need or that we would not experience significant
delays in obtaining these licenses. Furthermore, once licenses are issued we are required to comply with various information
reporting and other regulatory requirements to maintain those licenses, and there is no assurance that we will be able to satisfy
those requirements or other regulatory requirements applicable to our business of acquiring mortgage loans on an ongoing basis.
Our failure to obtain or maintain required licenses or our failure to comply with regulatory requirements that are applicable to our
business of acquiring mortgage loans may restrict our residential credit business and investment options and could harm our
business and expose us to penalties or other claims.
Risks Related to Our Relationship with Our Manager
The management agreement was negotiated between related parties and the terms, including fees payable, may not be as
favorable to us as if it were negotiated with an unaffiliated third party.
Because the Manager is owned by members of our management, the management agreement was developed by related parties.
Although our independent directors, who are responsible for protecting our and our stockholders’ interests with regard to the
management agreement, had the benefit of external financial and legal advisors, they did not have the benefit of arm’s-length
advice from our executive officers. The terms of the management agreement, including fees payable, may not reflect the terms
we may have received if it was negotiated with an unrelated third party. In addition, particularly as a result of our relationship
with the principal owners and employees of the Manager, who are members of our management, our directors may determine that
it is in the best interests of our stockholders 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 implementation of our
investment and financing strategies depend upon the experience of certain of the Manager’s officers and employees. None of
these individuals’ continued service is guaranteed. If the management agreement is terminated or 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.
The management fee is payable regardless of our performance.
The Manager receives a management fee from us that is based on a percentage of our stockholders’ equity, regardless of the
performance of our investment portfolio (except to the extent that performance affects 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 affect 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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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’ discharge of fiduciary duties to our stockholders.
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. If the Manager were to manage any additional entities, our executive officers could face conflicts
of interest in allocating their time among us and such additional entities.
Risks Related to Our Taxation as a REIT
Our failure to qualify as a REIT would have adverse tax consequences.
We believe that since 1997 we have qualified for taxation as a REIT for federal income tax purposes under Sections 856 through
860 of the Code. We plan to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT
requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to
qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come
from real estate sources and certain other sources that are itemized in the REIT tax laws. Additionally, our ability to satisfy the
REIT asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not
susceptible to precise determination, and for which we will not obtain independent appraisals. The proper classification of an
instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the
application of the REIT asset requirements. We are also required to distribute to stockholders at least 90% of our REIT taxable
income (determined without regard to the deduction for dividends paid and by excluding any net capital gain). Even a technical
or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service (“IRS”) might
make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult or impossible for
us to remain qualified as a REIT.
We also indirectly own interests in entities that have elected to be taxed as REITs under the U.S. federal income tax laws, or
“Subsidiary REITs.” Subsidiary REITs are subject to the various REIT qualification requirements that are applicable to us. If any
Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S. federal,
state, and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes
of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail
to qualify as a REIT unless we could avail ourselves of certain relief provisions. While we believe that the Subsidiary REITs have
qualified as REITs under the Code, we have joined each Subsidiary REIT in filing “protective” TRS elections under Section 856(l)
of the Code. We cannot assure you that such “protective” TRS elections would be effective to avoid adverse consequences to us.
Moreover, even if the “protective” elections were to be effective, the Subsidiary REITs would be subject to regular corporate
income tax, and we cannot assure you that we would not fail to satisfy the requirement that not more than 20% of the value of our
total assets may be represented by the securities of one or more TRSs. 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.
We have certain distribution requirements, which could adversely affect our ability to execute our business plan.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
As a REIT, we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain). The required distribution limits the amount we have available for other business
purposes, including amounts to fund our growth. Also, it is possible that because of the differences between the time we actually
receive revenue or pay expenses and the period we report those items for distribution purposes, we may have to borrow funds on
a short-term basis to meet the 90% distribution requirement.
To the extent that we satisfy this distribution 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 or non-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, and in some cases, potentially recognize
the discount in taxable income once such amounts are reflected in our financial statements. If we do not have other funds available
in these situations we could be required to (i) borrow funds on unfavorable terms, (ii) sell investments at disadvantageous prices,
(iii) distribute our own stock, see below, or (iv) 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 the corporate income tax and 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.
Conversely, from time to time, we may generate taxable income less than our income for financial reporting purposes due to GAAP
and tax accounting differences or, as mentioned above, the timing between the recognition of taxable income and the actual receipt
of cash. In such circumstances we may make distributions according to our business plan that are within our wherewithal from
an economic or cash management perspective, but that are labeled as return of capital for tax reporting purposes as they are in
excess of taxable income in that period.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of our common stock are
anticipated to constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this
rule. In particular:
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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’ discharge of fiduciary duties to our stockholders.
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. If the Manager were to manage any additional entities, our executive officers could face conflicts
of interest in allocating their time among us and such additional entities.
Risks Related to Our Taxation as a REIT
Our failure to qualify as a REIT would have adverse tax consequences.
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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 Code. We plan to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT
requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to
qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come
from real estate sources and certain other sources that are itemized in the REIT tax laws. Additionally, our ability to satisfy the
REIT asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not
susceptible to precise determination, and for which we will not obtain independent appraisals. The proper classification of an
instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the
application of the REIT asset requirements. We are also required to distribute to stockholders at least 90% of our REIT taxable
income (determined without regard to the deduction for dividends paid and by excluding any net capital gain). Even a technical
or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service (“IRS”) might
make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult or impossible for
us to remain qualified as a REIT.
We also indirectly own interests in entities that have elected to be taxed as REITs under the U.S. federal income tax laws, or
“Subsidiary REITs.” Subsidiary REITs are subject to the various REIT qualification requirements that are applicable to us. If any
Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S. federal,
state, and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes
of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail
to qualify as a REIT unless we could avail ourselves of certain relief provisions. While we believe that the Subsidiary REITs have
qualified as REITs under the Code, we have joined each Subsidiary REIT in filing “protective” TRS elections under Section 856(l)
of the Code. We cannot assure you that such “protective” TRS elections would be effective to avoid adverse consequences to us.
Moreover, even if the “protective” elections were to be effective, the Subsidiary REITs would be subject to regular corporate
income tax, and we cannot assure you that we would not fail to satisfy the requirement that not more than 20% of the value of our
total assets may be represented by the securities of one or more TRSs. 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.
We have certain distribution requirements, which could adversely affect our ability to execute our business plan.
34
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part of the income and gain recognized by certain
qualified employee pension trusts with respect to
our common stock may be treated as unrelated
business taxable income if shares of our common
stock are predominantly held by qualified employee
pension trusts, and we are required to rely on a
special look-through rule for purposes of meeting
one of the REIT ownership tests, and we are not
operated in a manner to avoid treatment of such
income or gain as unrelated business taxable
income;
part of the income and gain recognized by a tax-
exempt investor with respect to our common stock
would constitute unrelated business taxable income
if the investor incurs debt in order to acquire the
common stock;
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We may in the future choose to pay dividends in our own stock, in which case the stockholders may be required to pay income
taxes in excess of the cash dividends they receive.
We may in the future distribute taxable dividends that are payable in cash or 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
35
part or all of the income or gain recognized with
respect to our common stock by social clubs,
voluntary
associations,
supplemental unemployment benefit trusts and
qualified group legal services plans which are
exempt from federal income taxation under the
Code may be treated as unrelated business taxable
income;
to the extent that we (or a part of us, or a disregarded
subsidiary of ours) are a “taxable mortgage pool,”
or if we hold residual interests in a real estate
mortgage investment conduit or a CLO;
a portion of the distributions paid to a tax-exempt
stockholder that is allocable to excess inclusion
income may be treated as unrelated business taxable
income.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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.
Limits on ownership of our 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 any class of our capital. Our Board, 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” if it is
satisfied 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 20% of its total assets in the stock or securities of one or more taxable REIT subsidiaries
(“TRSs”); therefore, our TRSs cannot constitute more than 20% of our total assets.
A TRS is a corporation, other than a REIT or a qualified REIT subsidiary, in which a REIT owns stock and with which we jointly
elect 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 TRSs. 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 20% of the value of a REIT’s
assets may consist of stock or securities of one or more TRSs.
The stock and securities of our TRSs are expected to represent less than 20% of the value of our total assets. Furthermore, we
intend to monitor the value of our investments in the stock and securities of our TRSs to ensure compliance with the above-
described limitation. We cannot assure you, however, that we will always be able to comply with the limitation so as to maintain
REIT status.
TRSs are subject to tax at the regular corporate rates, are not required to distribute dividends, and the amount of dividends a
TRS can pay to its parent REIT may be limited by REIT gross income tests.
A TRS must pay income tax at regular corporate rates on any income that it earns. In certain circumstances, the ability of our
TRSs to deduct interest expenses for federal income tax may be limited. Such income, however, is not required to be distributed.
Our TRSs will pay corporate income tax on their taxable income, and their after-tax net income will be available for distribution
to us.
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 TRSs 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 TRSs, 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 TRSs to us in the
form of dividends. Certain asset transfers may, therefore, have to be structured as purchase and sale transactions upon which our
TRSs 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.
36
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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.
Limits on ownership of our 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 any class of our capital. Our Board, 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” if it is
satisfied 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.
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A REIT cannot invest more than 20% of its total assets in the stock or securities of one or more taxable REIT subsidiaries
(“TRSs”); therefore, our TRSs cannot constitute more than 20% of our total assets.
A TRS is a corporation, other than a REIT or a qualified REIT subsidiary, in which a REIT owns stock and with which we jointly
elect 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 TRSs. 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 20% of the value of a REIT’s
assets may consist of stock or securities of one or more TRSs.
The stock and securities of our TRSs are expected to represent less than 20% of the value of our total assets. Furthermore, we
intend to monitor the value of our investments in the stock and securities of our TRSs to ensure compliance with the above-
described limitation. We cannot assure you, however, that we will always be able to comply with the limitation so as to maintain
REIT status.
to us.
TRSs are subject to tax at the regular corporate rates, are not required to distribute dividends, and the amount of dividends a
TRS can pay to its parent REIT may be limited by REIT gross income tests.
A TRS must pay income tax at regular corporate rates on any income that it earns. In certain circumstances, the ability of our
TRSs to deduct interest expenses for federal income tax may be limited. Such income, however, is not required to be distributed.
Our TRSs will pay corporate income tax on their taxable income, and their after-tax net income will be available for distribution
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 TRSs 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 TRSs, 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.
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Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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 TRSs 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.
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 assets through our TRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
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 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, U.S. Government securities and qualified real estate assets. The remainder of our investment in
securities (other than U.S. Government securities, qualified real estate assets and securities issued by a TRS) 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 U.S. Government
securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, no more than
20% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements
at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for
certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we
may be required to liquidate from our investment portfolio otherwise attractive investments. These actions could have the effect
of reducing our income and amounts available for distribution to our stockholders.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.
To remain qualified as a REIT, we must comply with requirements regarding the composition of our assets and our sources of
income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with
these 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.
The limitations imposed by the REIT gross income tests may impede our ability to distribute assets from our TRSs to us in the
form of dividends. Certain asset transfers may, therefore, have to be structured as purchase and sale transactions upon which our
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to
remain qualified as a REIT.
TRSs 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.
36
We enter into certain financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally
sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in
exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto.
We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any
such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets
during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code could substantially limit our ability to hedge our liabilities. Any income from a properly designated
hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes
of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those
transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these
rules, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRSs. This could
increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated
with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide
any tax benefit, except for being carried forward against future taxable income in the TRSs.
The failure of a mezzanine loan or similar debt to qualify as a real estate asset could adversely affect our ability to qualify as
a REIT.
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We invest in mezzanine loans and similar debt (including preferred equity investments that we treat as mezzanine loans for U.S.
federal income tax purposes), 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.
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Qualifying as a REIT involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial
and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership
and other requirements on a continuing basis. In addition, our ability to satisfy the REIT qualification requirements depends in
part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an
equity interest in an entity that is classified as a partnership for federal income tax purposes.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring
CMOs.
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 mortgage loans, 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 to avoid the
prohibited transaction tax.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets
during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.
Certain financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our
stockholders.
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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code could substantially limit our ability to hedge our liabilities. Any income from a properly designated
hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes
of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those
transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these
rules, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRSs. This could
increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated
with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide
any tax benefit, except for being carried forward against future taxable income in the TRSs.
The failure of a mezzanine loan or similar debt to qualify as a real estate asset could adversely affect our ability to qualify as
a REIT.
We invest in mezzanine loans and similar debt (including preferred equity investments that we treat as mezzanine loans for U.S.
federal income tax purposes), 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
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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.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial
and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership
and other requirements on a continuing basis. In addition, our ability to satisfy the REIT qualification requirements depends in
part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an
equity interest in an entity that is classified as a partnership for federal income tax purposes.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring
CMOs.
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 mortgage loans, 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 to avoid the
prohibited transaction tax.
We may enter into securitization transactions and other financing transactions that could result in us, or a portion of our assets,
being treated as a taxable mortgage pool for U.S. federal income tax purposes. If we enter into such a transaction in the future,
we could be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool,
referred to as "excess inclusion income," that is allocable to the percentage of our shares held in record name by disqualified
organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state
pension plans and charitable remainder trusts and government entities). In that case, we could reduce distributions to such
stockholders by the amount of tax paid by us that is attributable to such stockholder's ownership.
If we were to realize excess inclusion income, IRS guidance indicates that the excess inclusion income would be allocated
among our stockholders in proportion to the dividends paid. Excess inclusion income cannot be offset by losses of a
stockholder. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully
taxable as unrelated business taxable income under Section 512 of the Code. If the stockholder is a foreign person, it would be
subject to U.S. federal income tax at the maximum tax rate and withholding will be required on this income without reduction
or exemption pursuant to any otherwise applicable income tax treaty.
The lease of qualified healthcare properties to a TRS is subject to special requirements.
We lease certain qualified healthcare properties we acquired from MTGE to a TRS, which hires a manager to manage the healthcare
operations at these properties. The lease revenues from this structure are treated as rents from real property if (1) they are paid
pursuant to an arms-length lease of a qualified healthcare property with a TRS and (2) the manager qualifies as an “eligible
independent contractor,” as defined in the Code. If any of these conditions are not satisfied, then the rents may not be treated as
revenues from real property.
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 counsel substantially to the effect that (i) for purposes
of the REIT asset tests, our ownership of a TBA should be treated as ownership of real estate assets, and (ii) for purposes of the
75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain
from the sale or disposition of an interest in mortgages on real property. Opinions of counsel are not binding on the IRS, and no
assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must
be emphasized that the opinion of counsel 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
counsel, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets
consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
Dividends payable by REITs generally receive different tax treatment than 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 qualified
dividend rates. For taxable years beginning before January 1, 2026, non-corporate taxpayers may deduct up to 20% of certain
pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that
are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective
maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable
to qualified dividend income does not adversely affect the taxation of REITs or dividends payable by REITs, 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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more
difficult or impossible for us to remain qualified as a REIT.
The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or
administrative action at any time, which could affect the federal income tax treatment of an investment in us. The federal income
tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S.
Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. The
recently enacted tax law informally known as the Tax Cuts and Jobs Act (the “TCJA”) significantly changes the U.S. federal
income tax laws applicable to businesses and their owners, including REITs and their stockholders. Technical corrections or other
amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming. Additional future 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.
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.
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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. During 2018, we
issued 154.2 million shares of common stock, which includes 86.3 million shares of common stock issued in connection with a
public offering, 43.6 million shares of common stock issued in connection with the MTGE Acquisition and 24.0 million shares
of common stock issued under our at-the-market sales program, and 19.2 million shares of preferred stock, including 2.2 million
shares of preferred stock issued in connection with the MTGE Acquisition, which could become convertible into common stock
under limited circumstances related to a change of control of the Company.
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:
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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;
capital commitments;
changes in market valuations of similar companies;
adverse market
increased
reaction
indebtedness we incur in the future;
to any
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additions or departures of management personnel;
actions by institutional stockholders or activist
investors;
speculation in the press or investment community;
changes in our distribution policy;
government action or regulation;
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.
Holders of our shares of common stock will be subject to the risk of volatile market prices and wide fluctuations in the market
price of our shares of common stock. These factors may cause the market price of our shares of common stock to decline, regardless
of our financial condition, results of operations, business or prospects. It is impossible to assure you that the market prices of our
shares of common stock will not fall in the future.
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.
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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 total number or value of any class of our outstanding common or preferred stock. Our
charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals
or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of
the outstanding stock by an individual or entity could cause 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 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 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.
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
taken without soliciting stockholder
can be
approval.
• Maryland business combination statute. 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.”
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 and cannot assure stockholders of our ability to pay dividends in
the future.
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
and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board may
deem relevant from time to time.
Our reported GAAP financial results differ from the taxable income results that impact our dividend distribution requirements
and, therefore, our GAAP results may not be an accurate indicator of future taxable income and dividend distributions.
Generally, the cumulative net income we report over the life of an asset will be the same for GAAP and tax purposes, although
the timing of this 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.
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New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more
difficult or impossible for us to remain qualified as a REIT.
The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or
administrative action at any time, which could affect the federal income tax treatment of an investment in us. The federal income
tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S.
Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. The
recently enacted tax law informally known as the Tax Cuts and Jobs Act (the “TCJA”) significantly changes the U.S. federal
income tax laws applicable to businesses and their owners, including REITs and their stockholders. Technical corrections or other
amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming. Additional future 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.
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.
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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. During 2018, we
issued 154.2 million shares of common stock, which includes 86.3 million shares of common stock issued in connection with a
public offering, 43.6 million shares of common stock issued in connection with the MTGE Acquisition and 24.0 million shares
of common stock issued under our at-the-market sales program, and 19.2 million shares of preferred stock, including 2.2 million
shares of preferred stock issued in connection with the MTGE Acquisition, which could become convertible into common stock
under limited circumstances related to a change of control of the Company.
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;
capital commitments;
changes in market valuations of similar companies;
adverse market
reaction
to any
increased
indebtedness we incur in the future;
•
•
•
•
•
•
•
additions or departures of management personnel;
actions by institutional stockholders or activist
investors;
speculation in the press or investment community;
changes in our distribution policy;
government action or regulation;
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.
Holders of our shares of common stock will be subject to the risk of volatile market prices and wide fluctuations in the market
price of our shares of common stock. These factors may cause the market price of our shares of common stock to decline, regardless
of our financial condition, results of operations, business or prospects. It is impossible to assure you that the market prices of our
shares of common stock will not fall in the future.
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.
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Regulatory Risks
Loss of Investment Company Act exemption from registration would adversely affect us.
We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If
we were to become subject to the Investment Company Act, 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” (“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 this provision of the Investment Company Act and
the rules and regulations promulgated under the Investment Company Act.
We rely on a SEC interpretation that “whole pool certificates” that are issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie
Mae (“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 in the Business of Acquiring Mortgages and
Mortgage-Related Instruments” (SEC Release No. IC-29778). In this concept release, the SEC announced it was reviewing
interpretive issues related to the Section 3(c)(5)(C) exemption. Among other things, the SEC requested comments on whether it
should revisit whether Agency Whole Pool Certificates may be treated as interests in real estate (and presumably Qualifying Real
Estate Assets) and whether companies, such as us, whose primary business consists of investing in Agency Whole Pool Certificates
are the type of entities that Congress intended to be encompassed by the exclusion provided by Section 3(c)(5)(C). The potential
outcomes of the SEC’s actions are unclear as is the SEC’s timetable for its review and actions.
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If the SEC changes its views regarding which securities are 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.
Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely
affect our business.
We are subject to regulation by laws at the local, state and federal level, including securities and tax laws and financial accounting
and reporting standards. These 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.
42
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Regulatory Risks
Loss of Investment Company Act exemption from registration would adversely affect us.
None.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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 the 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. At December 31,
2018, we were not party to any pending material legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
None.
We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If
we were to become subject to the Investment Company Act, 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” (“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 this provision of the Investment Company Act and
the rules and regulations promulgated under the Investment Company Act.
We rely on a SEC interpretation that “whole pool certificates” that are issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie
Mae (“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 in the Business of Acquiring Mortgages and
Mortgage-Related Instruments” (SEC Release No. IC-29778). In this concept release, the SEC announced it was reviewing
interpretive issues related to the Section 3(c)(5)(C) exemption. Among other things, the SEC requested comments on whether it
should revisit whether Agency Whole Pool Certificates may be treated as interests in real estate (and presumably Qualifying Real
Estate Assets) and whether companies, such as us, whose primary business consists of investing in Agency Whole Pool Certificates
are the type of entities that Congress intended to be encompassed by the exclusion provided by Section 3(c)(5)(C). The potential
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outcomes of the SEC’s actions are unclear as is the SEC’s timetable for its review and actions.
If the SEC changes its views regarding which securities are 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.
Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely
affect our business.
We are subject to regulation by laws at the local, state and federal level, including securities and tax laws and financial accounting
and reporting standards. These 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.
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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
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 January 31, 2019, we had 1,400,060,337 shares of common stock issued and outstanding which were held
by approximately 395,000 beneficial holders. The equity compensation plan information called for by Item 201(d) of Regulation
S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”
Dividends
The following table sets forth, for the periods indicated, the cash dividends declared per share of our common stock.
First quarter
Second quarter
Third quarter
Fourth quarter
Common Dividends Declared Per Share
2018
2017
$
$
$
$
0.30
0.30
0.30
0.30
$
$
$
$
0.30
0.30
0.30
0.30
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) consistent with the distribution requirements applicable to REITs. 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 by factors beyond our control. In addition, unrealized changes in the
estimated fair value of available-for-sale investments may have a direct effect on dividends. All distributions will be made at the
discretion of our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such other
factors as our Board may deem relevant from time to time. See also Item 1A. “Risk Factors.” 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, 2018, 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 Mortgage REIT Index, or BBG REIT index, an industry index of mortgage REITs. The comparison is for the five-
year period ended December 31, 2018 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 the last trading day of the initial year shown in the graph. Upon written
request we will provide stockholders with a list of the REITs included in the BBG REIT Index.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
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
Five-Year Share Performance
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 January 31, 2019, we had 1,400,060,337 shares of common stock issued and outstanding which were held
by approximately 395,000 beneficial holders. The equity compensation plan information called for by Item 201(d) of Regulation
S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”
Dividends
The following table sets forth, for the periods indicated, the cash dividends declared per share of our common stock.
First quarter
Second quarter
Third quarter
Fourth quarter
Common Dividends Declared Per Share
2018
2017
$
$
$
$
0.30
0.30
0.30
0.30
$
$
$
$
0.30
0.30
0.30
0.30
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) consistent with the distribution requirements applicable to REITs. 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 by factors beyond our control. In addition, unrealized changes in the
estimated fair value of available-for-sale investments may have a direct effect on dividends. All distributions will be made at the
discretion of our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such other
factors as our Board may deem relevant from time to time. See also Item 1A. “Risk Factors.” 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, 2018, 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 Mortgage REIT Index, or BBG REIT index, an industry index of mortgage REITs. The comparison is for the five-
year period ended December 31, 2018 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 the last trading day of the initial year shown in the graph. Upon written
request we will provide stockholders with a list of the REITs included in the BBG REIT Index.
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12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Annaly Capital Management, Inc.
S&P 500 Index
BBG REIT Index
100
100
100
121
114
119
118
115
108
141
129
132
186
157
158
172
150
154
The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither the
accuracy nor 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.
The above performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the
SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (the “Securities Exchange Act”) or to the
liabilities of Section 18 of the Securities Exchange Act, and shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate it by reference
into such a filing.
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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 Consolidated Financial
Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
As of and for the Years Ended December 31,
2018
2017
2016
2015
2014
Statement of comprehensive income data
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Realized and unrealized gains (losses)
Other income (loss)
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Less: Total general and administrative expenses
Income (loss) before income taxes
Less: Income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Annaly
Dividends on preferred stock
$
3,332,563
$
2,493,126
$
2,210,951
$
2,170,697
$
2,632,398
1,897,860
1,434,703
(1,162,984)
109,927
329,873
51,773
(2,375)
54,148
(260)
54,408
129,312
1,008,354
657,752
471,596
512,659
1,484,772
1,553,199
1,699,101
2,119,739
199,493
115,857
224,124
84,204
44,144
250,356
1,575,998
1,431,191
6,982
(1,595)
(1,021,351)
(2,791,399)
(13,717)
200,240
463,793
(1,954)
44,044
209,338
(836,954)
5,325
1,569,016
1,432,786
465,747
(842,279)
(588)
(970)
(809)
(196)
1,569,604
1,433,756
109,635
82,260
466,556
71,968
(842,083)
71,968
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Net income (loss) available (related) to common stockholders $
(74,904) $
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$
1,351,496
$
394,588
$
(914,051)
Net income (loss) per share available (related) to common stockholders
Basic
Diluted
Weighted average number of common shares outstanding
Basic
Diluted
Other financial data
Total assets
Total equity
Dividends declared per common share
$
$
$
$
$
(0.06) $
(0.06) $
1.37
1.37
$
$
1.39
1.39
$
$
0.42
0.42
$
$
(0.96)
(0.96)
1,209,601,809
1,065,923,652
969,787,583
947,062,099
947,539,294
1,209,601,809
1,066,351,616
970,102,353
947,276,742
947,539,294
105,787,527
14,117,801
1.20
$
$
$
101,760,050
14,871,573
1.20
$
$
$
87,905,046
12,575,972
1.20
$
$
$
75,190,893
$ 88,355,367
11,905,922
$ 13,333,781
1.20
$
1.20
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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 Consolidated Financial
Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
As of and for the Years Ended December 31,
2018
2017
2016
2015
2014
Statement of comprehensive income data
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Realized and unrealized gains (losses)
Other income (loss)
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Less: Total general and administrative expenses
Income (loss) before income taxes
Less: Income taxes
Net income (loss)
interests
Less: Net income (loss) attributable to noncontrolling
Net income (loss) attributable to Annaly
Dividends on preferred stock
$
3,332,563
$
2,493,126
$
2,210,951
$
2,170,697
$
2,632,398
1,897,860
1,434,703
(1,162,984)
109,927
329,873
51,773
(2,375)
54,148
(260)
54,408
129,312
1,008,354
657,752
471,596
512,659
1,484,772
1,553,199
1,699,101
2,119,739
199,493
115,857
224,124
84,204
44,144
250,356
1,575,998
1,431,191
6,982
(1,595)
(1,021,351)
(2,791,399)
(13,717)
200,240
463,793
(1,954)
44,044
209,338
(836,954)
5,325
1,569,016
1,432,786
465,747
(842,279)
(588)
(970)
(809)
(196)
1,569,604
1,433,756
109,635
82,260
466,556
71,968
(842,083)
71,968
Net income (loss) available (related) to common stockholders $
(74,904) $
1,459,969
$
1,351,496
$
394,588
$
(914,051)
Net income (loss) per share available (related) to common stockholders
Weighted average number of common shares outstanding
Basic
Diluted
Basic
Diluted
Other financial data
Total assets
Total equity
$
$
$
$
$
(0.06) $
(0.06) $
1.37
1.37
$
$
1.39
1.39
$
$
0.42
0.42
$
$
(0.96)
(0.96)
1,209,601,809
1,065,923,652
969,787,583
947,062,099
947,539,294
1,209,601,809
1,066,351,616
970,102,353
947,276,742
947,539,294
Dividends declared per common share
1.20
1.20
1.20
1.20
$
1.20
105,787,527
101,760,050
87,905,046
75,190,893
$ 88,355,367
14,117,801
14,871,573
12,575,972
11,905,922
$ 13,333,781
$
$
$
$
$
$
$
$
$
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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
contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which
are beyond our control) and 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,
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
our commercial business; our ability to grow our residential credit business; our ability to grow our middle market lending business;
credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential
mortgage credit assets, commercial real estate assets and corporate debt; risks related to investments in MSRs; our ability to
consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our
ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption
from registration under the Investment Company Act. For a discussion of the risks and uncertainties which could cause actual
results to differ from those contained in the forward-looking statements, see “Risk Factors” in this Annual Report on Form 10-K
and any subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-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.
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47
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
Overview
Acquisition of MTGE Investment Corp.
Business Environment
Economic Environment
Results of Operations
Net Income (Loss) Summary
Non-GAAP Financial Measures
Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings attributable to common
stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common share and annualized core return on average
equity (excluding PAA)
Premium Amortization Expense
Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)
Experienced and Projected Long-term CPR
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin (excluding PAA)
Economic Interest Expense and Average Cost of Interest Bearing Liabilities
Realized and Unrealized Gains (Losses)
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Other Income (Loss)
General and Administrative Expenses
Unrealized Gains and Losses - Available-for-Sale Investments
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Return on Average Equity
Financial Condition
Residential Securities
Contractual Obligations
Off-Balance Sheet Arrangements
Capital Management
Stockholders’ Equity
Capital Stock
Leverage and Capital
Risk Management
Risk Appetite
Governance
Description of Risks
Capital, Liquidity and Funding Risk Management
Funding
Excess Liquidity
Maturity Profile
Stress Testing
Liquidity Management Policies
Investment/Market Risk Management
Credit Risk Management
Counterparty Risk Management
Operational Risk Management
Compliance, Regulatory and Legal Risk Management
Critical Accounting Policies and Estimates
Valuation of Financial Instruments
Residential Securities
Residential Mortgage Loans
Commercial Real Estate Investments
Interest Rate Swaps
Revenue Recognition
Consolidation of Variable Interest Entities
Use of Estimates
Glossary of Terms
48
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81
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
Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings attributable to common
stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common share and annualized core return on average
Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin (excluding PAA)
Economic Interest Expense and Average Cost of Interest Bearing Liabilities
Realized and Unrealized Gains (Losses)
Other Income (Loss)
General and Administrative Expenses
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Unrealized Gains and Losses - Available-for-Sale Investments
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Overview
Acquisition of MTGE Investment Corp.
Business Environment
Economic Environment
Results of Operations
Net Income (Loss) Summary
Non-GAAP Financial Measures
equity (excluding PAA)
Premium Amortization Expense
Experienced and Projected Long-term CPR
Return on Average Equity
Financial Condition
Residential Securities
Contractual Obligations
Off-Balance Sheet Arrangements
Capital Management
Stockholders’ Equity
Capital Stock
Leverage and Capital
Risk Management
Risk Appetite
Governance
Description of Risks
Funding
Excess Liquidity
Maturity Profile
Stress Testing
Capital, Liquidity and Funding Risk Management
Liquidity Management Policies
Investment/Market Risk Management
Credit Risk Management
Counterparty Risk Management
Operational Risk Management
Compliance, Regulatory and Legal Risk Management
Critical Accounting Policies and Estimates
Valuation of Financial Instruments
Residential Securities
Residential Mortgage Loans
Commercial Real Estate Investments
Interest Rate Swaps
Revenue Recognition
Use of Estimates
Glossary of Terms
Consolidation of Variable Interest Entities
Page
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Overview
We are a leading diversified capital manager that invests in and finances residential and commercial assets. Our principal business
objective is to generate net income for distribution to our stockholders and to preserve capital through prudent selection of
investments and continuous management of our portfolio. We are a Maryland corporation that has elected to be taxed as a REIT.
We are externally managed by Annaly Management Company LLC (“Manager”). Our common stock is listed on the New York
Stock Exchange under the symbol “NLY.”
We use our capital coupled with borrowed funds to invest primarily 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 Part I, Item 1. “Business.”
Acquisition of MTGE Investment Corp.
As previously disclosed in our filings with the SEC, on September 7, 2018, Mountain Merger Sub Corporation, a wholly-owned
subsidiary of the Company, completed its acquisition of MTGE Investment Corp. (“MTGE”), an externally managed hybrid
mortgage REIT, for aggregate consideration to MTGE common shareholders of $906.2 million, consisting of $455.9 million in
equity consideration and $450.3 million in cash consideration (the “MTGE Acquisition”). We issued 43.6 million shares of common
stock as part of the consideration for the MTGE Acquisition. In addition, as part of the MTGE Acquisition, each share of MTGE
8.125% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (each, a “MTGE Preferred Share”), that was
outstanding immediately prior to the completion of the MTGE Acquisition was converted into one share of a newly-designated
series of our preferred stock, par value $0.01 per share, which we classified and designated as Series H Preferred Stock, and which
has rights, preferences, privileges and voting powers substantially the same as a MTGE Preferred Share.
We believe that MTGE’s portfolio is complementary to our pre-acquisition portfolio, that the combined capital base supports
continued growth of our businesses and that the acquisition creates efficiency and growth opportunities.
The MTGE Acquisition was accounted for as an asset acquisition in accordance with U.S. GAAP. In connection with the MTGE
Acquisition, transaction costs of $58.3 million were expensed as they were incurred and included in Other general and administrative
expenses in the Consolidated Statements of Comprehensive Income (Loss) during the year ended December 31, 2018. Similarly,
the excess consideration of $44.5 million over the fair value of the assets acquired was recognized within Other income (loss) in
the Consolidated Statements of Comprehensive Income (Loss) on the closing date of the acquisition in September 2018.
For additional details regarding the terms and conditions of the MTGE Acquisition and related matters, please refer to the
“Acquisition of MTGE Investment Corp.” Note in Part I. Item 1 and our other filings with the SEC that were made in connection
with the MTGE Acquisition.
Business Environment
The year ended December 31, 2018 was marked by the continued expansion of the United States economy, as underlying
fundamentals, particularly for the consumer and government sectors, remained sound. Interest rates continued to rise for much of
the year in large part driven by the Federal Reserve’s (“Fed”) four hikes to the Federal Funds Target Rate. Meanwhile, Agency
mortgage-backed security spreads widened over the course of the year as robust supply and the Federal Reserve balance sheet
runoff weighed on the sector. Credit sector spreads were modestly wider on growing concerns of an economic slowdown in coming
years. This broader macro-economic environment that included notable bouts of volatility, primarily in the first and fourth quarter
of 2018, lead us to maintain an active hedging strategy. Over the course of 2018, our net portfolio additions tilted modestly towards
credit assets. Despite our interest in adding credit assets to achieve greater portfolio diversification, we continue to view the broader
credit sector as fully valued. Consequently, we remain highly selective in the evaluation of investment opportunities. Within
Agency MBS, persistently higher interest rates provided a catalyst to rotate a portion of the portfolio into higher coupon MBS,
which contributed to the higher asset yield on our portfolio relative to the prior year.
Economic Environment
The pace of economic growth remained strong in 2018, coming in above estimated potential growth. Measured by real gross
domestic product (“GDP”), activity increased by an annualized 3.2% rate through the third quarter of 2018, an increase from the
2.5% growth rate in 2017. The increase was largely driven by increased government expenditures, growing by 2.2% through the
first three quarters of 2018 compared to 0.1% in 2017. Personal consumption, aided by improvement in the labor markets, grew
by an annualized rate of 2.6% over the first three quarters, similar to the 2.7% experienced in 2017. Business investment benefited
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48
49
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
from the tailwind of the 2017 tax reform and higher oil prices, rising at an annualized rate of 7.5% through September 30, 2018,
compared to 6.3% in 2017. Meanwhile, residential investment slowed meaningfully subsequent to higher mortgage rates, falling
by an annualized 2.8% through three quarters after increasing by 3.8% in 2017. Net exports were similarly a headwind on growth,
with the trade balance widening to a $950 billion as of the quarter ended September 30, 2018, as compared to a $900 billion in
the quarter ended December 31, 2017.
The Fed currently conducts monetary policy with a dual mandate: full employment and price stability. The unemployment rate
fell from 4.1% to 3.9% over the year, remaining below the Fed’s estimate of the long-run unemployment rate of 4.4%, according
to the Bureau of Labor Statistics and Federal Reserve Board. The economy added 223,000 jobs per month in 2018, up from 179,000
jobs added per month in 2017, with gains seen across a broad number of industries. Wage growth, as measured by the year-over-
year change in private sector Average Hourly Earnings, finally broke to the upside, reaching a post-crisis high of 3.3% in December
2018 compared to 2.7% in December 2017. The outlook has dimmed somewhat for 2019. In their latest forecast, the Fed projected
a modest dip to 3.5% unemployment in 2019 before rising moderately in later years as the economy slows.
Inflation remained near the Fed’s 2% target throughout 2018 as measured by the year-over-year changes in the Personal Consumer
Expenditure Chain Price Index (“PCE”). The headline PCE measure increased by 1.8% year-over-year in November 2018, roughly
unchanged from December 2017. The more stable core PCE measure, which excludes volatile food and energy prices, remained
close to the Fed’s 2.0% target after weakness in the first three months of the year, with the most recent reading of 1.9% year-over-
year in November 2018. The Fed expects the core and headline PCE measures to remain at or close to their 2% target over the
foreseeable future.
Throughout 2018 the Federal Open Market Committee (“FOMC”) continued to remove support for the economy by raising its
target for the federal funds rate. In assessing realized and expected progress towards its objectives, the FOMC raised the Federal
Funds Target Rate four times, at every other meeting throughout the year to coincide with the meetings that included a press
conference. Each increase was 25 basis points, bringing the target range from 1.25-1.50% in January 2018 to 2.25-2.50% at year-
end. Continued strong economic growth, labor market improvement and inflation near target led the FOMC to keep its economic
outlook optimistic, with the target range nearing the range of estimates for the long-run federal funds rate. In spite of this strong
realized growth, the FOMC noted increased risks to their outlook, reducing their median forecast for 2019 rate hikes from three
to two at their December 2018 meeting. This downgrade was primarily due to worsening foreign growth while also allowing the
FOMC to analyze the impact of previous rate increases and recent increased market volatility. Meanwhile, balance sheet runoff
continued in a programmatic way according to the implemented guidelines released on May 24, 2017. The Fed gradually reduced
the size of its portfolio of U.S. Treasury and Agency mortgage-backed securities holdings with runoff reaching the ultimate cap
of $30 billion for U.S. Treasury securities and $20 billion for Agency mortgage-backed securities in October 2018.
During the year ended December 31, 2018, the 10-year U.S. Treasury rate initially sold off to a seven-year high yield of 3.24%
on November 8, 2018, before rallying to 2.68% by year-end. The strong economic growth seen throughout the year contributed
to the initial move, while foreign growth fears and a dimming domestic economic outlook led to risk-off sentiment in the final
months of the year. Estimates of term premium, or the compensation required for purchasing longer-dated U.S. Treasury maturities,
remained at very low levels throughout the year, suggesting consistent demand for duration. The mortgage basis, or the spread
between the 30-year Agency mortgage-backed security coupon and 10-year U.S. Treasury rate, rose steadily throughout the year,
likely due to a combination of increased volatility and Fed balance sheet runoff.
The following table below presents interest rates and spreads at 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,
2017
3.00%
59 bps
2.41%
1.56%
1.84%
2016
3.13%
68 bps
2.44%
0.77%
1.32%
2018
3.50%
82 bps
2.68%
2.50%
2.88%
50
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
from the tailwind of the 2017 tax reform and higher oil prices, rising at an annualized rate of 7.5% through September 30, 2018,
compared to 6.3% in 2017. Meanwhile, residential investment slowed meaningfully subsequent to higher mortgage rates, falling
by an annualized 2.8% through three quarters after increasing by 3.8% in 2017. Net exports were similarly a headwind on growth,
with the trade balance widening to a $950 billion as of the quarter ended September 30, 2018, as compared to a $900 billion in
the quarter ended December 31, 2017.
The Fed currently conducts monetary policy with a dual mandate: full employment and price stability. The unemployment rate
fell from 4.1% to 3.9% over the year, remaining below the Fed’s estimate of the long-run unemployment rate of 4.4%, according
to the Bureau of Labor Statistics and Federal Reserve Board. The economy added 223,000 jobs per month in 2018, up from 179,000
jobs added per month in 2017, with gains seen across a broad number of industries. Wage growth, as measured by the year-over-
year change in private sector Average Hourly Earnings, finally broke to the upside, reaching a post-crisis high of 3.3% in December
2018 compared to 2.7% in December 2017. The outlook has dimmed somewhat for 2019. In their latest forecast, the Fed projected
a modest dip to 3.5% unemployment in 2019 before rising moderately in later years as the economy slows.
Inflation remained near the Fed’s 2% target throughout 2018 as measured by the year-over-year changes in the Personal Consumer
Expenditure Chain Price Index (“PCE”). The headline PCE measure increased by 1.8% year-over-year in November 2018, roughly
unchanged from December 2017. The more stable core PCE measure, which excludes volatile food and energy prices, remained
close to the Fed’s 2.0% target after weakness in the first three months of the year, with the most recent reading of 1.9% year-over-
year in November 2018. The Fed expects the core and headline PCE measures to remain at or close to their 2% target over the
foreseeable future.
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Throughout 2018 the Federal Open Market Committee (“FOMC”) continued to remove support for the economy by raising its
target for the federal funds rate. In assessing realized and expected progress towards its objectives, the FOMC raised the Federal
Funds Target Rate four times, at every other meeting throughout the year to coincide with the meetings that included a press
conference. Each increase was 25 basis points, bringing the target range from 1.25-1.50% in January 2018 to 2.25-2.50% at year-
end. Continued strong economic growth, labor market improvement and inflation near target led the FOMC to keep its economic
outlook optimistic, with the target range nearing the range of estimates for the long-run federal funds rate. In spite of this strong
realized growth, the FOMC noted increased risks to their outlook, reducing their median forecast for 2019 rate hikes from three
to two at their December 2018 meeting. This downgrade was primarily due to worsening foreign growth while also allowing the
FOMC to analyze the impact of previous rate increases and recent increased market volatility. Meanwhile, balance sheet runoff
continued in a programmatic way according to the implemented guidelines released on May 24, 2017. The Fed gradually reduced
the size of its portfolio of U.S. Treasury and Agency mortgage-backed securities holdings with runoff reaching the ultimate cap
of $30 billion for U.S. Treasury securities and $20 billion for Agency mortgage-backed securities in October 2018.
During the year ended December 31, 2018, the 10-year U.S. Treasury rate initially sold off to a seven-year high yield of 3.24%
on November 8, 2018, before rallying to 2.68% by year-end. The strong economic growth seen throughout the year contributed
to the initial move, while foreign growth fears and a dimming domestic economic outlook led to risk-off sentiment in the final
months of the year. Estimates of term premium, or the compensation required for purchasing longer-dated U.S. Treasury maturities,
remained at very low levels throughout the year, suggesting consistent demand for duration. The mortgage basis, or the spread
between the 30-year Agency mortgage-backed security coupon and 10-year U.S. Treasury rate, rose steadily throughout the year,
likely due to a combination of increased volatility and Fed balance sheet runoff.
The following table below presents interest rates and spreads at 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,
2017
3.00%
59 bps
2.41%
1.56%
1.84%
2016
3.13%
68 bps
2.44%
0.77%
1.32%
2018
3.50%
82 bps
2.68%
2.50%
2.88%
50
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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” above) and in Part I, Item 1A.
“Risk Factors”.
This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance
with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated
financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to
enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our
performance versus that of industry peers.
Please refer to the “Non-GAAP Financial Measures” section for additional information.
Net Income (Loss) Summary
The following table presents financial information related to our results of operations as of and for the years ended December 31,
2018, 2017 and 2016.
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51
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
As of and for the Years Ended December 31,
2018
2017
2016
Interest income
Interest expense
Net interest income
Realized and unrealized gains (losses)
Other income (loss)
Less: General and administrative expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Annaly
Less: 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
Other information
Asset portfolio at period-end
Average total assets
Average equity
Leverage at period-end (1)
Economic leverage at period-end (2)
Capital ratio (3)
Annualized return on average total assets
Annualized return on average equity
Annualized core return on average equity (excluding PAA) (4)
Net interest margin (5)
Net interest margin (excluding PAA) (4)
Average yield on interest earning assets
Average yield on interest earning assets (excluding PAA) (4)
Average cost of interest bearing liabilities (6)
Net interest spread
Net interest spread (excluding PAA) (4)
Constant prepayment rate
Long-term constant prepayment rate
Common stock book value per share
Interest income (excluding PAA) (4)
Economic interest expense (4) (6)
Economic net interest income (excluding PAA) (4)
Core earnings (4)
Premium amortization adjustment cost (benefit)
Core earnings (excluding PAA) (4)
Core earnings per common share (4)
PAA cost (benefit) per common share (4)
Core earnings (excluding PAA) per common share (4)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(dollars in thousands, except per share data)
3,332,563
1,897,860
1,434,703
(1,162,984)
109,927
329,873
51,773
(2,375)
54,148
(260)
54,408
129,312
(74,904)
2,493,126
1,008,354
1,484,772
199,493
115,857
224,124
1,575,998
6,982
1,569,016
(588)
1,569,604
109,635
1,459,969
2,210,951
657,752
1,553,199
84,204
44,144
250,356
1,431,191
(1,595)
1,432,786
(970)
1,433,756
82,260
1,351,496
$
$
(0.06)
(0.06)
1,209,601,809
1,209,601,809
102,340,249
102,544,922
14,332,404
6.3:1
7.0:1
12.1%
0.05%
0.38%
10.99%
1.57%
1.52%
3.23%
3.17%
2.04%
1.19%
1.13%
9.3%
10.1%
9.39
3,270,542
1,797,307
1,473,235
1,636,941
(62,021)
1,574,920
1.25
(0.05)
1.20
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.37
1.37
1,065,923,652
1,066,351,616
99,935,666
91,374,962
13,371,907
5.7:1
6.6:1
12.9%
1.72%
11.73%
10.54%
1.38%
1.51%
2.78%
2.94%
1.75%
1.03%
1.19%
10.6%
10.4%
11.34
2,634,962
1,334,093
1,300,869
1,267,160
141,836
1,408,996
1.09
0.13
1.22
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.39
1.39
969,787,583
970,102,353
85,364,917
81,033,136
12,192,715
5.8:1
6.4:1
13.1%
1.77%
11.75%
9.96%
1.48%
1.50%
2.81%
2.83%
1.62%
1.19%
1.21%
13.3%
10.1%
11.16
2,229,892
1,085,118
1,144,774
1,194,884
18,941
1,213,825
1.15
0.02
1.17
(1)
(2)
(3)
(4)
(5)
(6)
Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles and mortgages payable. Debt issued by
securitization vehicles, certain credit facilities (included within other secured financing), and mortgages payable are non-recourse to us.
Computed as the sum of Recourse Debt, TBA derivative and CMBX notional outstanding and net forward purchases (sales) of investments divided by
total equity.
Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated
VIEs.
Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
Represents the sum of our interest income plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component
of interest rate swaps divided by the sum of average Interest Earning Assets plus average outstanding TBA contract and CMBX balances.
Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average
interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense and
the net interest component of interest rate swaps. Prior to the quarter ended March 31, 2018, this metric included the net interest component of interest
rate swaps used to hedge cost of funds. Beginning with the quarter ended March 31, 2018, as a result of changes to the Company’s hedging portfolio,
this metric reflects the net interest component of all interest rate swaps.
52
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Interest income
Interest expense
Net interest income
Realized and unrealized gains (losses)
Other income (loss)
Less: General and administrative expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Annaly
Less: Dividends on preferred stock
Net income (loss) available (related) to common stockholders
Net income (loss) per share available (related) to common stockholders
Weighted average number of common shares outstanding
Basic
Diluted
Basic
Diluted
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Other information
Asset portfolio at period-end
Average total assets
Average equity
Leverage at period-end (1)
Economic leverage at period-end (2)
Capital ratio (3)
Annualized return on average total assets
Annualized return on average equity
Net interest margin (5)
Net interest margin (excluding PAA) (4)
Average yield on interest earning assets
Annualized core return on average equity (excluding PAA) (4)
Average yield on interest earning assets (excluding PAA) (4)
Average cost of interest bearing liabilities (6)
Net interest spread
Net interest spread (excluding PAA) (4)
Constant prepayment rate
Long-term constant prepayment rate
Common stock book value per share
Interest income (excluding PAA) (4)
Economic interest expense (4) (6)
Economic net interest income (excluding PAA) (4)
Core earnings (4)
Premium amortization adjustment cost (benefit)
Core earnings (excluding PAA) (4)
Core earnings per common share (4)
PAA cost (benefit) per common share (4)
Core earnings (excluding PAA) per common share (4)
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As of and for the Years Ended December 31,
2018
2017
2016
(dollars in thousands, except per share data)
1,209,601,809
1,209,601,809
1,065,923,652
1,066,351,616
969,787,583
970,102,353
102,340,249
102,544,922
14,332,404
99,935,666
91,374,962
13,371,907
85,364,917
81,033,136
12,192,715
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,332,563
1,897,860
1,434,703
(1,162,984)
109,927
329,873
51,773
(2,375)
54,148
(260)
54,408
129,312
(74,904)
(0.06)
(0.06)
6.3:1
7.0:1
12.1%
0.05%
0.38%
10.99%
1.57%
1.52%
3.23%
3.17%
2.04%
1.19%
1.13%
9.3%
10.1%
9.39
3,270,542
1,797,307
1,473,235
1,636,941
(62,021)
1,574,920
1.25
(0.05)
1.20
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,493,126
1,008,354
1,484,772
199,493
115,857
224,124
1,575,998
6,982
1,569,016
(588)
1,569,604
109,635
1,459,969
1.37
1.37
5.7:1
6.6:1
12.9%
1.72%
11.73%
10.54%
1.38%
1.51%
2.78%
2.94%
1.75%
1.03%
1.19%
10.6%
10.4%
11.34
2,634,962
1,334,093
1,300,869
1,267,160
141,836
1,408,996
1.09
0.13
1.22
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,210,951
657,752
1,553,199
84,204
44,144
250,356
1,431,191
(1,595)
1,432,786
(970)
1,433,756
82,260
1,351,496
1.39
1.39
5.8:1
6.4:1
13.1%
1.77%
11.75%
9.96%
1.48%
1.50%
2.81%
2.83%
1.62%
1.19%
1.21%
13.3%
10.1%
11.16
2,229,892
1,085,118
1,144,774
1,194,884
18,941
1,213,825
1.15
0.02
1.17
(1) Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles and mortgages payable. Debt issued by
securitization vehicles, certain credit facilities (included within other secured financing), and mortgages payable are non-recourse to us.
(2) Computed as the sum of Recourse Debt, TBA derivative and CMBX notional outstanding and net forward purchases (sales) of investments divided by
(3) Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated
total equity.
VIEs.
(4) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(5) Represents the sum of our interest income plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component
of interest rate swaps divided by the sum of average Interest Earning Assets plus average outstanding TBA contract and CMBX balances.
(6) Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average
interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense and
the net interest component of interest rate swaps. Prior to the quarter ended March 31, 2018, this metric included the net interest component of interest
rate swaps used to hedge cost of funds. Beginning with the quarter ended March 31, 2018, as a result of changes to the Company’s hedging portfolio,
this metric reflects the net interest component of all interest rate swaps.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
2018 Compared with 2017
GAAP
Net income (loss) was $54.1 million, which includes ($0.3) million attributable to noncontrolling interests, or ($0.06) per average
basic common share, for the year ended December 31, 2018 compared to $1.6 billion, which includes ($0.6) million attributable
to noncontrolling interests, or $1.37 per average basic common share, for the same period in 2017. We attribute the majority of
the change in net income (loss) to the increase in net losses on disposal of investments and the unfavorable change in net gains
(losses) on other derivatives, partially offset by the favorable change in the net interest component of interest rate swaps. Net
losses on disposal of investments was ($1.1) billion for the year ended December 31, 2018 compared to ($3.9) million for the
same period in 2017. Net losses on other derivatives was ($403.0) million for the year ended December 31, 2018 compared to net
gains of $261.4 million for the same period in 2017. The net interest component of interest rate swaps was $100.6 million for the
year ended December 31, 2018 compared with ($371.1) million for the same period in 2017. Refer to the section titled “Realized
and Unrealized Gains (Losses)” located within this Item 7 for additional information related to these changes.
Non-GAAP
Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.6 billion, or $1.20 per average common share, for
the year ended December 31, 2018, compared to $1.4 billion, or $1.22 per average common share, for the same period in 2017.
Core earnings (excluding PAA) increased during the year ended December 31, 2018 compared to the same period in 2017 primarily
due to higher coupon income earned resulting from an increase in average Interest Earning Assets and favorable changes in the
net interest component of interest rate swaps, partially offset by an increase in interest expense from higher borrowing rates and
an increase in average Interest Bearing Liabilities.
2017 Compared with 2016
GAAP
Net income (loss) was $1.6 billion, which includes ($0.6) million attributable to noncontrolling interests, or $1.37 per average
basic common share, for the year ended December 31, 2017 compared to $1.4 billion, which includes ($1.0) million attributable
to noncontrolling interests, or $1.39 per average basic common share, for the same period in 2016. We attribute the majority of
the change in net income (loss) to an increase in unrealized gains on interest rate swaps and the lower net interest component of
interest rate swaps, partially offset by the change in net unrealized gains (losses) on instruments measured at fair value through
earnings and lower net interest income during the year ended December 31, 2017 compared to the same period in 2016. Unrealized
gains on interest rate swaps were $512.9 million for the year ended December 31, 2017 compared with $282.2 million for the
same period in 2016, reflecting a rise in forward interest rates during the year ended December 31, 2017 compared to lower forward
rates during the same period in 2016. The net interest component of interest rate swaps decreased $135.6 million to ($371.1)
million for the year ended December 31, 2017 reflecting lower net rates during the year ended December 31, 2017 compared to
the same period in 2016. Net unrealized gains (losses) on instruments measured at fair value through earnings were ($39.7) million
for the year ended December 31, 2017 compared to $86.4 million for the same period in 2016. The change was primarily due to
unfavorable changes in unrealized gains (losses) on MSRs, partially offset by higher unrealized gains on non-Agency mortgage-
backed securities and lower unrealized losses on Agency interest-only investments. Net interest income decreased $68.4 million
to $1.5 billion for the year ended December 31, 2017, primarily due to higher cost of funds largely attributable to higher rates and
higher average balances on repurchase agreements, partially offset by higher coupon income earned from an increase in average
Interest Earning Assets for the year ended December 31, 2017 compared to the same period in 2016.
Non-GAAP
Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.4 billion, or $1.22 per average basic common share,
for the year ended December 31, 2017, compared to $1.2 billion, or $1.17 per average basic common share, for the same period
in 2016. Core earnings increased during the year ended December 31, 2017 compared to the same period in 2016 primarily due
to higher coupon income earned resulting from an increase in average Interest Earning Assets and the lower net interest component
of interest rate swaps, partially offset by an increase in interest expense from higher rates and an increase in average Interest
Bearing Liabilities.
Non-GAAP Financial Measures
Beginning with the quarter ended September 30, 2018, we updated our calculation of core earnings and related metrics to reflect
changes to our portfolio composition and operations, including the acquisition of MTGE in September 2018. Compared to prior
periods, the revised definition of core earnings includes coupon income (expense) on CMBX positions (reported in Net gains
(losses) on other derivatives) and excludes depreciation and amortization expense on real estate and related intangibles (reported
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53
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
in Other income (loss)), non-core income (loss) allocated to equity method investments (reported in Other income (loss)) and the
income tax effect of non-core income (loss) (reported in Income taxes). Prior period results have not been adjusted to conform to
the revised calculation as the impact in each of those periods is not material.
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide
the following non-GAAP financial measures.
•
•
•
•
core earnings and core earnings (excluding PAA);
core earnings attributable to common stockholders
and core earnings attributable
to common
stockholders (excluding PAA);
core earnings and core earnings (excluding PAA)
per average common share;
annualized core return on average equity (excluding
PAA);
•
•
•
•
•
•
interest income (excluding PAA);
economic interest expense;
economic net interest income (excluding PAA);
average yield on Interest Earning Assets (excluding
PAA);
net interest margin (excluding PAA); and
net interest spread (excluding PAA).
These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP.
While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations.
For example, we may calculate our non-GAAP metrics, such as core earnings, or the PAA, differently than our peers making
comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization
expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of
the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will
impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.
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These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating
performance and business trends, as well as for assessing our performance versus that of industry peers. Additional information
pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to
investors, and reconciliations to their most directly comparable GAAP results are provided below.
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Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings
attributable to common stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common
share and annualized core return on average equity (excluding PAA)
Our principal business objective is to generate net income for distribution to our stockholders and to preserve capital through
prudent selection of investments and continuous management of our portfolio. We generate net income by earning a net interest
spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging
and operating costs. Core earnings, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income
and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation and amortization
expense on real estate and related intangibles, non-core income allocated to equity method investments and other non-core
components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring
items) and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and core earnings (excluding PAA),
which is defined as core earnings excluding the premium amortization adjustment representing the cumulative impact on prior
periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency
mortgage-backed securities, are used by management and, we believe, used by analysts and investors to measure our progress in
achieving our principal business objective.
We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market
risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital
allocation policy and risk governance framework.
We believe these non-GAAP measures provide management and investors with additional details regarding our underlying
operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in
fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive
income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to
provide additional transparency into the operating performance of our portfolio. Annualized core return on average equity
(excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides
investors with additional detail on the core earnings generated by our invested equity capital.
The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings for the periods presented:
54
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide
GAAP net income (loss)
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Annaly
Adjustments to exclude reported realized and unrealized (gains) losses
Realized (gains) losses on termination or maturity of interest rate swaps
Unrealized (gains) losses on interest rate swaps
Net (gains) losses on disposal of investments
Net (gains) losses on other derivatives
Net unrealized (gains) losses on instruments measured at fair value through earnings
Loan loss provision
Bargain purchase gain
Adjustments to exclude components of other (income) loss
Depreciation and amortization expense related to commercial real estate (1)
Non-core (income) loss allocated to equity method investments (2)
Non-core other (income) loss (3)
Adjustments to exclude components of general and administrative expenses and income taxes
Transaction expenses and non-recurring items (4)
Income tax effect of non-core income (loss) items
Adjustments to add back components of realized and unrealized (gains) losses
TBA dollar roll income and CMBX coupon income (5)
MSR amortization (6)
Core earnings (7)
Less
Premium amortization adjustment cost (benefit)
Core earnings (excluding PAA) (7)
Dividends on preferred stock
Core earnings attributable to common stockholders (7)
Core earnings attributable to common stockholders (excluding PAA) (7)
GAAP net income (loss) per average common share
Core earnings per average common share (7)
Core earnings (excluding PAA) per average common share (7)
For the Years Ended December 31,
2018
2017
2016
(dollars in thousands, except per share data)
$
54,148
$
1,569,016
$
1,432,786
(260)
54,408
(588)
(970)
1,569,604
1,433,756
(1,409)
(424,081)
1,124,448
403,001
158,082
3,496
—
20,278
(12,665)
44,525
65,416
4,220
276,986
(79,764)
160,133
(512,918)
3,938
(261,438)
39,684
—
—
—
—
—
—
—
334,824
(66,667)
113,941
(282,190)
(33,089)
(230,580)
(86,391)
—
(72,576)
—
—
—
48,887
—
351,778
(48,652)
1,636,941
1,267,160
1,194,884
(62,021)
141,836
18,941
$
1,574,920
$
1,408,996
$
1,213,825
129,312
1,507,629
1,445,608
(0.06)
1.25
1.20
$
$
$
$
$
$
$
$
$
$
109,635
1,157,525
1,299,361
1.37
1.09
1.22
$
$
$
$
$
82,260
1,112,624
1,131,565
1.39
1.15
1.17
in Other income (loss)), non-core income (loss) allocated to equity method investments (reported in Other income (loss)) and the
income tax effect of non-core income (loss) (reported in Income taxes). Prior period results have not been adjusted to conform to
the revised calculation as the impact in each of those periods is not material.
the following non-GAAP financial measures.
•
•
•
•
core earnings and core earnings (excluding PAA);
core earnings attributable to common stockholders
and core earnings attributable
to common
stockholders (excluding PAA);
interest income (excluding PAA);
economic interest expense;
economic net interest income (excluding PAA);
average yield on Interest Earning Assets (excluding
core earnings and core earnings (excluding PAA)
PAA);
per average common share;
annualized core return on average equity (excluding
net interest margin (excluding PAA); and
net interest spread (excluding PAA).
•
•
•
•
•
•
PAA);
These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP.
While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations.
For example, we may calculate our non-GAAP metrics, such as core earnings, or the PAA, differently than our peers making
comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization
expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of
the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will
impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.
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t
i
r
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c
e
S
These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating
performance and business trends, as well as for assessing our performance versus that of industry peers. Additional information
pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to
investors, and reconciliations to their most directly comparable GAAP results are provided below.
Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings
attributable to common stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common
share and annualized core return on average equity (excluding PAA)
Our principal business objective is to generate net income for distribution to our stockholders and to preserve capital through
prudent selection of investments and continuous management of our portfolio. We generate net income by earning a net interest
spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging
and operating costs. Core earnings, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income
and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation and amortization
expense on real estate and related intangibles, non-core income allocated to equity method investments and other non-core
components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring
items) and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and core earnings (excluding PAA),
which is defined as core earnings excluding the premium amortization adjustment representing the cumulative impact on prior
periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency
mortgage-backed securities, are used by management and, we believe, used by analysts and investors to measure our progress in
achieving our principal business objective.
We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market
risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital
allocation policy and risk governance framework.
We believe these non-GAAP measures provide management and investors with additional details regarding our underlying
operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in
fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive
income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to
provide additional transparency into the operating performance of our portfolio. Annualized core return on average equity
(excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides
investors with additional detail on the core earnings generated by our invested equity capital.
The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings for the periods presented:
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(5)
Represents costs incurred in connection with the acquisition of Hatteras Financial Corp. for the year ended December 31, 2016.
TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled
$2.3 million for the year ended December 31, 2018. There were no adjustments for CMBX coupon income prior to the quarter ended September 30, 2018.
(6) MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on the Company’s MSR
portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value.
(7) Represents a non-GAAP financial measure.
From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency mortgage-
backed securities. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security
with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but
different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a
discount to the earlier month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of
54
55
GAAP return (loss) on average equity
Core return on average equity (excluding PAA) (7)
(1) Includes depreciation and amortization expense related to equity method investments.
(2) Beginning with the quarter ended September 30, 2018, we exclude non-core (income) loss allocated to equity method investments, which represents unrealized
(gains) losses allocated to equity interests in a portfolio of MSR and a realized gain on sale within an unconsolidated joint venture, which are components
of Other income (loss).
(3) Represents the amount of consideration paid for the acquisition of MTGE in excess of the fair value of net assets acquired. This amount is primarily attributable
to a decline in portfolio valuation between the pricing and closing dates of the transaction and is consistent with changes in market values observed for
similar instruments over the same period.
(4) Represents costs incurred in connection with the MTGE transaction and securitizations of residential whole loans for the year ended December 31, 2018.
10.99%
11.73%
10.54%
11.75%
0.38%
9.96%
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing
cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between
the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party
providing the financing is the party that would retain all principal and interest payments accrued during the financing period.
Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the
underlying Agency mortgage-backed security less an implied financing cost.
TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives
is based on methods similar to those used to value Agency mortgage-backed securities. We record TBA derivatives at fair value
on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value as Net gains (losses) on other
derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains
and losses on derivatives (excluding interest rate swaps).
TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different
settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls
capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest
income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other
derivatives in the Consolidated Statements of Comprehensive Income (Loss).
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The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular
rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position
(referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a
“pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on
the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal
losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income
(expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income
(Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included
in core earnings.
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Premium Amortization Expense
In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency mortgage-backed
securities, excluding interest-only securities, taking into account estimates of future principal prepayments in the calculation of
the effective yield. We recalculate the effective yield as differences between anticipated and actual prepayments occur. Using third-
party model and market information to project future cash flows and expected remaining lives of securities, the effective interest
rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized
cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the
acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates
and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any
given period.
Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of our non-
GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative
impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term CPR.
The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio
for the periods presented:
For the Years Ended December 31,
2018
2017
2016
(dollars in thousands)
Premium amortization expense
Less: PAA cost (benefit)
Premium amortization expense (excluding PAA)
$
$
705,926
(62,021)
767,947
$
$
879,305
141,836
737,469
$
$
814,575
18,941
795,634
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56
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing
cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between
the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party
providing the financing is the party that would retain all principal and interest payments accrued during the financing period.
Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the
underlying Agency mortgage-backed security less an implied financing cost.
TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives
is based on methods similar to those used to value Agency mortgage-backed securities. We record TBA derivatives at fair value
on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value as Net gains (losses) on other
derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains
and losses on derivatives (excluding interest rate swaps).
TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different
settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls
capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest
income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other
derivatives in the Consolidated Statements of Comprehensive Income (Loss).
The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular
rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position
(referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a
“pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on
the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal
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losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income
(expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income
(Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included
in core earnings.
Premium Amortization Expense
In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency mortgage-backed
securities, excluding interest-only securities, taking into account estimates of future principal prepayments in the calculation of
the effective yield. We recalculate the effective yield as differences between anticipated and actual prepayments occur. Using third-
party model and market information to project future cash flows and expected remaining lives of securities, the effective interest
rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized
cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the
acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates
and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any
given period.
Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of our non-
GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative
impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term CPR.
The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio
for the periods presented:
For the Years Ended December 31,
2018
2017
2016
(dollars in thousands)
Premium amortization expense
Less: PAA cost (benefit)
Premium amortization expense (excluding PAA)
$
$
705,926
(62,021)
767,947
$
$
879,305
141,836
737,469
$
$
814,575
18,941
795,634
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For the Years Ended December 31,
2018
2017
2016
(per average common share)
Premium amortization expense
Less: PAA cost (benefit)
Premium amortization expense (excluding PAA)
$
$
0.58
(0.05)
0.63
$
$
0.82
0.13
0.69
$
$
0.84
0.02
0.82
Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)
Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjustment, and
serves as the basis for deriving average yield on Interest Earning Assets (excluding PAA), net interest spread (excluding PAA)
and net interest margin (excluding PAA), which are discussed below. We believe this measure provides management and investors
with additional detail to enhance their understanding of our operating results and trends by excluding the component of premium
amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds
related to our Agency mortgage-backed securities (other than interest-only securities), which can obscure underlying trends in the
performance of the portfolio.
Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Prior to
the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps
used to hedge cost of funds. Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio,
this metric reflects the net interest component of all interest rate swaps. We use interest rate swaps to manage our exposure to
changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings.
Accordingly, adding the net interest component of interest rate swaps to interest expense, as computed in accordance with GAAP,
reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing
strategy.
Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to
enhance their understanding of the net economics of our primary business operations.
The following tables provide 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:
Interest Income (excluding PAA)
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
GAAP Interest
Income
PAA Cost
(Benefit)
Interest Income
(excluding PAA)
(dollars in thousands)
$
$
$
3,332,563
2,493,126
2,210,951
$
$
$
(62,021) $
141,836
18,941
$
$
3,270,542
2,634,962
2,229,892
Economic Interest Expense and Economic Net Interest Income (excluding PAA)
Add: Net
Interest
Component
of Interest
Rate Swaps (1)
GAAP
Interest
Expense
Economic
Interest
Expense
GAAP Net
Interest
Income
Less: Net
Interest
Component
of Interest
Rate Swaps (1)
Economic
Net
Interest
Income
Add: PAA
Cost
(Benefit)
Economic
Net Interest
Income
(excluding
PAA)
(dollars in thousands)
$
$
$
1,897,860
1,008,354
657,752
$
$
$
(100,553) $ 1,797,307
325,739
$ 1,334,093
427,366
$ 1,085,118
$
$
$
1,434,703
1,484,772
1,553,199
$
$
$
(100,553) $ 1,535,256
325,739
$ 1,159,033
427,366
$ 1,125,833
$
$
$
(62,021) $
1,473,235
141,836
18,941
$
$
1,300,869
1,144,774
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
(1) Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of
funds. Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component
of all interest rate swaps.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Experienced and Projected Long-Term CPR
Prepayment speeds, as reflected by the Constant Prepayment Rate (“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 and expectations of 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 and weighted average projected long-term CPR on our Agency mortgage-backed securities
portfolio as of and for the periods presented.
December 31, 2018
December 31, 2017
December 31, 2016
Experienced CPR (1)
Long-term CPR (2)
9.3%
10.6%
13.3%
10.1%
10.4%
10.1%
For the years ended December 31, 2018, 2017 and 2016, respectively.
(1)
(2) At December 31, 2018, 2017 and 2016, respectively.
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin
(excluding PAA)
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Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA)
and the average cost of interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of
interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest
component of interest rate swaps divided by the sum of average Interest Earning Assets plus average TBA contract and CMBX
balances, provide management with additional measures of our profitability that management relies upon in monitoring the
performance of the business.
Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management
evaluates our performance.
Net Interest Spread (excluding PAA)
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Assets (1)
Interest
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Average
Yield on
Interest
Earning
Assets
(excluding
PAA) (2)
Average
Interest
Bearing
Liabilities
Economic
Interest
Expense (2)(3)
(dollars in thousands)
Average
Cost of
Interest
Bearing
Liabilities (3)
For the years ended
December 31, 2018
$103,227,574
$3,270,542
December 31, 2017
$89,648,025
$2,634,962
December 31, 2016
$78,813,547
$2,229,892
3.17%
2.94%
2.83%
$88,216,125
$1,797,307
$76,321,069
$1,334,093
$66,817,870
$1,085,118
2.04%
1.75%
1.62%
Economic
Net
Interest
Income
(excluding
PAA) (2)
$1,473,235
$1,300,869
$1,144,774
Net
Interest
Spread
(excluding
PAA) (2)
1.13%
1.19 %
1.21 %
(1) Does not reflect the unrealized gains/(losses).
(2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(3) Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average
interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense
and the net interest component of interest rate swaps. Prior to the quarter ended March 31, 2018, this metric included the net interest component
of interest rate swaps used to hedge cost of funds. Beginning with the quarter ended March 31, 2018, as a result of changes to the Company’s
hedging portfolio, this metric reflects the net interest component of all interest rate swaps.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Experienced and Projected Long-Term CPR
Prepayment speeds, as reflected by the Constant Prepayment Rate (“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 and expectations of 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 and weighted average projected long-term CPR on our Agency mortgage-backed securities
portfolio as of and for the periods presented.
December 31, 2018
December 31, 2017
December 31, 2016
Experienced CPR (1)
Long-term CPR (2)
9.3%
10.6%
13.3%
10.1%
10.4%
10.1%
(1)
For the years ended December 31, 2018, 2017 and 2016, respectively.
(2) At December 31, 2018, 2017 and 2016, respectively.
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin
(excluding PAA)
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Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA)
and the average cost of interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of
interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest
component of interest rate swaps divided by the sum of average Interest Earning Assets plus average TBA contract and CMBX
balances, provide management with additional measures of our profitability that management relies upon in monitoring the
performance of the business.
evaluates our performance.
Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management
Net Interest Spread (excluding PAA)
Average
Yield on
Interest
Earning
Assets
Average
Interest
Interest
Income
Earning
Assets (1)
(excluding
PAA) (2)
(excluding
PAA) (2)
Average
Interest
Bearing
Liabilities
Economic
Interest
Expense (2)(3)
(dollars in thousands)
Average
Cost of
Interest
Bearing
Liabilities (3)
Economic
Net
Interest
Income
Net
Interest
Spread
(excluding
PAA) (2)
(excluding
PAA) (2)
For the years ended
December 31, 2018
$103,227,574
$3,270,542
December 31, 2017
$89,648,025
$2,634,962
December 31, 2016
$78,813,547
$2,229,892
3.17%
2.94%
2.83%
$88,216,125
$1,797,307
$76,321,069
$1,334,093
$66,817,870
$1,085,118
2.04%
1.75%
1.62%
$1,473,235
$1,300,869
$1,144,774
1.13%
1.19 %
1.21 %
(1) Does not reflect the unrealized gains/(losses).
(2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(3) Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average
interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense
and the net interest component of interest rate swaps. Prior to the quarter ended March 31, 2018, this metric included the net interest component
of interest rate swaps used to hedge cost of funds. Beginning with the quarter ended March 31, 2018, as a result of changes to the Company’s
hedging portfolio, this metric reflects the net interest component of all interest rate swaps.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Net Interest Margin (excluding PAA)
Interest
Income
(excluding
PAA) (1)
TBA Dollar
Roll and
CMBX
Coupon
Income (2)
Net Interest
Component
of Interest
Rate Swaps
Interest
Expense
Subtotal
Average
Interest
Earnings
Assets
Average
TBA
Contract
and CMBX
Balances
Subtotal
For the years ended
(dollars in thousands)
December 31, 2018 $3,270,542
December 31, 2017 $2,634,962
December 31, 2016 $2,229,892
276,986
334,824
351,778
(1,897,860)
100,553
$1,750,221
$103,227,574
12,115,869
$115,343,443
(1,008,354)
(371,108)
$1,590,324
$89,648,025
15,416,045
$105,064,070
(657,752)
(506,681)
$1,417,237
$78,813,547
15,399,142
$94,212,689
Net
Interest
Margin
(excluding
PAA) (1)
1.52%
1.51%
1.50%
(1) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(2)
TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled
$1.2 million for each of the quarters ended December 31, 2018 and September 30, 2018, and $2.3 million for the year ended December 31, 2018. There were
no adjustments for CMBX coupon income prior to September 30, 2018.
Economic Interest Expense and Average Cost of Interest Bearing Liabilities
Typically, our largest expense is the cost of Interest Bearing Liabilities and the net interest component of interest rate swaps. 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 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
Average
Six-
Month
LIBOR
(dollars in thousands)
For the years ended
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
December 31, 2018
$ 88,216,125
$ 88,646,247
$ 1,797,307
December 31, 2017
$ 76,321,069
$ 84,505,642
$ 1,334,093
2.04%
1.75 %
2.02%
1.11 %
2.49%
1.48 %
(0.47%)
(0.37%)
0.02%
0.64 %
(0.45%)
0.27 %
December 31, 2016
$ 66,817,870
0.56 %
(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Prior to the three months ended
March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds. Beginning with the three
months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.
$ 72,769,189
$ 1,085,118
(0.56%)
1.62 %
1.06 %
1.12 %
0.50 %
2018 Compared with 2017
Economic interest expense increased by $463.2 million for the year ended December 31, 2018 compared to the same period in
2017. The change in each period was primarily due to an increase in average Interest Bearing Liabilities and higher rates on
repurchase agreements, partially offset by the change in the net interest component of interest rate swaps which was $100.6 million
for the year ended December 31, 2018 compared to the net interest component of interest rate swaps used to hedge cost of funds
of ($325.7) million for the same period in 2017.
2017 Compared with 2016
Economic interest expense increased by $249.0 million for the year ended December 31, 2017 compared to the same period in
2016. The change in each period was primarily due to an increase in average Interest Bearing Liabilities of $9.5 billion and higher
rates on repurchase agreements, partially offset by the change in the net interest component of interest rate swaps for the year
ended December 31, 2017 compared to the same period in 2016.
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 may 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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 generally use interest rate swaps, swaptions and other
derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on
any given day may be increased or decreased. Our average borrowings during a quarter may differ from period end borrowings
as we implement our portfolio management strategies and risk management strategies over changing market conditions by
increasing or decreasing leverage. Additionally, these numbers may differ during periods when we conduct equity capital raises,
as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity 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 than our period end borrowings.
At December 31, 2018 and 2017, the majority of our debt represented repurchase agreements and other secured financing
arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments
and corporate loans. All of our Residential Securities 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 maintain the liquidity
and strength of our balance sheet.
Realized and Unrealized Gains (Losses)
Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of
investments, net gains (losses) on other derivatives and net unrealized gains (losses) on instruments measured at fair value through
earnings. These components of realized and unrealized gains (losses) for the years ended December 31, 2018, 2017 and 2016 were
as follows:
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Net gains (losses) on interest rate swaps (1)
Net gains (losses) on disposal of investments
Net gains (losses) on other derivatives
Net unrealized gains (losses) on instruments measured at
fair value through earnings
Loan loss provision
Bargain purchase gain
Total
(1)
For the Years Ended December 31,
2018
2017
2016
(dollars in thousands)
$
526,043
$
(18,323) $
(338,432)
(1,124,448)
(403,001)
(158,082)
(3,496)
—
(3,938)
261,438
(39,684)
—
—
$
(1,162,984) $
199,493
$
33,089
230,580
86,391
—
72,576
84,204
Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate
swaps and unrealized gains (losses) on interest rate swaps.
2018 Compared with 2017
Net gains (losses) on interest rate swaps for the year ended December 31, 2018 was $526.0 million compared to ($18.3) million
for the same period in 2017. The change was primarily attributable to the net interest component of interest rate swaps which was
$100.6 million for the year ended December 31, 2018 compared to ($371.1) million for the same period in 2017, as our interest
rate swaps shifted to a net receive position during the year ended December 31, 2018 compared to a net pay position for the same
period in 2017.
Net gains (losses) on disposal of investments was ($1.1) billion for the year ended December 31, 2018 compared with ($3.9)
million for the same period in 2017. For the year ended December 31, 2018, we disposed of Residential Securities with a carrying
value of $45.6 billion for an aggregate net loss of ($1.1) billion. For the same period in 2017, we disposed of Residential Securities
with a carrying value of $12.9 billion for an aggregate net loss of ($6.4) million.
Net gains (losses) on other derivatives was ($403.0) million for the year ended December 31, 2018 compared to $261.4 million
for the same period in 2017. Net gains (losses) on TBA derivatives was ($209.2) million for the year ended December 31, 2018
compared to $220.1 million for the same period in 2017. Net gains (losses) on futures contracts was ($104.0) million for the year
ended December 31, 2018 compared to $83.2 million for the same period in 2017.
Net unrealized gains (losses) on instruments measured at fair value through earnings was ($158.1) million for the year ended
December 31, 2018 compared to ($39.7) million for the same period in 2017, primarily due to unfavorable changes in unrealized
gains (losses) on Agency interest-only investments, non-Agency mortgage-backed securities and credit risk transfer securities,
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Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 generally use interest rate swaps, swaptions and other
derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on
any given day may be increased or decreased. Our average borrowings during a quarter may differ from period end borrowings
as we implement our portfolio management strategies and risk management strategies over changing market conditions by
increasing or decreasing leverage. Additionally, these numbers may differ during periods when we conduct equity capital raises,
as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity 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 than our period end borrowings.
At December 31, 2018 and 2017, the majority of our debt represented repurchase agreements and other secured financing
arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments
and corporate loans. All of our Residential Securities 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 maintain the liquidity
and strength of our balance sheet.
Realized and Unrealized Gains (Losses)
Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of
investments, net gains (losses) on other derivatives and net unrealized gains (losses) on instruments measured at fair value through
earnings. These components of realized and unrealized gains (losses) for the years ended December 31, 2018, 2017 and 2016 were
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as follows:
Net gains (losses) on interest rate swaps (1)
Net gains (losses) on disposal of investments
Net gains (losses) on other derivatives
Net unrealized gains (losses) on instruments measured at
fair value through earnings
Loan loss provision
Bargain purchase gain
Total
(1)
For the Years Ended December 31,
2018
2017
2016
(dollars in thousands)
$
526,043
$
(18,323) $
(338,432)
(1,124,448)
(403,001)
(158,082)
(3,496)
—
(3,938)
261,438
(39,684)
—
—
$
(1,162,984) $
199,493
$
33,089
230,580
86,391
—
72,576
84,204
Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate
swaps and unrealized gains (losses) on interest rate swaps.
Net gains (losses) on interest rate swaps for the year ended December 31, 2018 was $526.0 million compared to ($18.3) million
for the same period in 2017. The change was primarily attributable to the net interest component of interest rate swaps which was
$100.6 million for the year ended December 31, 2018 compared to ($371.1) million for the same period in 2017, as our interest
rate swaps shifted to a net receive position during the year ended December 31, 2018 compared to a net pay position for the same
period in 2017.
Net gains (losses) on disposal of investments was ($1.1) billion for the year ended December 31, 2018 compared with ($3.9)
million for the same period in 2017. For the year ended December 31, 2018, we disposed of Residential Securities with a carrying
value of $45.6 billion for an aggregate net loss of ($1.1) billion. For the same period in 2017, we disposed of Residential Securities
with a carrying value of $12.9 billion for an aggregate net loss of ($6.4) million.
Net gains (losses) on other derivatives was ($403.0) million for the year ended December 31, 2018 compared to $261.4 million
for the same period in 2017. Net gains (losses) on TBA derivatives was ($209.2) million for the year ended December 31, 2018
compared to $220.1 million for the same period in 2017. Net gains (losses) on futures contracts was ($104.0) million for the year
ended December 31, 2018 compared to $83.2 million for the same period in 2017.
Net unrealized gains (losses) on instruments measured at fair value through earnings was ($158.1) million for the year ended
December 31, 2018 compared to ($39.7) million for the same period in 2017, primarily due to unfavorable changes in unrealized
gains (losses) on Agency interest-only investments, non-Agency mortgage-backed securities and credit risk transfer securities,
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partially offset by favorable changes in unrealized gains (losses) on MSRs for the year ended December 31, 2018 compared to
the same period in 2017.
For the year ended December 31, 2018, a loan loss provision of $3.5 million was recorded on a commercial mortgage loan. Refer
to Note 6 located within Item 15 for additional information related to this loan loss provision. No provision for loan loss was
recorded for the same period in 2017.
2017 Compared with 2016
Net losses on interest rate swaps decreased by $320.1 million for the year ended December 31, 2017 compared to the same period
in 2016. Unrealized gains on interest rate swaps increased $230.7 million, there was a favorable change in the net interest component
of interest rate swaps of $135.6 million and realized losses on termination of interest rate swaps increased $46.2 million for the
year ended December 31, 2017 compared to the same period in 2016.
For the year ended December 31, 2017, we disposed of Residential Investment Securities with a carrying value of $12.9 billion
for an aggregate net loss of ($6.4) 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.
Net gains (losses) on other derivatives was $261.4 million for the year ended December 31, 2017 compared to $230.6 million for
the same period in 2016. The change was primarily attributable to a net gains on TBA contracts, partially offset by an unfavorable
change in net gains (losses) on interest rate swaptions recognized for the year ended December 31, 2017 compared to the same
period in 2016.
Net unrealized gains (losses) on instruments measured at fair value through earnings was ($39.7) million for the year ended
December 31, 2017 compared to $86.4 million for the same period in 2016. The change was primarily attributable to unrealized
gains (losses) on MSRs, partially offset by higher unrealized gains on non-agency mortgage-backed securities and lower unrealized
losses on Agency interest-only investments for the year ended December 31, 2017 compared to the same period in 2016.
Other Income (Loss)
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Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental
income and recoveries, net servicing income on MSRs, operating costs as well as depreciation and amortization expense. We
report in Other income (loss) items whose amounts, either individually or in the aggregate, would not, in the opinion of management,
be meaningful to readers of the financial statements. Given the nature of certain components of this line item, balances may
fluctuate from period to period.
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2018 Compared with 2017
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of compensation and management fee and other expenses. The following
table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.
Other income (loss) also includes the amount of consideration paid for the acquisition of MTGE Investment Corp. in excess of
the fair value of net assets acquired, which was $44.5 million for the year ended December 31, 2018.
G&A Expenses and Operating Expense Ratios
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
Total G&A
Expenses (1)
Total G&A Expenses/
Average Assets (1)
(dollars in thousands)
Total G&A Expenses/
Average Equity (1)
$
$
$
329,873
224,124
250,356
0.32%
0.25 %
0.31 %
2.30%
1.68 %
2.05 %
(1)
Includes $65.4 million of transaction costs incurred in connection with the MTGE Acquisition and securitizations of
residential whole loans for the year ended December 31, 2018. Excluding these transaction costs, G&A expenses as
a percentage of average total assets were 0.26% and as a percentage of average equity were 1.85% for year ended
December 31, 2018.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
2018 Compared with 2017
G&A expenses increased $105.7 million to $329.9 million for the year ended December 31, 2018 compared to the same period
in 2017. The change was largely attributable to transaction costs in connection with the MTGE Acquisition and securitizations of
residential whole loans, higher compensation and management fees, reflecting an increase in adjusted stockholders’ equity primarily
resulting from the equity capital raised during the third quarter of 2018 and second half of 2017, and reimbursement payments
made to the Manager for certain services in connection with the management and operations of Annaly which commenced during
the third quarter of 2018.
2017 Compared with 2016
G&A expenses decreased $26.2 million to $224.1 million for the year ended December 31, 2017 compared to the same period in
2016. The change in the period was primarily due to the transaction costs recognized in connection with the Hatteras Acquisition
of $48.9 million in 2016, partially offset by higher compensation and management fees reflecting an increase in adjusted
stockholders’ equity primarily due to the equity capital raised conducted during year ended December 31, 2017.
Unrealized Gains and Losses - Available-for-Sale Investments
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With our available-for-sale accounting treatment on our Agency mortgage-backed securities, which represent the largest portion
of assets on balance sheet, as well as certain commercial mortgage-backed securities, 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.
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Unrealized gain
Unrealized loss
Net unrealized gain (loss)
December 31, 2018
December 31, 2017
(dollars in thousands)
306,037
$
157,818
(2,285,902)
(1,283,838)
(1,979,865) $
(1,126,020)
$
$
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 reduce borrowing capacity. A very large negative change in the net fair value of our available-for-sale Residential
Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale.
The fair value of these securities being less than amortized cost at December 31, 2018 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 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 and interest amounts of the securities
by the respective issuing Agency.
Return on Average Equity
Our return on average equity was 0.38%, 11.73% and 11.75% for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table shows the components of our annualized return on average equity for the periods presented.
62
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
2018 Compared with 2017
G&A expenses increased $105.7 million to $329.9 million for the year ended December 31, 2018 compared to the same period
in 2017. The change was largely attributable to transaction costs in connection with the MTGE Acquisition and securitizations of
residential whole loans, higher compensation and management fees, reflecting an increase in adjusted stockholders’ equity primarily
resulting from the equity capital raised during the third quarter of 2018 and second half of 2017, and reimbursement payments
made to the Manager for certain services in connection with the management and operations of Annaly which commenced during
the third quarter of 2018.
2017 Compared with 2016
G&A expenses decreased $26.2 million to $224.1 million for the year ended December 31, 2017 compared to the same period in
2016. The change in the period was primarily due to the transaction costs recognized in connection with the Hatteras Acquisition
of $48.9 million in 2016, partially offset by higher compensation and management fees reflecting an increase in adjusted
stockholders’ equity primarily due to the equity capital raised conducted during year ended December 31, 2017.
Unrealized Gains and Losses - Available-for-Sale Investments
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With our available-for-sale accounting treatment on our Agency mortgage-backed securities, which represent the largest portion
of assets on balance sheet, as well as certain commercial mortgage-backed securities, 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 gain
Unrealized loss
Net unrealized gain (loss)
December 31, 2018
December 31, 2017
(dollars in thousands)
306,037
$
157,818
(2,285,902)
(1,283,838)
(1,979,865) $
(1,126,020)
$
$
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 reduce borrowing capacity. A very large negative change in the net fair value of our available-for-sale Residential
Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale.
The fair value of these securities being less than amortized cost at December 31, 2018 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 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 and interest amounts of the securities
by the respective issuing Agency.
Return on Average Equity
Our return on average equity was 0.38%, 11.73% and 11.75% for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table shows the components of our annualized return on average equity for the periods presented.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Components of Annualized Return on Average Equity
Economic Net
Interest Income/
Average Equity (1)
Realized and
Unrealized
Gains and
Losses/Average
Equity (2)
Other Income
(Loss)/Average
Equity
G&A Expenses/
Average Equity
Income
Taxes/ Average
Equity
Return on
Average Equity
For the years ended
December 31, 2018
December 31, 2017
10.71%
8.67 %
(8.81%)
3.93%
0.76%
0.86 %
(2.30%)
(1.68%)
0.02%
(0.05%)
0.38%
11.73 %
December 31, 2016
11.75 %
(1) Economic net interest income includes the net interest component of interest rate swaps. Prior to the three months ended March 31, 2018, economic interest
expense included the net interest component of interest rate swaps used to hedge cost of funds. Beginning with the three months ended March 31, 2018, as
a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.
(2.05%)
9.23 %
0.01%
4.20%
0.36%
(2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps.
Financial Condition
Total assets were $105.8 billion and $101.8 billion at December 31, 2018 and 2017, respectively. The change was primarily due
to increases in residential mortgage loans of $1.0 billion, cash and cash equivalents of $1.0 billion, corporate debt of $0.9 billion,
reverse repurchase agreements of $0.7 billion, and commercial real estate investments of $0.4 billion. Our portfolio composition,
net equity allocation and debt-to-net equity ratio by asset class were as follows at December 31, 2018:
Residential
Commercial
Agency
MBS and
MSRs
TBAs (1)
CRTs
Assets
Non-
Agency
MBS and
Residential
Mortgage
Loans
CRE Debt &
Preferred
Equity
Investments (2)
(dollars in thousands)
Investments
in CRE
Corporate
Debt
Total (3)
Fair value/carrying value
$ 91,310,808
$ 13,964,797
$ 552,097
$ 3,616,575
$
4,234,114
$
739,473
$ 1,887,182
$ 102,340,249
Debt
Repurchase agreements
79,122,838
13,803,000
373,536
Other secured financing
2,534,194
Debt issued by
securitization vehicles
Net forward purchases
Mortgages payable
Net equity allocated
Net equity allocated (%)
Debt/net equity ratio
—
—
—
—
—
—
—
—
721,304
968,235
898,196
154,282
837,798
2,509,264
—
—
—
—
—
—
—
—
511,056
—
81,115,874
526,600
4,183,311
—
—
—
3,347,062
514,257
511,056
—
514,257
—
$ 9,139,519
$
161,797
$ 178,561
$ 1,089,238
$
672,372
$
228,417
$ 1,360,582
$ 12,668,689
(4)
72%
9.0:1
1%
NM
1%
2.1:1
9%
2.3:1
5%
5.3:1
2%
2.2:1
11%
0.4:1
100%
6.3:1 (5)
(1) Fair value/carrying value represents implied market value and repurchase agreements represent the notional value.
(2)
(3)
(4) Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the Consolidated
Includes loans held for sale, net.
Excludes the TBA asset, debt and equity balances.
Statements of Financial Condition.
(5) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.
NM Not meaningful.
Residential Securities
Substantially all of our Agency mortgage-backed securities at December 31, 2018 and December 31, 2017 were backed by single-
family residential mortgage loans and 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, 2018 and December 31, 2017 we had on our Consolidated Statements of Financial Condition a total of $183.2
million and $148.3 million, respectively, of unamortized discount (which is the difference between the remaining principal value
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
and current amortized cost of our Residential Securities acquired at a price below principal value) and a total of $5.3 billion and
$6.2 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current
amortized cost of our Residential Securities acquired at a price above principal value).
The weighted average experienced prepayment speed on our Agency mortgage-backed securities portfolio for the years ended
December 31, 2018 and 2017 was 9.3% and 10.6%, respectively. The weighted average projected long-term prepayment speed
on our Agency mortgage-backed securities portfolio as of December 31, 2018 and 2017 was 10.1% and 10.4%, respectively.
Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-
backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed
securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if
mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal,
our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium
balance over a longer time period.
The following tables present our Residential Securities that were carried at fair value at December 31, 2018 and December 31,
2017.
December 31, 2018
December 31, 2017
Agency
Fixed-rate pass-through
Adjustable-rate pass-through
CMO
Interest-only
Multifamily
Reverse mortgages
Total agency securities
Residential credit
CRT
Alt-A
Prime
Subprime
NPL/RPL
Prime jumbo (>= 2010 vintage)
Prime jumbo (>= 2010 vintage) interest-only
Total residential credit securities
Total residential securities
$
$
$
$
$
Estimated Fair Value
(dollars in thousands)
83,052,552
$
4,937,984
11,221
873,889
1,838,565
38,784
90,752,995
552,097
182,361
343,986
394,621
3,438
220,658
16,874
$
$
1,714,035
92,467,030
$
$
81,983,842
6,948,906
—
1,085,762
493,689
39,564
90,551,763
651,764
183,886
192,760
533,880
42,988
126,622
17,158
1,749,058
92,300,821
The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed
securities) and interest-only mortgage-backed securities at the dates presented.
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64
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
and current amortized cost of our Residential Securities acquired at a price below principal value) and a total of $5.3 billion and
$6.2 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current
amortized cost of our Residential Securities acquired at a price above principal value).
The weighted average experienced prepayment speed on our Agency mortgage-backed securities portfolio for the years ended
December 31, 2018 and 2017 was 9.3% and 10.6%, respectively. The weighted average projected long-term prepayment speed
on our Agency mortgage-backed securities portfolio as of December 31, 2018 and 2017 was 10.1% and 10.4%, respectively.
Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-
backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed
securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if
mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal,
our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium
balance over a longer time period.
The following tables present our Residential Securities that were carried at fair value at December 31, 2018 and December 31,
2017.
Agency
Fixed-rate pass-through
Adjustable-rate pass-through
CMO
Interest-only
Multifamily
Reverse mortgages
Total agency securities
Residential credit
CRT
Alt-A
Prime
Subprime
NPL/RPL
Prime jumbo (>= 2010 vintage)
Prime jumbo (>= 2010 vintage) interest-only
Total residential credit securities
Total residential securities
December 31, 2018
December 31, 2017
Estimated Fair Value
(dollars in thousands)
83,052,552
$
4,937,984
11,221
873,889
1,838,565
38,784
90,752,995
552,097
182,361
343,986
394,621
3,438
220,658
16,874
$
$
1,714,035
92,467,030
$
$
81,983,842
6,948,906
—
1,085,762
493,689
39,564
90,551,763
651,764
183,886
192,760
533,880
42,988
126,622
17,158
1,749,058
92,300,821
The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed
securities) and interest-only mortgage-backed securities at the dates presented.
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64
Residential securities (1)
Principal amount
Net premium
Amortized cost
Amortized cost / principal amount
Carrying value
Carrying value / principal amount
Weighted average coupon rate
Weighted average yield
Adjustable-rate residential securities (1)
Principal amount
Weighted average coupon rate
Weighted average yield
Weighted average term to next adjustment
Weighted average lifetime cap (2)
Principal amount at period end as % of total residential securities
Fixed-rate residential securities (1)
Principal amount
Weighted average coupon rate
Weighted average yield
Principal amount at period end as % of total residential securities
Interest-only residential securities
Notional amount
Net premium
Amortized cost
Amortized cost / notional amount
Carrying value
Carrying value / notional amount
Weighted average coupon rate
Weighted average yield
December 31, 2018
December 31, 2017
(dollars in thousands)
$
89,579,223
$
3,925,803
93,505,026
104.38%
91,575,882
102.23%
3.90%
3.17%
87,518,155
4,682,299
92,200,454
105.35%
91,197,901
104.20%
3.69%
2.79%
$
6,020,096
$
8,002,252
$
$
3.47%
2.87%
19 Months
8.04%
6.72%
3.05%
2.52%
24 Months
8.12%
9.14%
83,559,127
$
79,515,903
3.93%
3.19%
93.28%
6,867,093
$
1,192,675
1,192,675
17.37%
891,148
12.98%
3.10%
1.73%
3.75%
2.82%
90.86%
7,793,767
1,342,048
1,342,048
17.22%
1,102,920
14.15%
3.61%
4.17%
(1) Excludes interest-only mortgage-backed securities.
(2) Excludes non-Agency mortgage-backed securities and CRT securities as this attribute is not applicable to these asset classes.
The following tables summarize certain characteristics of our Residential Credit portfolio at December 31, 2018.
Product
Total
Senior
Subordinate Coupon
Credit
Enhancement
60+
Delinquencies
3M VPR (1)
Payment Structure
Investment Characteristics
Agency credit risk transfer
Private label credit risk transfer
Alt-A
Prime
Subprime
Non-performing loan securitizations
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage) interest-only
(dollars in thousands)
$ 524,414
$
— $
524,414
27,683
182,361
343,986
394,621
3,438
220,658
16,874
—
107,293
158,351
145,384
—
186,014
16,874
27,683
75,068
185,635
249,237
3,438
34,644
—
Total/weighted average
$
(1) Represents the 3 month voluntary prepayment rate (“VPR”).
$ 1,714,035
613,916
$ 1,100,119
5.78%
7.70%
4.74%
4.71%
2.84%
5.00%
3.98%
0.44%
4.68%
1.18%
0.26%
11.06%
10.34%
8.89%
59.46%
14.68%
—
7.91%
0.29%
0.29%
9.59%
7.54%
18.98%
47.86%
0.10%
0.28%
7.93%
7.41%
8.65%
10.08%
13.32%
5.53%
6.86%
5.71%
7.24%
11.84%
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65
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Bond Coupon
Product
ARM
Fixed
Floater
Interest-Only
Estimated
Fair Value
(dollars in thousands)
Agency credit risk transfer
Private label credit risk transfer
$
— $
—
Alt-A
Prime
Subprime
Non-performing loan securitizations
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage) interest-only
44,896
160,736
—
—
—
—
— $
524,414
$
— $
524,414
—
112,952
168,137
48,583
3,438
220,658
—
27,683
24,513
15,113
345,653
—
—
—
—
—
—
385
—
—
16,874
27,683
182,361
343,986
394,621
3,438
220,658
16,874
Total
$
205,632
$
553,768
$
937,376
$
17,259
$
1,714,035
Contractual Obligations
The following table summarizes the effect on our liquidity and cash flows from contractual obligations at December 31, 2018.
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. At December 31, 2018, the interest rate swaps had a net fair value of
($372.3) million.
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Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
(dollars in thousands)
Repurchase agreements
$
80,581,658
$
534,216
$
Interest expense on repurchase agreements (1)
Other secured financing
Interest expense on other secured financing (1)
Debt issued by securitization vehicles (principal)
Interest expense on debt issued by securitization vehicles
Mortgages payable (principal)
Interest expense on mortgages payable
Long-term operating lease obligations
Total
468,490
2,893
126,676
—
120,923
33,081
20,332
3,565
20,737
3,653,818
150,679
883,500
241,846
16,125
38,068
7,514
— $
—
526,600
24,726
1,218,740
117,073
—
37,888
7,723
— $
81,115,874
—
—
—
1,234,641
761,707
467,628
160,999
6,757
489,227
4,183,311
302,081
3,336,881
1,241,549
516,834
257,287
25,559
$
81,357,618
$
5,546,503
$
1,932,750
$
2,631,732
$
91,468,603
(1)
Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 2018.
In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our
current operations via repurchase agreements. We may use FHLB Des Moines advances, securitization structures, credit facilities,
mortgages payable or other term financing structures to finance certain of our assets. During the year ended December 31, 2018,
we received $11.4 billion from principal repayments and $33.3 billion in cash from disposal of Residential Securities. During the
year ended December 31, 2017, we received $12.0 billion from principal repayments and $13.4 billion in cash from disposal of
Residential Securities.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships which would have been established for
the sole purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, the Company
has provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto)
with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures. We believe that the likelihood of making
any payments under these guarantees is remote, and have not accrued a related liability at December 31, 2018.
66
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Bond Coupon
Capital Management
Product
ARM
Fixed
Floater
Interest-Only
Estimated
Fair Value
$
— $
524,414
$
— $
524,414
Agency credit risk transfer
Private label credit risk transfer
Alt-A
Prime
Subprime
Non-performing loan securitizations
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage) interest-only
(dollars in thousands)
— $
—
44,896
160,736
—
—
—
—
—
112,952
168,137
48,583
3,438
220,658
—
27,683
24,513
15,113
345,653
—
—
—
—
—
—
385
—
—
16,874
27,683
182,361
343,986
394,621
3,438
220,658
16,874
Total
$
205,632
$
553,768
$
937,376
$
17,259
$
1,714,035
Contractual Obligations
The following table summarizes the effect on our liquidity and cash flows from contractual obligations at December 31, 2018.
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. At December 31, 2018, the interest rate swaps had a net fair value of
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($372.3) million.
Repurchase agreements
$
80,581,658
$
534,216
$
— $
81,115,874
Interest expense on repurchase agreements (1)
Other secured financing
Interest expense on other secured financing (1)
Debt issued by securitization vehicles (principal)
Interest expense on debt issued by securitization vehicles
Mortgages payable (principal)
Interest expense on mortgages payable
Long-term operating lease obligations
Within One
One to Three
Three to Five
Year
Years
Years
More than
Five Years
Total
(dollars in thousands)
— $
—
468,490
2,893
126,676
—
120,923
33,081
20,332
3,565
20,737
3,653,818
150,679
883,500
241,846
16,125
38,068
7,514
526,600
24,726
1,218,740
117,073
—
37,888
7,723
—
—
—
1,234,641
761,707
467,628
160,999
6,757
489,227
4,183,311
302,081
3,336,881
1,241,549
516,834
257,287
25,559
Total
(1)
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Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 2018.
In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our
current operations via repurchase agreements. We may use FHLB Des Moines advances, securitization structures, credit facilities,
mortgages payable or other term financing structures to finance certain of our assets. During the year ended December 31, 2018,
we received $11.4 billion from principal repayments and $33.3 billion in cash from disposal of Residential Securities. During the
year ended December 31, 2017, we received $12.0 billion from principal repayments and $13.4 billion in cash from disposal of
Residential Securities.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships which would have been established for
the sole purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, the Company
has provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto)
with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures. We believe that the likelihood of making
any payments under these guarantees is remote, and have not accrued a related liability at December 31, 2018.
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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 (“ICAAP”) framework supports capital measurement, and is integrated within
the overall risk governance framework. The ICAAP framework is designed to align capital measurement with our risk appetite.
Our 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. Our 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.
The major risks impacting capital are liquidity, investment/market, credit, counterparty, operational and compliance, regulatory
and legal risks. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” of this annual report
on Form 10-K.
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 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; and
•
• Other loss absorption instruments.
In the event we fall short of our internal limits, we will consider 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.
Stockholders’ Equity
The following table provides a summary of total stockholders’ equity at December 31, 2018 and 2017:
$
81,357,618
$
5,546,503
$
1,932,750
$
2,631,732
$
91,468,603
Stockholders’ equity
7.625% Series C cumulative redeemable preferred stock
7.50% Series D cumulative redeemable preferred stock
7.625% Series E cumulative redeemable preferred stock
6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock
6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock
8.125% Series H cumulative redeemable preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
December 31, 2018
December 31, 2017
(dollars in thousands)
169,466
445,457
—
696,910
411,335
55,000
13,138
18,794,331
(1,979,865)
(4,493,660)
290,514
445,457
287,500
696,910
—
—
11,596
17,221,265
(1,126,020)
(2,961,749)
$
14,112,112
$
14,865,473
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Capital Stock
The following table provides activity related to our Direct Purchase and Dividend Reinvestment Program for the periods presented:
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
Shares Issued Through
Direct Purchase
Amount Raised from Direct Purchase
and Dividend Reinvestment Program
(dollars in thousands, except per share data)
302,000
219,000
228,000
$
$
$
3,144
2,542
2,362
During the year ended December 31, 2018, we issued 24.0 million shares under the at-the-market sales program, for proceeds of
$251.1 million, net of commissions and fees.
During the year ended December 31, 2018, we closed the public offering of an original issuance of 75.0 million shares of common
stock for proceeds of approximately $762.8 million before deducting offering expenses. In connection with the offering, we granted
the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters
exercised in full resulting in an additional $114.4 million in proceeds before deducting offering expenses.
During the year ended December 31, 2017, we issued 140.5 million shares of common stock for proceeds of $1.7 billion before
deducting offering expenses.
Refer to the section titled “Acquisition of MTGE Investment Corp.” for capital stock activity related to the MTGE Acquisition.
No options were exercised during the years ended December 31, 2018, 2017, and 2016.
Leverage and Capital
We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may 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 an economic leverage ratio of less than 10:1. Our actual economic leverage ratio
varies from time to time based upon various factors, including our Manager’s opinion of the level of risk of our assets and liabilities,
our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by
lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.
Our debt-to-equity ratio at December 31, 2018 and December 31, 2017 was 6.3:1 and 5.7:1, respectively. Our economic leverage
ratio, which is computed as the sum of Recourse Debt, TBA derivative and CMBX notional outstanding and net forward purchases
of investments divided by total equity, at December 31, 2018 and December 31, 2017 was 7.0:1 and 6.6:1, respectively. Our capital
ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and
exclusive of debt issued by securitization vehicles), was 12.1% and 12.9% at December 31, 2018 and December 31, 2017,
respectively.
Risk Management
We are subject to a variety of risks in the ordinary conduct of our business. The effective management of these risks is of critical
importance to the overall success of Annaly. The objective of our risk management framework is to identify, measure, monitor
and control 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 management culture throughout Annaly focused on awareness which ensures the key risks are understood and
managed appropriately. Each employee of our Manager is accountable for monitoring and managing risk within their area of
responsibility.
Risk Appetite
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 our risk management philosophy. We engage in risk activities based on our core expertise
that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive
portfolio management, supported by a conservative liquidity and leverage posture.
The risk appetite statement asserts the following key risk parameters to guide our investment management activities:
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Description
allocation policy.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Risk Parameter
Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Capital Stock
The following table provides activity related to our Direct Purchase and Dividend Reinvestment Program for the periods presented:
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
Shares Issued Through
Direct Purchase
Amount Raised from Direct Purchase
and Dividend Reinvestment Program
(dollars in thousands, except per share data)
302,000
219,000
228,000
$
$
$
3,144
2,542
2,362
During the year ended December 31, 2018, we issued 24.0 million shares under the at-the-market sales program, for proceeds of
$251.1 million, net of commissions and fees.
During the year ended December 31, 2018, we closed the public offering of an original issuance of 75.0 million shares of common
stock for proceeds of approximately $762.8 million before deducting offering expenses. In connection with the offering, we granted
the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters
exercised in full resulting in an additional $114.4 million in proceeds before deducting offering expenses.
During the year ended December 31, 2017, we issued 140.5 million shares of common stock for proceeds of $1.7 billion before
deducting offering expenses.
Refer to the section titled “Acquisition of MTGE Investment Corp.” for capital stock activity related to the MTGE Acquisition.
No options were exercised during the years ended December 31, 2018, 2017, and 2016.
Leverage and Capital
We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may 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 an economic leverage ratio of less than 10:1. Our actual economic leverage ratio
varies from time to time based upon various factors, including our Manager’s opinion of the level of risk of our assets and liabilities,
our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by
lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.
Our debt-to-equity ratio at December 31, 2018 and December 31, 2017 was 6.3:1 and 5.7:1, respectively. Our economic leverage
ratio, which is computed as the sum of Recourse Debt, TBA derivative and CMBX notional outstanding and net forward purchases
of investments divided by total equity, at December 31, 2018 and December 31, 2017 was 7.0:1 and 6.6:1, respectively. Our capital
ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and
exclusive of debt issued by securitization vehicles), was 12.1% and 12.9% at December 31, 2018 and December 31, 2017,
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 success of Annaly. The objective of our risk management framework is to identify, measure, monitor
Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. We have built a strong and
collaborative risk management culture throughout Annaly focused on awareness which ensures the key risks are understood and
managed appropriately. Each employee of our Manager is accountable for monitoring and managing risk within their area of
respectively.
Risk Management
and control these risks.
responsibility.
Risk Appetite
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 our risk management philosophy. We engage in risk activities based on our core expertise
that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive
portfolio management, supported by a conservative liquidity and leverage posture.
The risk appetite statement asserts the following key risk parameters to guide our investment management activities:
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Leverage
We generally expect to maintain an economic leverage ratio no greater than 10:1.
Liquidity Risk
Interest Rate Risk
Credit Risk
We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse
market conditions.
We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative
instruments targeting both income and capital preservation.
We will seek to manage credit risk by making investments which conform within our specific investment policy
parameters and optimize risk-adjusted returns.
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.
Governance
Risk management begins with our Board, through the review and oversight of the risk management framework, and executive
management, through the ongoing formulation of risk management practices and related execution in managing risk. The Board
exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee
(“BAC”). The BRC is responsible for oversight of our risk governance structure, risk management and risk assessment guidelines
and policies and our risk appetite. The BAC is responsible for oversight of the quality and integrity of our accounting, internal
controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the
internal audit function.
Risk assessment and risk management are the responsibility of our management. A series of management committees have oversight
or decision-making responsibilities for risk management activities. Membership of these committees is reviewed regularly to
ensure the appropriate personnel are engaged in the risk management process. Four primary management committees have been
established to provide a comprehensive framework for risk management. The management committees responsible for our risk
management include the Enterprise Risk Committee (“ERC”), Asset and Liability Committee (“ALCO”), Investment Committee
and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating
Committee which is responsible for oversight and management of our operations, including oversight and approval authority over
all aspects of our enterprise risk management.
Audit Services is an independent function with reporting lines to the BAC. Audit Services is responsible for performing our internal
audit activities, which includes independently assessing and validating key controls within the risk management framework.
In the fourth quarter of 2018, the Company implemented an enhanced corporate compliance function, headed by a newly appointed
Chief Compliance Officer, who has reporting lines to the BAC. The corporate compliance group is responsible for the oversight
of the Company’s regulatory compliance.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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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
Description
Capital, Liquidity and Funding Risk
Investment/Market Risk
Credit Risk
Counterparty Risk
Operational Risk
Compliance, Regulatory and Legal Risk
Risk to earnings, capital or business resulting 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.
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 investment securities and other investment instruments.
Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms
of any contract or otherwise failure to perform as agreed. This risk is present in lending
and investing activities.
Risk to earnings, capital or business resulting from a counterparty’s failure to meet the
terms of any contract or otherwise failure to perform as agreed. This risk is present in
funding, hedging and investing activities.
Risk to earnings, capital, reputation or business arising from inadequate or failed internal
processes or systems (including proprietary and third party models), human factors or
external events.
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.
Capital, Liquidity and Funding Risk Management
Our capital, liquidity and funding 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 capital,
liquidity and funding risk management practices consist of the following primary elements:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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Description of Risks
wide risk management framework.
We are subject to a variety of risks due to the business we operate. Risk categories are an important component of a robust enterprise
We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk.
Risk
Description
Capital, Liquidity and Funding Risk
Investment/Market Risk
Credit Risk
Counterparty Risk
Operational Risk
Compliance, Regulatory and Legal Risk
Risk to earnings, capital or business resulting 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.
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 investment securities and other investment instruments.
Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms
of any contract or otherwise failure to perform as agreed. This risk is present in lending
and investing activities.
Risk to earnings, capital or business resulting from a counterparty’s failure to meet the
terms of any contract or otherwise failure to perform as agreed. This risk is present in
funding, hedging and investing activities.
Risk to earnings, capital, reputation or business arising from inadequate or failed internal
processes or systems (including proprietary and third party models), human factors or
external events.
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.
Capital, Liquidity and Funding Risk Management
Our capital, liquidity and funding 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 capital,
liquidity and funding risk management practices consist of the following primary elements:
Element
Funding
Excess Liquidity
Maturity Profile
Stress Testing
Description
Availability of diverse and stable sources of funds.
Excess liquidity primarily in the form of unencumbered assets and cash.
Diversity and tenor of liabilities and modest use of leverage.
Scenario modeling to measure the resiliency of our liquidity position.
Liquidity Management Policies
Comprehensive policies including monitoring, risk limits and an escalation protocol.
Funding
Our primary financing sources are repurchase agreements provided through counterparty arrangements and through Arcola, other
secured financing including funding from the Federal Home Loan Bank (“FHLB”), debt issued by securitization vehicles,
mortgages, credit facilities, note sales and various forms of equity. We maintain excess liquidity by holding unencumbered liquid
assets that could be either sold or used to collateralize additional borrowings.
We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity,
breadth and depth of counterparties and maintaining a staggered maturity profile.
Additionally, our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-
dealer. Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the
central counterparty. Arcola also borrows funds through direct repurchase agreements.
To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At December 31, 2018, the weighted
average days to maturity was 77 days.
Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on
the same business day that a margin call is made. Should prepayment speeds on the mortgages underlying our Agency and
Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the
market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position.
We maintain access to FHLB funding through our captive insurance subsidiary Truman. We finance eligible Agency, residential
credit and commercial investments through the FHLB. A rule from the FHFA requires captive insurance companies to terminate
their FHLB membership, however, given the length of its membership, Truman was granted a five year sunset provision whereby
its membership will expire in February 2021. We believe our business objectives align well with the mission of the FHLB System.
While there can be no assurances that such steps will be taken, we believe it would be appropriate for there to be legislative or
other action to permit Truman and similar captive insurance subsidiaries to retain their membership status beyond the current
sunset period.
We utilize diverse funding sources to finance our commercial investments. Aside from FHLB funding, we may utilize credit
facilities, securitization funding and, in the case of investments in commercial real estate, mortgage financing and note sales.
At December 31, 2018, we had total financial assets and cash pledged against existing liabilities of $91.8 billion. The weighted
average haircut was approximately 4% on repurchase agreements. The quality and character of the Residential Securities and
commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not
materially change at December 31, 2018 compared to the same period in 2017, 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, 2018.
The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement
balances outstanding for the periods presented:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Quarter ended
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
Repurchase Agreements
Reverse Repurchase Agreements
Average Daily
Amount
Outstanding
Ending Amount
Outstanding
Average Daily
Amount
Outstanding
Ending Amount
Outstanding
$
83,984,254
$
81,115,874
$
2,741,022
$
(dollars in thousands)
79,214,382
80,582,681
80,770,663
78,755,896
69,314,576
63,191,827
64,961,511
64,484,326
79,073,026
75,760,655
78,015,431
77,696,343
69,430,268
62,497,400
62,719,087
65,215,810
2,330,519
2,929,470
2,064,862
1,295,652
994,565
474,176
1,738,333
1,064,130
650,040
1,234,704
259,762
200,459
—
—
—
—
—
The following table provides information on our repurchase agreements and other secured financing by maturity date at
December 31, 2018. The weighted average remaining maturity on our repurchase agreements and other secured financing was
113 days at December 31, 2018:
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, 2018
Principal
Balance
Weighted
Average Rate
% of Total
(dollars in thousands)
$
—
32,012,640
8,164,165
18,689,773
10,132,675
16,299,932
$
85,299,185
—%
3.50%
2.33%
2.62%
2.52%
2.96%
2.97%
—%
37.5%
9.6%
21.9%
11.9%
19.1%
100.0%
(1) Approximately 5% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.
The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at December 31,
2018:
Weighted Average Rate
Principal
Balance
As of Period End
For the
Quarter
Weighted Average
Days to Maturity (1)
Repurchase agreements
Other secured financing (2)
Securitized debt of consolidated VIEs (3)
Mortgages payable (3)
$
81,115,874
4,183,311
3,336,881
516,834
(dollars in thousands)
2.97%
3.04%
3.62%
4.11%
2.43%
2.93%
3.76%
4.11%
77
812
3,833
4,734
Total indebtedness
$
(1) Determined based on estimated weighted-average lives of the underlying debt instruments.
(2)
(3) Non-recourse to Annaly.
89,152,900
Includes advances from the Federal Home Loan Bank of Des Moines of $3.6 billion and financing under credit facilities.
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 are no longer available to
support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following table
also provides the carrying amount of our encumbered and unencumbered financial assets at December 31, 2018:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
(2)
(3)
(4)
Total financial assets
(1)
The collateral received in connection with reverse repurchase agreements was repledged as of December 31, 2018.
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.
Includes assets transferred or pledged to securitization vehicles.
Includes interests in certain joint ventures and equity and debt instruments.
Financial assets
Cash and cash equivalents
Reverse repurchase agreements (1)
Investments, at carrying value (2)
Agency mortgage-backed securities
Credit risk transfer securities
Non-agency mortgage-backed securities
Residential mortgage loans (3)
MSRs
Commercial real estate debt investments (3)
Commercial real estate debt and preferred equity, held for investment
Loans held for sale, net
Corporate debt
Other assets (4)
Encumbered
Assets
Unencumbered
Assets
Total
(dollars in thousands)
$
1,581,775
650,040
$
$
153,974
—
1,735,749
650,040
85,594,336
4,684,307
90,278,643
470,238
982,611
2,035,373
3,616
2,884,501
1,041,331
42,184
81,859
179,327
419,264
554,197
10,626
255,472
—
552,097
1,161,938
2,454,637
557,813
2,895,127
1,296,803
42,184
803,428
—
96,089,433
$
$
1,083,754
245,030
7,667,810
$
1,887,182
245,030
103,757,243
Quarter ended
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days (1)
Total
Repurchase Agreements
Reverse Repurchase Agreements
Average Daily
Amount
Outstanding
Ending Amount
Outstanding
Average Daily
Amount
Outstanding
Ending Amount
Outstanding
$
83,984,254
$
81,115,874
$
2,741,022
$
(dollars in thousands)
79,214,382
80,582,681
80,770,663
78,755,896
69,314,576
63,191,827
64,961,511
64,484,326
79,073,026
75,760,655
78,015,431
77,696,343
69,430,268
62,497,400
62,719,087
65,215,810
2,330,519
2,929,470
2,064,862
1,295,652
994,565
474,176
1,738,333
1,064,130
650,040
1,234,704
259,762
200,459
—
—
—
—
—
December 31, 2018
Principal
Balance
Weighted
Average Rate
% of Total
(dollars in thousands)
$
—
32,012,640
8,164,165
18,689,773
10,132,675
16,299,932
$
85,299,185
—%
3.50%
2.33%
2.62%
2.52%
2.96%
2.97%
—%
37.5%
9.6%
21.9%
11.9%
19.1%
100.0%
The following table provides information on our repurchase agreements and other secured financing by maturity date at
December 31, 2018. The weighted average remaining maturity on our repurchase agreements and other secured financing was
113 days at December 31, 2018:
(1) Approximately 5% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.
The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at December 31,
2018:
Weighted Average Rate
Principal
Balance
As of Period End
For the
Quarter
Weighted Average
Days to Maturity (1)
(dollars in thousands)
2.97%
3.04%
3.62%
4.11%
2.43%
2.93%
3.76%
4.11%
77
812
3,833
4,734
Repurchase agreements
Other secured financing (2)
Securitized debt of consolidated VIEs (3)
Mortgages payable (3)
Total indebtedness
$
81,115,874
4,183,311
3,336,881
516,834
$
89,152,900
(1) Determined based on estimated weighted-average lives of the underlying debt instruments.
(2)
Includes advances from the Federal Home Loan Bank of Des Moines of $3.6 billion and financing under credit facilities.
(3) Non-recourse to Annaly.
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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 also considered and is
subject to certain parameters. The composition is monitored for concentration risk and asset type. We believe the assets we consider
liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including
as additional collateral to support 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 at December 31, 2018:
Liquid assets
Cash and cash equivalents
Residential securities (2)
Residential mortgage loans (3)
Commercial real estate debt investments (4)
Commercial real estate debt and preferred equity, held for investment
Loans held for sale, net
Corporate debt
Carrying Value (1)
(dollars in thousands)
$
1,735,749
91,992,293
1,359,806
156,758
1,041,995
42,184
1,346,355
Total liquid assets
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (3)(4)
97.75%
(1) Carrying value approximates the market value of assets. The assets listed in this table include $91.8 billion of assets that have been
pledged as collateral against existing liabilities at December 31, 2018. Please refer to the Encumbered and Unencumbered Assets
table for related information.
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.
Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $1.1 billion.
Excludes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.7 billion.
97,675,140
(3)
(2)
(4)
$
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 are no longer available to
support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following table
also provides the carrying amount of our encumbered and unencumbered financial assets at December 31, 2018:
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 sensitivity 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 final 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 our prepayment expectations for assets and liabilities
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
that exhibit prepayment characteristics. Cash and cash equivalents are included in the ‘Less than 3 Months’ maturity bucket, as
they are typically held for a short period of time.
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 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 changes in overall
market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if assets and
liabilities were perfectly matched in each maturity category. The amount of assets and liabilities utilized to compute our interest
rate sensitivity gap was determined in accordance with the contractual terms of the assets and liabilities, except that 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, whereby we generally pay a fixed rate and receive a floating rate and
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 liabilities in the following table at December 31, 2018 could vary substantially based on actual
prepayment experience.
Less than 3
Months
3-12
Months
More than 1
Year to 3
Years
3 Years and
Over
(dollars in thousands)
$
1,735,749
$
— $
— $
—
— $
—
4,370,379
83,457,465
Financial assets
Cash and cash equivalents
Reverse repurchase agreements
Agency mortgage-backed securities (principal)
Credit risk transfer securities (principal)
Non-agency mortgage-backed securities (principal)
Commercial mortgage-backed securities (principal)
Total securities
Residential mortgage loans (principal)
Commercial real estate debt and preferred equity (principal)
Corporate debt (principal)
Total loans
Assets transferred or pledged to securitization vehicles
(principal)
Total financial assets - maturity
Effect of utilizing reset dates (1)
Financial liabilities
Repurchase agreements
Other secured financing
Debt issued by securitization vehicles (principal)
Total financial liabilities - maturity
Effect of utilizing reset dates (1)(2)
650,040
844
—
—
—
844
—
370,788
—
370,788
—
2,757,421
7,100,673
—
—
—
12,121
—
12,121
—
300,199
—
300,199
—
312,320
2,941,406
3,253,726
21,715,080
65,492
—
$
$
$
$
$ 58,866,578
—
—
58,866,578
21,780,572
(48,566,528)
5,044,601
—
116,365
—
4,486,744
—
486,471
109,226
595,697
—
5,082,441
(2,002,702)
3,079,739
534,216
3,591,219
883,500
5,008,935
9,276,308
Total financial assets - interest rate sensitive
$
9,858,094
Total financial liabilities - interest rate sensitive
$ 10,300,050
$
26,825,173
$
14,285,243
Maturity gap
$ (56,109,157) $ (21,468,252) $
73,506
Total
1,735,749
650,040
87,828,688
542,374
1,208,161
155,921
89,735,144
1,347,052
1,307,911
1,908,563
4,563,526
3,803,655
100,488,114
542,374
1,079,675
155,921
85,235,435
1,347,052
150,453
1,799,337
3,296,842
3,803,655
92,335,932
(7,883,456)
$
$
$
$
84,452,476
$
100,644,035
— $
81,115,874
526,600
2,453,381
2,979,981
34,245,619
37,225,600
89,355,951
4,183,311
3,336,881
88,636,066
$
$
88,636,066
11,852,048
Cumulative maturity gap
$ (56,109,157) $ (77,577,409) $ (77,503,903) $
11,852,048
Interest rate sensitivity gap
$
(441,956) $ (23,571,447) $ (11,205,504) $
47,226,876
$
12,007,969
Cumulative rate sensitivity gap
(1) Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap utilizes
(441,956) $ (24,013,403) $ (35,218,907) $
12,007,969
$
reset dates, if applicable.
Includes effect of interest rate swaps.
(2)
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Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
that exhibit prepayment characteristics. Cash and cash equivalents are included in the ‘Less than 3 Months’ maturity bucket, as
they are typically held for a short period of time.
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.
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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 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 changes in overall
market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if assets and
liabilities were perfectly matched in each maturity category. The amount of assets and liabilities utilized to compute our interest
rate sensitivity gap was determined in accordance with the contractual terms of the assets and liabilities, except that 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, whereby we generally pay a fixed rate and receive a floating rate and
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 liabilities in the following table at December 31, 2018 could vary substantially based on actual
prepayment experience.
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Commercial real estate debt and preferred equity (principal)
370,788
300,199
Assets transferred or pledged to securitization vehicles
370,788
300,199
Financial assets
Cash and cash equivalents
Reverse repurchase agreements
Agency mortgage-backed securities (principal)
Credit risk transfer securities (principal)
Non-agency mortgage-backed securities (principal)
Commercial mortgage-backed securities (principal)
Total securities
Residential mortgage loans (principal)
Corporate debt (principal)
Total loans
(principal)
Total financial assets - maturity
Effect of utilizing reset dates (1)
Financial liabilities
Repurchase agreements
Other secured financing
Debt issued by securitization vehicles (principal)
Total financial liabilities - maturity
Effect of utilizing reset dates (1)(2)
Less than 3
Months
3-12
Months
$
1,735,749
$
— $
— $
More than 1
Year to 3
Years
3 Years and
Over
(dollars in thousands)
— $
—
4,370,379
83,457,465
12,121
116,365
12,121
4,486,744
650,040
844
—
—
—
844
—
—
—
—
—
—
—
—
—
—
2,757,421
7,100,673
312,320
2,941,406
3,253,726
5,082,441
(2,002,702)
3,079,739
$
$
$
$
—
—
65,492
—
58,866,578
21,780,572
(48,566,528)
5,044,601
—
—
—
—
—
486,471
109,226
595,697
534,216
3,591,219
883,500
5,008,935
9,276,308
$
$
$
$
Total
1,735,749
650,040
87,828,688
542,374
1,208,161
155,921
89,735,144
1,347,052
1,307,911
1,908,563
4,563,526
3,803,655
100,488,114
542,374
1,079,675
155,921
85,235,435
1,347,052
150,453
1,799,337
3,296,842
3,803,655
92,335,932
(7,883,456)
526,600
2,453,381
2,979,981
34,245,619
37,225,600
$
$
4,183,311
3,336,881
88,636,066
88,636,066
Total financial assets - interest rate sensitive
$
9,858,094
84,452,476
$
100,644,035
$ 58,866,578
21,715,080
— $
81,115,874
Total financial liabilities - interest rate sensitive
$ 10,300,050
$
26,825,173
$
14,285,243
Maturity gap
$ (56,109,157) $ (21,468,252) $
73,506
89,355,951
11,852,048
Cumulative maturity gap
$ (56,109,157) $ (77,577,409) $ (77,503,903) $
11,852,048
Interest rate sensitivity gap
(441,956) $ (23,571,447) $ (11,205,504) $
47,226,876
$
12,007,969
Cumulative rate sensitivity gap
(441,956) $ (24,013,403) $ (35,218,907) $
12,007,969
(1) Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap utilizes
reset dates, if applicable.
(2)
Includes effect of interest rate swaps.
$
$
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Stress Testing
We utilize liquidity stress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress tests
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.
Liquidity Management Policies
We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and
measurement, along with well-defined key limits. Both quantitative and qualitative targets are utilized to measure the ongoing
stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as both
short-term and long-term sustainability of the funding composition under stress conditions.
We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-
specific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation
protocol, with various liquidity ratings influencing management actions with respect to contingency planning and potential related
actions.
Investment/Market Risk Management
One of the primary risks we are subject to is investment/market 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 and spreads 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. In the case of interest rate swaps, we may use market agreed coupon (“MAC”) interest rate swaps in which we may
receive or make a payment at the time of entering such interest rate swap to compensate for the off-market nature of such interest
rate swap. MAC interest rate swaps offer increased liquidity and more efficient portfolio administration through compression
which is the process of reducing the number of unique interest rate swap contracts and replacing them with fewer contracts
containing market defined terms. 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 instantaneously increase or decrease by 25, 50 or 75 basis points, and
the effect of portfolio market value if mortgage option-adjusted spreads instantaneously 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, 2018. The net interest income simulations incorporate the interest expense
effect of rate resets on liabilities and derivatives as well as the amortization expense and reinvestment of principal based on the
prepayments on our securities, which varies based on the level of rates. The results assume no management actions in response
to the rate or spread changes. The following table presents estimates at December 31, 2018. Actual results could differ materially
from these estimates.
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75
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Change in Interest Rate (1)
-75 Basis points
Projected Percentage Change in
Economic Net Interest Income (2)
(18.6%)
Estimated Percentage
Change in Portfolio Value (3)
—%
Estimated Change as a
% on NAV (3)(4)
(0.1%)
-50 Basis points
-25 Basis points
Base interest rate
+25 Basis points
+50 Basis points
+75 Basis points
MBS Spread Shock (1)
-25 Basis points
-15 Basis points
-5 Basis points
Base interest rate
+5 Basis points
+15 Basis points
+25 Basis points
(11.0%)
(4.9%)
—
1.9%
3.2%
3.1%
Estimated Change in
Portfolio Market Value
1.5%
0.9%
0.3%
—
(0.3%)
(0.9%)
(1.5%)
0.1%
0.1%
—
(0.2%)
(0.6%)
(1.0%)
Estimated Change as a %
on NAV (3)(4)
11.5%
6.9%
2.3%
—
(2.3%)
(6.8%)
(11.2%)
0.9%
0.9%
—
(1.8%)
(4.3%)
(7.3%)
(1)
(2)
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Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment
professionals. Actual results could differ materially from these estimates.
Scenarios include Residential Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing
and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps.
Scenarios include Residential Securities, residential mortgage loans, MSRs and derivative instruments.
(3)
(4) NAV represents book value of equity.
Credit Risk Management
Key risk parameters have been established to specify our credit risk appetite. We will seek to manage credit risk by making
investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes.
While we do not expect to encounter credit risk in our Agency investments, we face credit risk on the non-Agency mortgage-
backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on residential mortgage loans,
commercial real estate investments and corporate debt. MSR values may also be impacted if overall costs to service the underlying
mortgage loans increase due to borrower performance. We are subject to risk of loss if an issuer or borrower fails to perform its
contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing
limits for credit exposure. We will originate or purchase commercial investments that meet our comprehensive underwriting process
and credit standards and are approved by the appropriate committee. Once a commercial investment is made, our ongoing
surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate
committee. We review credit and other risks of loss associated with each investment. Our management monitors the overall portfolio
risk and determines estimates of provision for loss. Our portfolio composition, based on balance sheet values, at December 31,
2018 and December 31, 2017 was as follows:
Category
Agency mortgage-backed securities
Credit risk transfer securities
Non-agency mortgage-backed securities
Residential mortgage loans
Mortgage servicing rights
Commercial real estate (1) (2)
Corporate debt
December 31, 2018
December 31, 2017
88.8%
0.5%
1.1%
2.4%
0.5%
4.9%
1.8%
90.6%
0.7%
1.1%
1.4%
0.6%
4.6%
1.0%
(1)
(2)
Includes assets transferred or pledged to securitization vehicles.
Net of unamortized origination fees.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Change in Interest Rate (1)
Projected Percentage Change in
Economic Net Interest Income (2)
Estimated Percentage
Change in Portfolio Value (3)
Estimated Change as a
% on NAV (3)(4)
MBS Spread Shock (1)
Estimated Change in
Portfolio Market Value
Estimated Change as a %
on NAV (3)(4)
-75 Basis points
-50 Basis points
-25 Basis points
Base interest rate
+25 Basis points
+50 Basis points
+75 Basis points
-25 Basis points
-15 Basis points
-5 Basis points
Base interest rate
+5 Basis points
+15 Basis points
+25 Basis points
(18.6%)
(11.0%)
(4.9%)
—
1.9%
3.2%
3.1%
1.5%
0.9%
0.3%
—
(0.3%)
(0.9%)
(1.5%)
(0.1%)
0.9%
0.9%
—
(1.8%)
(4.3%)
(7.3%)
—%
0.1%
0.1%
—
(0.2%)
(0.6%)
(1.0%)
11.5%
6.9%
2.3%
—
(2.3%)
(6.8%)
(11.2%)
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(1)
(2)
(3)
Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment
professionals. Actual results could differ materially from these estimates.
Scenarios include Residential Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing
and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps.
Scenarios include Residential Securities, residential mortgage loans, MSRs and derivative instruments.
(4) NAV represents book value of equity.
Credit Risk Management
Key risk parameters have been established to specify our credit risk appetite. We will seek to manage credit risk by making
investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes.
While we do not expect to encounter credit risk in our Agency investments, we face credit risk on the non-Agency mortgage-
backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on residential mortgage loans,
commercial real estate investments and corporate debt. MSR values may also be impacted if overall costs to service the underlying
mortgage loans increase due to borrower performance. We are subject to risk of loss if an issuer or borrower fails to perform its
contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing
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limits for credit exposure. We will originate or purchase commercial investments that meet our comprehensive underwriting process
and credit standards and are approved by the appropriate committee. Once a commercial investment is made, our ongoing
surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate
committee. We review credit and other risks of loss associated with each investment. Our management monitors the overall portfolio
risk and determines estimates of provision for loss. Our portfolio composition, based on balance sheet values, at December 31,
2018 and December 31, 2017 was as follows:
Category
Agency mortgage-backed securities
Credit risk transfer securities
Non-agency mortgage-backed securities
Residential mortgage loans
Mortgage servicing rights
Commercial real estate (1) (2)
Corporate debt
December 31, 2018
December 31, 2017
88.8%
0.5%
1.1%
2.4%
0.5%
4.9%
1.8%
90.6%
0.7%
1.1%
1.4%
0.6%
4.6%
1.0%
(1)
Includes assets transferred or pledged to securitization vehicles.
(2) Net of unamortized origination fees.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Counterparty Risk Management
Our use of repurchase and derivative agreements and trading activities create exposure to counterparty 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 investments are financed with repurchase agreements by pledging our Residential Securities and certain commercial real estate
investments as collateral to the lender. The collateral we pledge generally exceeds the amount of the borrowings under each
agreement. If the counterparty to the repurchase agreement defaults on its obligations and we are not able to recover our pledged
asset, we are at risk of losing the over-collateralization or haircut. The amount of this exposure is the difference between the 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.
We also use interest rate swaps and other derivatives to manage interest rate risk. Under these agreements, we pledge securities
and cash as collateral or settle variation margin payments 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 extent that our
unrealized gains on derivative instruments exceeded 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 type, counterparty
type, ratings and geography.
The following table summarizes our exposure to counterparties by geography at December 31, 2018:
Country
North America
Europe
Asia (non-Japan)
Japan
Number of
Counterparties
Repurchase
Agreement
Financing
Interest Rate Swaps
at Fair Value
Exposure (1)
(dollars in thousands)
$
58,638,821
$
16,775,716
502,072
5,199,265
32
13
1
4
(142,904) $
(229,347)
—
—
2,666,202
1,415,538
29,343
307,529
Total
4,418,612
(1) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase
(372,251) $
81,115,874
50
$
$
agreement financing and unrealized loss on swaps for each counterparty.
Operational Risk Management
We are subject to operational risk in each of our business and support functions. Operational risk may arise from internal or external
sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events.
Model risk considers potential errors with a model’s results due to uncertainty in model parameters and inappropriate methodologies
used. The result of these risks may include financial loss and reputational damage. We manage operational risk through a variety
of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor
management. Other tools include testing, including disaster recovery testing; systems controls, including access controls; training,
including cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Employee level lines
of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial
reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff,
and our overall governance framework.
We have established a Cybersecurity Committee to help mitigate cybersecurity risks. The role of the committee is to oversee cyber
risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee the Company’s
Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. Our cybersecurity risk
assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. The Cybersecurity
Committee periodically reports to the ERC, the BRC and the BAC. There is no assurance that these efforts will effectively mitigate
cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur. We have purchased
cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the
policy will cover all losses.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Compliance, Regulatory and Legal Risk Management
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 analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT
status within our risk management program.
The financial services industry is highly regulated and continues to receive increasing attention 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 affect us. Our risk
management framework is designed to identify, monitor and manage these risks under the oversight of the ERC.
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 our 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 ERC.
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Commodity Futures Trading
Commission (“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 (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight
or the CFTC, 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 relate to initial margin and
premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging
transactions, marketing 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 with 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 the Commodity
Pool Operator Registration 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 that 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
Residential Securities
There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.
Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high
degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices
from the TBA securities 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 require estimation and judgment in the valuation of Agency mortgage-backed securities. All internal fair 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 by counterparties to ensure sufficient collateralization, providing additional verification
of our internal pricing.
Residential Mortgage Loans
There is an active market for the residential whole loans in which we invest. Since we primarily invest in residential loans that
can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair
values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of
78
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Compliance, Regulatory and Legal Risk Management
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 analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT
status within our risk management program.
The financial services industry is highly regulated and continues to receive increasing attention 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 affect us. Our risk
management framework is designed to identify, monitor and manage these risks under the oversight of the ERC.
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 our 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 ERC.
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Commodity Futures Trading
Commission (“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 (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight
or the CFTC, 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
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Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment
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effective upon filing, so long as the claim is materially complete. The conditions that must be met relate to initial margin and
premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging
transactions, marketing 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 with 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 the Commodity
Pool Operator Registration 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 that 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
Residential Securities
There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.
Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high
degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices
from the TBA securities 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 require estimation and judgment in the valuation of Agency mortgage-backed securities. All internal fair 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 by counterparties to ensure sufficient collateralization, providing additional verification
of our internal pricing.
Residential Mortgage Loans
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
the individual loans, which may include loan term, coupon, and reset dates. Prepayment rates are difficult to predict and are a
significant estimate requiring judgment in the valuation of residential whole loans. All internal fair values are compared to external
pricing sources to determine reasonableness.
Commercial Real Estate Investments
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices
of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral.
These securities must also be evaluated for other-than-temporary impairment if the fair value of the security is lower than its
amortized cost. Determining whether there is an other-than-temporary impairment may require us to exercise significant judgment
and make estimates to determine expected cash flows incorporating assumptions such as changes in interest rates and loss
expectations. For commercial real estate loans and preferred equity investments classified as held for investment, we apply
significant judgment in evaluating the need for a loss reserve. Estimated net recoverable value of the commercial real estate loans
and preferred equity investments and other factors such as the fair value of any collateral, the amount and status of senior debt,
the prospects of the borrower and the competitive landscape where the borrower conducts business must be considered in
determining the allowance for loan losses. For commercial real estate loans held for sale, significant judgment may need to be
applied in determining the fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be
considered to determine the fair value of a loan held for sale include the borrower’s credit quality, liquidity and other market
factors and the fair value of the underlying collateral.
Interest Rate Swaps
We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared 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 uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based
on the fair values of our interest rate swaps. Through this margining process, we may be able to compare our recorded fair value
with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our
recorded fair value of the uncleared interest rate swaps. We value our cleared interest rate swaps using the prices provided by the
derivatives clearing organization.
Revenue Recognition
Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Securities and
their contractual terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted
into interest income over the projected lives of the securities using the interest method. We use third-party model and market
information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e.,
coupon, term, original loan size, original loan-to-value ratio, 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. Changes to model assumptions, including interest rates and other
market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment
activity as it relates to calculating the effective yield. Gains or losses on sales of Residential Securities are recorded on trade date
based on the specific identification method.
Consolidation of Variable Interest Entities
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 the activities that most significantly impact its economic performance. We
must also identify explicit and 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
the obligation to absorb losses that could be potentially significant to the VIE.
There is an active market for the residential whole loans in which we invest. Since we primarily invest in residential loans that
can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair
values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Use of Estimates
The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially from those estimates.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Use of Estimates
The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially 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 Loan / Security
A loan / security on which interest rates are adjusted at regular
intervals according to predetermined criteria. The adjustable
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 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 also refers to 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.
Average Life
On a mortgage-backed security, the average time to receipt
of each dollar of principal, weighted by the amount of each
principal prepayment, based on prepayment assumptions.
B
Basis Point (“BP”)
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 typically looks to U.S. Treasury
securities as benchmarks.
B-Piece
The most subordinate commercial mortgage-backed security
bond class.
Board
Refers to the board of directors of Annaly.
Bond
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. 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 or its own
account.
C
Capital Buffer
Includes unencumbered financial assets which can be
either sold or utilized as collateral to meet liquidity needs.
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Capital Ratio
Calculated as total stockholders’ equity divided by total
assets inclusive of outstanding market value of TBA positions
and exclusive of consolidated VIEs.
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Carry
The amount an asset earns over its hedging and financing
costs. A positive carry happens when the rate on the securities
being financed is greater than the rate on the funds borrowed.
A negative carry is when the rate on the funds borrowed is
greater than the rate on the securities that are being financed.
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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.
CMBX
The CMBX index is a synthetic tradable index referencing a
basket of 25 CMBS of a particular rating and vintage. The
CMBX index allows investors to take a long position
B-Note
Subordinate mortgage notes and/or subordinate mortgage
loan participations.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
(referred to as selling protection) or short position (referred
to as purchasing protection) on the respective basket of
CMBS securities and is structured as a “pay-as-you-go”
contract whereby the protection seller receives and the
protection buyer pays a standardized running coupon on the
contracted notional amount. Additionally, the protection
seller is obligated to pay to the protection buyer the amount
of principal losses and/or coupon shortfalls on the underlying
CMBS securities as they occur.
Collateral
Securities, cash or property pledged by a borrower or 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.
Collateralized Mortgage Obligation (“CMO”)
A multiclass bond backed by a pool of mortgage pass-through
securities or mortgage loans.
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.
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Commercial Mortgage-Backed Security
Securities collateralized by a pool of mortgages on
commercial real estate in which all principal and interest from
the mortgages flow to certificate holders in a defined
sequence or manner.
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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.
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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 Average
Common Share
Core earnings is defined as the sum of (a) economic net
interest income, (b) TBA dollar roll income and CMBX
coupon income, (c) realized amortization of MSRs, (d) other
income (loss) (excluding depreciation and amortization
expense on real estate and related intangibles, non-core
income allocated to equity method investments and other
82
non-core components of other income (loss)), (e) general and
administrative expenses (excluding transaction expenses and
non-recurring items) and (f) income taxes (excluding the
income tax effect of non-core income (loss) items), and core
earnings (excluding PAA) is defined as core earnings
excluding the premium amortization adjustment representing
the cumulative impact on prior periods, but not the current
period, of quarter-over-quarter changes in estimated long-
term prepayment speeds related to our Agency mortgage-
backed securities. Core earnings and core earnings
(excluding PAA) per average common share is calculated by
dividing core earnings or core earnings (excluding PAA) by
average basic common shares for the period. As discussed in
the section titled “Non-GAAP Financial Measures”, these
measures have been updated beginning in the third quarter
ended September 30, 2018. Prior period results will not be
adjusted to conform to the revised calculation as the impact
in each of those periods is not material.
Corporate Debt
Non-government debt instruments issued by corporations.
Long-term corporate debt can be issued as bonds or loans.
Counterparty
One of two entities in a transaction. For example, in the bond
market a counterparty can be a state or local government, a
broker-dealer or a corporation.
Coupon
The interest rate on a bond that is used to compute the amount
of interest due on a periodic basis.
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.
Credit Derivatives
Derivative instruments that have one or more underlyings
related to the credit risk of a specified entity (or group of
entities) or an index that exposes the seller to potential loss
from specified credit-risk related events. An example is
credit derivatives referencing the commercial mortgage-
backed securities index.
Credit Risk Transfer (“CRT”) Securities
Credit Risk Transfer securities are risk sharing transactions
issued by Fannie Mae and Freddie Mac 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, Freddie Mac and/or third parties to private
investors.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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, index or reference pool (e.g. futures contracts,
options, interest rate swaps, interest rate swaptions and
certain to-be-announced securities).
Economic Net Interest Income
Non-GAAP financial measure that is composed of GAAP net
interest income less Economic Interest Expense.
Encumbered Assets
Assets on the company’s balance sheet which have been
pledged as collateral against a liability.
Eurodollar
A U.S. dollar deposit held in Europe or elsewhere outside the
United States.
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.
Discount Price
When the dollar price is below face value, it is said to be
selling at a discount.
Fannie Mae
Federal National Mortgage Association.
Duration
The weighted maturity of a fixed-income investment’s cash
flows, used in the estimation of the price sensitivity of fixed-
income securities for a given change in interest rates.
E
Economic Capital
A measure of the risk a firm is subject to. It is the amount of
capital a firm needs as a buffer to protect against risk. It is
a probabilistic measure of potential future losses at a given
confidence level over a given time horizon.
Economic Interest Expense
Non-GAAP financial measure that is comprised of GAAP
interest expense and the net interest component of interest
rate swaps.
Economic Leverage Ratio (Economic Debt-to-Equity
Ratio)
Calculated as the sum of recourse debt, TBA derivative and
CMBX notional outstanding and net forward purchases
(sales) of investments divided by total equity. Recourse debt
consists of repurchase agreements and other secured
financing (excluding certain non-recourse credit facilities).
Debt issued by securitization vehicles, certain credit facilities
(included within other secured financing) and mortgages
payable are non-recourse to us and are excluded from this
measure.
Federal Deposit Insurance Corporation (“FDIC”)
An independent agency created by the U.S. Congress to
maintain stability and public confidence in the nation’s
financial system by insuring deposits, examining and
supervising financial institutions for safety and soundness
and consumer protection, and managing receiverships.
Federal Funds Rate
The interest rate charged by banks on overnight loans of their
excess reserve funds to other banks.
Federal Home Loan Banks (“FHLB”)
U.S. Government-sponsored banks that provide reliable
liquidity to member financial institutions to support housing
finance and community investment.
Federal Housing Financing Agency (“FHFA”)
The FHFA is an independent regulatory agency that oversees
vital components of the secondary mortgage market
including Fannie Mae, Freddie Mac and the Federal Home
Loan Banks.
Industry Regulatory Authority,
Financial
(“FINRA”)
FINRA is a non-governmental organization tasked with
regulating all business dealings conducted between dealers,
brokers and all public investors.
Inc.
Fixed-Rate Mortgage
A mortgage featuring level monthly payments, determined
at the outset, which remain constant over the life of the
mortgage.
83
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(referred to as selling protection) or short position (referred
non-core components of other income (loss)), (e) general and
to as purchasing protection) on the respective basket of
administrative expenses (excluding transaction expenses and
CMBS securities and is structured as a “pay-as-you-go”
non-recurring items) and (f) income taxes (excluding the
contract whereby the protection seller receives and the
income tax effect of non-core income (loss) items), and core
protection buyer pays a standardized running coupon on the
earnings (excluding PAA) is defined as core earnings
contracted notional amount. Additionally, the protection
excluding the premium amortization adjustment representing
seller is obligated to pay to the protection buyer the amount
the cumulative impact on prior periods, but not the current
of principal losses and/or coupon shortfalls on the underlying
period, of quarter-over-quarter changes in estimated long-
CMBS securities as they occur.
Collateral
term prepayment speeds related to our Agency mortgage-
backed securities. Core earnings and core earnings
(excluding PAA) per average common share is calculated by
Securities, cash or property pledged by a borrower or party
dividing core earnings or core earnings (excluding PAA) by
to a derivative contract to secure payment of a loan or
average basic common shares for the period. As discussed in
derivative. If the borrower fails to repay the loan or defaults
the section titled “Non-GAAP Financial Measures”, these
under the derivative contract, the secured party may take
measures have been updated beginning in the third quarter
ownership of the collateral.
ended September 30, 2018. Prior period results will not be
adjusted to conform to the revised calculation as the impact
Collateralized Mortgage Obligation (“CMO”)
in each of those periods is not material.
A multiclass bond backed by a pool of mortgage pass-through
securities or mortgage loans.
Corporate Debt
Commodity Futures Trading Commission (“CFTC”)
Long-term corporate debt can be issued as bonds or loans.
Non-government debt instruments issued by corporations.
An independent U.S. federal agency established by the
Commodity Futures Trading Commission Act of 1974. The
Counterparty
CFTC regulates the swaps, commodity futures and options
One of two entities in a transaction. For example, in the bond
markets. Its goals include the promotion of competitive and
market a counterparty can be a state or local government, a
efficient futures markets and the protection of investors
broker-dealer or a corporation.
against manipulation, abusive trade practices and fraud.
Coupon
Commercial Mortgage-Backed Security
The interest rate on a bond that is used to compute the amount
Securities collateralized by a pool of mortgages on
of interest due on a periodic basis.
commercial real estate in which all principal and interest from
the mortgages flow to certificate holders in a defined
Credit and Counterparty Risk
sequence or manner.
Constant Prepayment Rate (“CPR”)
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
The percentage of outstanding mortgage loan principal that
counterparty risk is present in lending, investing, funding and
prepays in one year, based on the annualization of the Single
hedging activities.
Monthly Mortality, which reflects the outstanding mortgage
loan principal that prepays in one month.
Credit Derivatives
Securities which may be converted into shares of another
entities) or an index that exposes the seller to potential loss
security under stated terms, often into the issuing company’s
from specified credit-risk related events. An example is
Derivative instruments that have one or more underlyings
related to the credit risk of a specified entity (or group of
credit derivatives referencing the commercial mortgage-
backed securities index.
Convertible Securities
common stock.
Convexity
A measure of the change in a security’s duration with respect
Credit Risk Transfer (“CRT”) Securities
to changes in interest rates. The more convex a security is,
Credit Risk Transfer securities are risk sharing transactions
the more its duration will change with interest rate changes.
issued by Fannie Mae and Freddie Mac and similarly
Core Earnings and Core Earnings Per Average
Common Share
structured transactions arranged by third party market
participants. The securities issued in the CRT sector are
designed to synthetically transfer mortgage credit risk from
Core earnings is defined as the sum of (a) economic net
Fannie Mae, Freddie Mac and/or third parties to private
interest income, (b) TBA dollar roll income and CMBX
investors.
coupon income, (c) realized amortization of MSRs, (d) other
income (loss) (excluding depreciation and amortization
expense on real estate and related intangibles, non-core
income allocated to equity method investments and other
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Fixed Income Clearing Corporation (“FICC”)
The FICC is an agency that deals with the confirmation,
settlement and delivery of fixed-income assets in the U.S.
The agency ensures the systematic and efficient settlement
of U.S. Government securities and mortgage-backed security
transactions in the market.
Floating Rate Bond
A bond for which the interest rate is adjusted periodically
according to a predetermined formula, usually linked to an
index.
Floating Rate CMO
A CMO tranche which pays an adjustable rate of interest tied
to a representative interest rate index such as the LIBOR, the
Constant Maturity Treasury or the Cost of Funds Index.
Freddie Mac
Federal Home Loan Mortgage Corporation.
Futures Contract
A legally binding agreement to buy or sell a commodity or
financial instrument in a designated future month at a price
agreed upon at the initiation of the contract by the buyer and
seller. Futures contracts are standardized according to the
quality, quantity, and delivery time and location for each
commodity. A futures contract differs from an option in that
an option gives one of the counterparties a right and the other
an obligation to buy or sell, while a futures contract 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
U.S. generally accepted accounting principles.
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.
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to
Interest Bearing Liabilities
Refers
issued by
repurchase agreements, debt
securitization vehicles, FHLB Des Moines advances and
credit facilities. Average Interest Bearing Liabilities is based
on daily balances.
Interest Earning Assets
Refers to Residential Securities, U.S. Treasury securities,
reverse repurchase agreements, commercial real estate debt
and preferred equity interests, residential mortgage loans and
corporate debt. Average Interest Earning Assets is based on
daily balances.
Interest-Only (IO) Bond
The interest portion of mortgage, Treasury or bond payments,
which is separated and sold individually from the principal
portion of those same payments.
Interest Rate Risk
The risk that an investment’s value will change due to a
change in the absolute level of interest rates, in the spread
between two rates, in the shape of the yield curve or in any
other interest rate relationship. As market interest rates rise,
the value of current fixed income investment holdings
declines. Diversifying, deleveraging and hedging techniques
are utilized to mitigate this risk. Interest rate risk is a form of
market risk.
Interest Rate Swap
A binding agreement between counterparties to exchange
periodic interest payments on some predetermined dollar
principal, which is called the notional principal amount. For
example, one party will pay fixed and receive a variable rate .
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.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Fixed Income Clearing Corporation (“FICC”)
Interest Bearing Liabilities
The FICC is an agency that deals with the confirmation,
Refers
to
repurchase agreements, debt
issued by
settlement and delivery of fixed-income assets in the U.S.
securitization vehicles, FHLB Des Moines advances and
The agency ensures the systematic and efficient settlement
credit facilities. Average Interest Bearing Liabilities is based
of U.S. Government securities and mortgage-backed security
on daily balances.
A bond for which the interest rate is adjusted periodically
reverse repurchase agreements, commercial real estate debt
according to a predetermined formula, usually linked to an
and preferred equity interests, residential mortgage loans and
Interest Earning Assets
Refers to Residential Securities, U.S. Treasury securities,
corporate debt. Average Interest Earning Assets is based on
daily balances.
transactions in the market.
Floating Rate Bond
index.
Floating Rate CMO
A CMO tranche which pays an adjustable rate of interest tied
Interest-Only (IO) Bond
to a representative interest rate index such as the LIBOR, the
The interest portion of mortgage, Treasury or bond payments,
Constant Maturity Treasury or the Cost of Funds Index.
which is separated and sold individually from the principal
portion of those same payments.
Freddie Mac
Futures Contract
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The risk that an investment’s value will change due to a
change in the absolute level of interest rates, in the spread
A legally binding agreement to buy or sell a commodity or
between two rates, in the shape of the yield curve or in any
financial instrument in a designated future month at a price
other interest rate relationship. As market interest rates rise,
agreed upon at the initiation of the contract by the buyer and
the value of current fixed income investment holdings
seller. Futures contracts are standardized according to the
declines. Diversifying, deleveraging and hedging techniques
quality, quantity, and delivery time and location for each
are utilized to mitigate this risk. Interest rate risk is a form of
commodity. A futures contract differs from an option in that
market risk.
an option gives one of the counterparties a right and the other
an obligation to buy or sell, while a futures contract represents
Interest Rate Swap
an obligation of both counterparties, one to deliver and the
A binding agreement between counterparties to exchange
other to accept delivery. A futures contract is part of a class
periodic interest payments on some predetermined dollar
of financial instruments called derivatives.
principal, which is called the notional principal amount. For
example, one party will pay fixed and receive a variable rate .
G
Interest Rate Swaption
U.S. generally accepted accounting principles.
GAAP
Ginnie Mae
Government National Mortgage Association.
An investment made with the intention of minimizing the
impact of adverse movements in interest rates or securities
H
Hedge
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.
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.
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Inverse IO Bond
An interest-only bond whose coupon is determined by a
formula expressing an inverse relationship to a benchmark
rate, such as LIBOR. As the benchmark rate changes, the IO
coupon adjusts in the opposite direction. When the
benchmark rate is relatively low, the IO pays a relatively high
coupon payment, and vice versa.
Investment/Market Risk
Risk to earnings, capital or business resulting in the decline
in value of our assets caused from changes in market
variables, such as interest rates, which affect the values of
Residential Securities and other investment instruments.
Investment Company Act
Refers to the Investment Company Act of 1940, as amended.
Federal Home Loan Mortgage Corporation.
Interest Rate Risk
L
Leverage
The use of borrowed money to increase investing power and
economic returns.
Leverage Ratio (Debt-to-Equity Ratio)
Calculated as total debt to total stockholders’ equity. For
purposes of calculating this ratio total debt includes
repurchase agreements, other secured financing, debt issued
by securitization vehicles and mortgages payable. Certain
credit facilities (included within other secured financing),
debt issued by securitization vehicles and mortgages payable
are non-recourse to us.
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 CPR
The Company’s projected prepayment speeds for certain
Agency mortgage-backed securities using third-party model
and market information. The Company’s prepayment speed
projections incorporate underlying loan characteristics (e.g.,
coupon, term, original loan size, original loan-to-value ratio,
etc.) and market data, including interest rate and home price
index forecasts. Changes to model assumptions, including
interest rates and other market data, as well as periodic
revisions to the model will cause changes in the results.
Long-Term Debt
Debt which matures in more than one year.
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M
Market Agreed Coupon (“MAC”) Interest Rate Swap
An interest rate swap contract structure with pre-defined,
market agreed terms, developed by SIFMA and ISDA with
liquidity and simplified
the purpose of promoting
administration.
Monetary Policy
Action taken by the Federal Open Market Committee of the
Federal Reserve System to influence the money supply or
interest rates.
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.
Mortgage Loan
A mortgage loan granted by a bank, thrift or other financial
institution that is based solely on real estate as security and
is not insured or guaranteed by a government agency.
Mortgage Servicing Rights (“MSRs”)
Contractual agreements constituting the right to service an
existing mortgage where the holder receives the benefits and
bears the costs and risks of servicing the mortgage.
N
NAV
Net asset value.
Net Interest Income
Represents
interest
investments, less interest expense paid for borrowings.
income earned on our portfolio
Net Interest Margin
Represents the sum of the Company's interest income plus
TBA dollar roll income and CMBX coupon income less
interest expense and the net interest component of interest
rate swaps divided by the sum of average Interest Earning
Assets plus average TBA contract and CMBX balances.
Net Interest Spread
Calculated by taking the average yield on Interest Earning
Assets minus the average cost of Interest Bearing Liabilities,
which includes the net interest component of interest rate
swaps.
Non-Performing Loan (“NPL”)
A loan that is close to defaulting or is in default.
Notional Amount
A stated principal amount in a derivative contract on which
the contract is based.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
O
Operational Risk
Risk to earnings, capital, reputation or business arising from
inadequate or failed internal processes or systems, human
factors or external events.
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.
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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
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.
Pass-Through Security
A securitization structure where a GSE or other entity
“passes” the amount collected from the borrowers every
month to the investor, after deducting fees and expenses.
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.
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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.
Premium Amortization Adjustment (“PAA”)
The cumulative impact on prior periods, but not the current
period, of quarter-over-quarter changes in estimated long-
term prepayment speeds related to our Agency mortgage-
backed securities.
Prepayment
The unscheduled partial or complete payment of the principal
amount outstanding on a mortgage loan or other debt before
it is due.
Prepayment Risk
The risk that falling interest rates will lead to increased
prepayments of mortgage or other loans, forcing the investor
to reinvest at lower prevailing rates.
Prime Rate
The indicative interest rate on loans that banks quote to
their best commercial customers.
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.
R
Rate Reset
The adjustment of the interest rate on a floating-rate security
according to a prescribed formula.
Real Estate Investment Trust (“REIT”)
A special purpose investment vehicle that provides investors
with the ability to participate directly in the ownership or
financing of real-estate related assets by pooling their capital
to purchase and manage mortgage loans and/or income
property.
Recourse Debt
Debt on which the economic borrower is obligated to repay
the entire balance regardless of the value of the pledged
collateral. By contrast, the economic borrower’s obligation
to repay non-recourse debt is limited to the value of the
pledged collateral. Recourse debt consists of repurchase
agreements and other secured financing (excluding certain
non-recourse credit facilities). Securitized debt, certain credit
facilities (included within other secured financing) and
mortgages payable are non-recourse to us and are excluded
from this measure.
Reinvestment Risk
The risk that interest income or principal repayments will
have to be reinvested at lower rates in a declining rate
environment.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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Risk to earnings, capital, reputation or business arising from
inadequate or failed internal processes or systems, human
Premium Amortization Adjustment (“PAA”)
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.
The cumulative impact on prior periods, but not the current
period, of quarter-over-quarter changes in estimated long-
term prepayment speeds related to our Agency mortgage-
O
Operational Risk
factors or external events.
Option Contract
A contract in which the buyer has the right, but not the
backed securities.
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
Prepayment
be worth more than the price set by the option (the strike
The unscheduled partial or complete payment of the principal
price), plus the price they pay for the option itself. Buyers of
amount outstanding on a mortgage loan or other debt before
put options bet that the security’s price will drop below the
it is due.
price set by the option. An option is part of a class of financial
instruments called derivatives, which means these financial
Prepayment Risk
instruments derive their value from the worth of an
The risk that falling interest rates will lead to increased
underlying investment.
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Original Face
its issue date.
Out-of-the-Money
The face value or original principal amount of a security on
Prime Rate
prepayments of mortgage or other loans, forcing the investor
to reinvest at lower prevailing rates.
The indicative interest rate on loans that banks quote to
their best commercial customers.
Description for an option that has no intrinsic value and
Principal and Interest
would be worthless if it expired today; for a call option, this
The term used to refer to regularly scheduled payments or
situation occurs when the strike price is higher than the
prepayments of principal and payments of interest on a
market price of the underlying security; for a put option, this
mortgage or other security.
situation occurs when the strike price is less than the market
price of the underlying security.
Over-The-Counter (“OTC”) Market
R
Rate Reset
the use of an auction system as represented by a stock
exchange.
Price equal to the face amount of a security; 100%.
property.
The principal amount of a bond or note due at maturity. Also
Debt on which the economic borrower is obligated to repay
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
Recourse Debt
the entire balance regardless of the value of the pledged
collateral. By contrast, the economic borrower’s obligation
to repay non-recourse debt is limited to the value of the
P
Par
Par Amount
known as par value.
Pass-Through Security
A securitization structure where a GSE or other entity
pledged collateral. Recourse debt consists of repurchase
“passes” the amount collected from the borrowers every
agreements and other secured financing (excluding certain
month to the investor, after deducting fees and expenses.
non-recourse credit facilities). Securitized debt, certain credit
facilities (included within other secured financing) and
mortgages payable are non-recourse to us and are excluded
Pool
A collection of mortgage loans assembled by an originator
from this measure.
or master servicer as the basis for a security. In the case of
Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-
Reinvestment Risk
through securities, pools are identified by a number assigned
The risk that interest income or principal repayments will
by the issuing agency.
have to be reinvested at lower rates in a declining rate
environment.
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Re-Performing Loan (“RPL”)
A type of loan in which payments were previously delinquent
by at least 90 days but have resumed.
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.
Residential Securities
Refers
securities and non-Agency mortgage-backed securities.
to Agency mortgage-backed securities, CRT
Residual
In a CMO, the residual is the tranche that collects any cash
flow from the collateral that remains after obligations to the
other tranches have been met.
Return on Average Equity
Calculated by
stockholders’ equity.
taking earnings divided by average
Reverse Repurchase Agreement
Refer to Repurchase Agreement. The buyer of securities
effectively provides a collateralized loan to the seller.
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.
A securities market that is conducted by dealers throughout
The adjustment of the interest rate on a floating-rate security
the country through negotiation of price rather than through
according to a prescribed formula.
S
Secondary Market
Ongoing market for bonds previously offered or sold in the
primary market.
Secured Overnight Financing Rate (“SOFR”)
Broad measure of the cost of borrowing cash overnight
collateralized by Treasury securities and was chosen by the
Alternative Reference Rate Committee as the preferred
benchmark rate to replace dollar LIBOR in coming years.
Settlement Date
The date securities must be delivered and paid for to complete
a transaction.
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.
Spread
When buying or selling a bond through a brokerage firm,
investors will be charged a commission or spread, which is
the difference between the market price and cost of purchase,
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and sometimes a service fee. Spreads differ based on several
factors including liquidity.
T
Target Assets
Includes Agency mortgage-backed
to-be-
announced forward contracts, CRT securities, MSRs, non-
Agency mortgage-backed securities, residential mortgage
loans, commercial real estate investments, and corporate
debt.
securities,
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.
TBA Dollar Roll Income
TBA dollar roll income is defined as the difference in price
between two TBA contracts with the same terms but different
settlement dates. The TBA contract settling in the later month
typically prices at a discount to the earlier month contract
with the difference in price commonly referred to as the
“drop”. TBA dollar roll income represents the equivalent of
interest income on the underlying security less an implied
cost of financing.
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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.
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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 (generally an equity index, loan
or bond) held by the counterparty.
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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, such as Fannie Mae and Freddie Mac;
these obligations are not explicitly guaranteed as to the timely
payment of principal and interest by the full faith and credit
of the U.S. government.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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.
Variable Interest Entity (“VIE”)
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.
Variation Margin
Cash or securities provided by a party to collateralize its
obligations under a transaction as a result of a change in value
of such transaction since the trade was executed or the last
time collateral was provided.
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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.
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.
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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.
88
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
V
Value-at-Risk (“VaR”)
Weighted Average Coupon
The weighted average interest rate of the underlying
mortgage loans or pools that serve as collateral for a security,
A statistical technique which measures the potential loss in
weighted by the size of the principal loan balances.
value of an asset or portfolio over a defined period for a given
confidence interval.
Variable Interest Entity (“VIE”)
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
An entity in which equity investors (i) do not have the
of principal is repaid to the investor. The WAL will change
characteristics of a controlling financial interest, and/or (ii)
as the security ages and depending on the actual realized rate
do not have sufficient equity at risk for the entity to finance
at which principal, scheduled and unscheduled, is paid on the
its activities without additional subordinated financial
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.
support from other parties.
Variation Margin
Cash or securities provided by a party to collateralize its
obligations under a transaction as a result of a change in value
of such transaction since the trade was executed or the last
time collateral was provided.
Volatility
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change.
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
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.
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S
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, (1) were effective in ensuring that
information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is accumulated
and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure and (2) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits
under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s
rules and forms.
There have been no changes in our internal controls over financial reporting that occurred during the three months ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect our internal control over financial
reporting.
Management’s Annual Report On Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act. Our internal
control over financial reporting is a process designed by, or under the supervision of, the Company’s CEO and CFO and effected
by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
•
•
pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the
Company;
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of
financial statements in accordance with generally
accepted accounting principles, and that receipts
•
and expenditures of the Company are being made
in accordance with authorizations of
only
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 consolidated 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.
88
89
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, 2018. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission’s (“COSO”) Internal Control-Integrated Framework (2013). As permitted by the
Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their assessment of
internal control over financial reporting during the first year after acquisition, the scope of our evaluation excluded the internal
controls of certain subsidiaries of Mountain Merger Sub Corporation (successor by merger to MTGE Investment Corp.), namely
Annaly Healthcare Investments LLC (formerly Capital Healthcare Investments, LLC) and its subsidiaries, which constituted
$321.6 million and $115.1 million of total assets and total equity, respectively, as of December 31, 2018, and $2.1 million of net
income (loss) for the year then ended.
Based on the Company’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), the
Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2018. The
Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s
internal control over financial reporting, which is included herein.
90
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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, 2018. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission’s (“COSO”) Internal Control-Integrated Framework (2013). As permitted by the
Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their assessment of
internal control over financial reporting during the first year after acquisition, the scope of our evaluation excluded the internal
controls of certain subsidiaries of Mountain Merger Sub Corporation (successor by merger to MTGE Investment Corp.), namely
Annaly Healthcare Investments LLC (formerly Capital Healthcare Investments, LLC) and its subsidiaries, which constituted
$321.6 million and $115.1 million of total assets and total equity, respectively, as of December 31, 2018, and $2.1 million of net
income (loss) for the year then ended.
Based on the Company’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), the
Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2018. The
Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s
internal control over financial reporting, which is included herein.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Annaly Capital Management, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31,
2018, 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). In our opinion, Annaly Capital Management, Inc. and
Subsidiaries’ (the Company) maintained, in all material respects, effective internal control over financial reporting as of December
31, 2018, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls
of certain subsidiaries of Mountain Merger Sub Corporation (successor by merger to MTGE Investment Corp.), namely Annaly
Healthcare Investments LLC (formerly Capital Healthcare Investments, LLC) and its subsidiaries, which is included in the 2018
consolidated financial statements of the Company and constituted $321.6 million and $115.1 million of total assets and total equity,
respectively, as of December 31, 2018, and $2.1 million of net income (loss) for the year then ended. Our audit of internal control
over financial reporting of Annaly Capital Management, Inc. and Subsidiaries also did not include an evaluation of the internal
control over financial reporting of certain subsidiaries of Mountain Merger Sub Corporation (successor by merger to MTGE
Investment Corp.), namely Annaly Healthcare Investments LLC (formerly Capital Healthcare Investments, LLC) and its
subsidiaries.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2018 and 2017, 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, 2018, the related notes, and financial statement schedules III and IV, and our report dated February
14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s 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’s Annual 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 are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
90
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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.
/s/ Ernst & Young LLP
New York, NY
February 14, 2019
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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.
ITEM 9B. OTHER INFORMATION
None.
/s/ Ernst & Young LLP
New York, NY
February 14, 2019
92
93
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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, 2018. 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, 2018.
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 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. We intend to satisfy the
disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics
by posting 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,
2018.
ITEM 11. EXECUTIVE COMPENSATION
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, 2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the 2010 Equity Incentive Plan. The
2010 Equity Incentive Plan authorizes the Compensation Committee of the Board 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.
We had previously adopted a long-term stock incentive plan for executive officers, key employees and nonemployee directors
(the “Prior Incentive Plan”). Since the adoption of the 2010 Equity Incentive Plan, no further awards will be made under the Prior
Incentive Plan, although existing awards will remain effective. All stock options issued under the 2010 Equity Incentive Plan and
the Prior Incentive Plan (collectively 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.
The following table provides information as of December 31, 2018 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
(a)
(b)
(c)
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
securities in column ‘a’)
209,375
—
209,375
$
$
13.25
—
13.25
29,695,575
—
29,695,575
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference
to the proxy statement to be filed with the SEC within 120 days after December 31, 2018.
94
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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, 2018.
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, 2018.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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, 2018. 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, 2018.
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 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. We intend to satisfy the
disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics
by posting on our website.
2018.
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,
ITEM 11. EXECUTIVE COMPENSATION
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, 2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the 2010 Equity Incentive Plan. The
2010 Equity Incentive Plan authorizes the Compensation Committee of the Board 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.
We had previously adopted a long-term stock incentive plan for executive officers, key employees and nonemployee directors
(the “Prior Incentive Plan”). Since the adoption of the 2010 Equity Incentive Plan, no further awards will be made under the Prior
Incentive Plan, although existing awards will remain effective. All stock options issued under the 2010 Equity Incentive Plan and
the Prior Incentive Plan (collectively 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.
The following table provides information as of December 31, 2018 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
(a)
(b)
(c)
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
securities in column ‘a’)
209,375
—
209,375
$
$
13.25
—
13.25
29,695,575
—
29,695,575
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference
to the proxy statement to be filed with the SEC within 120 days after December 31, 2018.
94
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1.
2.
Financial Statements. See Index to Financial Statements below.
Schedules to Financial Statements. See Index to Financial Statements below
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.
3.
Exhibits. See Exhibit Index below.
EXHIBIT INDEX
Exhibit Number
Exhibit Description
2.1
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
Agreement and Plan of Merger, by and among the Registrant, Mountain Merger Sub Corporation and MTGE
Investment Corp., dated as of May 2, 2018 (incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K filed on May 3, 2018).
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 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 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 Current Report on Form 8-K filed 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 Quarterly Report on Form 10-Q filed 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 Current Report on Form 8-K filed 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 Registration Statement on Form 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
Current Report on Form 8-K filed October 18, 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 Current
Report on 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).
Articles Supplementary designating the Registrant’s 7.625% Series E Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 (incorporated by reference to Exhibit 3.12 to the Registrant’s Registration
Statement on Form 8-A filed July 12, 2016).
Articles Supplementary reclassifying the Registrant’s 6% Series B Cumulative Convertible Preferred Stock,
liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.13 to the Registrant’s
Registration Statement on Form 8-A filed July 27, 2017).
96
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
All financial statement schedules not included have been omitted because they are either inapplicable or the information required
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1.
2.
Financial Statements. See Index to Financial Statements below.
Schedules to Financial Statements. See Index to Financial Statements below
is provided in our Financial Statements and Notes thereto.
3.
Exhibits. See Exhibit Index below.
EXHIBIT INDEX
Exhibit Number
Exhibit Description
Agreement and Plan of Merger, by and among the Registrant, Mountain Merger Sub Corporation and MTGE
Investment Corp., dated as of May 2, 2018 (incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K filed on May 3, 2018).
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)
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 June
filed August 5, 1997).
12, 2002).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 of the Registrant’s Current Report on Form 8-K filed 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 Quarterly Report on Form 10-Q filed 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 Current Report on Form 8-K filed 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 Registration Statement on Form 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
Current Report on Form 8-K filed October 18, 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 Current
Report on 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).
Articles Supplementary designating the Registrant’s 7.625% Series E Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 (incorporated by reference to Exhibit 3.12 to the Registrant’s Registration
Statement on Form 8-A filed July 12, 2016).
Articles Supplementary reclassifying the Registrant’s 6% Series B Cumulative Convertible Preferred Stock,
liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.13 to the Registrant’s
Registration Statement on Form 8-A filed July 27, 2017).
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2.1
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
3.18
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.1
10.2
10.3
Articles Supplementary designating the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.14 to the Registrant’s Registration Statement on Form 8-A filed July 27, 2017).
Articles Supplementary reclassifying and designating (1) 7,412,500 authorized but unissued shares of the
Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of
undesignated Common Stock; (2) 650,000 authorized but unissued shares of the Registrant’s 7.625% Series
C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common
Stock; and (3) 3,400,000 authorized but unissued shares of the Registrant’s 6.95% Series F Fixed-to-Floating
Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common
Stock. (incorporated by reference to Exhibit 3.15 of the Registrant’s Quarterly Report on Form 10-Q filed
November 3, 2017).
Articles Supplementary designating Annaly’s 6.50% Series G Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.16 to the Registrant’s Registration Statement on Form 8-A filed January 10, 2018).
Articles Supplementary reclassifying and designating (i) 11,500,000 authorized but unissued shares of the
Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of
Registrant’s undesignated common stock and (ii) 5,000,000 authorized but unissued shares of Registrant’s
7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of Registrant’s
undesignated common stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report
on Form 10-Q filed August 3, 2018).
Form of Articles Supplementary designating Annaly’s 8.125% Series H Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.17 to the Registrant’s
Registration Statement on Form 8-A filed September 7, 2018).
Amended and Restated Bylaws of the Registrant, adopted December 13, 2018 (incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed December 13, 2018).
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 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 on December 5, 2001).
Specimen Series C Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K filed May 16, 2012).
Specimen Series D Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K filed September 13, 2012).
Specimen Series E Preferred Stock Certificate (incorporated by reference to Exhibit 4.7 to the Registrant’s
Registration Statement (Registration No. 333-211140) on Form S-4/A filed May 27, 2016).
Specimen Series F Preferred Stock Certificate (incorporated by reference to Exhibit 4.8 to the Registrant’s
Registration Statement on Form 8-A filed July 27, 2017).
Specimen Series G Preferred Stock Certificate (incorporated by reference to Exhibit 4.9 to the Registrant’s
Registration Statement on Form 8-A filed January 10, 2018).
Specimen Series H Preferred Stock Certificate (incorporated by reference to Exhibit 4.10 to the Registrant’s
Registration Statement on Form S-4A filed May 31, 2018).
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 Current Report on Form 8-K filed February 12,
2010).
Indenture, dated as of February 1, 2019, between the Registrant and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 4.7 to the Registrant’s Current Report on Form S-3 filed February 1,
2019).
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 Current Report on Form
8-K filed February 12, 2010).
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 Current Report on Form
8-K filed May 14, 2012).
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 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 August 5, 1997).
Amended and Restated Management Agreement, by and between the Registrant and Annaly Capital
Management LLC, dated as of April 12, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s
Form 10-Q filed August 3, 2018).*
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97
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
10.4
10.5
10.6
10.7
21.1
23.1
31.1
31.2
32.1
32.2
Registrant’s 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed June 1, 2010).*
Registrant’s Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 10.5 to the
Registrant’s Annual Report on Form 10-K filed February 23, 2017).*
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed March 20, 2017).
Severance and Noncompetition Agreement, by and between the Registrant and Kevin G. Keyes, dated as of
August 1, 2018 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-
Q filed August 3, 2018).*
Subsidiaries of Registrant.
Consent of Ernst & Young LLP.
Certification of Kevin G. Keyes, Chief Executive Officer and President (Principal Executive Officer) of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Glenn A. Votek, Chief Financial Officer (Principal Financial Officer) of the Registrant,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Kevin G. Keyes, Chief Executive Officer and President (Principal 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.
Exhibit 101.INS
XBRL
Exhibit 101.SCH
XBRL
Exhibit 101.CAL
XBRL
Exhibit 101.DEF
XBRL
Exhibit 101.LAB
XBRL
Exhibit 101.PRE
XBRL
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 †
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Exhibit Numbers 10.1, 10.3, 10.4, 10.5 and 10.7 are management contracts or compensatory plans required to be filed as
Exhibits to this Form 10-K.
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, 2018 and
December 31, 2017; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018,
2017 and 2016; (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and
2016; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016; and (v) Notes
to Consolidated Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this
interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of
the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and
otherwise is not subject to liability under these sections.
*
†
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Registrant’s 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
ITEM 16. FORM 10-K SUMMARY
Report on Form 8-K filed June 1, 2010).*
Registrant’s Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 10.5 to the
Registrant’s Annual Report on Form 10-K filed February 23, 2017).*
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed March 20, 2017).
Severance and Noncompetition Agreement, by and between the Registrant and Kevin G. Keyes, dated as of
August 1, 2018 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-
None.
Q filed August 3, 2018).*
Subsidiaries of Registrant.
Consent of Ernst & Young LLP.
Certification of Kevin G. Keyes, Chief Executive Officer and President (Principal 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.
Act of 2002.
Certification of Glenn A. Votek, Chief Financial Officer (Principal Financial Officer) of the Registrant,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Kevin G. Keyes, Chief Executive Officer and President (Principal Executive Officer) of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
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.
Exhibit 101.INS
Instance Document †
Exhibit 101.SCH
Taxonomy Extension Schema Document †
Exhibit 101.CAL
Taxonomy Extension Calculation Linkbase Document †
Exhibit 101.DEF
Additional Taxonomy Extension Definition Linkbase Document Created†
Exhibit 101.LAB
Taxonomy Extension Label Linkbase Document †
Exhibit 101.PRE
Taxonomy Extension Presentation Linkbase Document †
* Exhibit Numbers 10.1, 10.3, 10.4, 10.5 and 10.7 are management contracts or compensatory plans required to be filed as
Exhibits to this Form 10-K.
† 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, 2018 and
December 31, 2017; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018,
2017 and 2016; (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and
2016; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016; 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.
10.4
10.5
10.6
10.7
21.1
23.1
31.1
31.2
32.1
32.2
XBRL
XBRL
XBRL
XBRL
XBRL
XBRL
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99
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
FInancial Statements
Report of Independent Registered Public Accounting Firm
Page
F-1
Consolidated Financial Statements as of December 31, 2018 and 2017 and for the Years Ended December 31, 2018, 2017 and 2016
F-2
F-3
F-4
F-5
F-6
F-6
F-6
F-9
F-9
F-13
F-19
F-19
F-23
F-24
F-29
F-32
F-32
F-35
F-37
F-39
F-39
F-40
F-40
F-41
F-42
F-42
F-44
F-44
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.
Financial Instruments
Note 5.
Securities
Note 6.
Loans
Note 7.
Mortgage Servicing Rights
Note 8.
Variable Interest Entities
Note 9.
Real Estate
Note 10.
Derivative Instruments
Note 11.
Fair Value Measurements
Note 12.
Goodwill and Intangible Assets
Note 13.
Secured Financing
Note 14.
Capital Stock
Note 15.
Interest Income and Interest Expense
Note 16.
Net Income (Loss) Per Common Share
Note 17.
Income Taxes
Note 18.
Risk Management
Note 19.
Related Party Transactions
Note 20.
Lease Commitments and Contingencies
Note 21.
Arcola Regulatory Requirements
Note 22.
Acquisition of MTGE Investment Corp.
Note 23.
Summarized Quarterly Results (Unaudited)
Note 24.
Subsequent Events
100
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 2018 and 2017 and for the Years Ended December 31, 2018, 2017 and 2016
FInancial Statements
Report of Independent Registered Public Accounting Firm
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.
Financial Instruments
Note 5.
Securities
Note 6.
Loans
Note 7.
Mortgage Servicing Rights
Note 8.
Variable Interest Entities
Note 9.
Real Estate
Note 10.
Derivative Instruments
Note 11.
Fair Value Measurements
Note 12.
Goodwill and Intangible Assets
Note 13.
Secured Financing
Note 14.
Capital Stock
Note 15.
Interest Income and Interest Expense
Note 16.
Net Income (Loss) Per Common Share
Note 17.
Income Taxes
Note 18.
Risk Management
Note 19.
Related Party Transactions
Note 20.
Lease Commitments and Contingencies
Note 21.
Arcola Regulatory Requirements
Note 22.
Acquisition of MTGE Investment Corp.
Note 23.
Summarized Quarterly Results (Unaudited)
Note 24.
Subsequent Events
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Annaly Capital Management, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc. and
Subsidiaries (the Company) as of December 31, 2018 and 2017, 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, 2018, the related notes,
and financial statement schedules III and IV, collectively referred to as the “consolidated financial statements”. In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, 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 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY
February 14, 2019
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100
F-1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
Assets
Cash and cash equivalents (includes pledged assets of $1,581,775 and $579,213, respectively) (1)
Securities (includes pledged assets of $87,193,316 and $84,752,790, respectively) (2)
Loans, net (includes pledged assets of $2,997,051 and $1,811,062, respectively) (3)
Mortgage servicing rights (includes pledged assets of $3,616 and $5,224, respectively)
Assets transferred or pledged to securitization vehicles
Real estate, net
Derivative assets
Reverse repurchase agreements
Receivable for unsettled trades
Interest receivable
Goodwill and intangible assets, net
Other assets
Total assets
Liabilities and stockholders’ equity
Liabilities
Repurchase agreements
Other secured financing
Debt issued by securitization vehicles
Mortgages payable
Derivative liabilities
Payable for unsettled trades
Interest payable
Dividends payable
Other liabilities
Total liabilities
Stockholders’ equity
December 31,
December 31,
2018
2017
$
1,735,749
$
706,589
92,623,788
92,563,572
4,585,975
557,813
3,833,200
739,473
200,503
650,040
68,779
357,365
100,854
333,988
2,999,148
580,860
3,306,133
485,953
313,885
—
1,232
323,526
95,035
384,117
$ 105,787,527
$ 101,760,050
$
81,115,874
$
77,696,343
4,183,311
3,347,062
3,837,528
2,971,771
511,056
889,750
583,036
570,928
394,129
74,580
309,686
607,854
656,581
253,068
347,876
207,770
91,669,726
86,888,477
Preferred stock, par value $0.01 per share, 75,950,000 and 70,700,000 authorized, 73,400,000 and 70,700,000
issued and outstanding, respectively
1,778,168
1,720,381
Common stock, par value $0.01 per share, 1,924,050,000 and 1,929,300,000 authorized, 1,313,763,450
and 1,159,585,078 issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Noncontrolling interests
Total equity
13,138
11,596
18,794,331
17,221,265
(1,979,865)
(1,126,020)
(4,493,660)
(2,961,749)
14,112,112
14,865,473
5,689
6,100
14,117,801
14,871,573
$ 105,787,527
$ 101,760,050
Total liabilities and equity
(1)
(2)
(3)
Includes cash of consolidated Variable Interest Entities (“VIEs”) of $30.4 million and $42.3 million at December 31, 2018 and 2017, respectively.
Excludes $83.6 million and $66.3 million at December 31, 2018 and 2017, respectively, of non-Agency mortgage-backed securities and $224.3
million and $0 at December 31, 2018 and December 31, 2017, respectively, of commercial mortgage-backed securities in consolidated VIEs
pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition.
Includes $97.5 million and $19.7 million of residential mortgage loans held for sale and $42.2 million and $0 of commercial mortgage loans
held for sale at December 31, 2018 and 2017, respectively.
See notes to consolidated financial statements.
F-2
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
Assets
Cash and cash equivalents (includes pledged assets of $1,581,775 and $579,213, respectively) (1)
$
1,735,749
$
706,589
Securities (includes pledged assets of $87,193,316 and $84,752,790, respectively) (2)
Loans, net (includes pledged assets of $2,997,051 and $1,811,062, respectively) (3)
Mortgage servicing rights (includes pledged assets of $3,616 and $5,224, respectively)
Assets transferred or pledged to securitization vehicles
Real estate, net
Derivative assets
Reverse repurchase agreements
Receivable for unsettled trades
Interest receivable
Goodwill and intangible assets, net
Other assets
Total assets
Liabilities
Liabilities and stockholders’ equity
Repurchase agreements
Other secured financing
Debt issued by securitization vehicles
Mortgages payable
Derivative liabilities
Payable for unsettled trades
Interest payable
Dividends payable
Other liabilities
Total liabilities
Stockholders’ equity
and 1,159,585,078 issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
Preferred stock, par value $0.01 per share, 75,950,000 and 70,700,000 authorized, 73,400,000 and 70,700,000
issued and outstanding, respectively
Common stock, par value $0.01 per share, 1,924,050,000 and 1,929,300,000 authorized, 1,313,763,450
December 31,
December 31,
2018
2017
92,623,788
92,563,572
4,585,975
557,813
3,833,200
739,473
200,503
650,040
68,779
357,365
100,854
333,988
2,999,148
580,860
3,306,133
485,953
313,885
—
1,232
323,526
95,035
384,117
$ 105,787,527
$ 101,760,050
$
81,115,874
$
77,696,343
4,183,311
3,347,062
3,837,528
2,971,771
511,056
889,750
583,036
570,928
394,129
74,580
309,686
607,854
656,581
253,068
347,876
207,770
91,669,726
86,888,477
1,778,168
1,720,381
13,138
11,596
18,794,331
17,221,265
(1,979,865)
(1,126,020)
(4,493,660)
(2,961,749)
14,112,112
14,865,473
5,689
6,100
14,117,801
14,871,573
$ 105,787,527
$ 101,760,050
Net interest income
Interest income
Interest expense
Net interest income
Realized and unrealized gains (losses)
Net interest component of interest rate swaps
Realized gains (losses) on termination or maturity of interest rate swaps
Unrealized gains (losses) on interest rate swaps
Subtotal
Net gains (losses) on disposal of investments
Net gains (losses) on other derivatives
Net unrealized gains (losses) on instruments measured at fair value through earnings
Loan loss provision
Bargain purchase gain
Subtotal
Total realized and unrealized gains (losses)
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 interests
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
Other comprehensive income (loss)
Net income (loss)
$
$
$
$
For The Years Ended December 31,
2018
2017
2016
$
3,332,563
$
2,493,126
$
2,210,951
1,897,860
1,434,703
1,008,354
1,484,772
657,752
1,553,199
100,553
1,409
424,081
526,043
(1,124,448)
(403,001)
(158,082)
(3,496)
—
(1,689,027)
(1,162,984)
109,927
179,841
150,032
329,873
51,773
(2,375)
54,148
(260)
54,408
129,312
(371,108)
(160,133)
512,918
(18,323)
(3,938)
261,438
(39,684)
—
—
217,816
199,493
115,857
164,322
59,802
224,124
(506,681)
(113,941)
282,190
(338,432)
33,089
230,580
86,391
—
72,576
422,636
84,204
44,144
151,599
98,757
250,356
1,575,998
1,431,191
6,982
(1,595)
1,569,016
1,432,786
(588)
1,569,604
109,635
(970)
1,433,756
82,260
1,351,496
1.39
1.39
(74,904) $
1,459,969
(0.06) $
(0.06) $
1.37
1.37
$
$
$
1,209,601,809
1,065,923,652
1,209,601,809
1,066,351,616
969,787,583
970,102,353
54,148
$
1,569,016
$
1,432,786
(1)
(2)
(3)
Includes cash of consolidated Variable Interest Entities (“VIEs”) of $30.4 million and $42.3 million at December 31, 2018 and 2017, respectively.
Excludes $83.6 million and $66.3 million at December 31, 2018 and 2017, respectively, of non-Agency mortgage-backed securities and $224.3
million and $0 at December 31, 2018 and December 31, 2017, respectively, of commercial mortgage-backed securities in consolidated VIEs
pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition.
Includes $97.5 million and $19.7 million of residential mortgage loans held for sale and $42.2 million and $0 of commercial mortgage loans
held for sale at December 31, 2018 and 2017, respectively.
See notes to consolidated financial statements.
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 interests
Comprehensive income (loss) attributable to Annaly
Dividends on preferred stock
(2,004,166)
1,150,321
(853,845)
(799,697)
(260)
(799,437)
129,312
(89,997)
49,870
(40,127)
1,528,889
(588)
1,529,477
109,635
Comprehensive income (loss) attributable to common stockholders
$
(928,749) $
1,419,842
$
(686,414)
(21,883)
(708,297)
724,489
(970)
725,459
82,260
643,199
See notes to consolidated financial statements.
F-2
F-3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
For The Years Ended December 31,
2018
2017
2016
1,720,381
$
1,200,559
$
913,059
$
$
$
$
411,335
55,000
(408,548)
1,778,168
11,596
1,103
—
436
3
13,138
17,221,265
1,961
1,116,409
—
455,507
(3,952)
3,141
$
$
$
$
696,910
—
(177,088)
1,720,381
10,189
1,405
—
—
2
11,596
15,579,342
1,406
1,646,201
—
—
(8,224)
2,540
—
287,500
—
1,200,559
9,359
—
(111)
939
2
10,189
14,675,768
7,047
—
(102,601)
996,768
—
2,360
18,794,331
$
17,221,265
$
15,579,342
(1,126,020) $
(1,085,893) $
(2,004,166)
1,150,321
(89,997)
49,870
(377,596)
(686,414)
(21,883)
(1,979,865) $
(1,126,020) $
(1,085,893)
(2,961,749) $
(3,136,017) $
(3,324,616)
54,408
(129,312)
(1,457,007)
1,569,604
(109,635)
(1,285,701)
1,433,756
(82,260)
(1,162,897)
(4,493,660) $
(2,961,749) $
(3,136,017)
14,112,112
6,100
(260)
(151)
5,689
14,117,801
$
$
$
$
14,865,473
7,792
(588)
(1,104)
6,100
14,871,573
$
$
$
$
12,568,180
9,948
(970)
(1,186)
7,792
12,575,972
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Preferred stock
Beginning of period
Issuance
Acquisition of subsidiary
Redemption
End of period
Common stock
Beginning of period
Issuance
Buyback of common stock
Acquisition of subsidiary
Direct purchase and dividend reinvestment
End of period
Additional paid-in capital
Beginning of period
Stock compensation expense
Issuance
Buyback of common stock
Acquisition of subsidiary
Redemption of preferred stock
Direct purchase and dividend reinvestment
End of period
Accumulated other comprehensive income (loss)
Beginning of period
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for net gains (losses) included in net income (loss)
End of period
Accumulated deficit
Beginning of period
Net income (loss) attributable to Annaly
Dividends declared on preferred stock
Dividends and dividend equivalents declared on common stock and share-based awards
End of period
Total stockholder’s equity
Noncontrolling interests
Beginning of period
Net income (loss) attributable to noncontrolling interests
Equity contributions from (distributions to) noncontrolling interests
End of period
Total equity
See notes to consolidated financial statements.
F-4
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Direct purchase and dividend reinvestment
13,138
11,596
Preferred stock
Beginning of period
Issuance
Acquisition of subsidiary
Redemption
End of period
Common stock
Beginning of period
Issuance
Buyback of common stock
Acquisition of subsidiary
End of period
Additional paid-in capital
Beginning of period
Stock compensation expense
Issuance
Buyback of common stock
Acquisition of subsidiary
Redemption of preferred stock
Direct purchase and dividend reinvestment
End of period
Beginning of period
Accumulated other comprehensive income (loss)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for net gains (losses) included in net income (loss)
End of period
Accumulated deficit
Beginning of period
Net income (loss) attributable to Annaly
Dividends declared on preferred stock
End of period
Total stockholder’s equity
Noncontrolling interests
Beginning of period
End of period
Total equity
See notes to consolidated financial statements.
Net income (loss) attributable to noncontrolling interests
Equity contributions from (distributions to) noncontrolling interests
Dividends and dividend equivalents declared on common stock and share-based awards
For The Years Ended December 31,
2018
2017
2016
1,720,381
$
1,200,559
$
913,059
411,335
55,000
(408,548)
1,778,168
11,596
1,103
—
436
3
17,221,265
1,961
1,116,409
—
455,507
(3,952)
3,141
696,910
—
(177,088)
1,720,381
10,189
1,405
—
—
2
15,579,342
1,406
1,646,201
—
—
(8,224)
2,540
287,500
—
—
1,200,559
9,359
—
(111)
939
2
10,189
14,675,768
7,047
—
(102,601)
996,768
—
2,360
18,794,331
$
17,221,265
$
15,579,342
(1,126,020) $
(1,085,893) $
(2,004,166)
1,150,321
(89,997)
49,870
(377,596)
(686,414)
(21,883)
(1,979,865) $
(1,126,020) $
(1,085,893)
(2,961,749) $
(3,136,017) $
(3,324,616)
54,408
(129,312)
(1,457,007)
1,569,604
(109,635)
(1,285,701)
1,433,756
(82,260)
(1,162,897)
(4,493,660) $
(2,961,749) $
(3,136,017)
14,112,112
14,865,473
12,568,180
6,100
(260)
(151)
5,689
7,792
(588)
(1,104)
6,100
9,948
(970)
(1,186)
7,792
14,117,801
14,871,573
12,575,972
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
$
54,148
$
1,569,016
$
1,432,786
For The Years Ended December 31,
2017
2016
2018
Amortization of premiums and discounts of investments, net
Amortization of securitized debt premiums and discounts and deferred financing costs
Depreciation, amortization and other noncash expenses
Net (gains) losses on disposals of investments
Net (gains) losses on investments and derivatives
Income from unconsolidated joint ventures
Loan loss provision
Bargain purchase gain
Payments on purchases of loans held for sale
Proceeds from sales and repayments of loans held for sale
Net receipts (payments) on derivatives
Net change in
Due to / from brokers
Other assets
Interest receivable
Interest payable
Other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Payments on purchases of residential securities
Proceeds from sales of residential securities
Principal payments on residential securities
Payments on purchases of MSRs
Proceeds from sales of MSRs
Payments on purchases of corporate debt
Principal payments on corporate debt
Originations and purchases of commercial real estate investments
Proceeds from sales of commercial real estate investments
Principal repayments on commercial real estate investments
Proceeds from reverse repurchase agreements
Payments on reverse repurchase agreements
Distributions in excess of cumulative earnings from unconsolidated joint ventures
Payments on purchases of residential mortgage loans held for investment
Proceeds from repayments of residential mortgage loans held for investment
Payments on purchases of equity securities
Proceeds from sale of equity securities
Cash paid related to asset acquisition, net of cash acquired
Net payment from disposal of subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from repurchase agreements and other secured financing
Principal payments on repurchase agreements and other secured financing
Proceeds from issuances of securitized debt
Principal repayments on securitized debt
Payment of deferred financing cost
Net proceeds from stock offerings, direct purchases and dividend reinvestments
Redemptions of preferred stock
Principal payments on participation sold
Principal payments on mortgages payable
Net contributions (distributions) from (to) noncontrolling interests
Net payments on share repurchases
Dividends paid
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents including cash pledged as collateral, beginning of period
Cash and cash equivalents including cash pledged as collateral, end of period
Supplemental disclosure of cash flow information
Interest received
Dividends received
Fees received
Interest paid (excluding interest paid on interest rate swaps)
Net interest paid on interest rate swaps
Taxes received (paid)
Noncash investing activities
$
$
$
$
$
$
$
$
692,811
(3,439)
72,364
1,123,969
136,673
2,840
3,496
—
(227,871)
97,913
480,216
—
98,104
(19,563)
295,640
(185,283)
2,622,018
(44,624,006)
33,256,888
11,365,683
(381)
—
(1,241,818)
378,865
(815,252)
150,059
1,504,032
85,318,562
(85,030,351)
26,228
(1,286,046)
347,451
—
—
(258,334)
—
(908,420)
872,346
(3,596)
27,956
3,938
(734,672)
2,864
—
—
(309,473)
410,285
(233,915)
(16)
(58,715)
(52,202)
89,777
48,646
1,632,239
(40,287,765)
13,402,428
12,016,190
(11,493)
33
(693,095)
462,622
(504,952)
11,960
1,669,900
67,675,100
(67,675,100)
7,998
(928,512)
185,391
(2,104)
—
—
5,451
(14,665,948)
807,572
1,633
41,808
(33,089)
(599,161)
4,592
—
(72,576)
(99,590)
299,060
(168,812)
(12)
(110,417)
27,712
6,337
43,020
1,580,863
(25,529,322)
12,488,907
12,470,168
(174,167)
—
(399,713)
117,282
(1,918,845)
39,530
916,998
60,990,000
(60,990,000)
4,620
(65,623)
18,268
(88,062)
16,112
41,698
—
(2,062,149)
5,117,155,986
(5,116,952,444)
920,142
(1,384,333)
(1,072)
1,532,356
(412,500)
—
(716)
(971)
—
(1,540,886)
(684,438)
1,029,160
706,589
1,735,749
3,606,915,741
(3,594,482,419)
—
(1,022,994)
(2,054)
2,347,058
(185,312)
(12,827)
(2,365)
(1,104)
—
(1,353,172)
12,200,552
(833,157)
1,539,746
706,589
$
$
2,452,599,821
(2,452,037,156)
1,381,640
(343,071)
(3,076)
2,362
—
(336)
(23,581)
(1,186)
(102,712)
(1,220,931)
251,774
(229,512)
1,769,258
1,539,746
$
$
3,894,478
7,564
$
$
— $
$
$
$
1,726,887
(1,894)
(295)
3,447,308
5,238
$
$
— $
$
$
$
987,958
369,660
(1,502)
2,968,161
2,520
4,266
624,784
536,674
934
51,461
65,041
(708,297)
305,674
—
F-4
$
Receivable for unsettled trades
$
Payable for unsettled trades
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment $
68,779
583,036
(853,845)
$
$
$
Noncash financing activities
Dividends declared, not yet paid
Securitized debt assumed through consolidation of VIEs
See notes to consolidated financial statements.
$
$
394,129
$
— $
F-5
1,232
656,581
(40,127)
347,876
315,111
$
$
$
$
$
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
________________________________________________________________________________________________________________________________
1. DESCRIPTION OF BUSINESS
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February
18, 1997. The Company is a leading diversified capital manager that invests in and finances residential and commercial assets.
The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized
mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by
pools of mortgage loans, residential mortgage loans, mortgage servicing rights (“MSRs”), commercial real estate assets and
corporate debt. The Company’s principal business objective is to generate net income for distribution to its stockholders and to
preserve capital through prudent selection of investments and continuous management of its portfolio. The Company is externally
managed by Annaly Management Company LLC (the “Manager”).
The Company’s four investment groups are primarily comprised of the following:
Investment Groups
Description
Annaly Agency Group
Annaly Residential Credit Group
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Annaly Commercial Real Estate Group
Annaly Middle Market Lending Group
Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential
mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Invests primarily in non-Agency residential mortgage assets within securitized products
and residential mortgage loan markets.
Originates and invests in commercial mortgage loans, securities, and other commercial real
estate debt and equity investments.
Provides financing to private equity-backed middle market businesses across the capital
structure.
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of
1986, as amended, and regulations promulgated thereunder (the “Code”).
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2. BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”).
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the
reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ materially from those estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described below or are included elsewhere in these notes to the Consolidated
Financial Statements.
Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has
a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates
whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions
have been eliminated in consolidation. The Company reclassified previously presented financial information so that amounts
previously presented conform to the current presentation.
Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial
interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.
Variable Interest Entities – 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 VIE is required to be consolidated by its primary beneficiary, which is defined as the party
that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the
obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
F-6
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
________________________________________________________________________________________________________________________________
1. DESCRIPTION OF BUSINESS
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February
18, 1997. The Company is a leading diversified capital manager that invests in and finances residential and commercial assets.
The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized
mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by
pools of mortgage loans, residential mortgage loans, mortgage servicing rights (“MSRs”), commercial real estate assets and
corporate debt. The Company’s principal business objective is to generate net income for distribution to its stockholders and to
preserve capital through prudent selection of investments and continuous management of its portfolio. The Company is externally
managed by Annaly Management Company LLC (the “Manager”).
The Company’s four investment groups are primarily comprised of the following:
Investment Groups
Description
Annaly Agency Group
Annaly Residential Credit Group
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Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential
mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Invests primarily in non-Agency residential mortgage assets within securitized products
and residential mortgage loan markets.
Originates and invests in commercial mortgage loans, securities, and other commercial real
Annaly Commercial Real Estate Group
estate debt and equity investments.
Annaly Middle Market Lending Group
structure.
Provides financing to private equity-backed middle market businesses across the capital
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of
1986, as 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
U.S. generally accepted accounting principles (“GAAP”).
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the
reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ materially from those estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described below or are included elsewhere in these notes to the Consolidated
Financial Statements.
Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has
a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates
whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions
have been eliminated in consolidation. The Company reclassified previously presented financial information so that amounts
previously presented conform to the current presentation.
Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial
interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.
Variable Interest Entities – 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 VIE is required to be consolidated by its primary beneficiary, which is defined as the party
that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the
obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
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The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s
involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note
for further information.
Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the
operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting.
In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in
the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-
temporary impairment of joint ventures accounted for under the equity method. These investments are included in Real estate, net
and Other assets with income or loss included in Other income (loss).
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight
basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which
approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin
with counterparties to the Company’s interest rate swaps and other derivatives totaled $1.6 billion and $579.2 million at
December 31, 2018 and December 31, 2017.
Equity Securities – The Company may invest in equity securities that are not accounted for under the equity method or do not
result in consolidation. These equity securities are required to be reported at fair value with unrealized gains and losses reported
in the Consolidated Statements of Comprehensive Income (Loss) as Net unrealized gains (losses) on instruments measured at fair
value through earnings, unless the securities do not have readily determinable fair values. For such equity securities without
readily determinable fair values, the Company has elected to carry the securities at cost less impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
For equity securities carried at fair value through earnings, dividends are recorded in earnings on the declaration date. Dividends
from equity securities without readily determinable fair values are recognized as income when received to the extent they are
distributed from net accumulated earnings.
Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain
eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the
fair value option in order to simplify the accounting treatment for certain financial instruments. If an item is accounted for at fair
value, including financial instruments elected under the FVO, it is presented at fair value in the Consolidated Statements of Financial
Condition and any change in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair value through
earnings in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial
instruments for which the Company has elected the fair value option see the table in the “Financial Instruments” Note.
Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate
the fair value of certain financial instruments.
Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the
“Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements
of Financial Condition if they are subject to netting agreements and they meet the offsetting criteria. Please see below and refer
to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.
Derivative Instruments – Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires recognition of all derivatives as either
assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in
the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net
gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s
derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments”
Note for further discussion.
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 ratably over the
requisite service period for the entire award.
Interest Income - The Company recognizes coupon income, which is a component of interest income, based upon the outstanding
principal amounts of the Residential Securities and their contractual terms. In addition, the Company amortizes or accretes premiums
or discounts into interest income for its Agency mortgage-backed securities (other than multifamily securities), taking into account
estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield
as differences between anticipated and actual prepayments occur. Using third-party model and market information to project future
cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had
been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that
would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium
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F-6
F-7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income.
Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization
recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit
securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to
yield made on a prospective basis.
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to
securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective
interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts
are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income
and Interest Expense” Note for further discussion of interest income.
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. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its
stockholders. The Company and certain of its direct and indirect subsidiaries 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 its taxable income. Refer to the “Income Taxes” Note for further discussion
on income taxes.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were
not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or
did not have a significant impact on the Company’s consolidated financial statements upon adoption.
Standard
Description
Effective Date
Standards that are not yet adopted
ASU 2016-13 Financial
instruments - Credit
losses (Topic 326):
Measurement of credit
losses on financial
instruments
January 1, 2020
(early adoption
permitted)
This ASU updates the existing incurred
loss model to a current expected credit loss
(“CECL”) model for financial assets and
net investments in leases that are not
accounted for at fair value through
earnings. The amendments affect loans,
held-to-maturity debt securities, trade
receivables, net investments in leases, off-
balance sheet credit exposures and any
other financial assets not excluded from
the scope. There are also
limited
amendments to the impairment model for
available-for-sale debt securities.
Effect on the Financial Statements
or Other Significant Matters
The Company plans to adopt the new standard on its effective
date. While the Company is continuing to assess the impact the
ASU will have on the consolidated financial statements, the
measurement of expected credit losses under the CECL model
will be based on relevant information about past events,
including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectability
of the reported amounts of the financial assets in scope of the
model. The Company is developing an appropriate allowance
methodology, assessing the impact on the consolidated financial
statements and determining appropriate internal controls and
financial statement disclosures. Further, based on the amended
guidance for available-for-sale debt securities, the Company:
• will be required to use an allowance approach to recognize
credit impairment, with the allowance to be limited to the
amount by which the security’s fair value is less than its
amortized cost basis;
• may not consider the length of time fair value has been
below amortized cost, and
• may not consider recoveries of fair value after the balance
sheet date when assessing whether a credit loss exists.
Standard
Description
Effective Date
Effect on the Financial Statements
or Other Significant Matters
Standards that were adopted
ASU 2017-01 Business
combinations (Topic
805): Clarifying the
definition of a business
ASU 2016-15
Statement of cash flows
(Topic 230):
Classification of certain
cash receipts and cash
payments
This update provides a screen
to
determine and a framework to evaluate
when a set of assets and activities is a
business.
This update provides specific guidance on
certain cash flow classification issues,
including classification of cash receipts
and payments that have aspects of more
than one class of cash flows. If cash flows
cannot be separated by source or use, the
appropriate classification should depend
on the activity that is likely to be the
predominant source or use of cash flows.
January 1, 2018 The amendments are expected to result in fewer transactions
being accounted for as business combinations.
January 1, 2018 As a result of adopting this standard, the Company reclassified
its cash flows on reverse repurchase and repurchase agreements
entered into by Arcola Securities, Inc. from operating activities
to investing and financing activities, respectively, in the
Consolidated Statements of Cash Flows. The Company applied
the retrospective
in
reclassification of comparative periods.
transition method, which resulted
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F-8
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income.
Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization
4. FINANCIAL INSTRUMENTS
The following table presents characteristics for certain of the Company’s financial instruments at December 31, 2018 and December
31, 2017.
Financial Instruments (1)
Balance Sheet Line Item
Type / Form
Assets
Agency mortgage-backed securities (2)
Agency mortgage-backed securities (3)
Credit risk transfer securities
Non-agency mortgage-backed
securities
Commercial real estate debt
investments - CMBS
Commercial real estate debt
investments - Conduit CMBS
Measurement Basis
(dollars in thousands)
Fair value, with unrealized gains (losses)
through other comprehensive income
Fair value, with unrealized gains (losses)
through earnings
Fair value, with unrealized gains (losses)
through earnings
Fair value, with unrealized gains (losses)
through earnings
Fair value, with unrealized gains (losses)
through other comprehensive income
Fair value, with unrealized gains (losses)
through earnings
Residential mortgage loans
Fair value, with unrealized gains (losses)
through earnings
Commercial real estate debt and
preferred equity, held for investment
Amortized cost
December
31, 2018
December
31, 2017
$ 89,840,322
$ 89,426,437
912,673
1,125,326
552,097
651,764
1,161,938
1,097,294
138,242
244,636
18,516
18,115
92,623,788
92,563,572
1,359,806
958,546
1,296,803
1,029,327
Commercial loans held for sale, net
Lower of amortized cost or fair value
42,184
—
Securities
Securities
Securities
Securities
Securities
Securities
Total securities
Loans, net
Loans, net
Loans, net
Loans, net
Corporate debt
Amortized cost
Total loans, net
Assets transferred or pledged to
securitization vehicles
Assets transferred or pledged to
securitization vehicles
Residential mortgage loans
Commercial mortgage loans
Fair value, with unrealized gains (losses)
through earnings
Fair value, with unrealized gains (losses)
through earnings
Total assets transferred or pledged to securitization vehicles
Reverse repurchase agreements
Reverse repurchase agreements
Amortized cost
Repurchase agreements
Repurchase agreements
Liabilities
Other secured financing
Loans
Debt issued by securitization
vehicles
Mortgages payable
Securities
Loans
Amortized cost
Amortized cost
Fair value, with unrealized gains (losses)
through earnings
Amortized cost
1,887,182
4,585,975
1,011,275
2,999,148
1,094,831
479,776
2,738,369
3,833,200
650,040
2,826,357
3,306,133
—
81,115,874
77,696,343
4,183,311
3,837,528
3,347,062
2,971,771
511,056
309,686
Standard
Description
Effective Date
Effect on the Financial Statements
or Other Significant Matters
5. SECURITIES
(1) Receivable for unsettled trades, Interest receivable, Dividends payable, Payable for unsettled trades and Interest payable are accounted for at cost.
(2)
(3)
Includes Agency pass-through, CMO and multifamily securities.
Includes interest-only securities and reverse mortgages.
The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed
securities. All of the debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with
changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in
fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated
Statements of Comprehensive Income (Loss). Transactions for securities are recorded on trade date, including TBA securities that
meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded
on trade date based on the specific identification method.
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Other-Than-Temporary Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities
for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such
evaluation.
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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
F-9
recognized in any given period.
yield made on a prospective basis.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit
securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to
securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective
interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts
are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income
and Interest Expense” Note for further discussion of interest income.
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. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its
stockholders. The Company and certain of its direct and indirect subsidiaries 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 its taxable income. Refer to the “Income Taxes” Note for further discussion
on income taxes.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were
not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or
did not have a significant impact on the Company’s consolidated financial statements upon adoption.
Standard
Description
Effective Date
Effect on the Financial Statements
or Other Significant Matters
Standards that are not yet adopted
ASU 2016-13 Financial
instruments - Credit
losses (Topic 326):
Measurement of credit
losses on financial
instruments
This ASU updates the existing incurred
loss model to a current expected credit loss
(“CECL”) model for financial assets and
net investments in leases that are not
accounted for at fair value through
earnings. The amendments affect loans,
held-to-maturity debt securities, trade
receivables, net investments in leases, off-
balance sheet credit exposures and any
other financial assets not excluded from
the scope. There are also
limited
amendments to the impairment model for
available-for-sale debt securities.
January 1, 2020
(early adoption
permitted)
The Company plans to adopt the new standard on its effective
date. While the Company is continuing to assess the impact the
ASU will have on the consolidated financial statements, the
measurement of expected credit losses under the CECL model
will be based on relevant information about past events,
including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectability
of the reported amounts of the financial assets in scope of the
model. The Company is developing an appropriate allowance
methodology, assessing the impact on the consolidated financial
statements and determining appropriate internal controls and
financial statement disclosures. Further, based on the amended
guidance for available-for-sale debt securities, the Company:
• will be required to use an allowance approach to recognize
credit impairment, with the allowance to be limited to the
amount by which the security’s fair value is less than its
• may not consider the length of time fair value has been
amortized cost basis;
below amortized cost, and
• may not consider recoveries of fair value after the balance
sheet date when assessing whether a credit loss exists.
ASU 2017-01 Business
This update provides a screen
to
January 1, 2018 The amendments are expected to result in fewer transactions
being accounted for as business combinations.
Standards that were adopted
combinations (Topic
805): Clarifying the
determine and a framework to evaluate
when a set of assets and activities is a
definition of a business
business.
ASU 2016-15
Statement of cash flows
(Topic 230):
Classification of certain
cash receipts and cash
payments
This update provides specific guidance on
certain cash flow classification issues,
including classification of cash receipts
and payments that have aspects of more
than one class of cash flows. If cash flows
cannot be separated by source or use, the
appropriate classification should depend
on the activity that is likely to be the
predominant source or use of cash flows.
January 1, 2018 As a result of adopting this standard, the Company reclassified
its cash flows on reverse repurchase and repurchase agreements
entered into by Arcola Securities, Inc. from operating activities
to investing and financing activities, respectively, in the
Consolidated Statements of Cash Flows. The Company applied
the retrospective
transition method, which resulted
in
reclassification of comparative periods.
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F-8
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
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). When the fair value of a held-to-maturity security is less than the cost, the Company performs an
analysis to determine whether it expects to recover the entire cost basis of the security. There was no other-than-temporary
impairment recognized for the years ended December 31, 2018, 2017 and 2016.
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities representing interests in or obligations backed by pools of residential or
multifamily mortgage loans and certificates. Many of the underlying loans and certificates are 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”).
Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of
a generic pool, on a to-be-announced basis (“TBA securities”). TBA securities without intent to accept delivery (“TBA derivatives”),
are accounted for as derivatives as discussed in the “Derivative Instruments” Note.
Credit Risk Transfer Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly
structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage
credit risk from Fannie Mae and Freddie Mac to private investors.
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Non-Agency Mortgage-Backed Securities- The Company invests in non-Agency mortgage-backed securities such as those issued
in non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities are
classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of Other
comprehensive income (loss). Management evaluates such Commercial Securities for other-than-temporary impairment at least
quarterly. The Company elected the fair value option on certain Commercial Securities, including conduit commercial mortgage-
backed securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded
through earnings.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and CRT securities are referred to herein as
“Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may,
from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.
The following represents a rollforward of the activity for the Company’s securities:
December 31, 2018
Residential Securities
Commercial Securities
Total
Beginning balance January 1
Purchases
Sales
Principal paydowns
Amortization / accretion
Fair value adjustment
Ending balance December 31
$
$
(dollars in thousands)
92,300,821
$
262,751
$
58,857,206
(45,628,102)
(11,364,599)
(705,928)
(992,368)
73,261
(56,555)
(122,659)
675
(715)
92,467,030
$
156,758
$
92,563,572
58,930,467
(45,684,657)
(11,487,258)
(705,253)
(993,083)
92,623,788
F-10
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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). When the fair value of a held-to-maturity security is less than the cost, the Company performs an
analysis to determine whether it expects to recover the entire cost basis of the security. There was no other-than-temporary
impairment recognized for the years ended December 31, 2018, 2017 and 2016.
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities representing interests in or obligations backed by pools of residential or
multifamily mortgage loans and certificates. Many of the underlying loans and certificates are 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”).
Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of
a generic pool, on a to-be-announced basis (“TBA securities”). TBA securities without intent to accept delivery (“TBA derivatives”),
are accounted for as derivatives as discussed in the “Derivative Instruments” Note.
Credit Risk Transfer Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly
structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage
credit risk from Fannie Mae and Freddie Mac to private investors.
Non-Agency Mortgage-Backed Securities- The Company invests in non-Agency mortgage-backed securities such as those issued
in non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities are
classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of Other
comprehensive income (loss). Management evaluates such Commercial Securities for other-than-temporary impairment at least
quarterly. The Company elected the fair value option on certain Commercial Securities, including conduit commercial mortgage-
backed securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded
through earnings.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and CRT securities are referred to herein as
“Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may,
from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.
The following represents a rollforward of the activity for the Company’s securities:
December 31, 2018
Residential Securities
Commercial Securities
Total
(dollars in thousands)
Beginning balance January 1
92,300,821
$
262,751
$
Purchases
Sales
Principal paydowns
Amortization / accretion
Fair value adjustment
58,857,206
(45,628,102)
(11,364,599)
(705,928)
(992,368)
73,261
(56,555)
(122,659)
675
(715)
Ending balance December 31
92,467,030
$
156,758
$
$
$
92,563,572
58,930,467
(45,684,657)
(11,487,258)
(705,253)
(993,083)
92,623,788
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following tables present the Company’s Residential Investment Securities portfolio that was carried at their fair value at
December 31, 2018 and 2017:
Agency
Fixed-rate pass-through
Adjustable-rate pass-through
CMO
Interest-only
Multifamily
Reverse mortgages
Total agency securities
Residential credit
CRT
Alt-A
Prime
Subprime
NPL/RPL
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage)
Interest-only
December 31, 2018
Principal /
Notional
Remaining
Premium
Remaining
Discount
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
(dollars in thousands)
$ 81,144,650
$
3,810,808
$
(36,987) $ 84,918,471
$
264,443
$ (2,130,362) $ 83,052,552
4,835,983
11,113
6,007,008
1,802,292
34,650
$ 93,835,696
$
542,374
202,889
353,108
423,166
3,431
225,567
860,085
247,981
53
1,179,855
12,329
4,175
5,255,201
28,444
349
2,040
1,776
—
1,087
12,820
46,516
5,301,717
$
$
$
$
(1,337)
5,082,627
—
—
(5,332)
—
11,166
1,179,855
1,809,289
38,825
(43,656) $ 93,040,233
(15,466) $
(31,238)
(23,153)
(65,005)
(30)
(4,691)
555,352
172,000
331,995
359,937
3,401
221,963
$
$
7,127
55
1,446
32,753
69
(151,770)
4,937,984
—
(307,412)
(3,477)
(110)
11,221
873,889
1,838,565
38,784
305,893
$ (2,593,131) $ 90,752,995
7,879
$
(11,134) $
10,559
12,821
35,278
37
1,439
(198)
(830)
(594)
—
(2,744)
552,097
182,361
343,986
394,621
3,438
220,658
—
12,820
4,054
—
16,874
(139,583) $
1,657,468
(183,239) $ 94,697,701
(9,740) $
155,959
(192,979) $ 94,853,660
$
$
$
$
December 31, 2017
72,067
$
(15,500) $
1,714,035
377,960
$ (2,608,631) $ 92,467,030
1,659
$
(860) $
156,758
379,619
$ (2,609,491) $ 92,623,788
$
$
$
$
$
$
Total residential credit securities
$
2,610,620
Total residential securities
$ 96,446,316
Commercial
Commercial securities
Total securities
$
155,921
9,778
$ 96,602,237
$
5,311,495
Agency
(dollars in thousands)
Fixed-rate pass-through
$ 78,509,335
$
4,514,815
$
(1,750) $ 83,022,400
$
140,115
$ (1,178,673) $ 81,983,842
Principal /
Notional
Remaining
Premium
Remaining
Discount
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Adjustable-rate pass-through
Interest-only
Multifamily
Reverse mortgages
Total agency investments
Residential credit
CRT
Alt-A
Prime
Subprime
NPL/RPL
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage)
Interest-only
6,760,991
6,804,715
490,753
35,000
$ 92,600,794
$
593,027
204,213
197,756
554,470
42,585
130,025
989,052
Total residential credit securities
Total residential securities
$
2,711,128
$ 95,311,922
Commercial
Commercial securities
Total securities
$
270,288
$ 95,582,210
277,212
1,326,761
5,038
4,527
6,128,353
25,463
499
358
2,037
14
627
15,287
44,285
6,172,638
680
6,173,318
$
$
$
$
$
$
$
$
$
$
$
$
(1,952)
—
(341)
—
7,036,251
1,326,761
495,450
39,527
(4,043) $ 91,920,389
(3,456) $
(34,000)
(24,158)
(78,561)
(117)
(3,956)
615,034
170,712
173,956
477,946
42,482
126,696
$
$
15,776
1,863
84
37
(103,121)
(242,862)
(1,845)
—
6,948,906
1,085,762
493,689
39,564
157,875
$ (1,526,501) $ 90,551,763
36,730
$
— $
13,976
18,804
56,024
506
1,038
(802)
—
(90)
—
(1,112)
651,764
183,886
192,760
533,880
42,988
126,622
—
15,287
1,871
—
17,158
(144,248) $
1,622,113
(148,291) $ 93,542,502
(9,731) $
261,237
(158,022) $ 93,803,739
$
$
$
$
128,949
$
(2,004) $
1,749,058
286,824
$ (1,528,505) $ 92,300,821
1,843
$
(329) $
262,751
288,667
$ (1,528,834) $ 92,563,572
F-10
F-11
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency concentration at
December 31, 2018 and 2017:
Investment Type
Fannie Mae
Freddie Mac
Ginnie Mae
Total
December 31, 2018
December 31, 2017
(dollars in thousands)
$
$
60,270,432
$
30,397,556
85,007
90,752,995
$
63,361,415
27,091,978
98,370
90,551,763
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual
maturities of the portfolio are generally affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities at December 31, 2018 and 2017, according to their estimated
weighted average life classifications:
Estimated 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, 2018
December 31, 2017
Estimated Fair
Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
(dollars in thousands)
$
13,447
$
13,670
$
471,977
$
476,538
11,710,172
80,202,479
540,932
11,928,973
82,218,464
536,594
13,838,890
77,273,833
716,121
13,925,749
78,431,852
708,363
$
92,467,030
$
94,697,701
$
92,300,821
$
93,542,502
The estimated weighted average lives of the Residential Securities at December 31, 2018 and 2017 in the table above are based
upon projected principal prepayment rates. The actual weighted average lives of the Residential 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, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities
have been in a continuous unrealized loss position at December 31, 2018 and 2017.
December 31, 2018
December 31, 2017
Estimated
Fair Value (1)
Gross
Unrealized
Losses (1)
Number of
Securities (1)
Estimated
Fair Value (1)
(dollars in thousands)
Gross
Unrealized
Losses (1)
Number of
Securities (1)
Less than 12 months
12 Months or more
Total
$
$
22,418,036
$
(432,352)
43,134,843
(1,853,257)
65,552,879
$
(2,285,609)
713
1,476
2,189
$
$
39,878,158
39,491,238
79,369,396
$
$
(272,234)
(1,011,405)
(1,283,639)
1,114
911
2,025
(1)
Excludes interest-only mortgage-backed securities and reverse mortgages.
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 impaired because the Company 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.
During the year ended December 31, 2018, the Company disposed of $45.6 billion of Residential Securities, resulting in a net
realized loss of ($1.1) billion. During the year ended December 31, 2017, the Company disposed of $12.9 billion of Residential
Securities, resulting in a net realized loss of ($6.4) million. During the year ended December 31, 2016, the Company disposed of
$12.3 billion of Residential Securities, resulting in a net realized gain of $31.0 million.
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F-12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency concentration at
6. LOANS
December 31, 2018 and 2017:
The Company invests in residential, commercial and corporate loans. Loans are classified as either held for investment or held
for sale. Loans are also eligible to be accounted for under the fair value option. Excluding loans transferred or pledged to
securitization vehicles, as of December 31, 2018, the Company reported $1.4 billion of loans for which the fair value option was
elected. If loans are held for investment and the fair value option has not been elected, they are accounted for at amortized cost
less impairment. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or
fair value.
Loans can be classified as held for investment if the Company has the intent and ability to hold the loan for the foreseeable future
or to maturity or payoff. If the Company has the intent and ability to sell loans, they are classified as held for sale.
Nonaccrual Status – If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest
income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued, but is recognized
on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt, but collection of
interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is
applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is
recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount
of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment
within a reasonable period of time and there is a sustained period of repayment performance by the borrower.
Allowance for Losses – The Company evaluates the need for a loss reserve on its CRE Debt and Preferred Equity Investments
and its corporate loans. A provision for losses related to CRE Debt and Preferred Equity Investments and corporate loans may be
established when it is probable the Company will not collect amounts contractually due or all amounts previously estimated to be
collectible. 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 and
corporate loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of
any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine
if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial
statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and
sensitivities performed at inception of the investment. Because these determinations are based upon projections of future economic
events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the
reporting date.
The Company may be exposed to various levels of credit risk depending on the nature of its 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. The Company’s investment underwriting procedures
include evaluation of
their respective properties or
companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that
trigger re-evaluation by management.
the underlying borrowers’ ability
to manage and operate
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, economic trends (both macro and those
affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject
property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses
the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-
specific considerations.
The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for
commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely
Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual
obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting
some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but
exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment
prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral
pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are
Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans
are considered uncollectible.
F-12
F-13
Investment Type
Fannie Mae
Freddie Mac
Ginnie Mae
Total
December 31, 2018
December 31, 2017
(dollars in thousands)
$
$
60,270,432
$
30,397,556
85,007
90,752,995
$
63,361,415
27,091,978
98,370
90,551,763
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual
maturities of the portfolio are generally affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities at December 31, 2018 and 2017, according to their estimated
weighted average life classifications:
Estimated 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, 2018
December 31, 2017
Estimated Fair
Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
(dollars in thousands)
$
13,447
$
13,670
$
471,977
$
476,538
11,710,172
80,202,479
540,932
11,928,973
82,218,464
536,594
13,838,890
77,273,833
716,121
13,925,749
78,431,852
708,363
$
92,467,030
$
94,697,701
$
92,300,821
$
93,542,502
The estimated weighted average lives of the Residential Securities at December 31, 2018 and 2017 in the table above are based
upon projected principal prepayment rates. The actual weighted average lives of the Residential 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, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities
have been in a continuous unrealized loss position at December 31, 2018 and 2017.
December 31, 2018
December 31, 2017
Estimated
Fair Value (1)
Gross
Unrealized
Losses (1)
Number of
Securities (1)
Estimated
Fair Value (1)
(dollars in thousands)
Gross
Unrealized
Losses (1)
Number of
Securities (1)
Less than 12 months
22,418,036
$
(432,352)
12 Months or more
43,134,843
(1,853,257)
65,552,879
$
(2,285,609)
$
$
713
1,476
2,189
$
$
39,878,158
39,491,238
79,369,396
$
$
(272,234)
(1,011,405)
(1,283,639)
1,114
911
2,025
Total
(1)
Excludes interest-only mortgage-backed securities and reverse mortgages.
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 impaired because the Company 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.
During the year ended December 31, 2018, the Company disposed of $45.6 billion of Residential Securities, resulting in a net
realized loss of ($1.1) billion. During the year ended December 31, 2017, the Company disposed of $12.9 billion of Residential
Securities, resulting in a net realized loss of ($6.4) million. During the year ended December 31, 2016, the Company disposed of
$12.3 billion of Residential Securities, resulting in a net realized gain of $31.0 million.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
As of and for the year ended December 31, 2018, the Company recorded a loan loss provision of $3.5 million on a mezzanine
loan secured by 100% of the equity interests in the owner of an office park in suburban Houston, Texas. There was no provision
for loan loss recorded as of and for the year ended December 31, 2017.
The following table presents the activity of the Company’s loan investments, including loans held for sale, for the year ended
December 31, 2018:
Residential
Commercial
Corporate
Total
(dollars in thousands)
Beginning balance January 1, 2018
$
958,546
$
1,029,327
$
1,011,275
$
Purchases
Sales and transfers (1)
Principal Payments
Change in fair value
Amortization / accretion
Change in loan loss allowance
1,816,353
(1,227,769)
(186,878)
2,186
(2,632)
—
663,683
—
(353,740)
—
3,213
(3,496)
1,314,445
(72,610)
(378,865)
—
12,937
—
2,999,148
3,794,481
(1,300,379)
(919,483)
2,186
13,518
(3,496)
Ending balance December 31, 2018
(1)
Includes securitizations, syndications and transfers.
$
1,359,806
$
1,338,987
$
1,887,182
$
4,585,975
The carrying value of the Company’s commercial loans held for sale was $42.2 million and $0 at December 31, 2018 and
December 31, 2017, respectively.
Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans.
Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential
mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it
also has certain powers and rights to direct the activities of such trusts. Please refer to the “Variable Interest Entities” Note for
further information related to the Company’s consolidated Residential Mortgage Loan Trusts.
The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including
loans transferred or pledged to securitization vehicles, at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(dollars in thousands)
Fair value
Unpaid principal balance
$
$
2,454,637 $
2,425,657 $
1,438,322
1,419,807
The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of
Comprehensive Income (Loss) for December 31, 2018 and 2017 for these investments:
Interest income
Net gains (losses) on disposal of investments
Net unrealized gains (losses) on instruments measured at fair value through earnings
Total included in net income (loss)
For the Years Ended
December 31, 2018
December 31, 2017
(dollars in thousands)
$
$
83,259
$
(12,934)
1,102
71,427
$
28,817
(4,704)
8,468
32,581
F-14
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
As of and for the year ended December 31, 2018, the Company recorded a loan loss provision of $3.5 million on a mezzanine
loan secured by 100% of the equity interests in the owner of an office park in suburban Houston, Texas. There was no provision
The following table provides the geographic concentrations based on the unpaid principal balances at December 31, 2018 and
2017 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
for loan loss recorded as of and for the year ended December 31, 2017.
The following table presents the activity of the Company’s loan investments, including loans held for sale, for the year ended
December 31, 2018:
Beginning balance January 1, 2018
$
958,546
$
1,029,327
$
1,011,275
$
Residential
Commercial
Corporate
Total
(dollars in thousands)
Purchases
Sales and transfers (1)
Principal Payments
Change in fair value
Amortization / accretion
Change in loan loss allowance
1,816,353
(1,227,769)
(186,878)
2,186
(2,632)
—
663,683
(353,740)
—
—
3,213
(3,496)
1,314,445
(72,610)
(378,865)
12,937
—
—
2,999,148
3,794,481
(1,300,379)
(919,483)
2,186
13,518
(3,496)
Ending balance December 31, 2018
$
1,359,806
$
1,338,987
$
1,887,182
$
4,585,975
(1)
Includes securitizations, syndications and transfers.
The carrying value of the Company’s commercial loans held for sale was $42.2 million and $0 at December 31, 2018 and
December 31, 2017, respectively.
Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans.
Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential
mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it
also has certain powers and rights to direct the activities of such trusts. Please refer to the “Variable Interest Entities” Note for
further information related to the Company’s consolidated Residential Mortgage Loan Trusts.
The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including
loans transferred or pledged to securitization vehicles, at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(dollars in thousands)
Fair value
Unpaid principal balance
$
$
2,454,637 $
2,425,657 $
1,438,322
1,419,807
The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of
Comprehensive Income (Loss) for December 31, 2018 and 2017 for these investments:
Interest income
Net gains (losses) on disposal of investments
Net unrealized gains (losses) on instruments measured at fair value through earnings
Total included in net income (loss)
For the Years Ended
December 31, 2018
December 31, 2017
(dollars in thousands)
$
$
83,259
$
(12,934)
1,102
71,427
$
28,817
(4,704)
8,468
32,581
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Geographic Concentrations of Residential Mortgage Loans
December 31, 2018
December 31, 2017
Property location
% of Balance
Property location
% of Balance
California
Florida
New York
All other (none individually greater than 5%)
Total
53.7%
7.1%
6.6%
32.6%
100.0%
California
Florida
New York
All other (none individually greater than 5%)
49.8%
9.3%
7.1%
33.8%
100.0%
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or
pledged to securitization vehicles, at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Portfolio
Range
Portfolio
Weighted
Average
Portfolio
Range
(dollars in thousands)
$0 - $3,500
2.00% - 7.75%
$457
4.72%
$1 - $3,663
1.63% - 7.50%
Portfolio
Weighted
Average
$514
4.25%
1/1/2028 - 11/1/2058
1/11/2046
1/1/2028 - 5/1/2057
2/1/2043
Unpaid principal balance
Interest rate
Maturity
FICO score at loan origination
Loan-to-value ratio at loan origination
505 - 823
8% - 111%
752
68%
468 - 823
11% - 100%
748
68%
At December 31, 2018 and 2017, approximately 47% and 78%, respectively, of the carrying value of the Company’s residential
mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.
Commercial
The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The Company designates loans
as held for investment if it has the intent and ability to hold the loans until maturity or payoff. The difference between the principal
amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans that are
designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance,
net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees
and costs, premiums or discounts are amortized into interest income over the life of the loan.
If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans
are classified as held for sale. Commercial real estate loans that are designated as held for sale are carried at the lower of amortized
cost or fair value in the accompanying Consolidated Statements of Financial Condition. Any origination fees and costs or purchase
premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of commercial real estate
loans held for sale on an individual loan basis.
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, if necessary.
At December 31, 2018, and 2017, approximately 88% and 86%, respectively, of the carrying value of the Company’s CRE Debt
and Preferred Equity Investments, excluding commercial loans held for sale, were adjustable-rate.
During the year ended December 31, 2017, the Company sold $115.0 million ($114.4 million, net of origination fees) of a
commercial mortgage loan held for sale to unrelated third parties at carrying value. Accordingly, no gain or loss was recorded in
connection with the sale.
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F-14
F-15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
At December 31, 2018 and 2017, commercial real estate investments held for investment were comprised of the following:
December 31, 2018
December 31, 2017
Outstanding
Principal
Carrying
Value (1)
Percentage
of Loan
Portfolio (2)
Outstanding
Principal
Carrying
Value (1)
Percentage
of Loan
Portfolio (2)
(dollars in thousands)
Senior mortgages
$
988,248
$
Mezzanine loans
Preferred equity
319,663
—
981,202
315,601
—
75.6% $
629,143
$
24.4%
—%
395,015
9,000
625,900
394,442
8,985
60.9%
38.2%
0.9%
Total
(1) Carrying value includes unamortized origination fees of $7.6 million and $3.8 million at December 31, 2018 and 2017, respectively.
(2) Based on outstanding principal.
100.0% $
1,029,327
1,033,158
1,296,803
1,307,911
$
$
$
100.0%
The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for
investment at December 31, 2018 and 2017:
Net carrying value (January 1, 2018)
Originations & advances (principal)
Principal payments
Net (increase) decrease in origination fees
Amortization of net origination fees
Allowance for loan losses
December 31, 2018
Senior
Mortgages
Mezzanine
Loans
Preferred
Equity
Total
(dollars in thousands)
$
625,900
$
394,442
$
8,985
$
1,029,327
575,953
(216,849)
(6,624)
2,822
—
52,224
(127,575)
(370)
376
(3,496)
—
(9,000)
—
15
—
628,177
(353,424)
(6,994)
3,213
(3,496)
Net carrying value (December 31, 2018)
$
981,202
$
315,601
$
— $
1,296,803
Net carrying value (January 1, 2017)
Originations & advances (principal)
Principal payments
Amortization & accretion of (premium) discounts
Net (increase) decrease in origination fees
Amortization of net origination fees
December 31, 2017
Senior
Mortgages
Mezzanine
Loans
Preferred
Equity
Total
(dollars in thousands)
$
510,071
$
451,467
$
8,967
$
338,242
(221,421)
(44)
(3,317)
2,369
69,121
(127,799)
28
(605)
2,230
—
—
—
—
18
970,505
407,363
(349,220)
(16)
(3,922)
4,617
Net carrying value (December 31, 2017)
$
625,900
$
394,442
$
8,985
$
1,029,327
F-16
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December 31, 2018
December 31, 2017
Outstanding
Principal
Carrying
Value (1)
Percentage
of Loan
Portfolio (2)
Outstanding
Principal
Carrying
Value (1)
Percentage
of Loan
Portfolio (2)
(dollars in thousands)
988,248
$
319,663
—
981,202
315,601
—
75.6% $
629,143
$
24.4%
—%
395,015
9,000
625,900
394,442
8,985
60.9%
38.2%
0.9%
100.0%
Senior mortgages
Mezzanine loans
Preferred equity
$
$
Total
1,307,911
$
1,296,803
100.0% $
1,033,158
$
1,029,327
(1) Carrying value includes unamortized origination fees of $7.6 million and $3.8 million at December 31, 2018 and 2017, respectively.
(2) Based on outstanding principal.
December 31, 2018
Senior
Mortgages
Mezzanine
Loans
Preferred
Equity
Total
(dollars in thousands)
$
625,900
$
394,442
$
8,985
$
1,029,327
Net carrying value (January 1, 2018)
Originations & advances (principal)
Principal payments
Net (increase) decrease in origination fees
Amortization of net origination fees
Allowance for loan losses
575,953
(216,849)
(6,624)
2,822
—
52,224
(127,575)
(370)
376
(3,496)
Net carrying value (December 31, 2018)
$
981,202
$
315,601
$
— $
1,296,803
December 31, 2017
Senior
Mortgages
Mezzanine
Loans
Preferred
Equity
Total
(dollars in thousands)
$
510,071
$
451,467
$
8,967
$
Net carrying value (January 1, 2017)
Originations & advances (principal)
Principal payments
Amortization & accretion of (premium) discounts
Net (increase) decrease in origination fees
Amortization of net origination fees
338,242
(221,421)
(44)
(3,317)
2,369
69,121
(127,799)
28
(605)
2,230
Net carrying value (December 31, 2017)
$
625,900
$
394,442
$
8,985
$
1,029,327
(9,000)
—
—
15
—
—
—
—
—
18
628,177
(353,424)
(6,994)
3,213
(3,496)
970,505
407,363
(349,220)
(16)
(3,922)
4,617
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
At December 31, 2018 and 2017, commercial real estate investments held for investment were comprised of the following:
The following table provides the internal loan risk ratings of commercial real estate investments held for investment as of
December 31, 2018 and 2017.
December 31, 2018
Internal Ratings
Investment Type
Outstanding
Principal (1)
Percentage
of CRE
Debt and
Preferred
Equity
Portfolio
Performing
Performing
- Closely
Monitored
Performing
- Special
Mention
(dollars in thousands)
Substandard (2) Doubtful (3)
Loss
Total
Senior mortgages
$
988,248
75.6% $
653,066
Mezzanine loans
Total
319,663
$ 1,307,911
24.4%
100.0% $
140,776
793,842
$
$
215,792
38,884
254,676
$
$
55,000
96,400
151,400
$
$
64,390
36,603
100,993
$
$
— $ — $ 988,248
7,000
7,000
—
319,663
— $1,307,911
The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for
investment at December 31, 2018 and 2017:
December 31, 2017
Internal Ratings
Investment Type
Outstanding
Principal (1)
Percentage
of CRE
Debt and
Preferred
Equity
Portfolio
Performing
Performing
- Closely
Monitored
Performing
- Special
Mention
(dollars in thousands)
Substandard (2)
Doubtful
Loss
Total
Senior mortgages $
Mezzanine loans
Preferred equity
629,143
395,015
9,000
60.9% $
409,878
$
115,075
$
36,800
$
67,390
$
— $ — $
629,143
38.2%
0.9%
206,169
—
66,498
—
122,348
9,000
—
—
—
—
—
—
395,015
9,000
Total
(1)
(2) The Company rated two loans as Substandard as of December 31, 2018. The Company evaluated whether an impairment exists and determined in each case
Excludes Loans held for sale, net.
— $ — $ 1,033,158
$ 1,033,158
100.0% $
616,047
168,148
181,573
67,390
$
$
$
$
that, based on quantitative and qualitative factors, the Company expects repayment of contractual amounts due.
(3) The Company rated one loan as Doubtful as of December 31, 2018. The Company evaluated impairment considerations and recognized a loan loss allowance
of $3.5 million as of and for the year ended December 31, 2018.
Corporate Debt
The Company’s investments in corporate loans are designated as held for investment when the Company has the intent and ability
to hold the investment until maturity or payoff. These investments are carried at their principal balance outstanding plus any
premiums or discounts less allowances for loan losses. Interest income from coupon payments is accrued based upon the outstanding
principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income
using the effective interest method. These investments typically take the form of senior secured loans primarily in first or second
lien positions. The Company’s senior secured loans generally have stated maturities of five to seven years. In connection with
these senior secured loans the Company receives a security interest in certain assets of the borrower and such assets support
repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority
to scheduled principal and interest and priority of security in the assets of the borrower.
F-16
F-17
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of
the portfolio at December 31, 2018 and 2017 are as follows:
Industry Dispersion
December 31, 2018
December 31, 2017
Fixed
Rate
Floating
Rate
Total
Fixed
Rate
Floating
Rate
Total
(dollars in thousands)
Aircraft and parts
Arrangement of transportation of freight & cargo
$
— $
—
Coating, engraving and allied services
Computer programming, data processing & other computer
related services
Drugs
Electrical work
Electronic components & accessories
Engineering, architectural & surveying
Groceries and related products
Grocery stores
Home health care services
Insurance agents, brokers and services
Mailing, reproduction, commercial art and photography, and
stenographic
Management and public relations services
Medical and dental laboratories
Metal cans & shipping containers
Miscellaneous business services
Miscellaneous equipment rental and leasing
Miscellaneous health and allied services, not elsewhere classified
Miscellaneous nonmetallic minerals, except fuels
Miscellaneous plastic products
Motor vehicles and motor vehicle equipment
Motor vehicles and motor vehicle parts and supplies
Nonferrous foundries (castings)
Offices and clinics of doctors of medicine
Offices of clinics and other health practitioners
Public warehousing and storage
Research, development and testing services
Schools and educational services, not elsewhere classified
Services allied with the exchange of securities
Surgical, medical, and dental instruments and supplies
Telephone communications
Total
$
41,342
21,632
57,223
41,342
21,632
57,223
$
242,185
242,185
35,882
41,760
24,059
80,748
—
23,431
—
48,942
14,843
487,046
26,858
118,248
19,622
49,552
56,003
—
9,953
16,563
29,046
12,948
97,877
21,100
84,278
33,381
19,805
14,877
96,607
61,371
35,882
41,760
24,059
80,748
—
23,431
—
48,942
14,843
487,046
26,858
118,248
19,622
49,552
56,003
—
9,953
16,563
29,046
12,948
97,877
21,100
84,278
33,381
19,805
14,877
96,607
61,371
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
34,814
—
64,034
34,814
—
64,034
209,624
209,624
38,708
—
23,916
—
14,794
23,531
23,779
28,872
—
94,871
26,956
—
19,723
49,129
25,963
25,992
9,879
—
12,212
—
60,000
18,979
48,890
33,155
20,625
13,960
29,687
59,182
38,708
—
23,916
—
14,794
23,531
23,779
28,872
—
94,871
26,956
—
19,723
49,129
25,963
25,992
9,879
—
12,212
—
60,000
18,979
48,890
33,155
20,625
13,960
29,687
59,182
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $ 1,887,182
$ 1,887,182
$
— $ 1,011,275
$ 1,011,275
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at
December 31, 2018 and 2017.
First lien loans
Second lien loans
Total
$
$
December 31, 2018
December 31, 2017
(dollars in thousands)
1,346,356
540,826
1,887,182
$
$
582,724
428,551
1,011,275
F-18
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of
the portfolio at December 31, 2018 and 2017 are as follows:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
7. MORTGAGE SERVICING RIGHTS
The Company owns variable interests in an entity that invests in MSRs, refer to the “Variable Interest Entities” Note for a detailed
discussion on this topic.
MSRs represent the rights associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not
originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who
perform substantially all servicing functions for the loans underlying the MSRs. The Company intends to hold the MSRs as
investments and elected to account for all of its investments in MSRs at fair value. As such, they are recognized at fair value on
the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a
component of Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements
of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the
Consolidated Statements of Comprehensive Income (Loss).
The following table presents activity related to MSRs for the years ended December 31, 2018 and 2017:
Fair value, beginning of period
Sales
Other (1)
Change in fair value due to
Changes in valuation inputs or assumptions (2)
Other changes, including realization of expected cash flows
Fair value, end of period
(1)
December 31, 2018
December 31, 2017
(dollars in thousands)
580,860
$
652,216
—
(4)
56,721
(79,764)
557,813
$
(33)
(27)
(4,629)
(66,667)
580,860
$
$
Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to
be not acceptable.
Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes
in interest rates.
(2)
12,212
12,212
For the years ended December 31, 2018 and 2017, the Company recognized $112.7 million and $129.4 million of net servicing
income from MSRs in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
8. VARIABLE INTEREST ENTITIES
The Company has investments in Freddie Mac securitizations (“FREMF Trusts”) which are structured as pass-through entities
that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF
Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer
without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The
FREMF Trusts are included in the “Commercial Trusts” in the tables below.
The Company purchased approximately $94 million of a subordinated tranche in a securitization trust in 2018. As the directing
holder, the Company can remove the special servicer with or without cause as well as direct activities that are considered to be
most significant to the economic performance of the trust. As such, the Company was determined to be the primary beneficiary
and consolidates the trust. The trust is included in “Commercial Trusts” in the tables below.
Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the Commercial Trusts in
order to avoid an accounting mismatch, and to represent more faithfully the economics of its interest in the entities. The fair value
option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss).
The Company applied the practical expedient under ASU 2014-07, whereby the Company determines whether the fair value of
the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments.
The Company has determined that the fair value of the financial liabilities of the Commercial Trusts are more observable, since
the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed
securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature
and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial
assets of the Commercial Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company
has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value
measurement hierarchy.
F-18
F-19
Aircraft and parts
$
— $
41,342
$
41,342
$
— $
34,814
$
34,814
Arrangement of transportation of freight & cargo
Coating, engraving and allied services
Computer programming, data processing & other computer
related services
Drugs
Electrical work
Electronic components & accessories
Engineering, architectural & surveying
Groceries and related products
Grocery stores
Home health care services
Insurance agents, brokers and services
Management and public relations services
Medical and dental laboratories
Metal cans & shipping containers
Miscellaneous business services
Miscellaneous equipment rental and leasing
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stenographic
Mailing, reproduction, commercial art and photography, and
Miscellaneous health and allied services, not elsewhere classified
Miscellaneous nonmetallic minerals, except fuels
Miscellaneous plastic products
Motor vehicles and motor vehicle equipment
Motor vehicles and motor vehicle parts and supplies
Nonferrous foundries (castings)
Offices and clinics of doctors of medicine
Offices of clinics and other health practitioners
Public warehousing and storage
Research, development and testing services
Schools and educational services, not elsewhere classified
Services allied with the exchange of securities
Surgical, medical, and dental instruments and supplies
Telephone communications
Total
Industry Dispersion
December 31, 2018
December 31, 2017
Fixed
Rate
Floating
Rate
Total
Fixed
Rate
Floating
Rate
Total
(dollars in thousands)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
242,185
242,185
23,431
23,431
48,942
48,942
21,632
57,223
35,882
41,760
24,059
80,748
—
—
14,843
487,046
26,858
118,248
19,622
49,552
56,003
—
9,953
16,563
29,046
12,948
97,877
21,100
84,278
33,381
19,805
14,877
96,607
61,371
21,632
57,223
35,882
41,760
24,059
80,748
—
—
14,843
487,046
26,858
118,248
19,622
49,552
56,003
—
9,953
16,563
29,046
12,948
97,877
21,100
84,278
33,381
19,805
14,877
96,607
61,371
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
64,034
209,624
38,708
—
64,034
209,624
38,708
23,916
23,916
—
—
14,794
23,531
23,779
28,872
—
94,871
26,956
—
19,723
49,129
25,963
25,992
9,879
—
—
60,000
18,979
48,890
33,155
20,625
13,960
29,687
59,182
—
—
14,794
23,531
23,779
28,872
—
94,871
26,956
—
19,723
49,129
25,963
25,992
9,879
—
—
60,000
18,979
48,890
33,155
20,625
13,960
29,687
59,182
$
— $ 1,887,182
$ 1,887,182
$
— $ 1,011,275
$ 1,011,275
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at
December 31, 2018 and 2017.
First lien loans
Second lien loans
Total
$
$
December 31, 2018
December 31, 2017
(dollars in thousands)
1,346,356
540,826
1,887,182
$
$
582,724
428,551
1,011,275
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Commercial Trusts mortgage loans had an aggregate unpaid principal balance of $2.7 billion at December 31, 2018. At
December 31, 2018, there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable
to instrument-specific credit risk of the underlying loans or securitized debt securities at December 31, 2018 based upon the
Company’s process of monitoring events of default on the underlying mortgage loans.
The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential
mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of
the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company continues to be the
master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates
the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to
apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential
mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s
debt held by third parties was $72.1 million at December 31, 2018.
In March 2018, the Company closed OBX 2018-01, with a face value of $327.5 million. In July 2018, the Company closed OBX
2018-EXP1 with a face value of 383.4 million. In October 2018, the Company closed OBX 2018-EXP2 with a face value of $384.0
million. The OBX 2018-01 Trust, the OBX 2018-EXP1 Trust and the OBX 2018-EXP2 Trust are referred to collectively as the
“OBX Trusts”. These securitizations represent financing transactions which provide non-recourse financing to the Company that
are collateralized by residential mortgage loans purchased by the Company. As of December 31, 2018, a total of $766.5 million
of bonds were issued to third parties and the Company retained $221.3 million of mortgage-backed securities, which are eliminated
in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to
direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially
significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but
has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the
residential mortgage trust are available from third-party pricing services. The Company incurred approximately $5.4 million of
costs in connection with these securitizations that were expensed as incurred during the year ended December 31, 2018. The
contractual principal amount of the OBX Trusts’ debt held by third parties was $769.0 million at December 31, 2018.
Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential
mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that
are eliminated upon consolidation.
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of
December 31, 2018, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the
Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest
in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate
loans with a carrying amount of $568.7 million at December 31, 2018. The transfers did not qualify for sale accounting and are
reflected as an intercompany secured borrowing that is eliminated upon consolidation. At December 31, 2018, the subsidiary had
an intercompany receivable of $376.6 million, which eliminates upon consolidation and an Other secured financing of $376.6
million to the third party financial institution.
In July 2017, a consolidated subsidiary of the Company entered into a $150.0 million credit facility with a third party financial
institution. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role
as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company
has transferred corporate loans to the subsidiary with a carrying amount of $234.8 million at December 31, 2018, which continue
to be reflected in the Company’s Consolidated Statements of Financial Condition in Loans. At December 31, 2018, the subsidiary
had an Other secured financing of $150.0 million to the third party financial institution.
The Company also owns variable interests in an entity that invests in MSRs and has structured its operations, funding and
capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled
to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse
to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the
Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the
Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the
primary beneficiary and consolidates this silo.
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.8 billion
at December 31, 2018. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs 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 VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense
are recognized using the effective interest method.
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F-20
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Commercial Trusts mortgage loans had an aggregate unpaid principal balance of $2.7 billion at December 31, 2018. At
December 31, 2018, there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable
to instrument-specific credit risk of the underlying loans or securitized debt securities at December 31, 2018 based upon the
Company’s process of monitoring events of default on the underlying mortgage loans.
The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential
mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of
the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company continues to be the
master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates
the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to
apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential
mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s
debt held by third parties was $72.1 million at December 31, 2018.
In March 2018, the Company closed OBX 2018-01, with a face value of $327.5 million. In July 2018, the Company closed OBX
2018-EXP1 with a face value of 383.4 million. In October 2018, the Company closed OBX 2018-EXP2 with a face value of $384.0
million. The OBX 2018-01 Trust, the OBX 2018-EXP1 Trust and the OBX 2018-EXP2 Trust are referred to collectively as the
“OBX Trusts”. These securitizations represent financing transactions which provide non-recourse financing to the Company that
are collateralized by residential mortgage loans purchased by the Company. As of December 31, 2018, a total of $766.5 million
of bonds were issued to third parties and the Company retained $221.3 million of mortgage-backed securities, which are eliminated
in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to
direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially
significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but
has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the
residential mortgage trust are available from third-party pricing services. The Company incurred approximately $5.4 million of
costs in connection with these securitizations that were expensed as incurred during the year ended December 31, 2018. The
contractual principal amount of the OBX Trusts’ debt held by third parties was $769.0 million at December 31, 2018.
Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential
mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that
are eliminated upon consolidation.
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of
December 31, 2018, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the
Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest
in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate
loans with a carrying amount of $568.7 million at December 31, 2018. The transfers did not qualify for sale accounting and are
reflected as an intercompany secured borrowing that is eliminated upon consolidation. At December 31, 2018, the subsidiary had
an intercompany receivable of $376.6 million, which eliminates upon consolidation and an Other secured financing of $376.6
million to the third party financial institution.
In July 2017, a consolidated subsidiary of the Company entered into a $150.0 million credit facility with a third party financial
institution. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role
as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company
has transferred corporate loans to the subsidiary with a carrying amount of $234.8 million at December 31, 2018, which continue
to be reflected in the Company’s Consolidated Statements of Financial Condition in Loans. At December 31, 2018, the subsidiary
had an Other secured financing of $150.0 million to the third party financial institution.
The Company also owns variable interests in an entity that invests in MSRs and has structured its operations, funding and
capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled
to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse
to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the
Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the
Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the
primary beneficiary and consolidates this silo.
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.8 billion
at December 31, 2018. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs 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 VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense
are recognized using the effective interest method.
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The statements of financial condition of the Company’s VIEs, excluding the credit facility VIEs and OBX Trusts as the transfers
of residential mortgage loans did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated
Statements of Financial Condition at December 31, 2018 and 2017 are as follows:
December 31, 2018
Commercial Trusts
Residential Trusts
MSR Silo
Assets
Cash and cash equivalents
Loans
Assets transferred or pledged to securitization vehicles
Mortgage servicing rights
Interest receivable
Other assets
Total assets
Liabilities
Debt issued by securitization vehicles (non-recourse)
Other secured financing
Interest payable
Other liabilities
Total liabilities
$
$
$
$
(dollars in thousands)
— $
—
— $
—
2,738,369
105,003
—
11,451
—
2,749,820
2,509,264
—
4,594
—
$
$
—
539
4
105,546
71,324
—
238
—
$
$
2,513,858
$
71,562
$
30,444
97,464
—
557,813
—
28,756
714,477
—
68,385
—
1,975
70,360
Assets
Cash and cash equivalents
Loans
Assets transferred or pledged to securitization vehicles
Mortgage servicing rights
Interest receivable
Derivative assets
Other assets
Total assets
Liabilities
Debt issued by securitization vehicles (non-recourse)
Other secured financing
Interest payable
Other liabilities
Total liabilities
December 31, 2017
Commercial Trusts
Residential Trusts
MSR Silo
(dollars in thousands)
$
$
$
$
— $
—
2,826,357
—
10,339
—
—
2,836,696
2,620,952
$
$
—
4,554
—
— $
—
478,811
—
1,599
—
1,418
481,828
350,819
$
$
—
931
112
2,625,506
$
351,862
$
42,293
19,667
—
580,860
—
1
32,354
675,175
—
10,496
—
4,856
15,352
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F-20
F-21
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s
VIEs, excluding the credit facility VIEs and OBX Trusts, at December 31, 2018 are as follows:
Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Commercial Trusts
Residential Trusts
Property Location
Principal Balance
% of Balance
Property Location
Principal Balance
% of Balance
$
Maryland
California
Virginia
Texas
Pennsylvania
New York
Massachusetts
Other (1)
408,671
360,279
336,799
306,590
281,084
280,552
179,202
571,873
Total
(1)
$
2,725,050
No individual state greater than 5%.
(dollars in thousands)
15.0% California
13.2% Texas
12.4% Washington
11.3% Illinois
10.3% Florida
10.3% Other (1)
6.6%
20.9%
100.0%
$
46,574
13,888
7,512
7,239
5,382
24,325
44.4%
13.2%
7.2%
6.9%
5.1%
23.2%
$
104,920
100.0%
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F-22
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s
VIEs, excluding the credit facility VIEs and OBX Trusts, at December 31, 2018 are as follows:
Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Commercial Trusts
Residential Trusts
Property Location
Principal Balance
% of Balance
Property Location
Principal Balance
% of Balance
$
$
Maryland
California
Virginia
Texas
Pennsylvania
New York
Massachusetts
Other (1)
408,671
360,279
336,799
306,590
281,084
280,552
179,202
571,873
(dollars in thousands)
15.0% California
13.2% Texas
12.4% Washington
11.3% Illinois
10.3% Florida
10.3% Other (1)
6.6%
20.9%
100.0%
46,574
13,888
7,512
7,239
5,382
24,325
44.4%
13.2%
7.2%
6.9%
5.1%
23.2%
Total
(1)
$
2,725,050
No individual state greater than 5%.
$
104,920
100.0%
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
9. REAL ESTATE
Real estate investments 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 acquisitions deemed to be business combinations are expensed. Ordinary repairs and maintenance which
are not reimbursed by tenants are expensed as incurred. Major replacements and improvements that extend the useful life of the
asset are capitalized and depreciated over their useful life.
Real estate investments are depreciated using the straight-line method over the estimated useful lives of the assets, summarized
as follows:
Category
Building and building improvements
Furniture and fixtures
Term
1 - 44 years
1 - 4 years
There was no real estate acquired in settlement of residential mortgage loans at December 31, 2018 or December 31, 2017 other
than real estate held by securitization trusts that the Company was required to consolidate. The Company would be considered to
have received physical possession of residential real estate property collateralizing a residential mortgage loan, so that the loan is
derecognized and the real estate property would be recognized, if either (i) the Company obtains legal title to the residential real
estate property upon completion of a foreclosure or (ii) the borrower conveys all interest in the residential real estate property to
the Company to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
Real estate investments, including REO, that 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.
The Company’s real estate portfolio (REO and real estate held for investment) is reviewed on a quarterly basis, or more frequently
as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying
value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate future
undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review,
the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other
factors. To the extent 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.
The Company acquired real estate holdings in connection with the MTGE Acquisition during the year ended December 31, 2018;
refer to the “Acquisition of MTGE Investment Corp.” Note for additional information. There were no acquisitions of new real
estate holdings during the year ended December 31, 2017. The company sold one of its wholly-owned triple net leased properties
during the year ended December 31, 2017 for $12.0 million and recognized a gain on sale of $5.1 million.
The weighted average amortization period for intangible assets and liabilities at December 31, 2018 is 4.9 years. Above market
leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Accounts
payable and other liabilities in the Consolidated Statements of Financial Condition.
Real estate, net
Land
Buildings and improvements
Furniture, fixtures and equipment
Subtotal
Less: accumulated depreciation
Total real estate held for investment, at amortized cost, net
Equity in unconsolidated joint ventures
Total real estate, net
December 31, 2018
December 31, 2017
(dollars in thousands)
$
128,742
$
581,320
11,602
721,664
(67,026)
654,638
84,835
$
739,473
$
111,012
330,959
—
441,971
(48,920)
393,051
92,902
485,953
F-22
F-23
Depreciation expense was $18.1 million and $15.8 million for the years ended December 31, 2018 and 2017, respectively and is
included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Rental Income
The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases
generally also require that the tenants reimburse the Company for certain operating costs. Rental income is included in Other
income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).
Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in
effect at December 31, 2018 for consolidated investments in real estate are as follows:
December 31, 2018
(dollars in thousands)
$
$
49,950
46,290
43,050
39,327
36,624
208,706
423,947
2019
2020
2021
2022
2023
Later years
Total
10. DERIVATIVE INSTRUMENTS
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”),
TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward
purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities,
credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps.
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion
of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and
futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures
contracts, certain forward purchase commitments and credit derivatives 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 and terms of the derivative contract. In the case of market agreed coupon
(“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swap to
compensate for the out of market nature of such interest rate swap. Similar to other interest rate swaps, the Company may have
to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the
Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the
derivative contracts.
Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at
fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated
Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on
other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative
transactions have been designated as hedging instruments for accounting purposes.
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other
derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest
rate swaps net of variation margin pledged under such transactions. At December 31, 2018, $496.2 million of variation margin
was reported as a reduction to interest rate swaps, at fair value.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In
particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase
agreements by economically hedging cash flows associated with these borrowings. Interest rate swap agreements may or may
not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal
pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps are generally fair valued
F-24
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Rental Income
The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases
generally also require that the tenants reimburse the Company for certain operating costs. Rental income is included in Other
income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).
Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in
effect at December 31, 2018 for consolidated investments in real estate are as follows:
December 31, 2018
(dollars in thousands)
$
$
49,950
46,290
43,050
39,327
36,624
208,706
423,947
2019
2020
2021
2022
2023
Later years
Total
10. DERIVATIVE INSTRUMENTS
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”),
TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward
purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities,
credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps.
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion
of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and
futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures
contracts, certain forward purchase commitments and credit derivatives 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 and terms of the derivative contract. In the case of market agreed coupon
(“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swap to
compensate for the out of market nature of such interest rate swap. Similar to other interest rate swaps, the Company may have
to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the
Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the
derivative contracts.
Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at
fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated
Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on
other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative
transactions have been designated as hedging instruments for accounting purposes.
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other
derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest
rate swaps net of variation margin pledged under such transactions. At December 31, 2018, $496.2 million of variation margin
was reported as a reduction to interest rate swaps, at fair value.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In
particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase
agreements by economically hedging cash flows associated with these borrowings. Interest rate swap agreements may or may
not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal
pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps are generally fair valued
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
using the DCO’s market values. MAC interest rate swaps are also centrally cleared and fair valued using internal pricing models
and compared to the DCO’s market value.
Swaptions – Swaptions are purchased or 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 or received for swaptions is
reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the
realized gain (loss) on the swaption would be equal to the premium received or 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 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 methods similar to those used to value Agency mortgage-backed securities.
MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility
while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on
current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal
pricing models and compared to the counterparty market value at the valuation date.
Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of
futures contracts help to mitigate the potential impact of changes in interest rates on the 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.
Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby
the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close
with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.
Credit Derivatives – The Company may enter into credit derivatives referencing the commercial mortgage-backed securities index,
such as the CMBX index, and synthetic total return swaps. Refer to the section titled “Glossary of Terms” located in Part II, Item
7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information related
to the CMBX index.
The table below summarizes fair value information about our derivative assets and liabilities at December 31, 2018 and 2017:
Derivatives Instruments
December 31, 2018
December 31, 2017
Assets
Interest rate swaps
Interest rate swaptions
TBA derivatives
Futures contracts
Purchase commitments
Credit derivatives (1)
Liabilities
Interest rate swaps
TBA derivatives
Futures contracts
Purchase commitments
Credit derivatives (1)
$
$
$
$
(dollars in thousands)
48,114
$
7,216
141,688
—
844
2,641
200,503
420,365
—
462,309
33
7,043
$
$
889,750
$
30,272
36,150
29,067
218,361
35
—
313,885
569,129
21,776
12,285
157
4,507
607,854
(1)
The notional amount of the credit derivatives in which the Company purchased protection was $30.0 million at December 31,
2018. The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company
sold protection of $451.0 million and $125.0 million at December 31, 2018 and December 31, 2017, respectively, plus any
coupon shortfalls on the underlying tranche. The credit derivative tranches referencing the basket of bonds had a range of
ratings between AAA and BBB-.
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F-24
F-25
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2018 and 2017:
Maturity
Current
Notional (1)
Weighted Average
Pay Rate
Weighted Average
Receive Rate
Weighted Average
Years to Maturity
December 31, 2018
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted average
(dollars in thousands)
$
31,900,200
16,603,200
18,060,900
3,901,400
$
70,465,700
1.84%
2.29%
2.57%
3.63%
2.17%
2.73%
2.70%
2.56%
2.59%
2.68%
December 31, 2017
1.21
4.30
8.62
17.33
4.26
Maturity
Current
Notional (1)
Weighted Average
Pay Rate (2) (3)
Weighted Average
Receive Rate (2)
Weighted Average
Years to Maturity (2)
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted average
(1)
(dollars in thousands)
$
6,532,000
14,791,800
10,179,000
3,826,400
$
35,329,200
1.56 %
2.12 %
2.35 %
3.65 %
2.22 %
1.62 %
1.57 %
1.58 %
1.51 %
1.58 %
2.08
4.51
8.04
18.47
6.72
There were no forward starting swaps at December 31, 2018. Notional amount includes $8.1 billion forward starting pay fixed swaps at
December 31, 2017.
Excludes forward starting swaps.
(2)
(3) Weighted average fixed rate on forward starting pay fixed swaps was 1.86% at December 31, 2017.
The following table presents swaptions outstanding at December 31, 2018 and 2017.
December 31, 2018
Current
Underlying
Notional
Weighted Average
Underlying Pay
Rate
Weighted Average
Underlying Receive
Rate
Weighted Average
Underlying Years to
Maturity
Weighted Average
Months to Expiration
(dollars in thousands)
Long
$4,075,000
3.30%
3M LIBOR
10.08
3.06
December 31, 2017
Current
Underlying
Notional
Weighted Average
Underlying Pay
Rate
Weighted Average
Underlying Receive
Rate
Weighted Average
Underlying Years to
Maturity
Weighted Average
Months to Expiration
(dollars in thousands)
Long
$6,000,000
2.62%
3M LIBOR
9.97
4.49
F-26
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2018 and 2017:
The following table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 2018 and 2017:
Maturity
Current
Notional (1)
Weighted Average
Weighted Average
Pay Rate
Receive Rate
Weighted Average
Years to Maturity
December 31, 2018
(dollars in thousands)
$
31,900,200
16,603,200
18,060,900
3,901,400
$
70,465,700
$
6,532,000
14,791,800
10,179,000
3,826,400
$
35,329,200
December 31, 2017
(dollars in thousands)
1.84%
2.29%
2.57%
3.63%
2.17%
1.56 %
2.12 %
2.35 %
3.65 %
2.22 %
2.73%
2.70%
2.56%
2.59%
2.68%
1.62 %
1.57 %
1.58 %
1.51 %
1.58 %
1.21
4.30
8.62
17.33
4.26
2.08
4.51
8.04
18.47
6.72
Maturity
Current
Notional (1)
Weighted Average
Pay Rate (2) (3)
Weighted Average
Receive Rate (2)
Weighted Average
Years to Maturity (2)
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted average
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted average
(1)
(2)
December 31, 2017.
Excludes forward starting swaps.
There were no forward starting swaps at December 31, 2018. Notional amount includes $8.1 billion forward starting pay fixed swaps at
(3) Weighted average fixed rate on forward starting pay fixed swaps was 1.86% at December 31, 2017.
The following table presents swaptions outstanding at December 31, 2018 and 2017.
Current
Underlying
Notional
Weighted Average
Underlying Pay
Weighted Average
Underlying Receive
Weighted Average
Underlying Years to
Rate
Rate
Maturity
Weighted Average
Months to Expiration
Long
$4,075,000
3.30%
3M LIBOR
10.08
3.06
Current
Underlying
Notional
Weighted Average
Underlying Pay
Weighted Average
Underlying Receive
Weighted Average
Underlying Years to
Rate
Rate
Maturity
Weighted Average
Months to Expiration
Long
$6,000,000
2.62%
3M LIBOR
9.97
4.49
December 31, 2018
(dollars in thousands)
December 31, 2017
(dollars in thousands)
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Purchase and sale contracts
for derivative TBAs
Notional
Implied Cost Basis
Implied Market Value
Net Carrying Value
Purchase contracts
$
13,803,000
$
13,823,109
$
13,964,797
$
141,688
(dollars in thousands)
December 31, 2018
December 31, 2017
Purchase and sale contracts
for derivative TBAs
Notional
Implied Cost Basis
Implied Market Value
Net Carrying Value
(dollars in thousands)
Purchase contracts
Sale contracts
Net TBA derivatives
$
$
15,828,000
(250,000)
15,578,000
$
$
16,381,826
(254,804)
16,127,022
$
$
16,390,251
(255,938)
16,134,313
$
8,425
(1,134)
7,291
The following table summarizes certain characteristics of the Company’s futures derivatives at December 31, 2018 and 2017:
December 31, 2018
Notional - Long
Positions
(dollars in thousands)
Notional - Short
Positions
Weighted Average
Years to Maturity
U.S. Treasury futures - 2 year
U.S. Treasury futures - 5 year
U.S. Treasury futures - 10 year and greater
Total
$
$
— $
—
—
— $
(1,166,000)
(6,359,400)
(11,152,600)
(18,678,000)
1.97
4.39
7.10
5.86
December 31, 2017
Notional - Long
Positions
(dollars in thousands)
Notional - Short
Positions
Weighted Average
Years to Maturity
2-year swap equivalent Eurodollar contracts
U.S. Treasury futures - 5 year
U.S. Treasury futures - 10 year and greater
Total
$
$
— $
—
—
— $
(17,161,000)
(4,217,400)
(4,914,500)
(26,292,900)
2.00
4.41
7.01
3.32
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.
The following tables present information about derivative assets and liabilities that are subject to such provisions and can potentially
be offset on our Consolidated Statements of Financial Condition at December 31, 2018 and 2017, respectively.
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F-27
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
December 31, 2018
Amounts Eligible for Offset
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Assets
(dollars in thousands)
Interest rate swaps, at fair value
$
48,114
$
(29,308) $
— $
Interest rate swaptions, at fair value
TBA derivatives, at fair value
Purchase commitments
Credit derivatives
Liabilities
7,216
141,688
844
2,641
—
—
—
(2,641)
—
—
—
—
18,806
7,216
141,688
844
—
Interest rate swaps, at fair value
$
420,365
$
(29,308) $
(11,856) $
379,201
Futures contracts, at fair value
Purchase commitments
Credit derivatives
462,309
33
7,043
—
—
(2,641)
(462,309)
—
(4,402)
—
33
—
December 31, 2017
Amounts Eligible for Offset
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Assets
(dollars in thousands)
Interest rate swaps, at fair value
$
30,272
$
(27,379) $
— $
Interest rate swaptions, at fair value
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
Liabilities
36,150
29,067
218,361
35
—
(12,551)
(12,285)
—
—
—
—
—
2,893
36,150
16,516
206,076
35
Interest rate swaps, at fair value
$
569,129
$
(27,379) $
— $
541,750
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
Credit derivatives
21,776
12,285
157
4,507
(12,551)
(12,285)
—
—
—
—
—
(3,520)
9,225
—
157
987
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Comprehensive Income (Loss)
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
$
$
$
Realized Gains (Losses) on
Interest Rate Swaps
Realized Gains (Losses) on
Termination of Interest
Rate Swaps
(dollars in thousands)
Unrealized Gains (Losses)
on Interest Rate Swaps
100,553
$
(371,108) $
(506,681) $
1,409
$
(160,133) $
(113,941) $
424,081
512,918
282,190
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
Year Ended December 31, 2018
Derivative Instruments
Realized Gain (Loss)
Unrealized Gain (Loss)
(dollars in thousands)
Net TBA derivatives
$
(343,594) $
134,397
$
Net interest rate swaptions
Futures
Purchase commitments
Credit derivatives
Total
(98,248)
564,418
—
9,662
F-28
2,679
(668,384)
1,002
(5,945)
$
Amount of Gain/(Loss)
Recognized in Net Gains
(Losses) on Other
Derivatives
(209,197)
(95,569)
(103,966)
1,002
3,717
(404,013)
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
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Amounts Eligible for Offset
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Assets
(dollars in thousands)
Interest rate swaps, at fair value
$
48,114
$
(29,308) $
— $
Interest rate swaps, at fair value
$
420,365
$
(29,308) $
(11,856) $
379,201
December 31, 2017
Amounts Eligible for Offset
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Assets
(dollars in thousands)
Interest rate swaps, at fair value
$
30,272
$
(27,379) $
— $
Interest rate swaptions, at fair value
TBA derivatives, at fair value
Purchase commitments
Credit derivatives
Liabilities
Futures contracts, at fair value
Purchase commitments
Credit derivatives
Interest rate swaptions, at fair value
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
Liabilities
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
Credit derivatives
7,216
141,688
844
2,641
462,309
33
7,043
36,150
29,067
218,361
35
21,776
12,285
157
4,507
—
—
—
—
—
(2,641)
(2,641)
(12,551)
(12,285)
—
—
(12,551)
(12,285)
—
—
(462,309)
—
(4,402)
—
—
—
—
—
—
—
—
—
—
—
(3,520)
18,806
7,216
141,688
844
—
—
33
—
2,893
36,150
16,516
206,076
35
9,225
—
157
987
Interest rate swaps, at fair value
$
569,129
$
(27,379) $
— $
541,750
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Comprehensive Income (Loss)
Realized Gains (Losses) on
Interest Rate Swaps
Unrealized Gains (Losses)
on Interest Rate Swaps
Realized Gains (Losses) on
Termination of Interest
Rate Swaps
(dollars in thousands)
100,553
$
(371,108) $
(506,681) $
1,409
$
(160,133) $
(113,941) $
424,081
512,918
282,190
For the years ended
December 31, 2018
December 31, 2017
December 31, 2016
$
$
$
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
Year Ended December 31, 2018
Derivative Instruments
Realized Gain (Loss)
Unrealized Gain (Loss)
(dollars in thousands)
Net TBA derivatives
$
(343,594) $
134,397
$
Net interest rate swaptions
Futures
Purchase commitments
Credit derivatives
Total
(98,248)
564,418
—
9,662
F-28
Amount of Gain/(Loss)
Recognized in Net Gains
(Losses) on Other
Derivatives
2,679
(668,384)
1,002
(5,945)
$
(209,197)
(95,569)
(103,966)
1,002
3,717
(404,013)
Derivative Instruments
Realized Gain (Loss)
Unrealized Gain (Loss)
Amount of Gain/(Loss)
Recognized in Net Gains
(Losses) on Other Derivatives
Year Ended December 31, 2017
Net TBA derivatives
$
154,575
$
(dollars in thousands)
Net interest rate swaptions
Futures
Purchase commitments
Credit derivatives
Total
(935)
20,459
—
1,521
65,490
$
(42,660)
62,778
162
28
$
220,065
(43,595)
83,237
162
1,549
261,418
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements
or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the 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.
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 value of all derivative
instruments with the aforementioned features are in a net asset position at December 31, 2018.
11. FAIR VALUE MEASUREMENTS
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments that are accounted
for at fair value. 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.
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 identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on
the lowest priority 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 in the related notes are categorized based on the
inputs to the valuation techniques as follows:
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 securities as trading, available-for-sale or held-to-maturity depending upon the type of security and
the Company’s intent and ability to hold such security to maturity. Securities 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.
Residential Securities, 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 market pricing methods, including a spread
measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment
speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates
for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based
inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly
corroborates 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.
F-29
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Securities, residential mortgage loans, interest rate swap and swaption markets and MBS options 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 Residential Securities, interest rate swaps, swaptions, TBA derivatives and MBS options
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
Residential Securities, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices
of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying
collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.
For the fair value of debt issued by securitization vehicles, refer to the Note titled “Variable Interest Entities” for additional
information.
The Company classifies its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for
these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations
primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates,
delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third-
party pricing providers. Management reviews the valuations received from third-party pricing providers and uses them as a point
of comparison to modeled values. The valuation of MSRs requires significant judgment by management and the third-party pricing
providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and
therefore the Company’s financial statements.
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The following tables present the estimated fair values of financial instruments measured at fair value on a recurring basis. There
were no transfers between levels of the fair value hierarchy during the periods presented.
Assets
Securities
December 31, 2018
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Agency mortgage-backed securities
$
— $
90,752,995
$
— $
90,752,995
Credit risk transfer securities
Non-Agency mortgage-backed securities
Commercial mortgage-backed securities
Loans
Residential mortgage loans
Mortgage servicing rights
Assets transferred or pledged to securitization vehicles
Derivative assets
Interest rate swaps
Other derivatives
Total assets
Liabilities
Debt issued by securitization vehicles
Derivative liabilities
Interest rate swaps
Other derivatives
Total liabilities
—
—
—
—
—
—
—
—
552,097
1,161,938
156,758
1,359,806
—
—
—
—
—
557,813
3,833,200
48,114
152,389
—
—
—
552,097
1,161,938
156,758
1,359,806
557,813
3,833,200
48,114
152,389
$
— $
98,017,297
$
557,813
$
98,575,110
—
—
462,309
3,347,062
420,365
7,076
—
—
—
3,347,062
420,365
469,385
$
462,309
$
3,774,503
$
— $
4,236,812
F-30
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Assets
Securities
December 31, 2017
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Agency mortgage-backed securities
$
— $
90,551,763
$
— $
90,551,763
Credit risk transfer securities
Non-Agency mortgage-backed securities
Commercial mortgage-backed securities
Loans
Residential mortgage loans
Mortgage servicing rights
Assets transferred or pledged to securitization vehicles
Derivative assets
Interest rate swaps
Other derivatives
Total assets
Liabilities
Debt issued by securitization vehicles
Derivative liabilities
Interest rate swaps
Other derivatives
Total liabilities
—
—
—
—
—
—
—
218,361
651,764
1,097,294
262,751
958,546
—
3,306,133
30,272
65,252
—
—
—
—
580,860
—
—
—
651,764
1,097,294
262,751
958,546
580,860
3,306,133
30,272
283,613
$
$
$
218,361
$
96,923,775
— $
2,971,771
$
$
580,860
$
97,722,996
— $
2,971,771
—
12,285
569,129
26,440
—
—
569,129
38,725
12,285
$
3,567,340
$
— $
3,579,625
Quantitative Information about Level 3 Fair Value Measurements
The Company considers unobservable inputs to be those for which market data is not available and that are developed using the
best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs
vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs
along with interrelationships between and among the significant unobservable inputs and their impact on the fair value
measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered
independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a
linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such
relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse
relationship would also generally apply. For MSRs, in general, increases in the discount, prepayment or delinquency rates or in
annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-
than-expected prepayments of mortgages underlying the Company’s investments in MSRs, which in turn could result in a decline
in the estimated fair value of MSRs. Refer to the Note titled “Mortgage Servicing Rights” for additional information.
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for
Level 3 MSRs. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these
Level 3 investments.
December 31, 2018
December 31, 2017
Range
Range
Valuation Technique
Discounted cash flow
Unobservable Input (1)
Discount rate
(Weighted Average )
9.0% -12.0% (9.4%)
Unobservable Input (1)
Discount rate
(Weighted Average )
10.0% -15.0% (10.4%)
Prepayment rate
4.7% - 13.9% (8.0%)
Prepayment rate
4.6% - 22.3% (9.4%)
Delinquency rate
0.0% - 5.0% (2.3%)
Delinquency rate
0.0% - 13.0% (2.2%)
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Securities, residential mortgage loans, interest rate swap and swaption markets and MBS options 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 Residential Securities, interest rate swaps, swaptions, TBA derivatives and MBS options
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
Residential Securities, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices
of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying
collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.
For the fair value of debt issued by securitization vehicles, refer to the Note titled “Variable Interest Entities” for additional
information.
The Company classifies its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for
these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations
primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates,
delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third-
party pricing providers. Management reviews the valuations received from third-party pricing providers and uses them as a point
of comparison to modeled values. The valuation of MSRs requires significant judgment by management and the third-party pricing
providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and
therefore the Company’s financial statements.
The following tables present the estimated fair values of financial instruments measured at fair value on a recurring basis. There
were no transfers between levels of the fair value hierarchy during the periods presented.
Agency mortgage-backed securities
$
— $
90,752,995
$
— $
90,752,995
Assets
Securities
Credit risk transfer securities
Non-Agency mortgage-backed securities
Commercial mortgage-backed securities
Loans
Residential mortgage loans
Mortgage servicing rights
Assets transferred or pledged to securitization vehicles
Derivative assets
Interest rate swaps
Other derivatives
Total assets
Liabilities
Derivative liabilities
Interest rate swaps
Other derivatives
Total liabilities
Debt issued by securitization vehicles
December 31, 2018
Level 1
Level 2
Level 3
Total
(dollars in thousands)
—
557,813
—
—
—
—
—
—
—
—
—
—
552,097
1,161,938
156,758
1,359,806
3,833,200
48,114
152,389
3,347,062
420,365
7,076
—
—
—
—
—
—
—
—
—
—
552,097
1,161,938
156,758
1,359,806
557,813
3,833,200
48,114
152,389
3,347,062
420,365
469,385
462,309
$
462,309
$
3,774,503
$
— $
4,236,812
$
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98,017,297
$
557,813
$
98,575,110
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(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets.
F-30
F-31
The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at
December 31, 2018 and 2017.
$84 - $181 ($102)
Cost to service
Cost to service
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Financial assets
Loans
Commercial real estate debt and preferred
equity, held for investment
Commercial loans held for sale, net
Corporate debt
Financial liabilities
Repurchase agreements
Other secured financing
Mortgage payable
December 31, 2018
December 31, 2017
Level in
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
(dollars in thousands)
Fair
Value
3
3
2
1,2
1,2
3
$
1,296,803
$
1,303,487
$
1,029,327
$
1,035,095
42,184
42,184
—
—
1,887,182
1,863,524
1,011,275
1,014,139
$
81,115,874
$
81,115,874
$
77,696,343
$
77,697,828
4,183,311
511,056
4,183,805
507,770
3,837,528
309,686
3,837,595
310,218
12. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. 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 are allocated to the assets acquired, including identifiable intangible
assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price
over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets
acquired over the purchase price is recognized as a bargain purchase gain.
The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it
more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a
quantitative analysis is performed. The quantitative impairment test for goodwill utilizes a two-step approach, whereby the
Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit
is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying
value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair
value.
At December 31, 2018 and 2017, Goodwill totaled $71.8 million.
Intangible assets, net
Finite life intangible assets are amortized over their expected useful lives. The following table presents the activity of finite lived
intangible assets for the year ended December 31, 2018.
Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2017
Intangible assets acquired
Intangible assets divested
Less: amortization expense
Balance at December 31, 2018
$
$
23,220
14,483
81
(8,745)
29,039
13. SECURED FINANCING
Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase
agreements. At the inception of each transaction, the Company assesses each of the specified criteria in ASC 860, Transfers and
Servicing, and has determined that each of the financing agreements meet the specified criteria in this guidance.
F-32
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company obtains collateral
in connection with the reverse repurchase agreements in order to mitigate credit risk exposure to its counterparties.
Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net
in 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 and cash flows on reverse repurchase agreements
as investing activities in the Consolidated Statements of Cash Flows.
The Company had outstanding $81.1 billion and $77.7 billion of repurchase agreements with weighted average borrowing rates
of 2.36% and 1.89%, after giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted average
remaining maturities of 77 days and 58 days at December 31, 2018 and 2017, respectively. The Company has select arrangements
with counterparties to enter into repurchase agreements for $1.1 billion with $406.1 million available to be drawn at December
31, 2018.
At December 31, 2018 and 2017, the repurchase agreements had the following remaining maturities, collateral types and weighted
average rates:
December 31, 2018
Agency
Mortgage-
Backed
Securities
Non-Agency
Mortgage-
Backed
Securities
Commercial
Loans
Commercial
Mortgage-
Backed
Securities
CRTs
U.S.
Treasury
Securities
Total
Repurchase
Agreements
Weighted
Average
Rate
(dollars in thousands)
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days (1)
$
— $
— $
— $
— $
— $
— $
—
30,661,001
8,164,165
18,326,399
10,067,183
11,263,625
284,906
—
88,630
—
—
353,429
—
251,441
—
—
—
—
—
72,840
—
23,302
—
116,434
693,939
108,115
640,465
32,012,641
—
—
—
—
8,164,165
18,689,772
10,067,183
12,182,113
Total
$ 78,482,373
$
373,536
$
721,304
$
693,939
$
204,257
$
640,465
$ 81,115,874
—%
3.50%
2.33%
2.62%
2.54%
2.92%
2.97%
Agency
Mortgage-
Backed
Securities
CRTs
December 31, 2017
Non-Agency
Mortgage-
Backed
Securities
Commercial
Loans
Commercial
Mortgage-
Backed
Securities
Total
Repurchase
Agreements
Weighted
Average Rate
Financial assets
Loans
Commercial real estate debt and preferred
equity, held for investment
Commercial loans held for sale, net
Corporate debt
Financial liabilities
Repurchase agreements
Other secured financing
Mortgage payable
December 31, 2018
December 31, 2017
Level in
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
(dollars in thousands)
Fair
Value
3
3
2
1,2
1,2
3
$
1,296,803
$
1,303,487
$
1,029,327
$
1,035,095
42,184
42,184
—
—
1,887,182
1,863,524
1,011,275
1,014,139
$
81,115,874
$
81,115,874
$
77,696,343
$
77,697,828
4,183,311
511,056
4,183,805
507,770
3,837,528
309,686
3,837,595
310,218
12. GOODWILL AND INTANGIBLE ASSETS
Goodwill
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The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. 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 are allocated to the assets acquired, including identifiable intangible
assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price
over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets
acquired over the purchase price is recognized as a bargain purchase gain.
The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it
more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a
quantitative analysis is performed. The quantitative impairment test for goodwill utilizes a two-step approach, whereby the
Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit
is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying
value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair
At December 31, 2018 and 2017, Goodwill totaled $71.8 million.
value.
Intangible assets, net
Finite life intangible assets are amortized over their expected useful lives. The following table presents the activity of finite lived
intangible assets for the year ended December 31, 2018.
Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2017
Intangible assets acquired
Intangible assets divested
Less: amortization expense
Balance at December 31, 2018
$
$
23,220
14,483
81
(8,745)
29,039
13. SECURED FINANCING
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Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase
agreements. At the inception of each transaction, the Company assesses each of the specified criteria in ASC 860, Transfers and
Servicing, and has determined that each of the financing agreements meet the specified criteria in this guidance.
Gross amounts
Amounts offset
Netted amounts
$
$
650,040
—
650,040
$
$
81,115,874
—
81,115,874
$
$
1,250,000
$
(1,250,000)
— $
78,946,343
(1,250,000)
77,696,343
F-32
F-33
The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset
in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented
in the Consolidated Statements of Financial Condition at December 31, 2018 and 2017. Refer to the “Derivative Instruments”
Note for information related to the effect of netting arrangements on the Company’s derivative instruments.
December 31, 2018
December 31, 2017
Reverse Repurchase
Agreements
Repurchase
Agreements
Reverse Repurchase
Agreements
Repurchase
Agreements
(dollars in thousands)
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days (1)
(dollars in thousands)
$
— $
— $
— $
— $
— $
—
33,421,609
10,811,515
13,800,743
10,128,006
8,542,108
263,528
7,229
7,214
—
—
253,290
3,658
47,830
—
—
—
—
—
—
385,113
18,125
6,375
—
—
—
33,956,552
10,828,777
13,855,787
10,128,006
8,927,221
Total
(1) Approximately 1% of the total repurchase agreements had a remaining maturity over 1 year at each of December 31, 2018 and 2017.
—%
1.69%
1.44%
1.59%
1.39%
1.77%
1.61%
$ 76,703,981
$ 77,696,343
277,971
304,778
385,113
24,500
$
$
$
$
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Other Secured Financing - The Company also finances a portion of its financial assets with advances from the Federal Home
Loan Bank of Des Moines (“FHLB Des Moines”). Borrowings from FHLB Des Moines are reported in Other secured financing
in the Company’s Consolidated Statements of Financial Condition. At December 31, 2018, $3.6 billion of the advances matures
between one to three years. At December 31, 2017, $2.1 billion of advances from the FHLB Des Moines matured beyond three
years and $1.4 billion matures between one to three years. The weighted average rate of the advances from the FHLB Des Moines
was 2.78% and 1.49% at December 31, 2018 and 2017, respectively. The Company held $147.9 million of capital stock in the
FHLB Des Moines at December 31, 2018 and 2017, which is reported at cost and included in Other assets on the Company’s
Consolidated Statements of Financial Condition.
Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior
securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $90.2 billion and
$303.1 million, respectively, at December 31, 2018 and $87.0 billion and $267.3 million, respectively, at December 31, 2017.
The fair value of collateral received in connection with reverse repurchase agreements was $650.0 million, which the Company
fully repledged, and $0 as of December 31, 2018 and December 31, 2017, respectively.
Mortgage loans payable at December 31, 2018 and 2017, were as follows:
Property
Mortgage
Carrying
Value
Mortgage
Principal
December 31, 2018
Interest Rate
(dollars in thousands)
Fixed/Floating
Rate
Maturity Date
Priority
Joint Ventures (fixed)
$
316,275
$
318,664
4.03% - 4.96%
Fixed
2024 - 2029
First liens
Joint Ventures (floating)
Virginia
Texas
Utah (floating)
Utah (fixed)
Minnesota
Tennessee
Wisconsin
Total
Property
Joint Ventures
Tennessee
Virginia
Total
16,125
95,827
32,189
9,703
7,279
13,438
12,328
7,892
16,125
L+2.75%
Floating
3/14/2020
First liens
97,667
2.75% - 4.96%
33,735
9,706
7,201
13,473
12,350
7,913
3.28%
L+3.50%
3.69%
3.69%
4.01%
3.69%
Fixed
Fixed
Floating
Fixed
Fixed
Fixed
Fixed
2019-2053
1/1/2053
1/31/2019
6/1/2053
6/1/2053
9/6/2019
6/1/2053
First liens
First liens
First liens
First liens
First liens
First liens
First liens
$
511,056
$
516,834
Mortgage
Carrying
Value
Mortgage
Principal
December 31, 2017
Interest Rate
(dollars in thousands)
$
$
286,373
$
289,125
4.03% - 4.61%
12,294
11,019
12,350
11,025
4.01%
3.58%
309,686
$
312,500
Fixed/Floating
Rate
Maturity Date
Priority
Fixed
Fixed
Fixed
2024 and 2025
9/6/2019
6/6/2019
First liens
First liens
First liens
The following table details future mortgage loan principal payments at December 31, 2018:
2019
2020
2021
2022
2023
Later years
Total
Mortgage Loan Principal Payments
(dollars in thousands)
$
$
F-34
36,109
19,408
3,490
3,709
3,844
450,274
516,834
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
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Other Secured Financing - The Company also finances a portion of its financial assets with advances from the Federal Home
Loan Bank of Des Moines (“FHLB Des Moines”). Borrowings from FHLB Des Moines are reported in Other secured financing
in the Company’s Consolidated Statements of Financial Condition. At December 31, 2018, $3.6 billion of the advances matures
between one to three years. At December 31, 2017, $2.1 billion of advances from the FHLB Des Moines matured beyond three
years and $1.4 billion matures between one to three years. The weighted average rate of the advances from the FHLB Des Moines
was 2.78% and 1.49% at December 31, 2018 and 2017, respectively. The Company held $147.9 million of capital stock in the
FHLB Des Moines at December 31, 2018 and 2017, which is reported at cost and included in Other assets on the Company’s
Consolidated Statements of Financial Condition.
Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior
securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $90.2 billion and
$303.1 million, respectively, at December 31, 2018 and $87.0 billion and $267.3 million, respectively, at December 31, 2017.
The fair value of collateral received in connection with reverse repurchase agreements was $650.0 million, which the Company
fully repledged, and $0 as of December 31, 2018 and December 31, 2017, respectively.
Mortgage loans payable at December 31, 2018 and 2017, were as follows:
Property
Interest Rate
Rate
Maturity Date
Priority
Mortgage
Carrying
Value
Mortgage
Principal
December 31, 2018
(dollars in thousands)
Fixed/Floating
Joint Ventures (fixed)
$
316,275
$
318,664
4.03% - 4.96%
Fixed
2024 - 2029
First liens
Joint Ventures (floating)
16,125
L+2.75%
Floating
3/14/2020
First liens
16,125
95,827
32,189
9,703
7,279
13,438
12,328
7,892
97,667
2.75% - 4.96%
33,735
9,706
7,201
13,473
12,350
7,913
3.28%
L+3.50%
3.69%
3.69%
4.01%
3.69%
Fixed
Fixed
Floating
Fixed
Fixed
Fixed
Fixed
2019-2053
1/1/2053
1/31/2019
6/1/2053
6/1/2053
9/6/2019
6/1/2053
First liens
First liens
First liens
First liens
First liens
First liens
First liens
Virginia
Texas
Utah (floating)
Utah (fixed)
Minnesota
Tennessee
Wisconsin
Total
$
511,056
$
516,834
Mortgage
Carrying
Value
Mortgage
Principal
December 31, 2017
(dollars in thousands)
Fixed/Floating
Joint Ventures
286,373
$
289,125
4.03% - 4.61%
$
$
12,294
11,019
12,350
11,025
4.01%
3.58%
309,686
$
312,500
Tennessee
Virginia
Total
Fixed
Fixed
Fixed
2024 and 2025
9/6/2019
6/6/2019
First liens
First liens
First liens
The following table details future mortgage loan principal payments at December 31, 2018:
2019
2020
2021
2022
2023
Later years
Total
Mortgage Loan Principal Payments
(dollars in thousands)
$
$
F-34
36,109
19,408
3,490
3,709
3,844
450,274
516,834
14. CAPITAL STOCK
(A) Common Stock
The following table provides a summary of the Company’s common shares authorized and issued and outstanding at December 31,
2018 and 2017.
Shares authorized
Shares issued and outstanding
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
Par Value
Common stock
1,924,050,000
1,929,300,000
1,313,763,450
1,159,585,078
$0.01
During the year ended December 31, 2018, the Company issued 43.6 million shares of common stock as part of the consideration
for the MTGE Acquisition.
During the year ended December 31, 2018, the Company closed the public offering of an original issuance of 75.0 million shares
of common stock for proceeds of $762.8 million before deducting offering expenses. In connection with the offering, the Company
granted the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the
underwriters exercised in full resulting in an additional $114.4 million in proceeds before deducting offering expenses.
During the year ended December 31, 2017, the Company issued 140.5 million shares of common stock for proceeds of $1.7 billion
before deducting offering expenses.
No options were exercised during the years ended December 31, 2018, 2017, and 2016.
The following table provides a summary of activity related to the Company’s Direct Purchase and Dividend Reinvestment Program.
Shares issued through direct purchase and dividend reinvestment program
Amount raised from direct purchase and dividend reinvestment program
$
(dollars in thousands)
302,000
3,144
$
219,000
2,542
December 31, 2018
December 31, 2017
In January 2018, the Company entered into separate Distribution Agency Agreements (collectively, the “Sales Agreements”) with
each of Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Barclays Capital Inc., Citigroup Global
Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette &
Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares
of its common stock, having an aggregate offering price of up to $1.5 billion from time to time through any of the Sales Agents.
During the year ended December 31, 2018, the Company issued 24.0 million shares under the at-the-market sales program for
proceeds of $251.1 million, net of commissions and fees.
Property
Interest Rate
Rate
Maturity Date
Priority
(B)
Preferred Stock
The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at December 31, 2018 and
2017. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence
over the Company’s common stock with respect to payment of dividends and the distribution of assets.
F-35
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Shares Authorized
Shares Issued And Outstanding
Carrying Value
December
31, 2018
December
31, 2017
December 31,
2018
December
31, 2017
December
31, 2018
December
31, 2017
Contractual
Rate
Fixed-rate
(dollars in thousands)
Date At
Which
Dividend
Rate
Becomes
Floating
Earliest
Redemption
Date (1)
Series C
7,000,000
12,000,000
7,000,000
12,000,000
$
169,466
$
290,514
7.625%
5/16/2017
Series D
18,400,000
18,400,000
18,400,000
18,400,000
445,457
445,457
7.50%
9/13/2017
Series E
—
11,500,000
—
11,500,000
—
287,500
7.625%
8/27/2017
Series H
2,200,000
—
2,200,000
—
55,000
— 8.125%
5/22/2019
NA
NA
NA
NA
Fixed-to-floating rate
Series F
28,800,000
28,800,000
28,800,000
28,800,000
696,910
696,910
6.95%
9/30/2022
9/30/2022
Series G
19,550,000
—
17,000,000
—
411,335
—
6.50%
3/31/2023
3/31/2023
Floating
Annual
Rate
NA
NA
NA
NA
3M LIBOR
+ 4.993%
3M LIBOR
+ 4.172%
Total
(1)
75,950,000
70,700,000
73,400,000
70,700,000
$ 1,778,168
$ 1,720,381
Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under
limited circumstances related to a change in control of the Company.
Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued
and unpaid dividends through their redemption date. Through December 31, 2018, the Company had declared and paid all required
quarterly dividends on the Company’s preferred stock.
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During the year ended December 31, 2018, the Company issued 17.0 million shares of its 6.50% Series G Fixed-to-Floating Rate
Cumulative Redeemable Preferred Stock (“Series G Preferred Stock”) for gross proceeds of $425.0 million before deducting the
underwriting discount and other estimated offering expenses and 2.2 million shares of its Series H Cumulative Redeemable
Preferred Stock (“Series H Preferred Stock”) in connection with the acquisition of MTGE Investment Corp. Refer to the
“Acquisition of MTGE Investment Corp.” Note for additional information related to the Company’s Series H Preferred Stock.
During the year ended December 31, 2018, the Company redeemed 5.0 million shares of its Series C Cumulative Redeemable
Preferred Stock (“Series C Preferred Stock”) for $125.0 million and all 11.5 million of its issued and outstanding shares of Series
E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”) for $287.5 million.
During the year ended December 31, 2017, the Company issued 28.8 million shares of its 6.95% Series F Fixed-to-Floating Rate
Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”), liquidation preference of $25.00 per share, for gross
proceeds of $720.0 million before deducting the underwriting discount and other offering expenses.
On August 25, 2017, the Company redeemed all 7.4 million of its issued and outstanding shares of 7.875% Series A Cumulative
Redeemable Preferred Stock (“Series A Preferred Stock”) for $187.5 million.
The Series C Preferred Stock, Series D Cumulative Redeemable Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock rank senior to the common stock of the Company.
(C) Distributions to Stockholders
F-36
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following table provides a summary of the Company’s dividend distribution activity for the periods presented:
Dividends and dividend equivalents declared on common stock and share-based awards
Distributions declared per common share
Distributions paid to common stockholders after period end
Distributions paid per common share after period end
Date of distributions paid to common stockholders after period end
Dividends declared to series A preferred stockholders
Dividends declared per share of series A preferred Stock
Dividends declared to series C preferred stockholders
Dividends declared per share of series C preferred stock (1)
Dividends declared to series D preferred stockholders
Dividends declared per share of series D preferred stock
Dividends declared to series E preferred stockholders
Dividends declared per share of series E preferred stock
Dividends declared to series F preferred stockholders
Dividends declared per share of series F preferred stock
Dividends declared to series G preferred stockholders
Dividends declared per share of series G preferred stock
Dividends declared to series H preferred stockholders
Dividends declared per share of series H preferred stock
(1)
Includes dividends declared per share for shares outstanding at December 31, 2018.
For the Years Ended
December 31, 2018
December 31, 2017
(dollars in thousands, except per share data)
1,457,007
1.20
394,129
0.30
$
$
$
$
1,285,701
1.20
347,876
0.30
January 31, 2019
January 31, 2018
— $
— $
14,323
1.906
34,500
1.875
2,253
0.196
50,040
1.738
26,781
1.575
1,415
0.643
$
$
$
$
$
$
$
$
$
$
$
$
9,527
1.285
22,875
1.906
34,500
1.875
21,922
1.906
20,811
0.724
—
—
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
15. INTEREST INCOME AND INTEREST EXPENSE
Refer to the note titled “Significant Accounting Policies” for details surrounding the Company’s accounting policy related to net
interest income on securities and loans.
The following table summarizes the interest income recognition methodology for Residential Securities:
Shares Authorized
Shares Issued And Outstanding
Carrying Value
December
31, 2018
December
31, 2017
December 31,
2018
December
31, 2017
December
31, 2018
December
31, 2017
Rate
Contractual
Redemption
Fixed-rate
(dollars in thousands)
Series C
7,000,000
12,000,000
7,000,000
12,000,000
$
169,466
$
290,514
7.625%
5/16/2017
Series D
18,400,000
18,400,000
18,400,000
18,400,000
445,457
445,457
7.50%
9/13/2017
Series E
—
11,500,000
—
11,500,000
—
287,500
7.625%
8/27/2017
Series H
2,200,000
—
2,200,000
—
55,000
— 8.125%
5/22/2019
NA
NA
NA
NA
Fixed-to-floating rate
Date At
Which
Dividend
Rate
Becomes
Floating
Earliest
Date (1)
Series F
28,800,000
28,800,000
28,800,000
28,800,000
696,910
696,910
6.95%
9/30/2022
9/30/2022
Floating
Annual
Rate
NA
NA
NA
NA
3M LIBOR
+ 4.993%
3M LIBOR
+ 4.172%
Series G
19,550,000
—
17,000,000
—
411,335
—
6.50%
3/31/2023
3/31/2023
Total
75,950,000
70,700,000
73,400,000
70,700,000
$ 1,778,168
$ 1,720,381
(1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under
limited circumstances related to a change in control of the Company.
Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued
and unpaid dividends through their redemption date. Through December 31, 2018, the Company had declared and paid all required
quarterly dividends on the Company’s preferred stock.
During the year ended December 31, 2018, the Company issued 17.0 million shares of its 6.50% Series G Fixed-to-Floating Rate
Cumulative Redeemable Preferred Stock (“Series G Preferred Stock”) for gross proceeds of $425.0 million before deducting the
underwriting discount and other estimated offering expenses and 2.2 million shares of its Series H Cumulative Redeemable
Preferred Stock (“Series H Preferred Stock”) in connection with the acquisition of MTGE Investment Corp. Refer to the
“Acquisition of MTGE Investment Corp.” Note for additional information related to the Company’s Series H Preferred Stock.
During the year ended December 31, 2018, the Company redeemed 5.0 million shares of its Series C Cumulative Redeemable
Preferred Stock (“Series C Preferred Stock”) for $125.0 million and all 11.5 million of its issued and outstanding shares of Series
E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”) for $287.5 million.
During the year ended December 31, 2017, the Company issued 28.8 million shares of its 6.95% Series F Fixed-to-Floating Rate
Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”), liquidation preference of $25.00 per share, for gross
proceeds of $720.0 million before deducting the underwriting discount and other offering expenses.
On August 25, 2017, the Company redeemed all 7.4 million of its issued and outstanding shares of 7.875% Series A Cumulative
Redeemable Preferred Stock (“Series A Preferred Stock”) for $187.5 million.
The Series C Preferred Stock, Series D Cumulative Redeemable Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock rank senior to the common stock of the Company.
(C) Distributions to Stockholders
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Agency
Fixed-rate pass-through (1)
Adjustable-rate pass-through (1)
Multifamily (1)
Collateralized mortgage obligation (“CMO”) (1)
Reverse mortgages (2)
Interest-only (2)
Residential credit
CRT (2)
Alt-A (2)
Prime (2)
Subprime (2)
NPL/RPL (2)
Prime jumbo (2)
Prime jumbo interest-only (2)
(1)
Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements
of Comprehensive Income (Loss).
Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through
earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss).
Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted
as if the new effective yield had been applied since inception.
Interest Income Methodology
Effective yield (3)
Effective yield (3)
Contractual Cash Flows
Effective yield (3)
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
(2)
(3)
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F-36
F-37
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The following presents the components of the Company’s interest income and interest expense for the years ended December 31,
2018, 2017 and 2016.
Interest income
Residential securities
Residential mortgage loans
Commercial investment portfolio (1)
U.S. Treasury securities
Reverse repurchase agreements
Total interest income
Interest expense
Repurchase agreements
Debt issued by securitization vehicles
Participation sold
Other
Total interest expense
Net interest income
(1)
2018
For the Years Ended December 31,
2017
(dollars in thousands)
2016
$
$
$
2,830,521
83,260
356,981
160
61,641
3,332,563
1,698,930
98,013
—
100,917
1,897,860
1,434,703
$
$
$
2,170,041
30,540
273,884
—
18,661
2,493,126
891,819
60,304
195
56,036
1,008,354
1,484,772
$
$
$
1,944,457
4,147
252,436
—
9,911
2,210,951
585,826
44,392
627
26,907
657,752
1,553,199
Includes commercial real estate debt and preferred equity, corporate debt and assets transferred or pledged to securitization
vehicles.
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F-38
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
2018, 2017 and 2016.
The following presents the components of the Company’s interest income and interest expense for the years ended December 31,
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
16. NET INCOME (LOSS) PER COMMON SHARE
Interest income
Residential securities
Residential mortgage loans
Commercial investment portfolio (1)
U.S. Treasury securities
Reverse repurchase agreements
Total interest income
Interest expense
Repurchase agreements
Debt issued by securitization vehicles
Participation sold
Other
Total interest expense
Net interest income
(1)
vehicles.
For the Years Ended December 31,
2018
2017
2016
(dollars in thousands)
2,830,521
$
2,170,041
$
$
$
83,260
356,981
160
61,641
1,698,930
98,013
—
100,917
1,897,860
30,540
273,884
—
18,661
891,819
60,304
195
56,036
1,008,354
1,944,457
4,147
252,436
—
9,911
585,826
44,392
627
26,907
657,752
3,332,563
$
2,493,126
$
2,210,951
Includes commercial real estate debt and preferred equity, corporate debt and assets transferred or pledged to securitization
$
1,434,703
$
1,484,772
$
1,553,199
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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, 2018, 2017 and 2016.
Net income (loss)
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Annaly
Dividends on preferred stock
Net income (loss) available (related) to common stockholders
Weighted average shares of common stock outstanding-basic
Add: Effect of stock awards, if dilutive
Weighted average shares of common stock outstanding-diluted
Net income (loss) per share available (related) to common share
Basic
Diluted
December 31, 2018
December 31, 2017
December 31, 2016
For the Years Ended
(dollars in thousands, except per share data)
54,148
$
1,569,016
$
1,432,786
(260)
54,408
129,312
(588)
1,569,604
109,635
(74,904) $
1,459,969
$
1,209,601,809
1,065,923,652
—
427,964
1,209,601,809
1,066,351,616
(970)
1,433,756
82,260
1,351,496
969,787,583
314,770
970,102,353
(0.06) $
(0.06) $
1.37
1.37
$
$
1.39
1.39
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$
$
$
Options to purchase 0.2 million shares, 0.8 million shares and 1.1 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 years ended December 31, 2018,
2017 and 2016, respectively.
17. INCOME TAXES
For the year ended December 31, 2018 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860.
As a REIT, the Company will not incur 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 that relate to, among other things, 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.
The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc., Arcola Securities, Inc. (“Arcola”)
and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as 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 deemed necessary at December 31, 2018 and December 31, 2017.
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 years ended December 31, 2018, December 31, 2017 and December 31, 2016 the Company recorded ($2.4) million,
$7.0 million and ($1.8) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal,
state and local tax returns from 2015 and forward remain open for examination.
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F-38
F-39
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
18. RISK MANAGEMENT
The primary risks to the Company are liquidity, investment/market risk and credit risk. Interest rates are highly sensitive to many
factors, including governmental monetary and tax policies, domestic and international economic and political considerations and
other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which
is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with
the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes
in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from
the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase
agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the
existing collateral to reduce borrowing levels.
The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate
swaps, interest rate swaptions and other hedges.
Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future interest
rates may adversely affect the performance and market value of the Company’s investments. This could negatively impact the
Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing,
the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established
policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging
strategies.
The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude
CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal
and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government.
Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating.
The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full
faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments,
real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency
mortgage-backed securities and corporate debt. MSR values may also be adversely impacted if overall costs to service the underlying
mortgage loans increase due to borrower performance. 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. RELATED PARTY TRANSACTIONS
Management Agreement
The Company and the Manager have entered into a management agreement pursuant to which the Company’s management is
conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies
established by the Board (the “Externalization”). The management agreement was effective as of July 1, 2013 and was amended
on November 5, 2014, amended and restated on April 12, 2016, and amended and restated on August 1, 2018 (the management
agreement, as amended and restated, is referred to as “Management Agreement”).
Under the Management Agreement, the Manager, subject to the supervision and direction of the Company’s Board, is responsible
for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of
capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The
Manager also performs such other supervisory and management services and activities relating to the Company’s assets and
operations as may be appropriate. In exchange for the management services, the Company pays the Manager a monthly management
fee in an amount equal to 1/12th of 1.05% of our stockholder's equity (as defined in the Management Agreement), and the Manager
is responsible for providing personnel to manage the Company, and paying all compensation and benefit expenses associated with
such personnel. The Company does not pay the Manager any incentive fees.
For the years ended December 31, 2018, 2017 and 2016, the compensation and management fee was $179.8 million (includes
$5.2 million related to compensation expense for the employees of the Company’s subsidiaries), $164.3 million (includes $7.2
million related to compensation expense for the employees of the Company’s subsidiaries), and $151.6 million (includes $8.4
million related to compensation expense for the employees of the Company’s subsidiaries), respectively.
F-40
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
18. RISK MANAGEMENT
The primary risks to the Company are liquidity, investment/market risk and credit risk. Interest rates are highly sensitive to many
factors, including governmental monetary and tax policies, domestic and international economic and political considerations and
other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which
is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with
the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes
in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from
the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase
agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the
existing collateral to reduce borrowing levels.
swaps, interest rate swaptions and other hedges.
The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate
Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future interest
rates may adversely affect the performance and market value of the Company’s investments. This could negatively impact the
Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing,
the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established
policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging
The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude
CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal
and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government.
Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating.
The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full
faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments,
real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency
mortgage-backed securities and corporate debt. MSR values may also be adversely impacted if overall costs to service the underlying
mortgage loans increase due to borrower performance. 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.
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19. RELATED PARTY TRANSACTIONS
Management Agreement
The Company and the Manager have entered into a management agreement pursuant to which the Company’s management is
conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies
established by the Board (the “Externalization”). The management agreement was effective as of July 1, 2013 and was amended
on November 5, 2014, amended and restated on April 12, 2016, and amended and restated on August 1, 2018 (the management
agreement, as amended and restated, is referred to as “Management Agreement”).
Under the Management Agreement, the Manager, subject to the supervision and direction of the Company’s Board, is responsible
for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of
capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The
Manager also performs such other supervisory and management services and activities relating to the Company’s assets and
operations as may be appropriate. In exchange for the management services, the Company pays the Manager a monthly management
fee in an amount equal to 1/12th of 1.05% of our stockholder's equity (as defined in the Management Agreement), and the Manager
is responsible for providing personnel to manage the Company, and paying all compensation and benefit expenses associated with
such personnel. The Company does not pay the Manager any incentive fees.
For the years ended December 31, 2018, 2017 and 2016, the compensation and management fee was $179.8 million (includes
$5.2 million related to compensation expense for the employees of the Company’s subsidiaries), $164.3 million (includes $7.2
million related to compensation expense for the employees of the Company’s subsidiaries), and $151.6 million (includes $8.4
million related to compensation expense for the employees of the Company’s subsidiaries), respectively.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Following the unanimous approval of the Company’s independent directors (the “Independent Directors”), in August 2018, the
Company began reimbursing the Manager for certain services in connection with the management and operations of the Company
and its subsidiaries as permitted under the terms of the Management Agreement. Such reimbursable expenses include the cost for
certain legal, tax, accounting and other support and advisory services provided by employees of the Manager to the Company.
Pursuant to the Management Agreement, the Company may reimburse the Manager for the cost of such services, provided such
costs are no greater than those that would be payable to comparable third party providers. For the year ended December 31, 2018,
reimbursement payments to the Manager were $9.2 million. There were no reimbursement payments to the Manager during the
years ended 2017 and 2016. None of the reimbursement payments are attributable to compensation of the Company’s executive
officers.
At December 31, 2018 and 2017, the Company had amounts payable to the Manager of $16.0 million and $13.8 million, respectively.
The Management Agreement’s current term ends on December 31, 2019 and will automatically renew for successive two-year
terms unless at least two-thirds of the Company’s independent directors or the holders of a majority of the outstanding shares of
the Company’s common stock in their sole discretion elect to terminate the agreement for any or no reason upon 365 days prior
written notice (such notice, a “Termination Notice”).
If the Company makes an election to terminate the Management Agreement, the Company may elect to accelerate the termination
date (“the “Termination Date”) to a date that is between seven and 90 days after the date of the Company’s delivery of a Termination
Notice (the “Notice Delivery Date”). If the Company does not make an election to accelerate the Termination Date, then the
Manager may elect to accelerate the Termination Date to the date that is 90 days after the Notice Delivery Date. If the Termination
Date is accelerated (such date, the “Accelerated Termination Date”) by either the Company or the Manager, in addition to any
amounts accrued for the period prior to the Accelerated Termination Date, the Company shall pay the Manager an acceleration
fee (the “Acceleration Fee”) in an amount equal to the average annual management fee earned by the Manager during the 24-
month period immediately preceding such Accelerated Termination Date multiplied by a fraction with a numerator of 365 minus
the number of days from the Notice Delivery Date to the Accelerated Termination Date, and a denominator of 365.
The Management Agreement may also be terminated by the Manager for any reason or no reason upon 365 days prior written
notice, or with shorter notice periods by either the Company or the Manager for cause or by the Company in the event of a sale
of the Manager that was not pre-approved by the Independent Directors.
The Management Agreement may be amended or modified by agreement between the Company and the Manager.
20. LEASE COMMITMENTS AND CONTINGENCIES
Commitments
In September 2014, the Company entered into a non-cancelable lease for office space which commenced in July 2014 and expires
in September 2025. The lease expense for each of the years ended December 31, 2018, 2017, and 2016 was $3.0 million, $3.1
million and $3.1 million. The Company’s aggregate future minimum lease payments total $25.6 million. The following table
details the future lease payments:
Years ended December 31,
Lease Commitments
(dollars in thousands)
2019
2020
2021
2022
2023
Later years
Total
$
$
3,565
3,652
3,862
3,862
3,862
6,756
25,559
Contingencies
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated
financial statements. There were no material contingencies at December 31, 2018 and 2017.
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F-40
F-41
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
21. ARCOLA REGULATORY REQUIREMENTS
Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola 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.
Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance
activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity.
Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-
backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements
and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value
in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying
collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when
necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give
Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with
the same counterparty.
As a self-clearing, registered broker dealer, Arcola is required to maintain minimum net capital by FINRA. At December 31, 2018
Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates with capital in excess of its regulatory
capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1, at December 31, 2018 was $393.8 million
with excess net capital of $393.5 million.
22. ACQUISITION OF MTGE INVESTMENT CORP.
As previously disclosed in the Company’s filings with the SEC, on September 7, 2018, Mountain Merger Sub Corporation, a
wholly-owned subsidiary of the Company, completed its acquisition of MTGE Investment Corp. (“MTGE”), an externally managed
hybrid mortgage REIT, for aggregate consideration to MTGE common shareholders of $906.2 million, consisting of $455.9 million
in equity consideration and $450.3 million in cash consideration (the “MTGE Acquisition”). The Company issued 43.6 million
common stock as part of the consideration for the MTGE Acquisition. In addition, as part of the MTGE Acquisition, each share
of MTGE 8.125% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (each, a “MTGE Preferred Share”),
that was outstanding as of immediately prior to the completion of the MTGE Acquisition was converted into one share of a newly-
designated series of the Company’s preferred stock, par value $0.01 per share, which the Company classified and designated as
Series H Preferred Stock, and which have rights, preferences, privileges and voting powers substantially the same as a MTGE
Preferred Share.
Series H Preferred Stock, and which have rights, preferences, privileges and voting powers substantially the same as a MTGE
Preferred Share.
The Company believes that the MTGE’s portfolio is complementary to the Company’s pre-acquisition portfolio, that the combined
capital base supports continued growth of the Company’s businesses and that the acquisition creates efficiency and growth
opportunities.
The MTGE Acquisition was accounted for as an asset acquisition in accordance with Accounting Standards Codification 805
Business Combinations (“ASC 805”). Under ASC 805, an acquisition does not qualify as a business combination if the acquisition
does not meet the definition of a business. U.S. GAAP defines a business as an integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic
benefits directly to investors or other owners, members, or participants. Since the Company did not acquire the external management
agreement with the MTGE’s third party manager, there were no substantive processes acquired as part of the acquisition. Therefore,
the MTGE Acquisition was not considered a business combination.
Under ASC 805, an asset acquisition is accounted for under the cost accumulation model which allocates the cost of the acquisition
which generally includes direct transaction costs to the individual assets acquired and liabilities assumed on the basis of relative
fair value with certain exceptions including financial assets and current assets. These exceptions are excluded from the cost
accumulation method since recognizing these assets at amounts other than their fair value would result in a subsequent gain or
loss upon re-measurement. Since there are no significant non-financial assets to allocate the transaction costs to, the transaction
costs of $58.3 million were expensed as they were incurred and included in Other general and administrative expenses in the
Company’s Consolidated Statements of Comprehensive Income (Loss) during the year ended December 31, 2018. Similarly, the
excess consideration of $44.5 million over the fair value of the assets acquired was recognized within Other income (loss) in the
Company’s Consolidated Statements of Comprehensive Income (Loss) on the closing date of the acquisition during the year ended
December 31, 2018. The allocation of the consideration paid as part of the transaction and its assignment to the initial carrying
value of the MTGE portfolio is noted in the below table.
F-42
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
21. ARCOLA REGULATORY REQUIREMENTS
Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola 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.
Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance
activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity.
Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-
backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements
and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value
in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying
collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when
necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give
Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with
the same counterparty.
As a self-clearing, registered broker dealer, Arcola is required to maintain minimum net capital by FINRA. At December 31, 2018
Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates with capital in excess of its regulatory
capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1, at December 31, 2018 was $393.8 million
with excess net capital of $393.5 million.
Preferred Share.
Preferred Share.
opportunities.
22. ACQUISITION OF MTGE INVESTMENT CORP.
As previously disclosed in the Company’s filings with the SEC, on September 7, 2018, Mountain Merger Sub Corporation, a
wholly-owned subsidiary of the Company, completed its acquisition of MTGE Investment Corp. (“MTGE”), an externally managed
hybrid mortgage REIT, for aggregate consideration to MTGE common shareholders of $906.2 million, consisting of $455.9 million
in equity consideration and $450.3 million in cash consideration (the “MTGE Acquisition”). The Company issued 43.6 million
common stock as part of the consideration for the MTGE Acquisition. In addition, as part of the MTGE Acquisition, each share
of MTGE 8.125% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (each, a “MTGE Preferred Share”),
that was outstanding as of immediately prior to the completion of the MTGE Acquisition was converted into one share of a newly-
designated series of the Company’s preferred stock, par value $0.01 per share, which the Company classified and designated as
Series H Preferred Stock, and which have rights, preferences, privileges and voting powers substantially the same as a MTGE
Series H Preferred Stock, and which have rights, preferences, privileges and voting powers substantially the same as a MTGE
The Company believes that the MTGE’s portfolio is complementary to the Company’s pre-acquisition portfolio, that the combined
capital base supports continued growth of the Company’s businesses and that the acquisition creates efficiency and growth
The MTGE Acquisition was accounted for as an asset acquisition in accordance with Accounting Standards Codification 805
Business Combinations (“ASC 805”). Under ASC 805, an acquisition does not qualify as a business combination if the acquisition
does not meet the definition of a business. U.S. GAAP defines a business as an integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic
benefits directly to investors or other owners, members, or participants. Since the Company did not acquire the external management
agreement with the MTGE’s third party manager, there were no substantive processes acquired as part of the acquisition. Therefore,
the MTGE Acquisition was not considered a business combination.
Under ASC 805, an asset acquisition is accounted for under the cost accumulation model which allocates the cost of the acquisition
which generally includes direct transaction costs to the individual assets acquired and liabilities assumed on the basis of relative
fair value with certain exceptions including financial assets and current assets. These exceptions are excluded from the cost
accumulation method since recognizing these assets at amounts other than their fair value would result in a subsequent gain or
loss upon re-measurement. Since there are no significant non-financial assets to allocate the transaction costs to, the transaction
costs of $58.3 million were expensed as they were incurred and included in Other general and administrative expenses in the
Company’s Consolidated Statements of Comprehensive Income (Loss) during the year ended December 31, 2018. Similarly, the
excess consideration of $44.5 million over the fair value of the assets acquired was recognized within Other income (loss) in the
Company’s Consolidated Statements of Comprehensive Income (Loss) on the closing date of the acquisition during the year ended
December 31, 2018. The allocation of the consideration paid as part of the transaction and its assignment to the initial carrying
value of the MTGE portfolio is noted in the below table.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Consideration transferred
Cash
Common equity
Preferred shares
Exchange of MTGE preferred stock for Annaly preferred stock
Total consideration
Net assets
Cash and cash equivalents
Securities
Real estate, net
Derivative assets
Reverse repurchase agreements
Receivable for unsettled trades
Principal receivable
Interest receivable
Intangible assets, net
Other assets
Total assets acquired
Repurchase agreements
Mortgages payable
U.S. Treasury securities sold, not yet purchased
Derivative liabilities
Interest payable
Dividends payable
Other liabilities
Total liabilities assumed
Net assets acquired
September 2018
(dollars in thousands)
$
$
$
$
450,287
455,943
55,000
961,230
191,953
4,111,930
277,648
18,629
938,251
6,809
44,462
14,282
14,483
50,105
5,668,552
3,561,816
201,629
934,149
2,498
22,220
819
28,715
4,751,846
916,706
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F-42
F-43
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
23. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of summarized quarterly results of operations for the years ended December 31, 2018 and 2017.
These quarterly results were prepared in accordance with GAAP and reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results. These adjustments are of a normal, recurring nature.
For the Quarters Ended
December 31,
2018
September 30,
2018
June 30,
2018
March 31,
2018
(dollars in thousands, expect per share data)
Interest income
Interest expense
Net interest income
Total realized and unrealized gains (losses)
Total other income (loss)
Less: Total general and administrative expenses
Income (loss) before income taxes
Less: Income taxes
Net income (loss)
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Less: Net income attributable to noncontrolling interests
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
$
$
(1.74) $
(1.74) $
0.29
0.29
$
859,674
586,774
$
272,900
(2,502,035)
52,377
77,073
(2,253,831)
1,041
(2,254,872)
17
32,494
(2,287,383) $
816,596
500,973
315,623
199,716
(10,643)
126,509
378,187
(7,242)
385,429
(149)
31,675
353,903
$
$
$
$
776,806
442,692
334,114
294,646
34,170
63,781
599,149
3,262
595,887
(32)
31,377
564,542
0.49
0.49
$
$
$
$
879,487
367,421
512,066
844,689
34,023
62,510
1,328,268
564
1,327,704
(96)
33,766
1,294,034
1.12
1.12
For the Quarters Ended
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
(dollars in thousands, expect per share data)
$
745,423
$
622,550
$
537,426
$
318,711
426,712
359,215
25,064
59,257
751,734
4,963
746,771
(151)
32,334
714,588
268,937
353,613
43,807
28,282
57,016
368,686
1,371
367,315
(232)
30,355
337,192
0.31
0.31
$
$
$
222,281
315,145
(277,794)
30,865
54,023
14,193
(329)
14,522
(102)
23,473
$
$
$
(8,849) $
(0.01) $
(0.01) $
587,727
198,425
389,302
74,265
31,646
53,828
441,385
977
440,408
(103)
23,473
417,038
0.41
0.41
Interest income
Interest expense
Net interest income
Total realized and unrealized gains (losses)
Total other income (loss)
Less: Total general and administrative expenses
Income (loss) before income taxes
Less: Income taxes
Net income (loss)
Less: Net income attributable to noncontrolling interests
Less: Dividends on preferred stock (1)
Net income (loss) available (related) to common stockholders
$
Net income (loss) available (related) per share to common stockholders
Basic
Diluted
$
$
0.62
0.62
(1)
The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, cumulative and undeclared dividends
of $8.3 million on the Company's Series F Preferred Stock as of September 30, 2017.
24. SUBSEQUENT EVENTS
In January 2019, the Company closed the public offering of 86.3 million shares of the Company’s common stock, which includes
an over-allotment option exercised of 11.3 million shares, for proceeds of approximately $840.1 million, before deducting estimated
offering expenses.
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In January 2019, the Company completed and closed a securitization of residential mortgage loans, OBX 2019-INV1 Trust, with
a face value of $393.9 million. The securitization represented a financing transaction which provided non-recourse financing to
the Company collateralized by residential mortgage loans purchased by the Company.
F-44
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
23. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of summarized quarterly results of operations for the years ended December 31, 2018 and 2017.
These quarterly results were prepared in accordance with GAAP and reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results. These adjustments are of a normal, recurring nature.
Interest income
Interest expense
Net interest income
Total realized and unrealized gains (losses)
Total other income (loss)
Less: Total general and administrative expenses
Income (loss) before income taxes
Less: Income taxes
Net income (loss)
Less: Net income attributable to noncontrolling interests
Less: Dividends on preferred stock
Net income (loss) available (related) to common stockholders
(2,287,383) $
Net income (loss) available (related) per share to common stockholders
Basic
Diluted
Basic
Diluted
(1)
Interest income
Interest expense
Net interest income
Total realized and unrealized gains (losses)
Total other income (loss)
Less: Total general and administrative expenses
Income (loss) before income taxes
Less: Income taxes
Net income (loss)
Less: Net income attributable to noncontrolling interests
Less: Dividends on preferred stock (1)
Net income (loss) available (related) to common stockholders
Net income (loss) available (related) per share to common stockholders
For the Quarters Ended
December 31,
September 30,
2018
2018
June 30,
2018
March 31,
2018
(dollars in thousands, expect per share data)
$
859,674
$
816,596
$
776,806
$
586,774
272,900
(2,502,035)
52,377
77,073
(2,253,831)
1,041
(2,254,872)
17
32,494
500,973
315,623
199,716
(10,643)
126,509
378,187
(7,242)
385,429
(149)
31,675
353,903
(1.74) $
(1.74) $
0.29
0.29
318,711
426,712
359,215
25,064
59,257
751,734
4,963
746,771
(151)
32,334
714,588
0.62
0.62
$
$
$
268,937
353,613
43,807
28,282
57,016
368,686
1,371
367,315
(232)
30,355
337,192
0.31
0.31
442,692
334,114
294,646
34,170
63,781
599,149
3,262
595,887
(32)
31,377
564,542
0.49
0.49
$
$
$
879,487
367,421
512,066
844,689
34,023
62,510
1,328,268
1,327,704
564
(96)
33,766
1,294,034
1.12
1.12
222,281
315,145
(277,794)
30,865
54,023
14,193
(329)
14,522
(102)
23,473
(8,849) $
(0.01) $
(0.01) $
587,727
198,425
389,302
74,265
31,646
53,828
441,385
977
440,408
(103)
23,473
417,038
0.41
0.41
$
$
$
$
$
$
For the Quarters Ended
December 31,
September 30,
2017
2017
June 30,
2017
March 31,
2017
(dollars in thousands, expect per share data)
$
745,423
$
622,550
$
537,426
$
The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, cumulative and undeclared dividends
of $8.3 million on the Company's Series F Preferred Stock as of September 30, 2017.
24. SUBSEQUENT EVENTS
offering expenses.
In January 2019, the Company closed the public offering of 86.3 million shares of the Company’s common stock, which includes
an over-allotment option exercised of 11.3 million shares, for proceeds of approximately $840.1 million, before deducting estimated
In January 2019, the Company completed and closed a securitization of residential mortgage loans, OBX 2019-INV1 Trust, with
a face value of $393.9 million. The securitization represented a financing transaction which provided non-recourse financing to
the Company collateralized by residential mortgage loans purchased by the Company.
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F-46
F-47
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.
SIGNATURES
ANNALY CAPITAL MANAGEMENT, INC.
Date: February 14, 2019
By: /s/ Kevin G. Keyes
Kevin G. Keyes
Chairman, Chief Executive Officer and President (Principal Executive Officer)
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.
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Signature
/s/ Kevin G. Keyes
Kevin G. Keyes
/s/ Glenn A. Votek
Glenn A. Votek
/s/ Francine J. Bovich
Francine J. Bovich
/s/ Kevin P. Brady
Kevin P. Brady
/s/ Wellington J. Denahan
Wellington J. Denahan
/s/ Katherine Beirne Fallon
Katherine Beirne Fallon
/s/ Jonathan D. Green
Jonathan D. Green
/ s/ Michael E. Haylon
Michael E. Haylon
/s/ E. Wayne Nordberg
E. Wayne Nordberg
/s/ John H. Schaefer
John H. Schaefer
/s/ Donnell A. Segalas
Donnell A. Segalas
/s/ Vicki Williams
Vicki Williams
Kathy Hopinkah Hannan
Title
Date
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
February 14, 2019
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
II-1
ACREG: Refers to Annaly Commercial Real Estate Group
GSE: Refers to government sponsored enterprise
Glossary
Agency Peers: Represents companies comprising the
Agency sector within the BBREMTG Index*
Hybrid Peers: Represents the hybrid sector within the
BBREMTG Index*
AMML: Refers to Annaly Middle Market Lending Group
MLPs: Represents the Alerian MLP Index*
ARC: Refers to Annaly Residential Credit Group
MML Peers: Represents the S&P BDC Index*
BBREMTG: Represents the Bloomberg Mortgage
REIT Index*
mREITs or mREIT Peers: Represents the
BBREMTG Index*
Beta: Represents Bloomberg’s ‘Overridable Adjusted Beta’
which estimates the degree to which a stock’s price will
fluctuate based on a given movement in the representative
market index, calculated from December 31, 2013 to
January 31, 2019 with daily periodicity. S&P 500 is used as
the relative index for the calculation
S&P 500: Represents the S&P 500 Index*
Select Financials: Represents an average of companies
in the S5FINL Index with dividend yields greater than
50 basis points higher than the S&P 500 dividend yield as
of January 31, 2019
Commercial Peers: Represents companies comprising the
commercial sector within the BBREMTG Index*
SRI: Refers to Socially Responsible Investments
Consumer Staples: Represents the S5CONS Index*
Continuing Directors: Includes the eleven members of
Annaly’s Board that have been nominated for re-election
at the Company’s 2019 Annual Meeting of Stockholders
(the “Annual Meeting”). As noted in the Company’s 2019
Proxy Statement, Messrs. Brady and Nordberg have not
been renominated as Directors and will step down from
the Board following the Annual Meeting in line with the
Board refreshment policy adopted in October 2018
CRT: Refers to credit risk transfer securities
Treynor Ratio: Represents the annualized total
shareholder return from December 31, 2013 through
January 31, 2019 less the average yield on the 10-yr
Treasury over the respective period divided by the beta
over the respective period
Unencumbered Assets: Represents Annaly’s excess
liquidity and defined as assets that have not been
pledged or securitized (generally including cash and
cash equivalents, Agency MBS, CRT, Non-Agency MBS,
residential mortgage loans, MSRs, reverse repurchase
agreements, CRE debt and preferred equity, corporate
debt, unencumbered financial assets and capital stock)
Equity REITs: Represents the RMZ Index*
Utilities: Represents the Russell 3000 Utilities Index*
ESG: Refers to Environmental, Social and Governance
FHLB: Refers to the Federal Home Loan Bank
Yield Sectors or Yield Sector Peers: Representative of
Consumer Staples, Equity REITs, MLPs, Select Financials
and Utilities
*Represents constituents as of January 31, 2019.
Annaly Capital Management Inc. 2018 Annual Report Endnotes
Message from our Chairman, CEO and President
Source: Bloomberg and Company Filings.
Market data as of January 31, 2019. Financial data as of December 31, 2018.
1. Represents originated or purchased whole loans, commercial mortgage-backed securities and equity assets across the credit investment groups from
December 31, 2013 to December 31, 2018.
2. $6.5bn of capital includes: (1) $816mm raised through a common equity offering in July 2017; (2) $720mm raised through a preferred equity offering
in July 2017; (3) $857mm raised through a common equity offering in October 2017; (4) $425mm raised through a preferred equity offering in
January 2018; (5) $877mm raised through a common equity offering in September 2018; (6) $840mm raised through a common equity offering in
January 2019; (7) $251mm raised through the Company’s at-the-market sales program for its common stock, which was entered into in January 2018,
net of sales agent commissions and other offering expenses; (8) $975mm of equity issued as partial merger consideration and $288mm of preferred
equity assumed in connection with the Hatteras Financial acquisition in April 2016; and (9) $456mm of equity issued as partial merger consideration
and $55mm of preferred equity assumed in connection with the MTGE Investment Corp. (“MTGE”) acquisition in September 2018. These amounts
exclude any applicable underwriting discounts and other estimated offering expenses, unless otherwise noted. The July 2017, September 2018 and
January 2019 common equity offerings include the underwriters’ full exercise of their overallotment option to purchase additional shares of stock.
The July 2017 preferred offering and October 2017 common offering include the underwriters’ partial exercise of their overallotment option to
purchase additional shares of preferred and common stock, respectively.
3. Shareholder data per Ipreo from December 31, 2013 to December 31, 2018.
4. $2.4bn of additional borrowing capacity includes $1.5bn in residential whole loan securitizations ($1.1bn closed in 2018 and $394mm closed
subsequent to year end in January 2019) and $900mm in additional credit financing capacity ($700mm closed in 2018 and $200mm closed subsequent
to year end in January 2019).
5. Does not include structural leverage.
6. Represents economic leverage, which is computed as the sum of recourse debt, TBA derivative and CMBX notional outstanding and net forward
purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding
certain non-recourse credit facilities). Securitized debt, certain credit facilities (included within other secured financing) and mortgages payable are
non-recourse to the Company and are excluded from this measure. For Agency mREITs, economic leverage is computed using similarly defined
recourse debt as disclosed in each of the peers’ respective public filings.
7. Represents operating expense (excluding transaction costs) as a percentage of average equity. For Annaly and mREIT Peers, operating expense
is defined as: (i) for internally-managed peers, the sum of compensation and benefits, general and administrative expenses (“G&A”) and other
operating expenses, less any one-time or transaction related expenses and (ii) for externally-managed peers, the sum of net management fees,
compensation and benefits (if any), G&A and other operating expenses, less any one-time or transaction related expenses. Excludes companies with
negative equity or operating expenses as a percent of average equity in excess of 250%.
8. $15bn balance sheet includes: (1) $12.3bn of common equity as of December 31, 2018; (2) $1.8bn of preferred equity as of December 31, 2018; and (3)
$830mm of common equity raised through a common equity offering in January 2019, net of underwriting discounts and other offering expenses.
9. Represents originated or purchased whole loans, commercial mortgage-backed securities and equity assets across the credit investment groups
and includes unfunded commitments of $161mm. Year-over-year increase excludes loans acquired through securitization call rights and assets
onboarded in connection with the MTGE acquisition.
10. Represents total shareholder return for the period beginning December 31, 2013 to January 31, 2019.
11. Represents LTM pre-tax margin calculated as pre-tax income divided by total revenue or total gross interest income for each company. Companies
with negative pre-tax margins are excluded from the calculation.
12. Represents the average daily trading volume ($millions) for the trailing 3 months.
13. Represents percentage of Continuing Directors.
14. Employee composition statistics as of December 31, 2018. Annaly is externally-managed by Annaly Management Company, LLC (the “Manager”).
As of December 31, 2018, the Manager had 162 employees and Annaly’s subsidiaries collectively had 8 employees. For ease of reference, throughout
this Annual Report, the employees of the Manager, together with employees of Annaly’s subsidiaries, are referred to as Annaly’s employees.
15. Survey results based on annual internal surveys conducted by Perceptyx from 2015 through 2018.
16. Represents Financial Activities industry sector, which consists of Finance and Insurance and Real Estate and Rental and Leasing sectors as of
December 31, 2018.
Strategic Milestones
Source: Company Filings.
1. Credit assets shown net of securitized debt.
2.
July 2017 preferred offering size includes the underwriter’s partial exercise of its overallotment option to purchase additional shares of preferred
stock. Gross proceeds are before deducting the underwriting discount and other estimated offering expenses.
3. July 2017, September 2018 and January 2019 common offering size includes the underwriter’s full exercise of its overallotment option to purchase
additional shares of common stock. October 2017 offering size includes the underwriter's partial exercise of its overallotment option to purchase
additional shares of common stock. Gross proceeds are before deducting the underwriting discount and other estimated offering expenses.
4. “Credit Risk Transfer and De Facto GSE Reform”; D. Finkelstein, A. Strzodka, and J. Vickery; Federal Reserve Bank of New York Staff Reports, no.
838; February 2018. For more information please refer to: https://www.annaly.com/investors/news/thought-leadership.
5. Shown net of sales agent commissions and other offering expenses.
Diversified Shared Capital Model
Source: Bloomberg and Company Filings.
Market data as of January 31, 2019. Financial data as of December 31, 2018.
1. Data shown since December 31, 2013, which marks the beginning of Annaly’s diversification efforts, through January 31, 2019.
2. Agency assets include to be announced (“TBA”) purchase contracts (market value) and mortgage servicing rights (“MSRs”). Residential Credit and
Commercial Real Estate assets exclude securitized debt of consolidated variable interest entities (“VIEs”).
3. Represents the capital allocation for the each of the four investment groups and is calculated as the difference between assets and related financing.
Includes TBA purchase contracts, excludes non-portfolio related activity and varies from total stockholders’ equity.
4. Sector rank compares Annaly dedicated capital in each of its four investment groups as of December 31, 2018 (adjusted for P/B as of January 31,
2019) to the market capitalization of the companies in each respective comparative sector as of January 31, 2019. Comparative sectors used for
Agency, Commercial Real Estate and Residential Credit ranking are their respective sector within the BBREMTG Index as of January 31, 2019.
Comparative sector used for Middle Market Lending ranking is the S&P BDC Index as of January 31, 2019.
5. Levered return assumptions are for illustrative purposes only and attempt to represent current market asset returns and financing terms for
prospective investments of the same, or of a substantially similar, nature in each respective group.
6. Investment options are as of December 31 for each respective year.
Annaly Capital Management Inc. 2018 Annual Report Endnotes
Diversified Shared Capital Model | Agency
Source: Company Filings.
Financial data as of December 31, 2018 unless otherwise noted.
1. Agency assets include TBA purchase contracts (market value) and MSRs.
2. Measures total notional balances of interest rate swaps, interest rate swaptions and futures relative to repurchase agreements, other secured financing
and TBA derivative and CMBX notional outstanding; excludes MSRs and the effects of term financing, both of which serve to reduce interest rate
risk. Additionally, the hedge ratio does not take into consideration differences in duration between assets and liabilities.
3. Reflects Annaly's 5-year FHLB financing, which sunsets in February 2021.
4. Represents average Core ROE from March 31, 2016 to December 31, 2018. Annaly core ROE (ex-PAA) is a non-GAAP financial measure; see Non-
GAAP Reconciliations following these Endnotes for additional detail. Agency Peer Average calculated using core ROE or similarly adjusted ROE as
disclosed in each of the peers’ respective public filings, which differ from Annaly’s definition of core.
Diversified Shared Capital Model | Credit
Source: Company Filings.
Financial data as of December 31, 2018.
1. Includes unfunded commitments of $161mm.
2. Year-over-year increase excludes loans acquired through securitization call rights and assets onboarded in connection with the MTGE acquisition.
3. $2.4bn of financing capacity includes $1.5bn in residential whole loan securitizations ($1.1bn closed in 2018 and $394mm closed subsequent to year
end in January 2019) and $900mm in additional credit financing capacity ($700mm closed in 2018 and $200mm closed subsequent to year end in
January 2019).
4. Includes unfunded commitments in the year of origination.
5. Represents originated or purchased whole loans, commercial mortgage-backed securities and equity assets across the credit investment groups in
each year.
6. Reflects limited and general partnership interests in a commercial loan investment fund that is accounted for under the equity method for GAAP.
7. Reflects joint venture interests in a social impact loan investment fund that is accounted for under the equity method for GAAP.
8. Includes equity investments in health care assets.
9. Includes mezzanine loans for which Commercial Real Estate is also the corresponding first mortgage lender, B-Notes held for investment and a
B-Note held for sale.
Financing, Capital & Liquidity
Source: Company Filings and Bloomberg.
Financial data as of December 31, 2018.
1. Does not include structural leverage.
2. Includes $1.1bn closed in 2018 (three securitizations) and $394mm closed subsequent to year end in January 2019 (one securitization).
3. Close of third credit facility occurred subsequent to year end in January 2019.
4. “Agency Avg”, “Hybrid Avg” and “Commercial Avg” include the average leverage as of December 31, 2018 of the five largest mREITs by market
capitalization in their respective Agency, Hybrid and Commercial Real Estate sector within the BBREMTG Index as of January 31, 2019. “MML Avg”
includes the average leverage of the five largest market cap companies in the S&P BDC Index as of January 31, 2019.
5. For Annaly, economic leverage is computed as the sum of recourse debt, TBA derivative and CMBX notional outstanding and net forward purchases
(sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-
recourse credit facilities). Securitized debt, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse
to the Company and are excluded from this measure. For peers, economic leverage is computed using similarly defined recourse debt as disclosed
in each of the peers’ respective public filings.
6. Represents leverage rather than economic leverage and includes non-recourse debt.
7. Reflects Annaly’s 5-year FHLB financing, which sunsets in February 2021.
8. Agency Peers, Hybrid Peers and Commercial Peers represent the five largest mREITs by market capitalization in their respective Agency, Hybrid
and Commercial Real Estate sector within the BBREMTG Index as of January 31, 2019.
Operational Efficiency
Source: Bloomberg and Company Filings.
Financial data as of December 31, 2018 or most recent quarter available.
1. Represents operating expense (excluding transaction costs) as a percentage of Core Earnings. For Annaly and mREIT Peers, operating expense
is defined as: (i) for internally-managed peers, the sum of compensation and benefits, general and administrative expenses (“G&A”) and other
operating expenses, less any one-time or transaction related expenses and (ii) for externally-managed peers, the sum of net management fees,
compensation and benefits (if any), G&A and other operating expenses, less any one-time or transaction related expenses. Core Earnings (excluding
Premium Amortization Adjustment) is a non-GAAP financial measure; see Non-GAAP Reconciliation following these Endnotes for additional detail.
2. Represents operating expense (excluding transaction costs) as a percentage of average equity. For Annaly and mREIT Peers, operating expense
is defined as: (i) for internally-managed peers, the sum of compensation and benefits, general and administrative expenses (“G&A”) and other
operating expenses, less any one-time or transaction related expenses and (ii) for externally-managed peers, the sum of net management fees,
compensation and benefits (if any), G&A and other operating expenses, less any one-time or transaction related expenses. Excludes companies with
negative equity or operating expenses as a percent of average equity in excess of 250%.
3. Represents the average of the Yield Sectors.
Annaly Capital Management Inc. 2018 Annual Report Endnotes
Growth & Income
Source: Bloomberg and Company Filings.
Market data as of January 31, 2019. Financial data as of December 31, 2018.
1. Includes Annaly’s $876mm acquisition of CreXus Investment Corp. (closed May 2013), $1,519mm acquisition of Hatteras Financial Corp. (closed
July 2016) and $906mm acquisition of MTGE Investment Corp. (“MTGE”) (closed September 2018).
2. Represents: (1) $720mm raised through a preferred equity offering in July 2017; (2) $425mm raised through a preferred equity offering in January 2018;
(3) $251mm raised through the Company’s at-the-market sales program for its common stock, which was entered into in January 2018, net of sales
agent commissions and other offering expenses; (4) $975mm of equity issued as partial merger consideration and $288mm of preferred equity
assumed in connection with the Hatteras Financial acquisition in April 2016; and (5) $456mm of equity issued as partial merger consideration and
$55mm of preferred equity assumed in connection with the MTGE Investment Corp. acquisition in September 2018. These amounts exclude any
applicable underwriting discounts and other estimated offering expenses, unless otherwise noted. The July 2017 preferred offering includes the
underwriters’ partial exercise of their overallotment option to purchase additional shares of preferred stock.
3. Reflects announcement date of the MTGE acquisition, which closed in September 2018.
4. Total return shown since December 31, 2015.
5. “Cumulative Dividends Declared” represents common and preferred dividends. For the third quarter 2018, the common stock dividend is represented
as the aggregate $0.30 common stock dividend comprised of (i) the $0.22174 short period dividend paid on September 6, 2018 in connection with the
Company’s acquisition of MTGE, and (ii) the $0.07826 remaining dividend paid on September 28, 2018.
6. Line represents the lower bound of the Fed Funds target range.
Risk-Adjusted Returns
Source: Bloomberg and Company Filings.
Market data as of January 31, 2019. Financial data as of December 31, 2018.
1. Total return represents total shareholder return for the period beginning December 31, 2013 to January 31, 2019.
2. Represents average of the Yield Sectors.
3. Annaly beta relative to average Yield Sector beta as of January 31, 2019.
4. Annaly core ROE (ex-PAA) is a non-GAAP financial measure; see Non-GAAP Reconciliations for additional detail. Agency Peer Average calculated
using core ROE or similarly adjusted ROE as disclosed in each of the peers’ respective public filings, which differ from Annaly’s definition of core.
Values may not sum due to rounding.
Corporate Responsibility & Governance Milestones
1. In April 2016, Annaly expanded its Employee Stock Ownership Guidelines to Director-level and above employees, representing 40% of the Firm.
Pursuant to these guidelines, employees are not granted stock, but rather, asked to purchase predetermined amounts of shares in the open market
based on certain criteria including seniority, compensation level and role.
2. Initially know as Public Responsibility Committee (“PRC”).
Corporate Governance
Source: ISS Corporate Solutions and Ipreo.
1. Funds with ESG or SRI designations are as of December 31, 2018.
2. Representative of outreach during 2018-2019 proxy season and shareholder base as of December 31, 2018. Shareholder data per Ipreo.
Human Capital
1. Employee composition statistics as of December 31, 2018. Annaly is externally managed by Annaly Management Company, LLC (the “Manager”).
As of December 31, 2018, the Manager had 162 employees and Annaly’s subsidiaries collectively had 8 employees. For ease of reference, throughout
this Annual Report, the employees of the Manager, together with employees of Annaly’s subsidiaries, are referred to as Annaly’s employees.
2. Survey results based on annual internal surveys conducted by Perceptyx from 2015 through 2018.
3. Financial Services Sector data per United States Department of Labor, Bureau of Labor Statistics, "Job Openings and Labor Turnover Summary,"
using 2018 total.
4. As of December 31, 2018, excluding 2018 new hires.
Responsible Investments
Financial data as of December 31, 2018.
1. Represents the estimated number of homes financed by Annaly’s holdings of Agency MBS, residential whole loans and securities, as well as multi-
family commercial real estate loans, securities and equity investments. The number includes all homes related to securities and loans wholly-owned
by Annaly and a pro-rata share of homes in securities or equity investments that are partially owned by Annaly.
2. Represents the cumulative commitment value at investment date of Annaly’s middle market lending and commercial real estate investments in
health care, data and technology, sustainable environment and economic opportunities across communities, including current and prior investments,
through December 31, 2018.
3. Represents all of the loans included in low loan balance (<$85,000) and medium loan balance ($85,000-$110,000) Agency MBS pools wholly-owned
by Annaly and a pro-rata share of loans in low loan balance and medium loan balance Agency MBS pools partially-owned by Annaly. Based on
FHFA’s September 30, 2018 seasonally adjusted House Price Index, which is calculated using home sales price information from mortgages sold to,
or guaranteed by, Fannie Mae and Freddie Mac.
4. Represents residential whole loans owned by Annaly.
5. CRTs include the loans in the CRT reference pool for CRT securities partially owned by Annaly. In rare cases, some individual borrowers may be
counted multiple times if they are present in Annaly’s holdings of multiple asset types.
6. All figures quoted in this section represent the cumulative commitment value at investment date of Annaly’s commercial investments, including
current and prior investments, through December 31, 2018.
7. The United States Department of Agriculture defines a food desert as a “low-access community,” where at least 500 people and/or at least 33 percent
of the census tract's population must reside more than one mile from a supermarket or large grocery store (for rural census tracts, the distance is
more than 10 miles).
8. Annaly’s investment represents $20 million and Capital Impact Partner’s investment represents $5 million.
9. Annaly’s commitment represents $20 million and Capital Impact Partner’s commitment represents $5 million.
Annaly Capital Management Inc. 2018 Annual Report Board of Directors
1. Stepping down from the Board at the Annual Meeting in line with the Board refreshment policy adopted in October 2018.
Endnotes
Annaly Outperformance
Source: Bloomberg.
Market data shown from December 31, 2013 to January 31, 2019.
Non-GAAP Reconciliations
1. Includes depreciation and amortization expense related to equity method investments.
2. Beginning with the quarter ended September 30, 2018, the Company excludes non-core (income) loss allocated to equity method investments, which
represents the unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other income (loss). The quarter
ended December 31, 2018 also includes a realized gain on sale within an unconsolidated joint venture, which is a component of Other income (loss).
3. The quarter ended September 30, 2018 reflects the amount of consideration paid for the acquisition of MTGE in excess of the fair value of net assets
acquired. This amount is primarily attributable to a decline in portfolio valuation between the pricing and closing dates of the transaction and is
consistent with changes in market values observed for similar instruments over the same period.
4. Represents costs incurred in connection with the MTGE transaction and costs incurred in connection with a securitization of residential whole loans
for the quarters ended September 30, 2018 and December 31, 2018. Represents costs incurred in connection with a securitization of residential whole
loans for the quarter ended March 31, 2018.
5. TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income
totaled $1.2mm for each of the quarters ended December 31, 2018 and September 30, 2018. There were no adjustments for CMBX coupon income
prior to September 30, 2018.
6. MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on the Company’s MSR
portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value.
7. Net of dividends on preferred stock.
8. Average cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average
interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense
and the net interest component of interest rate swaps. Prior to the quarter ended March 31, 2018, this metric included the net interest component of
interest rate swaps used to hedge cost of funds. Beginning with the quarter ended March 31, 2018, as a result of changes to the Company’s hedging
portfolio, this metric reflects the net interest component of all interest rate swaps.
9. CMBX coupon income and average CMBX balances have only been applied to the quarters ended December 31, 2018 and September 30, 2018. The
impact to net interest margin (ex-PAA) in prior periods was immaterial.
Annaly Capital Management Inc. 2018 Annual Report )
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Annaly Capital Management Inc. 2018 Annual Report
(This page intentionally left blank.) Safe Harbor Notice
Forward-Looking Statements
This Annual Report, other written or oral communications, and our public documents to which we refer contain or incorporate by
reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and 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, including, but not limited to, changes
in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities (“MBS”) 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 our commercial real estate business; our ability
to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments
in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real
estate assets and corporate debt; risks related to investments in mortgage servicing rights; our ability to consummate any contemplated
investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification
as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment
Company Act of 1940, as amended. For a discussion of the risks and uncertainties which could cause actual results to differ from
those contained in the forward-looking statements, see “Risk Factors” in the Form 10-K included within the Annual Report and any
subsequent Quarterly Reports on Form 10-Q. 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 routinely posts important information for investors on the Company’s website, www.annaly.com. Annaly intends to use this
webpage as a means of disclosing material, non-public information, for complying with the Company’s disclosure obligations under
Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors,
analysts, the media and others interested in Annaly to monitor the Company’s website, in addition to following Annaly’s press releases,
SEC filings, public conference calls, presentations, webcasts and other information it posts from time to time on its website. To sign-
up for email-notifications, please visit the “Email Alerts” section of our website, www.annaly.com, under the “Investors” section and
enter the required information to enable notifications. The information contained on, or that may be accessed through, the Company’s
webpage is not incorporated by reference into, and is not a part of, this Annual Report.
Past performance is no guarantee of future results. There is no guarantee that any investment strategy referenced herein will work
under all market conditions. Prior to making any investment decision, you should evaluate your ability to invest for the long-term,
especially during periods of downturns in the market. You alone assume the responsibility of evaluating the merits and risks associated
with any potential investment or investment strategy referenced herein. To the extent that this material contains reference to any past
specific investment recommendations or strategies which were or would have been profitable to any person, it should not be assumed
that recommendations made in the future will be profitable or will equal the performance of such past investment recommendations
or strategies.
Non-GAAP Financial Measures
This Annual Report includes certain non-GAAP financial measures, including core earnings metrics, which are presented both
inclusive and exclusive of the premium amortization adjustment (“PAA”). We believe the non-GAAP financial measures are useful
for management, investors, analysts, and other interested parties in evaluating our performance but should not be viewed in isolation
and are not a substitute for financial measures computed in accordance with U.S. generally accepted accounting principles (“GAAP”).
In addition, we may calculate non-GAAP metrics, which include core earnings, and the PAA, differently than our peers making
comparative analysis difficult. Please see the section entitled “Non-GAAP Reconciliations” in the Endnotes to this Annual Report for a
reconciliation to the most directly comparable GAAP financial measures.
Annaly Capital Management, Inc. 1211 Avenue of the Americas New York, NY 10036www.annaly.com