RR
R
ii
Annaly Capital Management Inc. 2020 Annual Report
Note: Please refer to Glossary for defined terms and "Annaly | Power, Proven, People" in Endnotes section for footnoted information.
Power of Annaly
The industry leader with a differentiated investing model
Annaly’s Size, Scale and Diversification
~16x
Size of Median mREIT
by Market Cap(1)
$14bn
10
Permanent Capital(2)
Financing Options
$8.7bn
Unencumbered
Assets
Scale
Diversified
Financing
Liquid
Annaly uses its size and
scale to support two
fundamental pillars of the
American economy:
housing and business
Annaly is able to
efficiently diversify
investments across its
businesses through a
rigorous shared capital
model and capital
allocation process
Annaly’s deep and
diverse financing sources
include traditional repo,
warehouse lines and
financing through our
own broker dealer
Our diversified, lower
leveraged strategy results
in greater liquidity - $8.7bn
of total unencumbered
assets and $6.3bn of cash
and unencumbered
Agency MBS
Market Cap ($mm) | Annaly vs. mREIT Peers
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
Annaly Market Cap: $11.4bn
1
r
e
e
P
2
r
e
e
P
3
r
e
e
P
4
r
e
e
P
5
r
e
e
P
6
r
e
e
P
7
r
e
e
P
8
r
e
e
P
9
r
e
e
P
0
1
r
e
e
P
1
1
r
e
e
P
2
1
r
e
e
P
3
1
r
e
e
P
4
1
r
e
e
P
5
1
r
e
e
P
6
1
r
e
e
P
7
1
r
e
e
P
8
1
r
e
e
P
9
1
r
e
e
P
0
2
r
e
e
P
1
2
r
e
e
P
2
2
r
e
e
P
3
2
r
e
e
P
4
2
r
e
e
P
5
2
r
e
e
P
6
2
r
e
e
P
7
2
r
e
e
P
8
2
r
e
e
P
9
2
r
e
e
P
0
3
r
e
e
P
1
3
r
e
e
P
2
3
r
e
e
P
3
3
r
e
e
P
4
3
r
e
e
P
5
3
r
e
e
P
6
3
r
e
e
P
7
3
r
e
e
P
Peer Median Market Cap: $723mm
Note: Please refer to Glossary for defined terms and Power of Annaly in Endnotes section for footnoted information.
iv
Annaly Capital Management Inc. 2020 Annual Report
Proven Results
Proven over 20+ years to be a stable source of yield for shareholders
Since inception, Annaly has delivered ~$21bn in
dividends to shareholders(1)
$22,500
$20,000
$17,500
$15,000
$12,500
$10,000
$7,500
$5,000
$2,500
1,200%
1,000%
800%
600%
400%
200%
(200%)
7
9
9
1
8
9
9
1
9
9
9
1
0
0
0
2
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
Prior Cumulative Dividends Declared
Dividends Declared During Year
Annaly has delivered total returns of 861% since IPO, outperforming the
broader market by ~1.75x
861%
496%
10/1/1997
8/16/2001
7/2/2005
5/17/2009
4/2/2013
2/15/2017
1/1/2021
Annaly
S&P 500
Note: Please refer to Glossary for defined terms and Proven Results in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
v
People First
Our greatest asset is our employees highly skilled individuals with varying sets of
professional experience across sectors, credit cycles and functions who come to work
every day committed to the long-term success and growth of our Company
OurPeople
Thedeepandvariedexpertiseofourtalentedprofessionalshassupportedour
successfulevolutiontothediversifiedcapitalmanagerwearetoday
Employee Gender and Racial Diversity
32%
32%
45%
38%
of employees
identify as women
of employees identify as
racially / ethnically diverse
of new hires in 2020
identify as racially /
ethnically diverse
of promoted employees in
2020 identify as women or
racially / ethnically diverse
Diversity in Leadership
64%
100%
17%
38%
of Continuing Directors
identify as women or
racially / ethnically diverse
7 out of 11
of Board Committee Chairs
identify as women
5 out of 5
of Executive Officers
identify as women
1 out of 6
of Operating Committee
members identify as
women
5 out of 13
vi
Annaly Capital Management Inc. 2020 Annual Report
Contents
01 Message from Our CEO
02 OOur Investment Strategies
Agency
Residential Credit
Middle Market Lending
Commercial Real Estate | Planned Divestiture
03 Financing, Capital & Liquidity
04 Operational Efficiency
05 Corporate Responsibility & Governance
Leading with Purpose & Impact
Board Composition & Shareholder Engagement
Board of Directors
1
6
7
8
9
10
11
12
13
14
15
16
Annaly Capital Management Inc. 2020 Annual Report
vii
Message from Our CEO
Dear Fellow Shareholders,
management succession, corporate culture, diversity
and employment.
our
2020 was a year that tested our humanity as our
world was transformed by a pandemic that affected
all aspects of our lives. In reflecting on the year, I
believe a bright spot amidst the darkness was our
resilience. The strength and courage
universal
exhibited
responders, medical
first
by
professionals and countless others who continue to
lead our country through this difficult period are truly
inspiring. On behalf of everyone at Annaly, we are
grateful for the selflessness and sacrifices made by
so many during this crisis and we are reminded of the
responsibility to lead with purpose and impact during
this time of rapid change.
Resilience is also a quality shared by the employees
of Annaly whose tireless efforts helped us
successfully navigate this past year to deliver a
positive economic return for our shareholders. We
delivered performance that we are proud of amidst
the historic volatility experienced early in the year as
the viruss devastating economic impacts unfolded.
Annaly successfully transitioned to a remote work
environment ahead of government mandates and we
prioritized staying engaged with our employees
through new and innovative mediums. Weve
provided flexible work arrangements and our focus
on technology has allowed for a seamless working
experience throughout the year. This period has
reinforced the importance of culture, our people and
emergency planning and system resiliency, which
has been a priority of ours for years. In that spirit, we
expanded
(formerly)
Compensation Committee, which has been renamed
as
and
Development
broad
Compensation Committee,
include
to
capital
of
oversight
human
the Companys
management,
including policies and strategies
related to recruiting, retention, career development,
the mandate
Management
the
the
of
LEADING WITH PURPOSE & IMPACT
2020 was also a year marked by social unrest
sparked by issues of injustice and inequality. At
Annaly, we believe firmly in utilizing our voice to
speak out in support of equality and we have a
corporate
long-standing
commitment
responsibility and a culture
champions
inclusivity. We have taken significant steps to
improve our diversity efforts at Annaly including
expanded unconscious bias training, naming our first
Head of Inclusion and establishing an Inclusion
Support Committee of Executive Sponsors.
to
that
Additionally, on the 23rd anniversary of our IPO, we
inaugural corporate responsibility
published our
report, which details our significant corporate
governance
responsible
enhancements,
investments, corporate philanthropy and human
capital initiatives. These practices are integral to our
business at Annaly and our report includes related
supplemental
various
sustainability reporting frameworks and details how
we integrate ESG within our investment processes
and corporate strategy. We are continuously
enhancing these practices and are acutely focused
on ensuring our investments make a positive impact
on the world around us.
disclosures
under
Over the last few years, we have made significant
enhancements to our corporate governance in order
to drive value for shareholders. Notably,
the
completion of our management internalization in
June 2020 underscores our commitment to further
align the interests of management and shareholders
and demonstrates our continued efforts towards
enhanced governance practices that incorporate the
views
the
internalization, which has already resulted in
long-term owners. Ultimately,
of
Note: Please refer to Glossary for defined terms and Message from Our CEO in Endnotes section for footnoted information.
1
Annaly Capital Management Inc. 2020 Annual Report
the long run. As a testament
increased transparency and disclosures to our
is expected to save operating costs
shareholders,
over
to the
internalizations value, we have already reduced our
operating expense ratio by over 20 basis points to
1.62% as of year-end, which was at the low end of the
long-term target
at
range we
announcement of the internalization in February
2020 and well below the average of our mREIT Peers.
established
on
our
focus
strengthen
Most recently, we welcomed Eric A. Reeves to our
Board of Directors. Erics valuable insight and legal
and private capital expertise will enrich Annaly and
further
corporate
governance and business performance. We believe
our Company benefits from a diverse group of voices
on the Board and we have been committed to
increasing the Boards breadth as indicated by the
range of expertise in our Board skills and experiences
matrix, which is set forth in the proxy statement for
our 2021 annual meeting of stockholders.
PORTFOLIO PERFORMANCE & STRATEGY
In the face of continued economic uncertainty,
Annaly delivered strong results for 2020 that were
driven by careful management of our well-positioned
investment portfolio. Key to our performance during
the crisis was the liquidity of our Agency MBS
holdings and the ability to transact
in volatile
markets, as well as ample availability of financing. Of
further benefit was our relatively low overall leverage
profile and our differentiated approach to credit
investing. Throughout the year, we shifted our capital
allocation increasingly towards Agency MBS given
environment
the more
low
characterized by record low financing costs,
interest rate volatility and supportive supply and
demand dynamics.
operating
favorable
Our conservatively positioned credit businesses,
which carry relatively low leverage and limited
exposure to sectors most impacted by the pandemic,
were able to weather the disruption experienced early
in the year. To further illustrate this point, we were
able to reverse CECL reserves over the course of the
year, which declined by $20 million from the second
quarter to year end. While capital allocation to credit
was near the low end of our target range at 22% at
year end, the relative value equation shifted back
towards certain areas of credit as the economic
recovery solidified and we began increasing the
measured pace of activity in certain businesses.
Residential
strong
fundamental performance, and Middle Market
Lending, which saw credit performance indicators
improve year over year, represented the majority of
the $2.4 billion in credit originations for the year.
Credit, which
exhibited
an
been
important
We announced in March 2021 that we entered into a
definitive agreement to sell our Commercial Real
Estate business in a cash transaction valued at
$2.3 billion. The Commercial Real Estate business
pillar
of Annalys
has
differentiated
2013.
since
investment model
However, given structural changes in the operating
environment,
this transaction allows Annaly to
successfully monetize the platform and provides
additional capacity to further expand our leadership
in the core of our strategy residential mortgage
finance. We are grateful to the team who supported
and built the business over the years and we wish
them well in their future endeavors.
FINANCING, CAPITAL & LIQUIDITY
At the beginning of 2020, we took prudent steps to
fortify our balance sheet that proved invaluable as
Note: Please refer to Glossary for defined terms and Message from Our CE Oin En dno tes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
2
the market disruption experienced in March and April
Finally, we continued to use our stock buyback
took hold. We proactively reduced leverage starting
program as an effective tool to generate shareholder
in Q1 2020 and continued to do so in subsequent
return. Annaly repurchased $209 million of common
quarters, ending the year a full turn lower at 6.2x,
stock(3)
in 2020 when our evaluation deemed it the
which is the lowest economic leverage the Company
most attractive use of capital. We renewed our
has had in more than three years. Additionally, we
$1.5 billion common stock repurchase program
significantly increased our
liquidity with nearly
authorization(4)
at year-end and will consider
$9 billion of unencumbered assets as of December
additional opportunistic repurchases in the future
31, 2020, the strongest liquidity position for the
when appropriate to do so.
Company in years. We believe that this combination
of low leverage and robust liquidity allowed us to
STRATEGIC VISION
manage our capital more efficiently during a period
At Annaly, we see many synergies between our
of pronounced volatility, which differentiated us from
Agency and Residential Credit businesses and are
other market participants this past year.
During 2020, we continued to utilize the breadth of
our
financing capabilities, diversifying financing
through securitizations and increasing capacity
under our credit facilities. Annaly Residential Credit
Group completed five residential whole loan
securitizations totaling $2.1 billion since the
focused on strategically expanding our leadership
across all aspects of the housing market. We plan to
grow our operational capabilities and products
within our core competencies, diversifying and
growing our opportunity set through residential loan
acquisition channels, mortgage servicing rights
(MSR) and other asset types.
beginning of 2020 and was the third largest
As demonstrated by the announced divestiture of
non-bank issuer of new origination RMBS in 2020(1).
the Commercial Real Estate business, we are laying
Additionally, we secured $1.125 billion of additional
the foundation to further diversify within residential
capacity across two new credit facilities for the
housing finance. Within Agency, we are planning to
Residential Credit business. We took advantage of
begin investing in MSR on balance sheet and have
the relative attractiveness of balance sheet and
also established a partnership with a highly
structural
leverage compared to capital structure
reputable originator partner to further increase our
leverage, as evidenced by these transactions and the
exposure to the asset class. We have made several
redemption of our $460 million 7.50% Series D
key hires to support this growth and recently opened
Cumulative Redeemable Preferred Stock. Overall, the
an office in Dallas to broaden our sub-servicing
constructive financing environment was unlike
oversight
capabilities. Our Residential Credit
anything we have witnessed in our Companys
business
has
continued
to
form strategic
history. We achieved record-low financing costs with
partnerships to secure loan production and further
average
economic
cost
of
interest
bearing
our securitization platform, where we have been a
liabilities(2) declining 114 basis points to 0.87% over
programmatic issuer since the beginning of 2018.
the course of the year.
Note: Please refer to Glossary for defined terms and Message from Our CEO in Endnotes section for footnoted information.
3
Annaly Capital Management Inc. 2020 Annual Report
One of the many differentiators of our platform will
that the pandemic will end in the near future, we are
continue to be the optionality embedded in our
energized about our prospects and look forward to
alternative strategies, such as our Middle Market
continuing to update you on our progress on these
Lending platform. Through that business, which has
exciting initiatives.
been on balance sheet since 2010, we generate
leading returns with cycle-agnostic investments. We
Sincerely,
also expect to maintain exposure in commercial real
estate through opportunistic and efficient strategies
within the realm of securities. More broadly, we are
committed to continuing to deliver the highest quality
returns for our shareholders, while maintaining a
conservative leverage posture compared to peers.
CONCLUSION
As I reflect on my first year as CEO of Annaly I am
grateful
for
the support and dedication of our
employees, our management team, our Board and all
of Annalys
stakeholders.
Last
year,
these
relationships mattered more than ever. Throughout
our nearly 25-year history, our external stakeholders
have been key to our success and longevity and we
deeply value these partnerships. 2020 will be marked
as the most trying and exciting year of my career and
the lessons learned from this crisis, like each before
it, fuels our organizational growth and perspective.
Following the volatility last year, we are optimistic
about the health of our financial position and we will
remain nimble upon future dislocations to acquire
assets at attractive valuations that will perpetuate
our organic business objectives. Our attention to
driving shareholder value and staying focused
despite the severe turbulence surrounding us
enabled us to achieve several strategic milestones
during an otherwise challenging year. With real hope
David Finkelstein
Chief Executive Officer & Chief Investment Officer
David Finkelstein was named CEO and Director in March 2020.
Mr. Finkelstein has been with Annaly since 2013 and has served as
Chief Investment Officer since 2016. In this role, he has managed
the Agency portfolio and platform and helped build and oversee
Annalys three credit businesses. Mr. Finkelstein first encountered
Annaly in 2000 as a counterparty while trading fixed income
investments at Salomon Smith Barney and continued his
partnership with the Company in subsequent senior trading roles at
Citigroup Inc. and Barclays PLC. Mr. Finkelstein joined Annaly from
the Federal Reserve Bank of New York, where he served for four
years as an Officer in the Markets Group and was the primary
strategist and policy advisor for the MBS Purchase Program.
Mr. Finkelstein received a B.A. in Business Administration from the
University of Washington and a M.B.A. from the University of
Chicago, Booth School of Business. Mr. Finkelstein also holds the
Chartered Financial Analyst® designation.
Note: Please refer to Glossary for defined terms and Message from Our CEO in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
44
5
Annaly Capital Management Inc. 2020 Annual Report
Annaly Investment Strategies
$14 billion in permanent capital(1) invested in two fundamental pillars of the American
economy: housing and business
Portfolio Overview
Annaly Agency
Group(2)
30yr
90%
Whole
Loans
11%
Prime Jumbo
2%
RPL & NPL
19%
Prime/Alt-A/
Subprime
19%
2nd Lien
34%
Annaly Residential
Credit Group(3)
Annaly Middle
Market Lending
Group
Annaly Commercial
Real Estate Group |
Planned Divestiture(4)
Mezzanine
5%
Whole Loans
19%
DUS
2%
15yr & 20yr
7%
Other
1%
OBX Retained
27%
CRT
22%
1st Lien
66%
CMBS
34%
Equity
42%
778%
of Dedicated
Capital
7%
of Dedicated
Capital
10%
of Dedicated
Capital
5%
of Dedicated
Capital
Note: Please refer to Glossary for defined terms and Annaly Investment Strategies in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
6
Agency
The AAnnaly Agency Group invests in
Agency MBS collateralized by residential
mortgages which are guaranteed by Fannie
Mae, Freddie Mac or Ginnie Mae
Assets(1)
$94.6bn
Dedicated Capital
$10.7bn
Strategic Approach
Agency Portfolio Detail
Annalys Agency Portfolio is made up of
high quality, liquid securities, including
specified pools, TBAs, ARMs and
derivatives
Portfolio benefits from in-house
proprietary analytics that identify
emerging prepayment trends and aid in
accurately estimating cash flows
Diversified portfolio construct enhances
total return profile while duration and
convexity risks are hedged to protect
book value across various interest rate
and spread environments
Annalys Agency team has access to
traditional wholesale and proprietary
broker-dealer repo
Assets
Specified Pools and TBA Holdings, %
100%
75%
50%
25%
0%
2017
2018
2019
2020
Pools
TBA
Hedges(2)
Agency Hedging Composition, %
100%
75%
50%
25%
0%
2017
2018
2019
2020
Swaps
Swaptions
Futures
Note: Please refer to Glossary for defined terms and Our Investment Strategies | Agency in Endnotes section for footnoted information.
7
Annaly Capital Management Inc. 2020 Annual Report
Residential Credit
The AAnnaly Residential Credit Group
invests in Non-Agency residential mortgage
assets within the securitized product and
whole loan markets
Assets(1)
$2.5bn
Dedicated Capital
$0.9bn
Strategic Approach
Annaly Securitization History
Annaly Securitizations ($mm)
Ability to invest across securitized and
whole loan markets based on relative
value
Whole loan strategy focused on loans
made to creditworthy borrowers who are
underserved by traditional bank lenders
Programmatic securitization sponsor of
new origination, residential whole loans
with thirteen deals comprising +$5 billion
of issuance since the beginning of 2018
Securitization program gives Annaly the
ability to create proprietary investments
tailored to desired credit preferences with
control over diligence, origination
partners, servicers and loss mitigation
Securities span the capital structure and
both current and legacy securities
Utilize a variety of funding sources to
finance the business, including
securitization, repo and warehouse lines
$515
$489
$463$465
$468
$383$384
$394
$388
$384
$375
$327
$257
Mar Aug Oct Jan Apr Jun Jul Oct Jan Feb Jul Sep Mar
2018
2019
2020
2021
Investor Expanded Prime Seasoned ARMs Non-QM
Note: Please refer to Glossary for defined terms and Our Investment Strategies | Residential Credit in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
8
Middle Market Lending
The AAnnaly Middle Market Lending
Group provides financing to private equity
backed middle market businesses, focusing
primarily on senior debt within select
industries
Assets
$2.2bn
Dedicated Capital
$1.4bn
Strategic Approach
AMML by the Numbers
Portfolio as of December 31, 2020
Execute on a disciplined credit focused
investment strategy comprised
predominantly of first and second lien
loans
Maintain strong relationships with top
quartile U.S. based private equity firms
to generate repeat deal flow
29
Private Equity
Sponsors
Experienced investment team with a
history of allocating capital through
multiple economic cycles
$44mm
Average Investment Size(1)
48
Portfolio
Borrowers
0.7x
Leverage on
Portfolio(2)
Utilize a credit intensive investment
process and long-established
relationships to build a defensive
portfolio with a stringent focus on non-
discretionary, niche industries
Deal types include leveraged buyouts,
acquisition financing, refinancings and
dividend recapitalizations
$95mm
Average EBITDA at Underwriting
L+5.2% / L+8.3%
Weighted Average First / Second Lien
LIBOR Spread
Note: Please refer to Glossary for defined terms and Our Investment Strategies | Middle Market Lending in Endnotes section for footnoted information.
9
Annaly Capital Management Inc. 2020 Annual Report
Commercial Real Estate | Planned Divestiture
Annaly has entered into a definitive agreement to sell the
AAnnaly Commercial Real Estate Group to Slate Asset
Management, a global investment and asset management
firm focused on real estate, for $2.33 billion. Subject to
customary closing conditions, including applicable
regulatory approvals, the transaction is expected to be
completed by Q3 2021
$2,330,000,000
March 25, 2021
Strategic Evolution
Annaly acquired CreXus
Investment Corp. and
entered into the
commercial mortgage
market
Diversified into healthcare
CRE with acquisition of
MTGE Investment Corp.
Closed first $857mm
managed CRE CLO
2013
2014
2015
2016
2017
2018
2019
2020+
Expanded business with
new team that joined
from a leading real estate
company
Established strategic
partnership with
Pearlmark Real Estate
Partners
Announced agreement to
sell Commercial Real
Estate business to Slate
Asset Management
Investment Portfolio ($bn)(1)
$1.6
$1.5
$2.5
$2.3
$2.0
$2.9
$2.7
$2.3
2013
2014
2015
2016
2017
2018
2019
2020
Note: Please refer to Glossary for defined terms and Commercial Real Estate | Planned Divestiture in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
10
Financing, Capital & Liquidity
Annalys deep and diverse financing sources provide the Company with unique competitive
advantages. Throughout the year, Annaly further enhanced its capital structure and liquidity
through prudent capital management
Annaly’s Approach to Leverage
Capital
Structure
Leverage
Evaluate the relative benefits and
considerations of all forms of
capital and financing
Includes unsecured debt and
preferred equity, which we view
as implicit leverage
Monitor the relative attractiveness
of capital structure leverage
compared to balance sheet leverage
− Evaluate capital markets opportunities
through this holistic lens
Overall
Risk
Profile
Balance
Sheet
Leverage
Asset-Level
Structural
Leverage
Consider structural leverage
relative to balance sheet
leverage
Focus on synchronizing our
financing with the liquidity of
our investments
Utilize prudent balance sheet
leverage for higher spread
duration, more structurally
levered instruments
Economic Leverage
Maintain a relatively stable amount of total leverage on common equity
− Maintained Q3 2020 economic leverage ratio through Q4 2020, despite the preferred redemption and stock
repurchases(1), after four consecutive quarters of decreasing leverage
7.7xx
7.2xx
6.8xx
6.4xx
6.2xx
6.2xx
9/30/19
12/31/19
3/31/20
6/30/20
9/30/20
12/31/20
Financing, Capital and Liquidity Highlights Since the Beginning of 2020
Redeemed all outstanding shares
of the $460 million 7.50% Series D
preferred stock in December 2020
Closed five residential whole
loan securitizations totaling
$2.1 billioon(2)
Added $1.12255 billion of capacity for
our ARC business across two new
credit facilities
Record-low financing costs with
average economic cost of interest
bearing liabilities decliinninng 114bppss
to 0.87% over the course of the year
$8.7 billioon of unencumbered assets,
including cash and unencumbered
Agency MBS of $6.3 billion
Repurchased $209 million of common
stock in 2020 and authorized new
$1.5 billion common stock repurchase
program(3)
Note: Please refer to Glossary for defined terms and Financing, Capital & Liquidity in Endnotes section for footnoted information.
11
Annaly Capital Management Inc. 2020 Annual Report
Operational Efficiency
Annaly operates a highly institutionalized platform and benefits from its scale and
efficiency, operating at lower cost levels than peer averages. The Internalization provides an
opportunity for incremental cost control and operating flexibility
Technology
Risk
Management
Legal, Compliance &
Audit Services
Finance &
Treasury
Business
Operations
Robust compliance
Full service financial
function and protocols
operations
Proprietary, flexible
and integrated
systems platform
Innovative technology
leadership
Robust, enterprise-
class digital
infrastructure and
controls
Sophisticated market
risk capabilities and
deep credit skills
Independent internal
Hedging and financing
audit function
expertise
Risk professionals
embedded within the
investment groups
Comprehensive risk
governance framework
Deep in-house legal
and regulatory
expertise across
investment strategies,
corporate transactions
and governance
Capital markets
funding acumen
Sophisticated tax
expertise
Self-clearing
operations
Straight-through
processing
Robust reporting and
transparency
Strong internal
Strong tested system
controls environment
and process
redundancies to
ensure business
continuity
Annaly’s Internalization provides an opportunity for incremental cost control and operating flexibility
Operating Expense as % of Equity(1)
Annaly’s Long-Term
Target(1): 1.45%–1.60%
6.81%
Realized cost savings
reduced the operating
expense ratio by +20bps
year-over-year to 1.62% in
2020. We expect additional
cost savings following the
Commercial Real Estate
business divestiture and
have adjusted our long-
term target range from
1.60%-1.75% to 1.45%-1.60%
accordingly
3.34%
1.84%
1.62%
1.45% -1.60%
External mREIT Avg.
(YE 2020)
(2)
Internal mREIT Avg.
(YE 2020)
(2)
(2019 Actual)
(2020 Actual)
(Long-Term Target)
Note: Please refer to Glossary for defined terms and Operational Efficiency in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
12
Corporate Responsibility & Governance
Annaly has made several important governance enhancements to promote shareholder
value and support transparency over the last few years
2017
Publication of BBoard Skills Matrix in Proxy
Established CCorporate Responsibility
Committee of the Board
2018
Initiated an eenergy
audit to track and
monitor impact
and energy usage
Appointed
Head of
Corporate
Responsibility
and Government
Relations
Adopted bylaw
amendment to
declassify the
Board
Adopted an
enhanceed self-
evaluation process
for the Board and
comprehensive
Director
refreshment
policy
Elected ttwo new,
highly qualified
independent
directors
2019
Added eextensive disclosure
on the Company’s Corporate
Responsibility and ESG
efforts to our corporate website
Elected ttwo new, highly
qualified independent
Directors
Separated the roles of CEO
and Chair of the Board;
appointed the Company’s first
independent Board Chair
Internalized mmanagement
structure
Published
Inaugural Corporate
Responsibility Report
2021
2020
Redesigned Executive
Compensation Program to
reflect internally-managed
structure
Elected a nnew, highly qualified
independent Director
Disclosed rracial/ethnic diversity of our
Directors in our Board skills and experiences
matrix
13
Annaly Capital Management Inc. 2020 Annual Report
Leading with Purpose & Impact
During this time of considerable global challenges, Annaly has chosen to lead with purpose
and impact
Published Inaugural Corporate Responsibility Report
Annaly published our inaugural Corporate Responsibility report on the 23rd anniversary
of our IPO, demonstrating our commitment to transparency and robust ESG practices
The report introduces supplemental disclosures under the Sustainability Accounting
Standards Board (SASB) and Global Reporting Initiative (GRI) frameworks and
outlines goals and commitments across our five key ESG areas:
Corporate Governance
Human Capital
Responsible Investments
Risk Management
Environment
Expanded our High-Impact Partnerships
Annalys corporate giving has been focused on high-impact programs that seek to advance social issues that we
are committed to: combatting homelessness and advancing the professional development of women and
underrepresented groups
Considering new challenges in 2020, we responded with specific actions:
− Continued our work with Girls Who Invest and launched a new partnership with Project Destined. These
efforts aim to help build a pipeline of gender, racially and socioeconomically diverse professionals
− Contributions in response to the COVID-19 pandemic supporting non-profit organizations serving vulnerable
New Yorkers
Increased Focus on Diversity & Inclusion
We have prioritized continuing to improve our diversity efforts, which have long been a business imperative at
Annaly as we believe it helps us generate stronger returns for our shareholders
Some of our 2020 inclusion efforts include:
− Identified our first Head of Inclusion with support from a cross-functional team
− Developed an Inclusion Support Committee of Executive Sponsors
− Conducted unconscious bias training for all employees to establish foundational knowledge, language and
understanding to support Annalys diversity and inclusion initiatives
− Organized meetings with business heads and staff to discuss employees views and concerns followed by an
employee inclusion survey
Annaly Capital Management Inc. 2020 Annual Report
14
Board Composition & Shareholder Engagement Efforts
We are committed to having a Board representing diverse backgrounds and a wide range of
professional experiences that we believe benefits the long-term interest of our shareholders,
whom we regularly engage with on corporate responsibility and governance matters
11
Board of Directors
7
5
Continuing Directors
Continuing Directors Identify as
Women or Racially/Ethnically Diverse
Standing
Board Committees
Tenure
Age
>10 Years
2 Directors
5 to 10 Years
2 Directors
6.0
years
60’s
4 Directors
<5 Years
7 Directors
56
40’s
4 Directors
Represents the average tenure
of Continuing Directors
Represents the average age of
Continuing Directors
50’s | 3 Directors
Followingtheclosingofthe
Internalization,the
CompensationCommittee
assumedbroadoversightof
theCompany’shumancapital
management–including
policiesandstrategiesrelated
toretention,management
succession,corporateculture
anddiversity–andchanged
itsnametotheManagement
Developmentand
CompensationCommittee
2020–2021 Global Shareholder Engagement Efforts(1)
Outreachincluded
Outreachincludedapproximately
100%
~90%
Wetakeprideinour
extensiveoutreachefforts
andarecommittedto
transparency,enhanced
disclosureandcontinued
engagement
of top 100
institutional investors
of institutional
ownership
Note: Please refer to Glossary for defined terms and Board Composition & Shareholder Engagement Efforts in Endnotes section for footnoted information.
15
Annaly Capital Management Inc. 2020 Annual Report
Board of Directors
Annalys highly qualified Board of Directors possess a broad array of complementary skills
and experience
Annaly Board of Directors
Director
Principal Occupation
Committees
David L. Finkelstein
Chief Executive Officer & Chief Investment Officer
Annaly Capital Management, Inc.
Michael Haylon
Managing Director and Head of Conning
North America
Conning, Inc.
Independent Chaair of thee Board
Audit
Risk
Wellington J. Denahan
Former Executive Chairman and Co-Founder
Annaly Capital Management, Inc.
Vicee Chaair of the Board
Risk (Chair)
Corporate Responsibility
Francine J. Bovich
Former Managing Director
Morgan Stanley Investment Management
Nominating/Corporate Governance (Chair)
Corporate Responsibility
Katie Beirne Fallon
Chief Global Impact Officer
McDonalds Corporation
Corporate Responsibility (Chair)
Nominating and Corporate Governance
Thomas Hamilton
Owner and Director
Construction Forms, Inc.
Kathy Hopinkah Hannan Former National Managing Partner,
Global Lead Partner
KPMG LLP
Eric A. Reeves
Managing Director, Head of Private Capital
Investments
Duchossois Capital Management
John H. Schaefer
Former President and Chief Operating Officer
Morgan Stanley Global Wealth Management
Donnell A. Segalas(1)
Chief Executive Officer and Managing Partner
Pinnacle Asset Management, L.P.
Audit
Management Development & Compensation
Risk
Audit (Chair)
Management Development & Compensation
Nominating/Corporate Governance
Corporate Responsibility
Nominating/Corporate Governance
Audit
Management Development & Compensation
Risk
Corporate Responsibility
Management Development & Compensation
Nominating/Corporate Governance
Glenn A. Votek
Former Senior Advisor
Annaly Capital Management, Inc.
Corporate Responsibility
Risk
Vicki Williams
Chief Human Resources Officer
NBCUniversal
Management Development & Compensation
(Chair)
Audit
Note: Please refer to Glossary for defined terms and Board of Directors in Endnotes section for footnoted information.
Annaly Capital Management Inc. 2020 Annual Report
16
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: December 31, 2020
OR
☐ TRANSIT
RR
ION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSIT
RR
ION 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
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
6.95% Series F Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock
6.50% Series G Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock
6.75% Series I Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock
NLY
NLY.F
NLY.G
NLY.I
Securities registered pursuant to Section 12(g) of the Act: None
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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 subjeu
ct to such filff ing 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 chaptea
r) 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 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,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
“smaller reporting company,”
m
Large accelerated
filer
☑
Accelerated
filer
☐
Non-accelerated
filer
☐
Smaller reporting
company
☐
Emerging growth
company
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
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, 2020, the aggregate market value of the voting common stock held by non-affiliates of the registrant was
apa proximately $9.2 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 February 2, 2021 was 1,398,502,906.
DOCUMENTS INCORPORATED
RR
BY REFERENCE
ve proxy statement pursuant to Regulation 14A within 120 days of the end of the
The registrant intends to file a definiti
of such proxy statement are incorporated by reference into Part III of this
PP
ortions
fiscal year ended December 31, 2020. P00
Form 10-K.
dd
ANNALY CAPITAL MANAGEMENT, INC.
2020 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
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
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
Page
1
11
50
50
50
50
51
54
55
97
97
97
97
100
101
101
101
102
102
103
103
107
108
II-1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
PART I
ITEM 1. BUSINESS
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
“Annaly,”ll
it is mii
ade clear that the term means only t
ll hett
parent company.
“we,” “us,” or “our” refers
e
CC
to Annaly Cll
apital
Management, Inc. and our wholly-owned subsidiaries, excep
ee
t where
Refee r to the section titled “Glossary of Terms” located at the end of Part II, Item 7. “Management’s Discussion and Analyll sisyy
Financial Condition and Results ott
ions.” for definitions of certain of the commonly used terms in this annual report
Form 10-K.
perat
O
f Oo
e
of
on
The following descripti
related Notes thereto, and the information set forth under the heading “Special Note Regarding ForwFF
“
in Item 7. “Manageme
e read in conjunction with the Consoli
of Financial Condition and Results ott
nt’s Discussion and Analysisyy
on of our business should bll
peO rations.”
f Oo
CC
i
dated Financial Statements and the
ard-Looking Statements”
INDEX TO ITEM 1. BUSINESS
Business Overview
Business and Investment Strategy
Our Portfolio and Capital Allocation Policy
Risk Appetite
Capital Structure and Financing
Operating Platform
Risk Management
Closing of the Internalization and Termination of the Management
Agreement
Information about our Executive Officers
Human Capital
Regulatory Requirements
Competition
Corporate Governance
Distributions
Available Information
Page
2
2
3
3
5
5
6
6
6
7
8
9
9
10
10
1
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
ITEM 1. BUSINESS
SUBSIDIARIES
Business Overview
Introduction
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 optimize our returns
through prudent
management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that
(“REIT”). Prior to the closing of the Internalization (as defined below
has elected to be taxed as a real estate investment trust
under “Closing of the Internalization and Termination of the Management Agreement”) on June 30, 2020, we were externally
managed by Annaly Management Company LLC (our “Former Manager”). Our common stock is listed on the New York Stock
Exchange under the symbol “NLY.”
r
t
We use our capital
between the yield on our assets and the cost of our borrowings and hedging activities.
coupled with borrowed funds
a
ff
to invest primarily in real estate related investments, earning the spread
We believe that our business objectives are supporte
extensive experience of our employe
the availabili
m
ion of financing sources and our operational efficiencies.
ty and diversificat
the
es, the diversity of our investment strategy, a comprehensive risk management approach,
d by our size and conservative financial posture relative to the industry,rr
u
a
ff
Investment Groups
Our four investment groups are primarily comprised of the following:
Investment Groups
Annaly Agency Group
Annaly Residential Credit 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 primarily in non-Agency residential mortgage assets within securitized product and whole loan
markets.
Annaly Commercial Real Estate Group
Originates and invests in commercial mortgage loans, securities, and other commercial real estate debt
and equity investments.
Annaly Middle Market Lending Group
Provides financing to private equity-backed middle market businesses, focusing primarily on senior
debt within select industries.
Operating Platl
formt
Our operating platform reflects our investments in systems, infrastructure and personnel. Our technology investments have led
to the development of proprietary portfolio analytics, financial and capita
l allocation modeling, and other risk and reporting
tools, which, coupled with cutting-edge digital transformation applications, support the diversification and operating efficiency
of our business. Our operating platform supports our investments in Agency assets as well as residential credit assets,
commercial real estate assets, residential mortgage loans, mortgage servicing rights and corporate loans. We believe that the
diversity of our investment alternatives provides us the fleff xibility to adapt to changes in market conditions and to take
advantage of potential opportuni
ties.
a
t
Business and Investment Strategy
Shared Capita
al Model
Our company is comprised of four investment groups, each of which has multiple investment options to capita
relative returns
groups. Our shared capital model drives our capita
value while also managing risk.
alize on attractive
and market opportunities. In aggregate, we maintain numerous investment options across our investment
al allocation strategy allowing us to rotate our investments based on relative
t
Strategic Relationshipsi
A key element of our strategy is to establish and grow strategic relationships with industry leading partners in order to develop
and broaden access to quality originations flow as well as to leverage third party operations to effici
ently manage operating
for our shareholders. Additionally, we have attracted capital
costs, all in an effort
partners to our business, augmenting our public capita
s, which has resulted in increased scale without sacrificing
balance sheet liquidity. Certain of our strategic relationships also afford us the opportunity
to support communities through
socially responsible investing.
to generate attractive risk adjusted returns
ff
t
al markets effort
ff
ff
t
We have created multiple strategic and capia tal partnerships across our investment groups including the following:
2
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
ITEM 1. BUSINESS
SUBSIDIARIES
– Annaly Residential Credit Group has established relationships with key mortgage loan originators and aggregators
ently source proprietary originations suited to our risk
including well-known money center banks, allowing us to effici
parameters.
ff
– Annaly Commercial Real Estate Group maintains a partnership with Pearlmark Real Estate Partners, a leading real
estate private equity sponsor, providing access to co-investment opportunities through their seasoned commercial real
estate investment team.
– We have partnered with Pingora Loan Servicing, a premier mortgage servicer for MSR assets and a wholly-owned
with GIC Private Limited (“GIC”), a leading
f Bayview Asset Management, through our joint venturet
subsidiary orr
Sovereign Wealth Fund.
– We have also partnered with GIC through the creation of a joint venture with the purpose of investing in residential
credit assets, including newly-originated residential loans and securities issued by our subsidiaries.
– We have partnered with Capital Impact Partners, a national community development financial instituti
t
on, to create a
social impact joint venture supporting projects in underserved communities across the country.
Our Portfolio and Capital Allocation Policy
Under our capita
asset classes as we determine to be appropri
a
a
ate fromff
time to time.
l allocation policy and subject to oversight by our Board, we may allocate our investments within our target
Our Board may adopt changes to our capita
a
l 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”).
Our portfolio composition and capita
al allocation at December 31, 2020 and 2019 were as follows:
Investment Group
Residential
Annaly Agency Group (2)(3)
Annaly Residential Credit Group (3)
Commercial
Annaly Commercial Real Estate Group (3)
Annaly Middle Market Lending Group
December 31, 2020
December 31, 2019
Percentage of
Portfolio
Capital
Allocation (1)
Percentage of
Portfolio
Capital
Allocation (1)
93%
3%
2%
2%
78%
7%
5%
10%
93%
3%
2%
2%
74%
10%
7%
9%
(1)
(2)
(3)
Capital allocation represents the percentage of equity allocated to each category.
Includes MSRs and TBA purchase contracts.
Includes assets transferred or pledged to securitization vehicles net of debt issued by securitization vehicles.
Risk Appetite
ff
wide risk appe
We maintain a firm-
tite 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.
a
ff
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.
a
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, our exemption from registration
under the Investment Company Act and the licenses and registrations of our regulated subsidiaries.
3
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
roved the investment and operating policies and strategies that support our risk appet
Our Board has reviewed and appa
ite
statement 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 fact
ors, 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.
a
ff
We may seek to expand our capia tal base in order to further increase our ability to acquire new and different types of assets when
t
from new investments appear attractive relative to the targeted risk-adjusted returns.
the potential returns
We may in the future
ies.
es by offering our debt or equity securities in exchange for such opportunit
acquire assets or companim
t
t
Target Assets
Within the confines of the risk appet
consideration of the folff
lowing:
a
ite statement, we seek to generate the highest risk-adjusted returns
t
on capital invested, after
•
•
•
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;
•
•
•
The costs of finff ancing, 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 capita
purchase and finaff
al requirements associated with the
ncing of the asset.
• When applic
borrower;
a
abla e, the credit of the underlying
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.
t
4
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ALY CAPITAL MANAGEMENT, INC. ANDAA
ANNAA
ITEM 1. BUSINESS
SUBSIDIARIES
Capital Structure and Financing
al structure is designed to offer an efficient complement of funding
Our capita
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 capita
l profile, we utilize a mix of debt and equity funding. Debt funding may
include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending
facilities, corporate bond issuance, convertible bonds, mortgages payablea
al primarily consists of
common and preferred stock.
or other liabilities. Equity capita
a
ff
ff
We finance our Agency mortgage-backed securities and residential credit
investments primarily with repurchase
ce certain commercial real estate investments with repurchase agreements. We seek to diversify our
agreements. We also finan
exposure and limit concentrations by entering into repurchase agreements with multiple counterparties. We enter into
repurchase agreements with broker-dealers, commercial banks and other lenders that typically offer this type of financing. We
enter into collateralized borrowings with finaff
ncial institutions meeting internal credit standards and we monitor the financial
ons on a regular basis. At December 31, 2020, we had $64.8 billion of repurchase agreements
condition of these instituti
outstanding.
t
Additionally, our wholly-owned subsidiary, Arcola Securities, Inc. (“Arcola”), provides direct access to third party fundi
FINRA mRR
service offered by the Fixed Income Clearing Corporation (“FICC”), with FICC acting as the central counterpart
provides us greater depth and diversity of repurchase agreement funding while also limiting our counterparty exposure.
ng as a
ember broker-dealer. As an eligible institution, Arcola also raises funds through the General Collateral Finance Repo
y.tt Arcola
ff
r
To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At December 31, 2020, the
weighted average days to maturity was 64 days.
We utilize diverse funding sources to finance
securitization funding and, in the case of equity investments in commercial real estate, mortgage financing.
our commercial
investments,
ff
including bilateral borrowing facilities,
t
our stockholders. We generally expect to maintain an
We utilize leverage to enhance the risk-adjusted returns
generated forff
time to time based upon various factors, including our
economic leverage ratio of no greater than 10:1. This ratio varies fromff
management’s opinion of the level of risk of our assets and liabili
ties, our mix of assets, our liquidity position, our level of
a
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 what 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, cost basis of TBA and CMBX derivatives outstanding, and net forward
purchases (sales) of investments divided by total
equity.
ff
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 measures. Our actions 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 tablea
presents our leverage, economic leverage and capital ratios as of the periods presented.
Leverage ratio
Economic leverage ratio
December 31,
2020
December 31,
2019
5.1:1
6.2:1
7.1:1
7.2:1
Capital ratio
13.6%
12.0%
Operating Platform
ff
le and scalable operating platform to support the management and maintenance of our diverse asset
We maintain a flexib
to enhance resiliency, efficiency, cybersecurity and scalabia lity while also
portfolio. We have invested in our infrastructuret
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 financ
ing, monitoring, and financial accounting and reporting.
ff
Technology appl
ications also support our control functions including risk, complim ance, middle- and back-office functions. We
have added breadth to our operating platform to accommodate diverse asset classes and drive automation-based efficiencies.
a
5
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
ITEM 1. BUSINESS
SUBSIDIARIES
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 infrastructuret
investment has driven operating
efficiencies while expanding the platform. Routine disaster recovery and penetration testing enhances our systems resiliency,
security and recovery orr
a smooth transition to the
remote work environment in which we currently operate dued
f critical systems throughout the computing estate, and positioned us forff
to Coronavirus Disease 2019 (“COVID-19”).
Risk Management
Risk is a natural element of our business. Effective risk management is of critical importance to our business strategy. The
objective of our risk management framework is to identify, measure, monitor and control the key risks to which we are subject.
Our approac
discussion
a
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.”
h to risk management is comprehensive and has been designed to foste
r a holistic view of risk. For a full
ff
ff
Closing of the Internalization and Termination of the Management Agreement
On February 12, 2020, we entered into an internalization agreement (the “Internalization Agreement”) with our Former
Manager and certain affiliates of our Former Manager. Pursuant to the Internalization Agreement, we agreed to acquire all of
the outstanding equity interests of our Former Manager and our Former Manager’s direct and indirect parent companies from
their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the
Internalization, on June 30, 2020, we acquired all of the assets and liabia lities of our Former Manager (the net effect of which
was immaterial in amount), and we transitioned from an externally-managed REIT to an internally-managed REIT. At the
closing, all employees of our Former Manager became our employees. The parties also terminated the Amended and Restated
Management Agreement by and between us and our Former Manager (the “Management Agreement”) and therefore we no
to, or reimburse expenses of, our Former Manager. Pursuant to the Internalization Agreement, our
longer pay a management feeff
Former Manager waived any termination fee. For additional informff
ation about the Internalization, see the Note titled “Related
Party Transactions” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement
d
Schedules.”
Information about our Executive Officers
ff
The foll
owing tablea
ff
sets forth
certain information as of January 31, 2021 concerning our executive officers:
Name
Age
Title
David L. Finkelstein
Serena Wolfe
Steven F. Campbell
Timothy P. Coffey
Ilker Ertas
Anthony C. Green
48
41
48
47
50
46
Chief Executive Officer and Chief Investment Officer
Chief Financial Officer
Chief Operating Officer
Chief Credit Officer
Head of Securitized Products
Chief Corporate Officer, Chief Legal Officer and Secretary
David L. Finkelstein has served as the Chief Executive Officer of Annaly since March 2020, and 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 Offiff cer in the Markets Group of the Federal Reserve Bank of New York where
he was the primary strategist and policy advisor forff
the MBS purchase program. Mr. Finkelstein has over 20 years of
experience in fixed income investments. Prior to the Federal Reserve Bank of New York, Mr. Finkelstein held Agency MBS
nc. and Barclays PLC. Mr. Finkelstein received his B.A. in Business
trading positions at Salomon Smith Barney, Citigroup Iu
f Chicago, Booth School of Business.
Administration from the University of Washington and his M.B.A. from the University ott
Mr. Finkelstein also holds the Chartered Financial Analyst® designation.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
Serena Wolfe has served as Chief Financial Officer of Annaly since December 2019. Prior to joining Annaly in 2019, Ms.
& Young (“EY”) since 2011 and as its Central Region Real Estate Hospitality &
Wolfe served as a Partner at Ernst
s and client relationships across
Construction (“RHC”) leader from 2017 to November 2019, managing the go-to-market effort
ff
r
6
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
the sector. Ms. Wolfe was previously also EY’s Global RHC Assurance Leader. Ms. Wolfe practiced with EY forff
over 20
years, including six years with EY Australia and 16 years with the U.S. practice. Ms. Wolfe graduad ted froff m the University of
Queensland with a Bachelor of Commerce in Accounting. She is a Certifiedff
c Accountant in the states of New
York, California, Illinois and Pennsylvania.
Publiu
Steven F. Campbell has served as Chief Operating Officer of Annaly since June 2020. Prior to this position, Mr. Campbell
served in a number of other senior roles at Annaly, including as Head of Business Operations froff m September 2019 to June
2020, Head of Credit Operations and Enterprise Risk froff m February 2018 to September 2019, Chief Operating Officer of
Annaly Commercial Real Estate Group fu
2018 and Head of Credit Strategy from April 2015 to
February 2018. Mr. Campbell has over 20 years of experience in financial services. Prior to joining Annaly in 2015, Mr.
Campbell held various roles over six years at Fortress Investment Group LLC, including serving as a Managing Director in the
ration and D.B. Zwirn & Co,
Credit Funds business. Prior to that, Mr. Campbell held positions at General Electric Capital Corpor
L.P. with a focus on credit and debt restrucrr
the University of Notre Dame and a
M.B.A. from the University ot
turing. Mr. Campbell received a B.B.A. fromff
f Chicago, Booth School of Business.
roff m December 2016 to February
r
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. Coffeyff
has over 20 years of experience in leveraged finance and has
turing and distribution positions. Prior to joining Annaly in 2010, Mr. Coffey
held a variety of origination, execution, strucr
served as Managing Director and Head of Debt Capital Markets in the Leverage Finance Group au
t Bank of Ireland. Prior to that,
Mr. Coffeyff
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 fromff
Marquette University.
Ilker Ertas has served as Head of Securitized Products at Annaly since February 2019. Prior to this position, Mr. Ertas served in
a number of other senior roles at Annaly, including as Head of RMBS Portfolff
ios from February 2018 to February 2019, Head
of Trading from February 2017 to February 2018, Head of Asset Trading from October 2016 to February 2017 and Managing
d
Director, Agency & Residential Credit from June 2015 to October 2016. Mr. Ertas has 20 years of experience in U.S. fixeff
income markets. Prior to joining Annaly in 2015, Mr. Ertas was at Citigroup Iu
nc., where he was most recently a Managing
Director and Head of Mortgage Derivatives Trading. Mr. Ertas has also held mortgage trading positions at Barclays PLC and
Lehman Brothers Holdings Inc. Mr. Ertas received a B.S. in Industrial Engineering from Bogazici University in Istanbul,
Turkey and a M.B.A. from the Yale School of Management.
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 firff m K&L Gates LLP. Mr. Green has over 20 years of experience in corporate and securities law. Mr. Green holds a
B.A. in Economics and Political Science fromff
the University of Pennsylvania and a J.D. and LL.M. in International and
Comparam
Cornell Law School.
tive Law fromff
Human Capital
In connection with the closing of the Internalization on June 30, 2020, we transitioned from an externally-managed REIT to an
internally-managed REIT. Our human capita
al group oversees our human capital management to ensure that it is strategically
integrated with our goals and business plans. In addition, the Management Development and Compensation Committee of the
Board provides independent oversight of the our policies and strategies related to human capital management.
As of December 31, 2020, we had 180 emplom yees.
Our People and Culture
We recognize that our emplom yees are our most important asset, and we are committed to promoting their well-being,
engagement, development and full potential. We are focused on foste
ring an inclusive and rewarding work environment for all
our employe
es, with ongoing opportunities for career development and wellness support that seeks to facilitate the achievement
m
of their professional goals.
ff
is built on six core values: ownership, accountability, communication, collaboration, diversity and inclusion and
Our culturet
l to how we operate our business.
humility. These values are embedded in our professional and personal conduct and are crucia
All employees are responsible forff
and are vital to the continued
success of our company. Guided by these values, we are committed to attracting, developing and retaining the best talent, with
diverse experiences, perspectives and backgrounds.
upholding these values, which formff
the bedrock of our culturet
rr
es in the design and
We utilize emplom yee surveys to create an open and honest feedback forum, actively involve our employe
evolution of our culture, enhance our overall productivity and mitigate risk. Our leaders review survey feedba
ck to increase
ff
m
employe
e engagement and drive positive changes throughout the firff m.
m
7
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
ITEM 1. BUSINESS
SUBSIDIARIES
II
COVID-
19
m
es have largely worked remotely since March 2020. We supported our emplm oyees’
In response to COVID-19, our employe
remote working through stipends to upgrade home offiff ce equq ipment. Since September 2020, there are a limited number of
es who voluntarily work in the office on occasion. We implemented a regular Coronavirus testing protocol to optimize
employe
m
our ability to provide a safe wff
r we recognize that
ted people’s daily emotional lives and mental health. As a result, we have increased our mental health
the pandemic has affecff
connected with one another and to equip them
offerings and hosted a multitude of virtual seminars to help keep our employees
with tools to help alleviate some of the increased stress and burdens.
ork environment. In addition to addressing physical health and safety concerns,
m
Diversity & IncII
lusion
m
The diversity of our employees
brings a critical range of thought and experience throughout our company, cultivating
innovation, fresh perspectives and vital new ideas. Diversity and inclusion are essential tenets of our corporate culture. Our
human capital management group,
in coordination with our recently named Head of Inclusion and Inclusion Support
Committee of Executive Sponsors, is responsible for overseeing and continuing to improve our diversity and inclusion
initiatives.
With
We are committed to achieving diversity, including gender and racial/ethnic diversity, across all levels of our company.
50% of total employees in 2020 identifying as either female or racially/ethnically diverse, we are driven by the belief that
es supports our continued long-term growth. In 2017, we launched the Women’s Interactive
having a diverse group of employe
Network, which provides targeted development and networking opportunit
ies, knowledge exchanges, mentorship, coaching and
t
ts. Our diversity and inclusion efforts also include firm-wide initiatives like an unconscious bias training
volunteer efforff
ional knowledge, language and understanding to support the strategic diversity and
program offered in 2020 to establa ish foundat
inclusion efforts of the firm, organizing forums to discuss employe
es’ views and actively seeking out feedback from emplom yee
surveys.
m
m
m
ff
Employee Development, Benefits and Wellness
ll
We seek to invest in and promote talent to cultivate a high-performance culture and build on the capabili
of our employee
m
and choices.
s. We invest in a wide range of benefits and wellness initiatives for our employm
a
ties and full potential
ees to support healthy lifestyles
Our employee
m
compensation packages are designed to align employe
motivate talented employees. In addition, we offer emplom yees benefitsff
and flexible spending accounts, telemedicine benefits,
tuition reimbursement plan to cover all or part of the cost of educad
related to their specific job.
compensation program includes base salary, annual incentive bonuses and stock-based awards. Employe
e
e and stockholder interests and to provide incentives to attract, retain and
including health and insurance coverage, health savings
care resources. We also have a
ld directly
tion in a fieff
401(K) plans, paid time off and family
rs emplom yee educad
tion that furthe
m
m
ff
ff
ff
e needs and interests as well as our overall
We offer a number of learning and development programs tailored to our employe
strategic business objectives. For example, we offer targeted professional development training for employe
es at various stages
in their career. In 2020, we began offering firm-wide culture sessions where we facilitate discussions to gain insights on our
company’s
enhancement priorities.
culturet
m
m
m
Corporate and Employee Philanthropy
tt
and Volunteerism
Our corporate giving has been focused on high-impact programs that seek to advance social issues we are committed to,
In
including combating homelessness and advancing the professional development of women and underrepresented groups.
2020, we also provided support to COVID-19 relief efforts in our New York City community. Annaly and our employee
s
endeavor to meaningfully contribute to the communities where we live, work, and invest through Annaly’s corporate giving,
m
employe
e volunteerism and our employee charity match program.
m
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 U.S. federal income tax on our taxable income that is distributed to our stockholders.
REIT subsidiaries (“TRSs”), consists of qualified REIT real
Furthermore, substantially all of our assets, other than our taxablea
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 capa ital by FINRA.RR Arcola
consistently operates with capia tal in excess of its regulatory capia tal requirements as defined by SEC Rule 15c3-1.
ff
8
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
ITEM 1. BUSINESS
SUBSIDIARIES
We have a subsidiary that is registered with the SEC as an investment adviser 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 appa
ly to our relationships with that subsidiary’s clients. These provisions and duties impose restrictions and obligations on
us with respect to our dealings with our subsidiary’s clients, including, for example, restrictions on agency, cross and principal
transactions. Our registered investment adviser subsidiary is subject to periodic SEC examinations and other requirements
under the Investment Advisers Act and related regulations primarily intended to benefit advisory clients. These additional
e and comprehensive compliance program, recordkeeping
ff
requirements relate to, among other things, maintaining an effectiv
and reporting requirements and disclosure requirements.
The financial services industry is subject to extensive regulation and supervision in the U.S. The Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) and the rules thereunder significantly altered the financial
regulatory regime within which financial institutions operate. 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 opportunit
ies 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 competm ition see the “Risks Related to Our Investing, Portfolio Management
and Financing Activities” section in Item 1A. “Risk Factors.”
ff
t
Corporate Governance
We strive to conduct our business in accordance with the highest ethical standards and in complim ance with appa
governmental laws, rules and regulations. Our notable governance practices and policies include:
licable
• We closed our management internalization
transaction on June 30, 2020 and transitioned from
an externally-managed REIT to an internally-
managed REIT.
• Our Board is composed of a majority of independent
directors, and our Audit, Management Development
and Compensation, and Nominating/Corporate
Governance Committees are composed exclusively
of independent directors.
•
m
• We have separated the roles of Chair of the Board
and Chief Executive Officer, and appointed an
independent Chair of the Board.
In December 2018, we amended our bylaws to
declassify our Board over a three-year period with
all directors standing for annual election by our
company’s
annual meeting of stockholders in 2021.
• We have 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)
15th anniversary of service on our Board or (ii) 73rd
birthday.
• We have adopted a Code of Business Conduct and
ff
Ethics, which sets fort
h the basic principles and
guidelines for resolving various legal and ethical
questions that may arise in the workplace and in the
conduct of our business. This code is applicablea
our directors, officers and employees.
to
9
• We have adopted Corpor
rate Governance Guidelines
which, in conjunction with the charters of our Board
committees, provide the framework for the
governance of our company.
• We have procedurdd es by which any of our
m
es, officers or directors may raise concerns
employe
m
confidentially about our company’s
accounting, internal controls or auditing matters
with the Chair of the Board, the independent
directors, or the Chair of the Audit Committee or
through our whistleblower phone hotline or e-mail
inbox.
conduct,
• We have an Insider Trading Policy that prohibits our
directors, officers and emplm oyees, as well as those of
our subsidiaries from buying or selling our securities
on the basis of material nonpublic information and
prohibits communicating material nonpublic
information about our company to others. Our
Insider Trading Policy prohibits our directors,
officers and employees, from (1) holding our stock
in a margin account as eligible collateral, or
otherwise 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 executive officers are subjeb ct to a robust
clawback policy, which includes triggers for
financial restatements and misconduct.
Our executive officers are subjeb ct to stock
ownership guidelines and holding restrictions.
•
•
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
ITEM 1. BUSINESS
SUBSIDIARIES
Distributions
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 profitff s froff m our enterprise could be classified as return of capital
due to
differences between book and tax accounting rules. We may make additional returns
l when the potential risk-adjusted
returns
t to the limitations of applicable securities and state
t
corporation laws, we can returnt
capital by making purchases of our own capita
al stock or through payment of dividends.
l to exceed our cost of capita
from new investments faiff
l. Subjecb
a
of capita
a
a
t
Available Information
of charge, our annual
Our website is www.annaly.com. We make available on this website under “Investors - SEC Filings,” freeff
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 practicablea
such materials to the SEC pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (the “Securities Exchange Act”). Our website and the information contained therein are
not incorporated into this annual report on Form 10-K.
after we electronically file or furnish
ff
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, Management Development and Compensation Committee, Nominating/Corporate
Governance Committee, Risk Committee and Corpor
rate 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.
rate Responsibility Committee, our Corpor
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.
10
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
ITEM 1A. RISK FACTORS
An investment in our stock involves a number of risks. Beforff e making an investment decision, you should carefully consider all
of the risks described in this annual report on Form 10-K. If any of the risks discussed in this annual report on Form 10-K
actually occur, our business, financial condition and results of operations could be materially adversely affecff
ted. 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.
ff
INDEX TO ITEM 1A. RISK FACTORS
Summary Risk Factors
Risks Related to the Coronavirus Disease 2019 (“COVID-19”)
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 Business Structure
Risks Related to Our Taxation as a REIT
Risks of Ownership of Our Common Stock
Regulatory Risks
Page
12
14
15
28
32
36
40
40
47
49
11
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
Summary Risk Factors
Risks Related to COVID-19
•
COVID-19 has affected, and will likely continue to affect, the U.S. economy, the mortgage REIT industry and our business.
• We cannot predict the effect that government policies, laws and plans in response to the COVID-19 pandemic will have on us.
Risks Related to Our Investing, Portfolio Management and Financing Activities
Our strategy involves the use of leverage, which increases the risk that we may incur substantial losses.
Our leverage may cause margin calls and defaults and force us to sell assets under adverse market conditions.
Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition.
Failure to effectively manage our liquidity would adversely affect our results and financial condition.
Risk management policies and procedures may not adequately identify all risks to our businesses.
An increase or decrease in prepayment rates may adversely affect our profitability.
Volatile market conditions for mortgages and mortgage-related assets can result in a significant contraction in liquidity.
Competition may limit our ability to acquire desirable investments in our target assets and also affect the pricing of these assets.
Increases in interest payments on our borrowings relative to interest earned on our assets may adversely affect profitability.
Differences in timing of interest rate adjustments on our interest earning assets and borrowings may adversely affect profitability.
Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results.
An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value.
• We may change our policies without stockholder approval.
•
•
• We may exceed our target leverage ratios, or we may not be able to achieve our optimal leverage.
•
•
•
•
• We are subject to reinvestment risk.
•
•
•
•
•
•
• We may experience declines in market value of our assets resulting in us recording impairments, which may effect on our results.
•
The soundness of other financial institutions could adversely affect us.
•
Our hedging strategies may be costly or ineffective and our use of derivatives may expose us to counterparty and liquidity risks.
•
It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts.
•
Any incorrect, misleading or incomplete information used in connection with analytical models would subject us to potential risks.
•
Accounting rules related to certain of our transactions are highly complex and involve significant judgment and assumptions.
• We are dependent on information systems and third parties; system failures or cybersecurity incidents could disrupt our business.
•
•
• We may enter into new lines of business, acquire other companies or engage in other strategic initiatives.
• We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other accounts.
•
• We depend on third-party service providers, including mortgage loan servicers, for a variety of services related to our business.
•
•
Purchases and sales of Agency MBS by Federal Reserve may adversely affect the price and return associated with Agency MBS.
New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac and the federal government.
Securitizations, including non-recourse securitizations, may expose us to additional risks.
Counterparties may require us to enter into restrictive covenants relating to our operations that may inhibit our ability to grow.
Investments in MSRs may expose us to additional risks.
Risks Related To Our Credit Assets
Our assets may become non-performing or sub-performing assets, which are subject to increased risks relative to performing loans.
Prolonged economic slowdown or declining real estate values could impair the assets we may own and adversely affect our results.
Geographic concentration exposes investors to greater risk of default and loss.
Inadequate property insurance coverage could have an adverse impact on our operating results.
• We invest in securities in the credit risk transfer sector that are subject to mortgage credit risk.
•
•
•
• We may incur losses when a borrower defaults on a loan and the underlying collateral value is less than the amount due.
•
• We may be required to repurchase commercial or residential mortgage loans or indemnify investors.
•
• When we foreclose on an asset, we may come to own and operate the property securing the loan.
•
•
•
Financial covenants could adversely affect our ability to conduct our business.
Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets.
Our investments in corporate loans and debt securities for middle market companies carry risks.
Our due diligence of potential assets may not reveal all liabilities and other weaknesses.
Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets and Other Equity
The real estate assets we acquire are subject to risks particular to real property, which may adversely affect our returns
Commercial loan assets we originate and/or acquire depend on the ability
Commercial and non-Agency mortgage-backed securities we acquire may be subject to losses.
Borrowers may be unable to repay the Remaining Principal Balance on the Maturity Date.
The B-Notes that we originate and acquire may be subject to risks related to their privately negotiated structure and terms.
The mezzanine loan assets and other subordinate debt positions that we originate and acquire involve greater risks of loss.
•
•
•
•
•
•
• We are subject to additional risks associated with loan participations and co-lending arrangements.
•
Construction loans involve an increased risk of loss.
a
of property owner to generate net income from operating.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Lease expirations, lease defaults and lease terminations may adversely affect our revenue.
Our real estate investments are illiquid.
• We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their lease obligations.
•
•
• We may not control the special servicing of the mortgage loans included in the commercial MBS in which we invest.
•
Joint venture investments could be adversely affected by our lack of sole decision-making authority.
Risks Related To Our Residential Credit Business
Our investments in non-Agency MBS or other investment assets of lower credit quality involve credit risk.
Our investments in non-Agency MBS are collateralized by non-prime loans and may also include subprime mortgage loans.
Our investments may include subordinated tranches of non-Agency MBS, which are subordinate in payment to senior securities.
•
•
•
• We are subject to counterparty risk and may be unable to seek indemnity or demand repurchase of residential whole loans.
•
Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure.
•
Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial condition.
• We may be subject to liability for potential violations of truth-in-lending or other similar consumer protection laws and regulations.
• We may not be able to obtain or maintain the governmental licenses required to operate our Residential Credit business.
•
Our ability to profitably execute or participate in future securitizations transactions, including, in particular, securitizations of
residential mortgage loans, is dependent on numerous factors and if we are not able to achieve our desired level of profitability or if
we are unable to execute or participate in future securitizations, or incur losses in connection therewith, it could have a material
adverse impact on our business and financial results.
Risks Related to Our Business Structure
• We may be exposed to risks to which we have not historically been exposed as a result of the Internalization.
•
The departure of any of our key personnel could materially and adversely affect us.
Risks Related to Our Taxation as a REITR
Our failure to maintain our qualification as a REIT would have adverse tax consequences.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
•
• We have certain distribution requirements, which could adversely affect our ability to execute our business plan.
•
• We may choose to pay dividends in our own stock, which may require stockholders to pay taxes in excess of cash dividends.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Our inability to deduct certain compensation paid to our executives could require us to increase our distributions to stockholders.
Limits on ownership of our stock could have adverse consequences to you and limit your opportunity to receive a premium.
Our TRSs cannot constitute more than 20% of our total assets.
TRSs are subject to regular corporate tax and REIT gross income tests limit the amount of dividends they can pay to REIT parents.
Certain circumstances relating to a TRS may subject the REIT to a penalty tax.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Complying with REIT requirements may cause us to forgo or liquidate otherwise attractive opportunities.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability forff
Failure of certain investments to qualify as real estate assets could adversely affect our status as a REIT.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
Qualifying as a REIT involves highly technical and complex provisions of the Code.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring CMOs.
Some financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders.
The lease of qualified healthcare properties to a TRS is subject to special requirements.
Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
Dividends payable by REITs generally receive different tax treatment than dividend income from regular corporations.
New legislation or administrative or judicial action could make it more difficult or impossible for us to remain qualified as a REIT.
us.
Risks of Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile and negatively impacted by broad market fluctuations.
Our charter does not permit ownership of over 9.8% of our common or preferred stock without prior approval from our Board.
Provisions contained in Maryland law that are reflected in our charter and bylaws may have anti-takeover effects.
•
•
•
• We have not established a minimum dividend payment level and cannot assure stockholders of our ability to pay dividends.
•
Our reported GAAP financial results differ from the taxable income results that impact our dividend distribution requirements.
Regulatory Risks
•
•
Loss of Investment Company Act exemption from registration would adversely affect us.
Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may affect us.
13
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
Risks Related to COVID-19
COVID-19 has adversely all
a
ffec
industrytt
and our business.
ted, and will likely
ii
rr
contintt ue to adverdd
sely
affect, the U.S. economy, tyy hett mortgage REITEE
General
COVID-19 is causing significant disruptions to the U.S. and global economies and has contributed to volatility and negative
pressure in financial markets. COVID-19 and the related social distancing measures have had a broad negative impact on the
U.S. and global economies as many businesses, particularly smaller ones within the service-sector, have been force
d to close,
furlough and/or lay off emplom yees. As a result, U.S. unemployment claims have dramatically risen at unprecedented rates.
Other economic activity, including retail sales and industrial production, have slowed as well. The pace, timing and strength of
any recovery are still unknown and difficult to predict.
ff
m
The U.S. federal government, as well as many state and local governments, have adopted a number of emergency measures and
travel bans, “shelter in place” restrictions,
recommendations in response to the COVID-19 pandemic, including imposing
cancelling events, banning large gatherings, closing non-essential businesses, and generally promoting social
curfews,
ff
distancing (including in the workplace, which has resulted in a significaff
nt increase in employees working remotely). Across
the country, moratoriums are in place in certain states to stop evictions and foreclosures in an effort to lessen the financial
burden created by the COVID-19 outbreak and various states have even promulgated guidance to regulated servicers requiring
ate policies to assist mortgagors in need as a result of the COVID-19 pandemic. A number of states have enacted
ff
them to formul
laws which impose significant limits on the default remedies of lenders secured by real property.tt While some states have
begun a phased relaxation of certain of these measures, substantial restrictions on economic activity remain in place. Although
it cannot be predicted, additional policy action at the fede
ral, state and local level is possible in the near future. The COVID-19
pandemic (and any future COVID-19 outbreaks) and resulting emergency measures has led (and may continue to lead) to
al markets, the economy of the United States and the economies
significant disruptions in the global supply chain, global capita
of other nations. Concern aboa ut the potential effects of the COVID-19 pandemic and the effecff
tiveness of measures being put in
place by governmental bodies and reserve banks at various levels as well as by private enterprises to contain or mitigate its
spread has adversely affected economic conditions and capital markets globally, and has led to significant volatility in global
financial markets. There can be no assurance that the containment measures or other measures implemented from time to time
t those measures will have on the economy. While non-
will be successful in limiting the spread of the virus and what effecff
remains uncertain, and
essential economic activity is to some extent returnin
may vary substantially depending on the location and the type of activity. The disrupr
tion and volatility in the credit markets
and the reduction of economic activity in severely affected sectors may continue for an extended period or indefinitely, and may
worsen the recession in the United States and/or globally.
g in certain jurisdictions, the timing of such returnt
ff
t
ff
quarter of 2020, particularly in March, COVID-19 began to adversely affect the mortgage REIT industry
Beginning in the first
generally. In addition to negative general economic conditions, the impact of COVID-19 caused severe volatility across asset
classes, including mortgage-related assets. In order to increase liquidity, fixed income investors were forced to sell U.S.
Treasuries and Agency MBS, leading to an excess supply of these assets in need of redistribution. Pressure in financing markets
and the need to meet margin obligations (particularly in the mortgage REIT industry in connection with repurchase financing
obligations) created additional selling pressure in U.S. Treasury and Agency MBS markets, and widening of credit spreads.
Other markets, including the market for residential credit and commercial real estate securities, also experienced similar trends,
albeit on a relatively lesser scale.
Economic Conditions
ff
The conditions related to COVID-19 discussed above have also adversely affected our business and we expect these conditions
to continue during 2021. The significant decrease in economic activity and/or resulting decline in the housing market could
have an adverse effect
on the value of our investments in mortgage real estate-related assets, particularly residential real estate
assets. In addition, as interest rates continue to decline as a result of demand for U.S. Treasury securities and the activities of the
Federal Reserve, prepayments on our assets are likely to increase due to refinancing activity, which could have a material
on our results of operations. Further, in light of COVID-19’s impact on the overall economy, such as rising
adverse effect
ff
unemploym
ent levels or changes in consumer behavior related to loans as well as government policies and pronouncements,
borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans
to avail themselves of lower rates. Elevated levels of delinquency or default would have an adverse impact on the value of our
mortgage real estate related-assets. In addition to residential mortgage-related assets, the adverse economic conditions could
negatively impactm
tenants on our commercial property assets and/or businesses in which we lend to in connection with our
middle market lending activities, resulting in potential delinquencies, defaults or declines in asset values. To the extent current
m
14
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
conditions persist or worsen, we expect there to be a negative effect
on our results of operations, which may reduce earnings
and, in turn, cash available for distribution to our stockholders. The continued spread of COVID-19 could also negatively
impact the availabia lity of key personnel necessary to conduct our business.
ff
Financing Conditions
We may also experience more difficulty in our financing operations. COVID-19 has caused mortgage REITs to experience
severe disruptions in financing operations (including the cost, attractiveness and availability of financing), especially the ability
to utilize repurchase financing and the margin requirements related to such financing. The less liquid markets that make up au
significant portion of our credit portfolio, including residential securities and whole loans, commercial real estate securities and
loans and middle market lending, experienced significant disruption over this crisis period, marked by a sharp retraction in
borrowers. If conditions related to COVID-19 persist, we could experience an
volumes and a lack of access to credit forff
ity of our potential lenders to provide us with or renew financing, increased margin calls, and/ordd
unwillingness or inabila
al requirements. These conditions could force us to sell our assets at inopportune times or otherwise cause us to
additional capita
t our business. To the extent the COVID-19
potentially revise our strategic business initiatives, which could adversely affecff
t of heightening many of the other risks
pandemic adversely affects our business and financial results, it may also have the effecff
described in this Annual Report on Form 10-K for the year ended December 31, 2020, such as our risks related to our use of
leverage, management of our liquidity, exposure to counterparties, our ability to pay dividends in the future and our ability to
protect our information technology networks and infrast
ructure from unauthorized access, misuse, malware, phishing and other
events that could have a security impacm t as a result of our remote working environment or otherwise.
ff
We cannot predict the effecff
global recessionary economic conditions
tt
t that
tt
willii have on us.
government policies, laws and plans adopted in r
ii
esponse to the COVID-VV
19 pandemic and
The extent of the COVID-19-related disruptions and the duration of the pandemic as well as the long-term impacts of the social,
economic, and financial disrupr
tions caused by the COVID-19 pandemic are unknown at this time and may be severe.
Governments have adopted, and we expect will continue to adopt, policies, laws and plans intended to address the COVID-19
pandemic and adverse developments in the credit, financial and mortgage markets. While the U.S. Federal Reserve, the U.S.
government and other governments have implem mented unprecedented financial support or relief measures in response to
concernsr
ts of the COVID-19 pandemic, the likelihood of such measures calming the volatility
in the financial markets or addressing a long-term national or global economic downturn cannot be predicted and we cannot
assure you that these programs will be effect
ient at addressing the adverse impacts of the pandemic or otherwise
have a positive impact on our business.
surrounding the economic effecff
ive or sufficff
ff
Risks Related to Our Investing, Portfolio Management and Financing Activities
We may ca
hange our policll
tt
ies witii hout
.ll
stoctt kholder approval
a
time to time. Our Board and
Our Board has established very broad investment guidelines that may be amended fromff
management determine all of our significant policies, including our investment, financing, capita
l and asset allocation and
a
distribution policies. They may amend or revise these policies at any time without a vote of our stockholders, or otherwise
initiate a change in asset allocation. For example, in the first quarter of 2020, we proactively reduced the size of our Agency
t our
MBS portfolio in order to manage our leverage profile in response to COVID-19. Policy changes could adversely affecff
financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions.
tt
Our strategy
involvell
s thett
use of leverage, we
hich increases the riskii
thatt
t we may incur substanti
ali
tt
losses.
on investments. We incur this leverage
We expect our leverage to vary with market conditions and our assessment of risk/returnt
by borrowing against a substantial portion of the market value of our assets. Leverage, which is fundam
ental to our investment
strategy, creates significant risks. The risks associated with leverage are more acute during periods of economic slowdown or
recession, which the U.S. economy has experienced in connection with the conditions created by the COVID-19 pandemic.
ff
Because of our leverage, we may incur substa
ntial losses if our borrowing costs increase, and we may be unabla e to execute our
investment strategy if leverage is unavailable or is unavailable on attractive terms. The reasons our borrowing costs may
increase or our ability to borrow may decline include, but are not limited to, the folff
lowing:
u
•
•
short-term interest rates increase;
the market value of our investments availablea
collateralize borrowings decreases;
to
•
•
the “haircut” applied to our assets under the
repurchase agreements or other secured financing
arrangements increases;
interest rate volatility increases;
15
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
•
forced sales, particularly under adverse market
conditions, such as those which occured as a result
of the COVID-19 pandemic;
•
•
there is a disruption in the repo market generally or
that supports it; or
the infrastructuret
ff
the availability of financ
ing in the market decreases.
Our levll eragea may ca
ause margin cii
allsll and defaultsll and force us to stt
ell all
ssets utt
nder adverse market conditiii ons.
Because of our leverage, a decline in the value of our interest earnir ng 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
rate securities. Margin calls are most likely in
increases in interest rates tend to more negatively affect the market value of fixed-
market conditions in which the unencumbered assets that we would use to meet the margin calls have also decreased in value.
The risks associated with margin calls are more acute during periods of economic slowdown or recession, which the U.S.
economy has experienced in connection with the conditions created by the COVID-19 pandemic. We experienced margin calls
much higher than historical norms during
the onset of COVID-19.
d
ff
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, or allow lenders to sell those assets on our behalf at prices that could be below
our estimation of their value. 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
tcy Code and to liquidate the
the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankrupr
collateral under these agreements without delay.
We may ea
xcee
eed 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 wtt
e
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. Our target economic leverage ratio is set for the portfolio as a
whole, rather than separately for each asset type. The economic leverage ratio on Agency mortgage-backed securities may
exceed the target ratio for the portfolio as a whole. Because credit assets are generally less levered than Agency mortgage-
backed securities, at a given economic leverage ratio an increased allocation to credit assets generally means an increase in
economic leverage on Agency mortgage-backed securities. The economic leverage on our Agency mortgage-backed securities
is the primary driver of the risk of being unable to meet margin calls discussed above.
We may na
ot be able to achieve our optimtt
al leverage.ee
We use leverage as a strategy to increase the returnt
leverage for any of the following reasons:
to our investors. However, we may not be able to achieve our desired
•
•
we determine that the leverage would expose us to
excessive risk;
our lenders do not make funding availablea
acceptable rates; or
to us at
•
our lenders require that we provide additional
collateral to cover our borrowings.
ii
Failure
to procure or renew fundingii
on favorable t
ertt msrr
, os
ll
r at all, wll
ould adversely all
ffea
ct our resultsll and financi
ii
alii
tt
condition.
t
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
time when prices are depressed. Our business, results of operations and financial condition may be materially
at an inopportune
ted by disruptions in the financial markets, including disruptions associated with the conditions created by the
adversely affecff
COVID-19 pandemic. We cannot assure you that, under such extreme conditions, these markets will remain an efficient
source
, we will have to find alternative forms of financing for our assets, which
of financing for our assets. If our strategy is not viablea
may not be availablea
. 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 capita
on terms
If we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the
that are acceptable to us.
al will be available to us in the future
ff
ff
16
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
market price of our common stock and our ability to make distributions to our stockholders. Moreover, our ability to grow will
through the
be dependent on our ability to procure additional funding.
issuance of additional equity or borrowings, our growth will be constrained.
To the extent we are not able to raise additional funds
ff
ff
ii
Failure
to effeff ctively mll
anage our liquidit
y wtt
ii
ould all
dversely affect our results att
nd financial conditiii on.
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
ity of any of our potential lenders to provide us with or renew finff ancing, margin calls,
liquidity include: unwillingness or inabila
additional capital requirements appl
to our lenders, a disruptu ion in the financial markets (especially in light of the
disruption caused by the COVID-19 pandemic) 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.
icablea
a
Riskii management policll
ies and procedures may na
ot adequately identifytt
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. Our management may have less experience in
identifying and managing the risks of new business activities. 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 decdd rease in prepayme
ee
nt ratestt may aa
dversely affect our profitabi
ii
liii ty.
ii
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 ofteff n purchase mortgage-backed securities that have a higher
coupon rate than the prevailing market interest rates. In exchange for a higher coupou
n rate, we typically pay a premium over par
value to acquire these mortgage-backed securities. In accordance with U.S. generally accepted accounting principles
f the related mortgage-backed
(“GAAP”), we amortize the premiums on our mortgage-backed securities over the expected life off
securities. If the mortgage loans securing these mortgage-backed securities prepay at a more rapida
rate than anticipated, we will
ity.
have to amortize our premiums on an accelerated basis that may adversely affecff
t our profitabila
Defaults on mortgage loans underlying Agency mortgage-backed securities typically have the same effect as prepayments
because of the underlying Agency guarantee.
Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment
rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general
d-rate and adjustable-rate mortgage loans. We may seek to minimize
economic conditions and the relative interest rates on fixeff
prepayment risk to the extent practical, and in selecting investments we must balance prepayment risk against other risks and
the potential returns
prepayment risk. We may choose to bear
increased prepayment risk if we believe that the potential returns justify the risk.
of each investment. No strategy can completely insulate us fromff
t
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.
We are subject to rtt
einvii
tt
estmen
t risk.
We also are subject to reinvestment risk as a result of changes in interest rates. Any significant decrease in economic activity or
resulting decline in the housing market could have an adverse effecff
t on our investments in mortgage-related assets. Declines in
interest rates are generally accompanied by increased prepayments of mortgage loans, which in turt n 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, increases in interest rates are generally accompanied by
decreased prepayments of mortgage loans, which could reduce our capita
al available to reinvest into higher-yielding assets.
17
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
rr
tt
conditions
ii
cant contraction in liqui
dity
Volatile market
gg
a signifi
assets in which we invest.
ii
for mortgages and mortgage-r
tt
tt
for mortgages
elated
ll
tt
and mortgage
assets att
ll
-related
s well as the broader financial markets can result i
rr
assets,tt which may adversely
ll nii
value of to hett
affecff
t thett
Our results of operations are materially affecte
including Agency mortgage-backed securities, as well as the broader financial markets and the economy generally.
d by conditions in the markets for mortgages and mortgage-related assets,
ff
Significant adverse changes in finff ancial 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, COVID-19 or
other pandemic diseases, geopolitical issues including events such as the United Kingdom’s recent exit froff m the European
Union (commonly referred to as “Brexit”), trade wars, unemployment, the availability and cost of financing, the mortgage
market, the repurchase agreement market and a declining real estate market or prolonged government shutdown may contribute
the economy and markets. Increased market uncertainty and instability in
to increased volatility and diminished expectations forff
and credit markets, combined with declines in business
light of the COVID-19 pandemic in both U.S. and international capital
and consumer confidence and increased unemployment, have also contributed to volatility in domestic and internat
ional
markets.
a
r
For example, as a result of the finff ancial crises 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 forff mortgage-related assets.
This illiquidity negatively affected both the terms and availability of financing for all mortgage-related assets. Additionally, the
recession resulting from the COVID-19 pandemic could be more protracted than the recession caused by the financial crisis,
which could result in a significant rise in delinquencies and defaults on mortgage-related assets and further negatively impactm
market liquidity for mortgage-related assets.
Further increased volatility and deterioration in the markets forff mortgages and mortgage-related assets as well as the broader
financial markets may adversely affecff
t 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 favorablea
ity and
financial condition may be adversely affecff
ted if we are unable to obtain cost-effecff
tive financing for our investments.
terms or at all. Our profitabila
Competm ittt iontt
these assets.
may limi
t oii ur abilitll y t
o att
ii
tt
cquireii
ii
desirabl
ll nvii
e i
estmett
nts i
tt n oii
ur target assets att
nd could all
a
lso affec
t thett
pricing of
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
nce companies, public and private funds, government entities, commercial and
investors, including other REITs, specialty finaff
investment banks, commercial finance and insurance companies and other finff ancial institutt
ions. Many of our competim tors are
ncial, technical, technological, marketing and other resources than we do.
substantially larger and have considerably greater finaff
Other REITs with investment objectives that overlap wa
al, 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 competm itors are not subject to the operating constraints associated
In addition, some of our
with REIT compliance or maintenance of an exemption from the Investment Company Act.
competm itors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider varietyt
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 effecff
t 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 ablea
to identify and make investments that are consistent with our investment objectives.
ith ours may elect to raise significant amounts of capita
t
An increase in the interest payments ott
adversely affect our profitabi
.yy
liii tyii
ii
n our borrowings relati
ll
ve to the intii erett
st we earn on our int
ii ertt est earning assets may
We generally earn money based uponu
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.
18
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
ii ngii
Differences in timi
.yy
our profitabiliii tyii
of interett
st rate adjustments ott
n our interett
st earning assets and our borrowings may adversely affect
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 adjustablea
ver time
based upon
-rate interest earning assets. This means that their interest rates may vary orr
changes in an objective index, such as:
u
•
•
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.
•
Secured Overnight Financing Rate. A measure of
the cost of borrowing cash overnight collateralized
by U.S. Treasury securities, as published by the
Federal Reserve Bank of New York.
These indices generally reflect short-term interest rates. The interest rates on our borrowings similarly reflect short-term interest
rates. Nevertheless, the interest rates on our borrowings generally adjust more frequently than the interest rates on our
Accordingly,
adjusd
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 adjust
table-rate interest earning assets, which are also typically subject to periodic and lifetime interest rate caps.a
able-rate interest earning assets.
d
Changes in the method pursuant to which LIBOR
ll
results.
II
is detett rmineii d and potentiali
ii
discontinuati
on of LIBOR may aa
ffea
ct our
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory
reform. These reforms may cause such benchmarks to perform differently than in the past, or have
guidance and proposals forff
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 various LIBOR rates (“LIBOR rates”) may have been
under-reporting or otherwise manipulating or attempting to manipulate LIBOR rates. 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
rates. LIBOR rates are calculated by reference to a market for interbank lending that continues to shrink, as it is based on
increasingly fewer actuat
l transactions. This increases the subjectivity of the 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), are expected to result in changes to the manner in which LIBOR rates are determined or the establia
shment 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 afteff
r 2021.
t of these changes, other reforms, or the establishment of alternative reference rates in the
It is not possible to predict the effecff
United Kingdom or elsewhere. Furthermore, in the U.S., efforts to identify a set of U.S. dollar reference interest rates include
proposals by the Alternarr
tive Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New
York. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee
comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight
Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities. The
Federal Reserve Bank of New York began publishing SOFR rates in April 2018.
It is likely that U.S. Dollar LIBOR (“USD-LIBOR”) will be replaced by SOFR published by the Federal Reserve Bank of New
York. The manner and timing of this shift is not known with certainty. It is possible, but unlikely, that USD-LIBOR will be
used in new instruments created after 2021. Global regulators expect that the most-used tenors of USD-LIBOR will continue to
be published through June 2023, but are encouraging regulated institutions to make the shift earlier. For each existing LIBOR-
based instrument, the manner and timing of the switch depends on the terms of the relevant contract and the specificsff
of future
events. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. Any of these
alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could
have a material adverse effect on results.
bank credit risk, while SOFR does not.
SOFR is not an exact replacement forff USD-LIBOR. USD-LIBOR accounts forff
Therefore, LIBOR and SOFR are expected to behave differeff
ntly at times when market participants are concerned about the
financial strength of banks. Also, SOFR is an overnight rate instead of a term rate. There is currently no perfect way to create
robust, forward-looking SOFR term rates. A large and liquid market in SOFR-based future
s could eventually lead to the ability
to calculate forward-looking SOFR term rates, but currently the SOFR-based futures market is small relative to LIBOR-based
futures markets. Regulators and other members of the Alternative Reference Rates Committee (“ARRC”) have indicated that
market participants should stop using USD-LIBOR now, despite the unavailability of a forward-looking SOFR term rate.
ff
19
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
However, a large majori
sponsor, still reference USD-LIBOR.
a
ty of new issuance of floating-rate instruments, including some transactions in which we are issuer or
Regulators and other members of the ARRC have also indicated that all instruments that reference USD-LIBOR should include
robust fallbacks. The ARRC has published falff
lbacks for several asset types, and the International Swaps and Derivatives
Association (“ISDA”) has prepared documentation to implement fallbacks for derivatives.
Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread.
ISDA has described the spread calculation methodology that will appa
ly to derivatives that adopt the ISDA recommendations for
derivatives. The spread calculation methodology for non-derivatives is currently not known. The spread calculation is intended
to minimize value transfer between counterparties, borrowers, and lenders, but there is no assurance that the calculated spread
will be faiff
r and accurate.
lbacks recomm d d
hThe f lfallb k
iinstruments
LIB
ended byby hthe ARRC ar de diffifferent ffor
ivarious
hiThis couldld
ilwill il incorporate hthe recommend dded f lfallblba kcks.
dges.
bOR-basedd assets andd our USD-LIBOR b-based id interest rate hhedges.
non-derivatiive iinstruments,
d i
bOR-basedd
it in unexpec dted diffdifferences bbetween our USD-
l
resul
lalll USD-LIB
dand not
ilwilll m kake hth ie instrument fifixedd-rate, or
lblbackk thhat
fa f lalfff
yMany e ixistiingg USD-LIBOR b-based id instruments iei hther ddo not con
iin prac itice
t
trary to hthe contract
lual
fa f lalfff
iintent. W he have adhdheredd to thhe ISDA 2020 IBOR llFallbba kcks Protoc lol, bbut may iy incur costs ame dindi gng iinstruments not covered bd byy
lruleb kbooks to iim lplement ffallbllba kcks recomme d dnded byby hthe ARRC. We m yay d idecidde not to am dend,
hthat Protoc lol or byby lclea iringhouse
nghouse
adjust blable-rate
iin
-faci gng adjust
gmortgagges, are iimprac iti
dand i krisk fof lili itiggatiion. Our lle dnders
may by b le less
hiwhichh case we m yay bbear hthe cost andd ri kisk fof lili itigatigation. Some iinstruments,
illwillinging to ext dend credidit secu dred byby assets htha dt do not iincl dlude
iWi hth respect to hthose iinstruments, we may by bear hthe cost
continuation fof LIBOR, p
yarty
i
ymay bbeliliev ie is con
template hth de diis
lblba kck hthat one p
lcularlyrly consumer f
i
parti
brobust ffallllbbackks.
rovidde
i
y
lcal to am dend.
providde
i
l
i
i
hother ma krket pa irti icipants hhav le less experiience u dnderstanddiingg a dnd m dodelingling SOF bR-basedd assets and ld liiabili i
bOR-basedd assets a dnd lili bilabiliitiies, iinc
ependent on
d
We a dnd
LIB
USD-LIBOR cessa itio in i ds d
ffuture lili itigga ition, iit iis not currentlyly prac iti
provide
livaliddate hthe f ifair v lalues off cer
providers to
hthe ce
ssation fof LIBOR iin h i
their pricing
i
ricing m dodells.
i
culty fof iinvestiingg, hhedgidgi gng,
reasi gng hthe difdiffififff culty
kunknown ffuture ffacts, hthe language
lvalua ition
dand i krisk ma gnagement. Because hthe iimpactm
thhan
fof
language fof iindi idivid ldual contracts, andd thhe outcome fof potenti lial
service
i
counti gng ffor
i
dmodells to account ffor hthe cessatiion off LIBOR. We use
rovidders ac
service p
i
a
bilities
inci lal iinstruments. We are not aware fof hthose
lcal ffor our
itain fifina
i
l
involves operati
dand correct
hThe process fof tra insitiion i
dand we
ymay not idide intifyfy
ki
f
forward-looki gng, partiies
ypayment iis ddue. Proposedd mech ihanisms to
hthe ddayy thhat
ddoes not f lfullyly reflflect iinterest rates during
l
i krisks.
ional
lalll off thhose
during hthe callc lula ition
d l
fRefeff rences to USD-LIBOR may by be e b ddmbedd ded iin computer
freferences. Because compou dnd ded SOFR iis b kbackwar
dcode or
dmodells,
ooking rathher hthan
alculate p yayment amounts
iuntill
result iin a p yayment amount thhat
d ld-looking
kk
l
l
bl
iming ig issue
unable to c l
ymay
lsolve hthe operati
ional
l
iti
iperi dod.
kimaki gng or rec i ieivi gng USD-LIBOR b-basedd p yayments m yay bbe
lalso
ibl
iani gng hthat some iinstruments
possible thhat USD-LIBOR ilwilll contiinue to bbe
ldwould co intinue to bbe subje
d
It iis
me
lalso bbe
callc lulatedd pursuant to an en itirelyrely diffdifferent me hth dodology
gnificant itime andd resources.
ymay
publi h dshed hthat contiinues to bbe
require isignifica
bli
i
publi h dshed
bli
iwithhout b ibei gng representa itive off a yny
subject to hthe
kweaknk esses
named USD-LIBOR andd thhe frefore con itinues to bbe
ology. Preparingring ffor andd addddressing
fof hthe LIBOR c lalcul
underlyingying ma krket,
lation process. A rate m yay
dused ffor certaiin contracts, bbu it is
ressing hthe cessatiion off USD-LIBOR cessatiion
d l
i
hould
fpreferredd shhares sh ld
flo-floa iti gng
plicablle to hthat
fof our fifi dxed-t
provisions ap li b
i i
ldHolders
ssation
i
ce
hshares to hcha gnge hthe e ixistinging USD-LIBOR cessatiio fn f lalfff
hthe same tiim ie i bt begiegins to
didispute over hthe
itime.
results fof hthe USD-LIBOR f ll
fallb kbacks ffor hthat
l
frefer to thhe
lrelevant prospectus to
lclass. W de do not currentlyntly iint dend to am dend
lblbackks. Ea hch
fof our fifixed
yany lclasses
hsuch lclass hthat iis currentlyly outstanding
dundersta dnd hthe USD-LIBOR-
drred
d-to-floatinging
fl
anding bbecomes callll blable at
dorder to a
idvoid a
dd shhares iin
funds at an u fnfavorablblea
ional f
fprefe
d
l
ff
additi
iraise ddi
ypay a USD-LIBOR b-basedd rate. hShouldld we hchoose to callll a cllass fof pr feferre
fff
lclass, we may by b fe f
orced
d
to
An increase in interett
book value.
st rates may adversely affect thett market value of oo
ur interett
st earningii
assets att
nd, therefore,
e
also our
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 negatively affecff
ted 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.
ff
We may ea
ee
xpe
adverse effecff
rience declines
t on our results of operations and financial conditiii on.
in the market value of oo ur assets resultingtt
ii
in us recording impairm
m
ents, which may ha
ave an
20
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
ff
A decline in the market value of our mortgage-backed securities or other assets may require us to recognize an “other-than-
ent (“OTTI”) against such assets under GAAP. For a discussion of the assessment of OTTI, see the section
temporary” impairmm
titled “Significan
t 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 facff
tual and subjective information available at the
time of assessment. As a result, the timing and amount of OTTI constitutt e material estimates that are susceptible to significant
change.
The soundness of other
tt
ii
financi
alii
tt
institutions
could adversely affect us.
r
ated as a result of trading, clearing, counterparty,tt
borrower, or other relationships. We
Financial services institutions are interrel
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 financial
ons. Many of these transactions expose us to credit or counterparty risk in the event of default of our counterparty or, in
instituti
t
customers. Such credit risk could be heightened in respect of our European counterparties
certain instances, our counterparty’s
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.
tt
t
Our hedging
dd
tt
strate
giee
s may be costly,ll and may not hedge our risks as intende
tt
d.
Our policies permit us to enter into interest rate swaps, capsa
and floors, interest rate swaptions, interest rate 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 Investment Companym
Act exemption. We have used interest rate swaps and options to enter into
s) to provide a level of protection against interest rate risks.
interest rate swaps (commonly referred to as interest rate swaption
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.
l to protect or could adversely affect us because, among other things: interest rate
Entering into interest rate hedging may faiff
ng periods of volatile interest rates; available hedges may not correspond directly
hedging can be expensive, particularly durid
with the risk for which protection is sought; and the durat
ion of the hedge may not match the duration of the related asset or
liability. The expected transition fromff
LIBOR to alternative reference rates adds additional complication to our hedging
strategies.
d
a
Our use of derivativett
s may expose
xx
us to counterparty att
ii
nd liqui
dit
i
y rtt
isks.kk
The Dodd-Frank Act, and regulations under it, have caused significant changes to the structure of the market for interest rate
swaps and swaptia
change, but do not eliminate, the risks we face in our hedging activities.
ons. These new structures
t
Most swaps that we enter into must be cleared by a Derivatives Clearing Organization (“DCO”). DCOs are subject to regulatoryrr
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
payments, potential
bear the credit risk of both the DCO and the relevant FCM, in the form of potential late or unrecoverablea
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 liabia lity being hedged is
no longer effectively hedged.
s
xecution Facility. We bear additional fees for use of the DCO. We also bear feeff
Most swaps must be or are traded on a Swap Ea
rs. Because the standardized swaps available on
for use of the Swap Execution Facility.t We continue to bear risk of trade error
Swap Execution Facilities and cleared through DCOs are not as customizablea
the implementation
as the swaps available beforeff
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 forff
higher risk that collateral we have posted is unavailable to us if the FCM defaults.
futures transactions we bear a
Some derivatives transactions, such as swaptions, are not currently required to be cleared through a DCO. Therefore, we bear
on CMBX indexes are also not
the credit risk of the dealer with which we executed the swaption. TBA contracts and swapsa
cleared, and we bear the credit risk of the dealer.
Derivative transactions are subject to margin requirements. The relevant contract or clearinghouse ruler
s dictate the method of
determining the required amount of margin, the types of collateral accepted and the timing required to meet margin calls.
21
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
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 Ea
xecution Facilities or cleared on a DCO. Ongoing regulatory change in this area could
increase costs, increase risks, and adversely affeff ct our business and results of operations.
It may be uneconomical to "tt
tt
contract
s,tt which could nll
roll" our TBA dBB
arll
olldd
ii
ct our financi
ffea
ll
roll t
conditiontt
alii
egativtt ely all
and resultsll of operations.
tt
ratt nsactiott ns or we may ba
e unable to meet margin cii
allsll on our TBATT
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 differff ent
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 referre
d to as the “drop”. The drop is a reflection of the
expected net interest income fromff
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
ncing is the party that would retain all principal and interest payments accrued
market, the party providing the implied finaff
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 formff
of off-balance sheet financing and
increase our "at risk" leverage.
ff
The economic returnt
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 forff
distributions to shareholders.
There may be situat
tions 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
ity or unwillingness to roll has effects similar to any other loss of financing. If we do not
represent implied financing, an inabila
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 finan
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 effeff cts described
in the liquidity risks described above.
cing sources availablea
a
ff
We use analyti
incompletell
ll
n
informat
cal modeldd s all
iontt
tt
nd data in connection with t
ould sll
therewith wtt
used in connectiontt
hett
valuationtt
ubject us to potentialii
of our assets,tt
ii
risks.
and any incorrect, mtt
isleadingii
or
m
Given our strategies and the complexi
ty 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
d to
buy certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorablea
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 fromff
securitizations,
such as commercial or residential mortgage-backed securities. These risks include, but are not limited to, the following: (i)
liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled
collateral cash flows and/ordd
22
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
based on simplifying assumptim ons 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 constitutet
s a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the
models may contain incorrect assumptim ons as to what has occurred since the date information was last updated.
ff
The use of predictive models has inherent risks. For example, such models may incorrectly forec
Some of the analytical models used by us, such as mortgage prepayment models or mortgage default models, are predictive in
nature.
ast future behavior,
t
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 reliabila
ity of the supplied historical data and the abia lity of these historical
models to accurately reflect future periods. Additionally, such models may be more prone to inaccuracies in light of the
unprecedented conditions created by the COVID-19 pandemic. In particular, the economic, financial and related impacts of
COVID-19 is and will be very difficult to model (including as related to the housing and mortgage markets), as the catalyst for
these conditions (i.e., a global pandemic) is an event that is unparalleled in modern history and therefore is subject to wide
variables, assumptim ons and inputs. Therefore, historical data used in analytical models may be less reliablea
in predicting futff uret
conditions. Further, the conditions created by COVID-19 have increased volatility across asset classes. Extreme volatility in any
asset class, including real estate and mortgage-related assets, increases the likelihood of analytical models being inaccurate as
market participants attempt to value assets that have frequent, significant swings in pricing.
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. We may incorrectly value LIBOR-based instruments because our models
do not currently account for LIBOR cessation.
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 fromff
characteristics, such as derivative instruments or
t
structured
market prices, especially forff
securities with complexm
notes.
Accountingtt
assumptions,
Additiii onallyll , oyy ur applicatiott n of Go AAGG P may produce financialii
omplem x a
ee
rules relatell
tt
and changes in accounting treatment may adversely affect our profitabi
romff
that fluctuate f
ur transactions are highly c
ii
ertain o
tt
d to c
resultsll
f oo
tt
ll
tt
nd involve significant
and impactm
judgmegg
nt and
our financial results.tt
liii tyii
one period to another.
tt
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 assumptim ons. These
complem xities 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 inabila
on 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 flucff
tuate over short periods of
time.
ity to prepare our financial statements in a timely fashi
ff
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).
i
We are highly
significantly disrii upt our business,
abilitll y t
ii
peo rate our business.
tt o ott
ii
dependent on information systems
tt
and third parties, and systeyy ms failures or cybe
c
which may, in turn, negativtt ely all
ffa ecff
t thett market price of oo
rsecurity incidents
couldll
ur common stock and our
ii
Our business is highly dependent on communications and information systems. Any failure or interrur ptu ion of our systems or
cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading
23
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
In addition, we also faceff
activities, including mortgage-backed securities trading activities. A disruptiu
on 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
es or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial
employe
m
oing business with third parties that rely on us to meet their own data protection
losses, litigation and increased difficulty dt
the risk of operational failure, termination or capacity constraints of any of the third
requirements.
parties with which we do business or that facilitate our business activities, including clearing agents or other financi
al
intermediaries we use to facilitate our securities transactions, if their respective systems experience failure, interruptu ion, cyber-
attacks, or security breaches. Certain third parties provide information needed forff
our financial statements that we cannot obtain
or verify from other sources. If one of those third parties experiences a system failure or cybersecurity incident, we may not
have access to that information or may not have confidence in its accuracy. 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, the legal and
regulatory environment surrounding information privacy and security in the U.S. and international jurisdictions is constantly
evolving. New business initiatives have increased, and may continue to increase, the extent to which we are subject to such U.S.
and international
information privacy and security regulations. In addition, due to the transition to remote working
environments as a result of the COVID-19 pandemic, there is an elevated risk of such events occurring.
ff
m
r malware, viruses, computer
Computem
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 finff ancial, accounting and other data processing
systems. Although we have not detected a material cybersecurity breach to date, other financial instituti
ons 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. We may be held
responsible if certain third parties that facff
ilitate our business activities 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 facff
ilitate our business activities) or any failure to maintain
performance, reliabila
ity and security of our technical infrastructure, but such computer malware, viruses, and computer hacking
and phishing attacks may negatively affect our operations.
t
Our use of non-recourse securitizations
ii
ee
may ea
xpose
us to risks which could rll
esult in losses to utt
s.
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 ablea
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 inabila
ity 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 inabila
ity 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
of potentially
ncing or to liquidate assets at an inopportune time or price. To the extent that we are unable to obtain
less attractive finaff
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.
our assets on a long-term basis, we may be required to seek other forms
ff
ff
t
tt
Securitizati
ons expose us to additional
tt
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 issues 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,t we receive the cash proceeds of the sale of non-recourse
notes and a 100% interest in certain subordinate interests of the issuing entity. The securitization of all or a portion of our
nate interest we retain in the
commercial or residential loan portfolio might magnify off
issuing entity would be subordinate to the notes issued to investors and we would, therefore, absa orb ar
ll of the losses sustained
with respect to a securitized pool of assets before the owners of the notes experience any losses. Moreover, we cannot assure
to do so at favorable rates (particularly in light of the
you that we will be able to access the securitization market or be ablea
ur exposure to losses because any subordi
u
t
24
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
unpredictable impact of the COVID-19 pandemic on the securitization markets). The inabila
adversely affect
our performance and our ability to grow our business.
ff
ity to securitize our portfolio could
Counterparties may require us to enter into restrictive covenants rtt
grow our business
and increase revenues.
ii
elatll
ingtt
to our operations
tt
that may inhibit oii
ott
ur abilitll y t
tt
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 equq ity securities, and may impact our flexibility to determine our operating
policies and strategies. We may sell assets or reduce leverage at an inopportune time to avoid breaching these restrictions. 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 subju ect 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 dued
tly harm our business, financial condition, results of operations and ability to make
and outstanding. This could also significan
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 affeff ct our returns.
a
ff
ew lines
We may ea
ii
ntertt
ii
result in additiii onal risks
of business,
ii
and uncertainti
into ntt
ii
acquire other companiesi
es in our businesses.
or engage in other strategice
tt
initiat
ivtt es, each of which may
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:
•
•
•
•
•
•
•
•
t
a
ity of
es that
ty of suitablea
opportunities;
ties accurately and
terms for those opportunities;
the availabili
the level of competition from other companim
may have greater financial resources;
our ability to assess the value, strengths,
weaknesses, liabilities and potential profitabila
potential acquisition opportuni
negotiate acceptablea
the required investment of capital and other
resources;
the lack of availabili
the terms of any finaff
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;
ty of financing and, if availabla e,
ncings;
a
•
•
•
•
•
•
•
ities in any acquired business;
assumption of liabila
the disruption of our ongoing businesses;
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,
ff
including expected synergies, cost savings, or sales
or growth opportunit
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
charges.
ies, within the anticipated
t
Entry i
nto certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which
rr
we are currently exempt, and may lead to increased litigation and regulatory risk. The decision to increase or decrease
investments within a line of business may lead to additional risks and uncertainties. In addition, if a new or acquired business
ient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will
generates insufficff
be adversely affected
. Our strategic initiatives may include joint ventures, in which case we will be subju ect 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.
ff
We are subject to r
investmett
ii
nt accounts, includingii
isks and liabili
tt
potent
ial
tt
tt
tiii es in connection withii
sponsoring,
ii
investingtt
in and managingii
new funds and other
regulatorytt
ii
risks.
25
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
We have, and may in the future, sponsor, manage and serve as general partner and/odd r manager of new funds or investment
accounts, including collateralized loan obligations (“CLO”). Such sponsorship and management of, and investment in, such
funds and accounts may involve risks not otherwise present with a direct investment in such funds, and accounts’ target
investments, including, for example:
•
•
•
ff
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 naturet
terminated or dissolved under the terms of the
agreements, or we may be removed as general
partner and/or manager (with or without cause), and
in such event, we may not continue to manage or
invest in the applicaba le fund/account;
and may be
•
•
that disputes between us and the investors may
tration that would increase
result in litigation or arbir
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
fund/account to additional risk; and
the applicablea
that we may incur liability for obligations of a fund/
ff
account by reason of being its general partner or
manager.
a
Further, in relation to our operations, we have a subsidiary that is registered with the SEC as an investment adviser 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 froff m these provisions that appl
y to our relationships with that subsidiary’s clients. These provisions and
duties impose restrictions and obligations on us with respect to our dealings with our subsidiary’s clients, including, forff
example, restrictions on agency, cross and principal transactions. Our registered investment adviser subsidiary is 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 complym with federal securities laws. Additional sanctions that
may be imposed for failure to comply with appa
licable 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. We may
in the future be required to register one or more entities as a commodity pool operator or commodity trading adviser, subjecting
those entities to the regulations and oversight of the Commodity Futures Trading Commission and the National Futures
Association. We may also become subject to various international regulations on the asset management industry.
ff
Investmett
ee
nts in MSRs may ea
xpose
us to additiii onal risks.
ii
are considered to be largely dependent on underlying MSRs that either
We invest in financial instruments whose cash flows
the investment. We expect to increase our exposure to MSR-related investments in
directly or indirectly act as collateral forff
the
2021. Generally, we have the right to receive certain cash flows
servicing fees and/or excess servicing spread associated with the MSRs. While we do not directly own MSRs, our investments
in MSR-related assets indirectly expose us to risks associated with MSRs, including the following:
from the owner of the MSRs that are generated fromff
ff
ff
•
•
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 futff uret
should we desire to do so.
Our rights to the excess servicing spread are
subordina
u
Mac and Ginnie Mae, and are subject to
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.
te to the interests of Fannie Mae, Freddie
26
•
•
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.
The value of MSRs is highly sensitive to changes in
prepayment rates. Decreasing market interest rates
are generally associated with increases in
prepayment rates as borrowers are ablea
to refinance
their loans at lower costs. Prepayments result in the
partial or complete loss of the cash flows from the
related MSR.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
If we are not able to successfully manage these and other risks related to investing in MSRs, it may adversely affect
our MSR-related assets.
ff
the value of
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
We dWW epedd
relatell
nd on third-party service providers,
ii
includingii mortgage loan servicers and sub-servicers,rr
for a variety ott
f so
ervices
d to ott
ii
ur business.
We are, te hett
dd
refore, se ubject to the risks associatedtt with thirdii
-party
service providers.
We depend on a variety of services provided by third-party service providers related to our investments in MSRs as well as forff
general operating purposes. For example, we rely on the mortgage servicers who service the mortgage loans underlying our
MSRs to, among other things, collect principal and interest payments on such mortgage loans and perform loss mitigation
laws and regulations. Mortgage servicers and other service providers, such as trustees,
services in accordance with appli
bond insurance providers, due diligence vendors and document custodians, may fail to perforff m or otherwise not perform in a
manner that promotes our interests.
cablea
a
For example, any legislation or regulation intended to reduce or prevent foreclosures through, among other things, loan
modifications may reduce the value of mortgage loans, including those underlying our MSRs. Mortgage servicers may be
required or otherwise incentivized by the Federal or state governments to pursue actions designed to assist mortgagors, such as
loan modifications, forbearance plans and other actions intended to prevent foreclosure even if such loan modifications and
other actions are not in the best interests of the beneficial owners of the mortgage loans. Similarly, legislation delaying the
initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limiting the
ability of mortgage servicers to take actions that may be essential to preserve the value of the mortgage loans may also reduce
the value of mortgage loans underlying our MSRs. Any such limitations are likely to cause delayed or reduced collections from
mortgagors and generally increase servicing costs. As a consequence of the foregoing matters, our business, financial condition
and results of operations may be adversely affeff cted.
Purchases and sales of Ao
associatedtt with Agency mortgage-backed securities.
gency mortgage-backed securities by the FedeFF
rr
ral Reserve may adverdd
sel
a
y all
ffec
t thett
price and return
The Federal Reserve owns approximately $2.0 trillion of Agency mortgage-backed securities as of December 31, 2020. In
response to the market conditions created by the COVID-19 pandemic, the Federal Reserve has taken a number of proactive
measures, including cutting its target benchmark interest rate to 0%-0.25%, instituti
ng a quantitative easing program, including
the purchase of an unconstrained amount of Agency residential mortgage-backed securities, and putting in place a commercial
facility and term and overnight repurchase agreement financing facilities, all to bolster liquidity and to promote
ff
paper funding
price stabia lity and the smooth functioning of the mortgage-backed securities market. Certain actions taken by the U.S.,
including the Federal Reserve, in response to the COVID-19 pandemic may have a negative a impact on our results. For
example, decreases in short-term interest rates, such as those announced by the Federal Reserve during the first quarter of 2020,
may have a negative impact on our results. The Federal Reserve significantly further lowered interest rates in response to
COVID-19 pandemic concerns. These market interest rate declines may negatively affect our results of operations.
t
ay be passed affectingii
New laws mw
government, ott n the other, wrr
backed securities.
the relati
ll
a
dversely all
ffec
hich could all
onship between FanFF nie Mae and Freddiedd Mac, on thett
price of,o or our abilitll y t
ii
tt o i
tt nves
one hand, and the federal
nd finance Agency mortgage-
t in aii
t thett
dd
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
ct of 2008. In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S.
Economic Recovery Arr
Department of the Treasury entered into Preferred Stock Purchase Agreements with the FHFA and have taken various actions
intended to provide Fannie Mae and Freddie Mac with additional liquidity in an effoff
In
September 2019, FHFA and the U.S. Treasury Department agreed to modifications to the Preferred Stock Purchase Agreements
that will permit Fannie Mae and Freddie Mac to maintain capita
l reserves of $25 billion and $20 billion, respectively.
rt to ensure their finaff
a
ncial stability.
a
Shortly after Fannie Mae and Freddie Mac were placed in fede
ral 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
d and the nature of their guarantees
limited relative to historical measurements. The U.S. Treasury could also stop providing
could be eliminated or considerablya
ff
27
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
to Fannie Mae and Freddie Mac in the future.
credit support
Any changes to the nature of the guarantees provided by Fannie
u
Mae and Freddie Mac could redefine what constitutes an Agency mortgage-backed security and could have broad adverse
market implim cations. 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 affeff ct our business operations.
t
The recent U.S. elections may result in changes in federal policy with significant impacts on the legal and regulatory framework
affecting the mortgage industry. These changes, including personnel changes at the appa
regulatory agencies, may alter
the nature and scope of oversight affecff
ting the mortgage finance industry generally (particularly with respect to the future role
of Fannie Mae and Freddie Mac).
licablea
Risks Related To Our Credit Assets
We invest in s
ii
ecuritiii es in the credit risk transfer sector that are subject to mtt
ortgage 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
Investments in securities in the
may default on their obligations to make full and timely payments of principal and interest.
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 defaul
t of the issuer of the security.
ff
A prolonged economic slowdowdd
ll
results.
operatingtt
dd
n or declinin
g real estate values could impaim r t
ii hett
assets we may oa wn and adversely affect our
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. Investors
should consider the impact that the current recession resulting from the COVID-19 pandemic will have on the mortgage market
and ability of mortgagors to make timely payments on their mortgage loans. Furthermore, the economic impact of the
COVID-19 pandemic may result in a decline in real estate values (particularly in certain geographic
areas).
a
Owners of Agency mortgage-backed securities are protected fromff
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. A default on those underlying
mortgages exposes us to prepayment risk described above, but not a credit loss. 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.
ff
on one of our commercial mortgage loans or other commercial real estate debt or residential mortgage
In the event of a default
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
ii
to gtt
reatett r risk of default
e
and loss.
Repayments by borrowers and the market value of the related assets could be affect
ed 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 (including events
of conditions related to the COVID-19 pandemic) 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
ted to a greater degree than other areas of
mortgaged properties. In addition, local or regional economies may be adversely affecff
a
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
28
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
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 affect
ed.
ff
ff
Other regional factors – e.g., rising sea levels, earthquakes, floods,
s
forest fires, hurricanes or changes in governmental rulerr
(including rules related to the COVID-19 pandemic) or fiscal policies – also may adversely affect the mortgaged properties.
s or
Assets in certain regional areas may be more susceptible to certain hazards (such as earthquakes, widespread fires
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 oftenff
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 effecff
t on the local or national economy.
, flood
ff
ff
Inadequate property insurance coverage could have an adverse impactm
on our operatingii
results.tt
Commercial and residential real estate assets may suffer casualty losses dued
to risks (including acts of terrorism) that are not
covered by insurance or forff which insurance coverage requirements have been contractually limited by the related loan
documents. Moreover, if reconstruction or majora
owing 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 majora
repairs or may materially increase the cost thereof.
repairs are required foll
ff
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 ia ncii ur losses when a borrower default
e
s ott
n a loanll
and the underlyill ngii
tt
collat
eral
ll
value is less than the amount due.
q
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
al stack may be directly secured by the real estate assets of the borrower or may otherwise have a superior right to
in the capita
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
ted by
omissions by owners or managers of the assets. In addition, the value of the underlying real estate may be adversely affecff
some or all of the risks referenced below with respect to our owned real estate.
a
Some of our loans may be backed or supported by individual or corporate guarantees fromff
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 finff ancial 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.
ff
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
licable), during which time the collateral and/odd r a borrower’s financial condition may decline in
underlying collateral (if appa
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
to repay our loan at maturity through refinancing because the underlying property revenue
ff
able to obtain the necessary f
unds
rr
29
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our
loan at maturi
ty, we could suffer additional loss that may adversely impact our financial performance.
t
Our assets mtt
to performingii
loans.
ay become non-performingii
or sub-performingii
assets in the future, we
hich are subject to i
tt ncii
reased risks relati
ll
ve
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 unablea
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/odd r a substantial write-down of the principal of the loan. Even if a restructuring
payments or refinance the
t
were successfully accomplished, the borrower may not be able or willing to maintain the restruct
ured
t
restructured
loan upon maturity.
r
ff
tt
t
ff
From time to time we may find it necessary or desirable to forec
lose the liens of loans we acquire or originate, and the
ff
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 liabia lity claims and defenses) even when such assertions may
t or law, in an effort to prolong the foreclosure action and force the lender into a modification of the loan or
have no basis in facff
buy-out of the borrower’s position. In some states, foreclosure actions can take several years or more to litigate. At
a favora
blea
any time prior to or during the foreclosure proceedings, the borrower may filff e forff
bankruptcy, which would have the effect of
staying the foreclosure actions and further delaying the resolution of our claims. Foreclosure may create a negative publu ic
perception of the related property,tt
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
r reduce the proceeds and thus increase our loss. Any such reductions could materially and adversely affect the value
ff
will furthe
of the commercial loans in which we invest.
It is anticipated that as a result of financial difficulties dued
to the COVID-19 pandemic, borrowers will continue to request
forbearance or other relief with respect to their mortgage payments. In addition, across the country, moratoriums are in place in
ncial burden created by the COVID-19 pandemic
certain states to stop evictions and foreclosures in an effort to lessen the finaff
and various states have even promulgated guidance to regulated servicers requiring them to formulate policies to assist
mortgagors in need as a result of the COVID-19 pandemic. It is anticipated that other forbearance programs, foreclosure
moratoriums or other programs or mandates will be imposed or extended, including those that will impact mortgage related
assets. Moratoriums on foreclosures may significantly impair the servicer’s abilities or our abili
ty to pursue loss mitigation
strategies in a timely and effective manner.
a
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
enforce
losure, we may assume direct ownership of the underlying real estate. The
ff
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 effectuat
losure of the loan or a liquidation of the underlying property will
further reduced
ment of our rights. In the event of a forec
the proceeds and increase our loss.
tion of a forec
ff
ff
Whole loan mortgages are also subjeu
ct 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 appl
icable, 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.
a
We may be required to repurchas
representations and warranties, which could have a negativett
tt
e commercial or residentdd
ial
impactm
ee
tt
mortgage
on our earnings.n
loans or indemnifyi
tt
investors
if we breach
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 substitutet
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
30
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
ff
loans if we breach a representation or warranty in connection with our securitizations. The remedies availablea
on a mortgage loan. Likewise, we may be required to repurchase or
borrower fraud or in the event of early payment default
to a
substitutet
purchaser of mortgage loans are generally broader than those availablea
to us against the originating broker or correspondent.
Further, if a purchaser enforces its remedies against us, we may not be able to enforff ce 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 thirdii
associatedtt with such assets att
party service provideii
rs’ and servicers’rr due diligll ence of po
otentiatt
nd may na
ot reveal other
tt
weaknesses in such assets, which could l
l assets may not reveal all of the liabll
ll
osses.
tt
eall d to l
ll
ilities
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 fact
ors 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 facff
ts or that any asset acquisition will be successful.
ff
lose on an asset, wtt
When we forec
.yy
the risks inherent in that activityii
ff
e may come to own and operate t
tt hett
property securing the loan,
ll
which would expose us to
When we foreclose on a commercial or residential real estate asset, we may take title to the property s
ecuring 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 a debt
instrument secured by that property. In addition, we may end up owning a property that we would not otherwi
se 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 operating directly, including properties such as
hotels, hospitals, and skilled nursing facilities. 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.
rr
t
t
t
Financi
ii
alii
covenants could all
dversely affect our abilitll y t
tt o ctt
onduct 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 t
ll o att
cquire mortgage loans by eminenii
t domai
dd
n mii
ay adversely affect thett
value of oo ur assets.
Local governments have taken steps to consider how the power of eminent domain could be used to acquire residential
hether any mortgage loans sought to be purchased will be mortgage loans held in
mortgage loans and there can be no certainty wt
securitization trusts and what purchase price would be paid forff
any such mortgage loans. Any such actions could have a
on the market value of our mortgage-backed securities, mortgage loans and MSRs. There is also no
material adverse effect
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.
ff
Our investments in corporate loans and debt securitiii es for middl
e mll
i
m
arket companies
carry risks.
ii
We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market
companim
es. 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
31
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
markets, and generally have higher financing costs. Such companies, particularly in an economic slowdown or recession, may
al to expand or compete, and may be unable to obtain financing from
be in a weaker financial position, may need more capita
their respective private capital providers, public capa ital 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 vulnerablea
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 difficff ulties implementing
enterprise
resource plans and may facff e greater challenges integrating acquisitions than large businesses. These businesses may
r
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 impactm
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 att
certain assets and our abiliii tyii
to make distribu
ii
tions to our stockholders.
ssets we acquire are subject to risks
ii
particular to real property, wyy
hich may adversely affect our returns from
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 subju ect to various risks, including:
•
•
•
including earthquakes, hurricanes,
acts of God,
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;
•
•
•
changes in governmental laws and regulations, fiscal
policies and zoning ordinances and the related costs
of complim ance with laws and regulations, fiscal
policies and ordinances;
the potential for uninsured or under-insured propertytt
losses; and
environmental conditions of the real estate.
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
the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property.
liable forff
If any of these or similar events occurs, it may reduce our returnt
eliminate our ability to make distributions to stockholders.
from an affected property or investment and reduce or
The commercial loan assets we originate
from operatingtt
the property. Fyy
ii
ailFF ure to do so may ra
and/or//
acquireii
esult ill n dii
eldd inll quency ac
nd/or//
f to hett
foreclosure.ee
depend on the abilitll y ott
property ott wner to generate net income
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
the existence of independent income or assets of the borrower. In light of the
operation of such property rather than uponu
COVID-19 pandemic and related stay-at-home orders, certain businesses may not be able to open or to open at full
to
customers, which may have an effect on their ability to generate income. 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 affeff cted
by, among other things,
a
capacity
ff
•
•
•
•
•
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;
government orders regulating the operation of a
tenant’s business;
changes in laws that increase operating expenses or
limit rents that may be charged;
32
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
•
•
•
•
a
eviction moratoriums;
costs of remediation, and liabilities
environmental conditions;
the potential forff
losses;
changes in governmental
laws and regulations,
including fiscal policies, zoning ordinances and
uninsured or underinsured property
associated with
terrorist attacks, pandemics, social
environmental legislation and the related costs of
compliance;
acts of God,
unrest and civil disturt bar nces;
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 bankrupr
tcy (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
losure of a commercial real
debtor-in-possession to the extent the lien is unenforceablea
estate loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated returnt
on
such commercial real estate.
under state law. Workouts and/odd r forec
ff
Commercial and non-Agency mortgagtt
ll
e-backed securities we acquire may be subject to l
tt
osse
s.
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,tt
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 capita
al 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
on the related mortgage-backed securities. The prices of lower credit quality mortgage-backed securities
principal payments dued
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 abila
f obligors of mortgages
underlying mortgage-backed securities to make principal and interest payments may be impaired. In such event, existing credit
may be insufficient to protect us against loss of our principal and interest on these
support in the securitization structuret
securities.
ity ot
Borrowers mrr
ay be unable t
ll o rtt
epay the remaining
ii
ii
princi
pal
ii
ll
balance
on the maturityii date.ee
Many commercial loans are non-amortizing balloon loans that provide for substantial payments of principal dued
at their stated
maturities. Commercial loans with substantial remaining principal balances at their stated maturity date involve greater risk
ff
than full
y-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 abia lity 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 affect
ed by a number of factors, including:
u
ff
•
•
•
•
•
•
•
over
t
the availabia lity of, aff nd competition for, credit for
commercial real estate projects, which fluff ctuate
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;
a
cablea
government assistance/rent
reductions in appli
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 fixeff
the availability of credit for multi-family and
commercial properties;
d income and mortgage markets;
•
•
•
•
•
•
•
•
33
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
•
•
prevailing general and regional economic
conditions; and
the availabili
a
fluctuates over time.
ty of funds in the credit markets which
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-NoteNN s that
terms of to hett
tt
we originate att
transaction, which may ra
ll
esult ill n l
ii
osses
to us.
nd acquireii may be subject to additional
tt
riskii
s rkk
elatell
d to t
tt hett
privateltt y nll
tt
egotiat
edtt
structure and
q
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 f
roff m 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.
rr
The mezzani
ee
than senior loans.
neii
loan assets att
nd other subordinate dtt
ebtdd
positiii ons that
tt
we originaii
te and acquire involve greater risks okk
ll
f lo oss
ff
We originate and acquire mezzanine loans, which take the form of subordinated loans secured by a pledge of the ownership
interests by an entity that directly or indirectly owns the property-owning entity. We also make commercial real estate preferred
equity investments, which, unlike mezzanine loans, generally are 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-
closure by the senior
producing real property, because the loan may become unsecured or unrecoverable as a result of foreff
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 forff
a mezzanine loan, we may
not have full recourse to the assets of such entity,t
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
only after the senior debt. As a result, we may not recover some or
borrower bankruptcy, our subordinate debt will be satisfiedff
all of our 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 addidd tionii
al risks associatett d with loan participati
ii
ons and co-lending an
rrangements.tt
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 instituti
on
to take actions to which we object but
of, and control over, foreclosure proceedings. Similarly, certain participants may be ablea
to which we will be bound if our participation interest represents a minority interest. We may be adversely affecff
ted by this lack
of control.
t
Construction loans involve an incii
reased risk of loss.
originate construction loans. If we fail to fund our entire commitment
We have in the past and may in the future acquire and/ordd
on a construct
ion loan or if a borrower otherwise fails to complem te 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
r
34
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
borrower is unable to raise funds to complete it from other sources; a borrower claim against us for failure to perform under the
by the borrower; and
loan documents; increased costs to the borrower that the borrower is unable to pay; a bankruptcy filing
abana
donment by the borrower of the collateral for the loan.
ff
If we do not have an adequate completion guarantee backed by a person or entity with sufficient creditworthiness, risks of cost
overruns and non-complem tion of renovation of the properties underlying rehabila
itation 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 rehabila
itation costs exceeding original
estimates, possibly making a project uneconomical, environmental risks and rehabila
itation 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.
xx
We may experienc
ons.
i
obligati
ll
e losse
s if t
i hett
tt
creditwor
thiness of our tenants deteriorates and they ae
re unable to meet their lease
We own properties leased to tenants and receive rents fromff
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
hat might be substantially less than the remaining rent owed under the
unpaid, future rent would be subject to a statutory cap ta
lease. In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptc
y filff ing 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
rental amount. Without regard to the manner in which the
for a lease termination fee that is likely less than the total contractual
lease termination occurs, we are likely to incur additional costs in the formff
of tenant improvements and leasing commissions in
our efforts to lease the space to a new tenant.
r
t
t
ting an operating tenant of one or more of our healthcare properties, there can be no
With respect to a deterioration affecff
replacement tenants or enter into leases with new tenants on terms as
assurance that we would be able to identify suitablea
to us as the current leases or that we would be able to lease those properties at all. Our abia lity to reposition our
favorablea
properties with a suitablea
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 rulr es, and we could incur substantial
additional expenses in connection with any licensing, receivership or change-of-ownership proceedings. Our ability t
o locate
and attract suitablea
restrictions on
use of the properties, and we may be forced to spend substantial amounts to adapta
the properties to other uses. If we are not
replacements on a timely basis we may be required to fund certain expenses and obligations
successful in identifying
m
(e.g., real estate taxes, debt costs and maintenance expenses) to preserve the value of, and avoid the imposit
ion of liens on, our
ties, including obligations
properties while they are being repositioned. In addition, we may incur certain obligations and liabili
to indemnify the replacement tenant or operator, which could adversely affect our business, results of operations and finaff
ncial
condition.
replacement tenants also could be impaired by the specialized healthcare uses or contractual
suitablea
a
ff
t
t
The risks associated with properties leased to tenants are more acute during periods of economic slowdown or recession,
especially if these periods are accompanied by high unemployment and declining real estate values. A weakening economy,
high unemployment and declining real estate values significff antly increase the likelihood that a tenant’s creditworthiness may
deteriorate, which in turn may adversely affecff
t us.
In any of the foregoi
ff
ng circumstances, our financial performance could be materially adversely affecff
ted.
xx
Lease expirati
ons, lease defaultsll and lease terminations may aa
rr
dversel
a
y all
ffec
t our revenue.ee
Lease expirations and lease terminations may result in reducd ed 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 defauff
lts or lease
terminations by one or more significant tenants or the failure of tenants under expiring leases to elect to renew their leases,
al
could cause us to experience long periods of vacancy with no revenue from a faci
lity and to incur substantial capita
ff
35
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGE
Item 1A. Risk Factors
A
MENT, INC. ANDAA
SUBSIDIARIES
expenditures and/or lease concessions to obtain replacement tenants. The risk of lease expirations and lease terminations is
more acute during periods of economic slowdown or recession, especially if these periods are accompanied by high
unemploym
ent and declining real estate values.
m
Our real estate investments are illill quid.ii
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
t
have an adverse effect on our financial condition.
We may na
which we invii
ot control
s
the spec
ial servicingii
est and, in such cases,ee the spes
of the mortgage
cialii
tt
tt
loans included in t
ii
hett
commercialii mortgage-backed securitiestt
in
servicer may take actions
tt
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 affeff ct our interests.
Joint venture investments ctt
venturer’s financial conditiii on.
ould bll
e adversely affectedtt
by our lack of so
ole dll
ecdd ision-making authority
tt
ll
and reliance
upon a co-
relationship, in some circumstances (such as majora
We co-invest with third parties through joint ventures. Although we generally retain control and decision-making authority in a
decisions) we may not be permitted to exercise sole decision-
joint venturet
or the subject property. Investments in joint ventures may involve risks not
making authority regarding such joint venturet
might become bankrupt or otherwise fail to
present were a third party not involved, including the possibility that co-venturers
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
Consequently, actions by any such co-venturer might result in subjecting properties
liable forff
owned by the joint venture to additional risk, although these risks are mitigated by transaction structuret
and the terms and
conditions of agreements governing the relationship.
the actions of our co-venturers.
t
t
t
Risks Related To Our Residential Credit Business
Our investments in non-Agency mortgage-backe
(“NPL”) which we have acquired in recent periods) or other invii
investmett
could mll
nts in MSRs or seasoned re-performing and non-performingii
atertt
iallyll adversely affect our results ott
d securities (incl
tt
perat
ions.
o
f oo
tt
ii
uding re-performingii
loans (“RPL”)PP
/ non-performingii
estment assets of lower credit quality,tt
residential
tt
whole loans, involve credit risk,
ii
loans
including our
which
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 abia lity to acquire non-Agency mortgage-backed
securities, residential whole loans, MSRs 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 defaulta
and/or higher-than-expected loss severities on the
mortgages underlying our non-Agency mortgage-backed securities, MSRs or on our residential whole loan investments may
adversely affecff
t 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, MSRs 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.
36
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
We have investments i
investmett
risk of losses.
tt
ll
nts collateral
ized
ll
n nii
on-Agency mortgage-bac
ked securities collall
teralizii ed by non-prime loans
by subprimeii mortgage
loans, which, due to lower underwritingii
ll
and may also have
standards, are subject to increased
tt
tt
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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 non-prime and subprim
e 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 foll
owed), 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 non-prime and subprim
e 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.
u
u
ff
Our investments may include subordinatett d trantt
right of po
ayment to more senior securities.
tt
ches of no
on-Agency mortgage-backed securitiii es, ws
hich are subordinate in
uret
Our investments may include subordinated tranches of non-Agency mortgage-backed securities, which are subordinated classes
of securities collateralized by a pool of mortgage loans and, accordingly, are the first or among the
of securities in a struct
rr
or liquidation of the underlying collateral and the last to receive payment of interest
first to bear the loss upon a restructuring
r values of these subordinated interests tend to be more sensitive to changes in
and principal. Additionally, estimated faiff
economic conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and
may not be liquid investments.
t
We are subject to counterpart
y rtt
ee
whole loans if they breach repre
tt
isk and may be unable to seek inde
tt
sentati
ons and warranties, which could cause us to stt
uffer losses.
ii mnityii or require counterparties tott repurchase
ee
residentiali
When selling or securitizing mortgage loans, sellers typically make customary representations and warranr
ties aboa ut 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.
ties,
There can be no assurance that a mortgage loan purchase agreement will contain appropri
ate representations and warranr
that we or the trust that purchases the mortgage loans would be able to enforff ce a contractual right to repurchase or substituti
on,
or that the seller of the loans will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase
ity to obtain or enforce an indemnity or require repurchase of a significant number of loans could
agreements. The inabila
adversely affecff
t our results of operations, financial condition and business.
a
t
Our investments in residentiali whole loans subject us to stt
ervicing-relat
ett d risks, including tn hose
tt
ii
associatett d with foreclosure.
ll
In connection with the acquisition and securitization of residential whole loans, we rely on unaffiliated servicing companie
s 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.
m
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
l servicing of the loans we purchase together with the
contract, with unaffiliated servicing companies to carry out the actuat
related MSRs (including all direct interface with the borrowers), we are nevertheless ultimately responsible, vis-à-visii
the
borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related
abla e law and regulation. In light of the current regulatory environment, such exposure could be
notes and mortgages and applic
any failure to service the loans to the
significant even though we might have contractual claims against our servicers forff
required standard.
a
When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our
closure states such as New York, Florida and New Jersey can be
subsidiaries. The foreclosure process, especially in judicial foreff
losure, and then liquidating the property through
lengthy and expensive, and the delays and costs involved in complem ting a forec
ff
37
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
sale, may materially increase any related loss. Finally, at such time as title is taken to a forec
extensive rehabila
that would require expensive and time-consuming remediation.
losed property, it may require more
itation than we estimated at acquisition or a previously unknown environmental liabia lity may be discovered
ff
r
The COVID-19 pandemic and the resulting economic disrupti
on it has caused may result in liquidity pressures on servicers and
other third-party vendors that we rely upon. For instance, as a result of an increase in mortgagors requesting relief in the form of
forbearance plans and/or other loss mitigation, servicers and other parties responsible in capia tal markets securitization
transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to
experience financial difficulties if mortgagors do not make monthly payments as a result of the COVID-19 pandemic. The
negative impacm t on the business and operations of such servicers or other parties responsible for funding such advances could
be significant. Sources of liquidity typically available to servicers and other relevant parties for the purpose of funding advances
ons, may not be sufficient to meet the
of monthly mortgage payments, especially entities that are not depository instituti
increased need that could result froff m significantly higher delinquency and/or forbearance rates. The extent of such liquidity
pressures in the futff uret
is not known at this time and is subject to continual change.
t
Challenges
ll
conditiii on.
to the MERS®EE
tt
System could materially and adversely affect our business, results of operat
ions
o
and financialii
MERSCORP, Inc. is a privately held company that maintains an electronic registry, referred to as the MERS System, that tracks
cer. Mortgage
ownership of residential mortgage loans in the U.S., as well as the identity of the associated servicer and subservi
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. The MERS
System allows us to foreclose on delinquent loans more efficff
iently than we otherwise could ourselves.
u
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
closure proceedings. As a result, investigations by governmental authorities and
other legal documents in connection with foreff
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 finaff
ncial condition.
a
espect to mortgage loans we own, or which we have purchased and subsequentlytt
tt
laii r consumer protectiontt
nding or other
of truth-in-le
tt
violations
ii
simi
ii
laws and regulations,
tt
sold, we may be subject to l
iall bilitll ytt
tt
rr
which could adversely
With r
tt
for potentialii
impact our business
ii
and financialii
ll
results.
q
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
ed mortgage” regulations. In addition, there are various other federal, state,
Protection Bureau’s “abia lity-to-repay” and “qualifi
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 appl
icable 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
ral consumer protection laws and regulations could subject us, as an assignee or purchaser of these loans (or as
complym with fede
losure, including by recoupment or
an investor in securities backed by these loans), to monetary penalties and defenses to forec
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 affect
ed residential mortgage loans, which could adversely impact our business and
financial results. On December 10, 2020, the Consumer Financial Protection Bureau adopted a set of “bright-line” loan pricing
thresholds to replace the previous qualified mortgage 43% debt-to-income threshold calculated in accordance with “Appendix
a
ff
ff
ff
38
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Q”. The Consumer Financial Protection Bureau also created a new category of a qualifiedff mortgage, referred to as a “Seasoned
QM”, which consists of first-lien, fixed rate loans that met certain performance requirements over a seasoning period of at least
36 months, are held in portfolio until the end of the seasoning period by the originating creditor or first purchaser, comply with
general restrictions on product features and points and fees, and meet certain underwriting requirements. At this time, however,
there can be no assurance what impact the final rulr es will have on the mortgage market and the “abilit
y-to-repay” rules.
Furthermore, the temporary qualified mortgage provision applicable to certain mortgage loans eligible for purchase or
pay, commonly referred to as the “GSE patch,” is scheduled to expire on the
guarantee by the GSEs under the ability-to-re
earlier of (i) the mandatory complim ance date of the final ruler
amending the general qualified mortgage definition described
above (which is July 1, 2021) or (ii) the date that the GSEs exit conservatorship. We cannot predict the impact of its expiration
on the mortgage market.
a
t
We may not be able to obtain oii
we may fail to complm y wll
tt
mortgage
loans and servicing right
ith various statett
i
s.tt
r maintii aintt
the governmentaltt
to operate ott
ur Residential
ff
and fede
ral laws aw nd regulations
applicable to our business of acquiringii
licenses requiredii
tt
tt Creditdd business and
tt
resident
ial
ii
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 requiq red to
with various information reporting and other regulatory requirements to maintain those licenses, and there is no
complym
assurance that we will be ablea
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 complym 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.
o ptt
tt
rofitably
tt
tt mortgage
ial
tt
Our abilitll y t
of resident
ii
ityll
profitabil
tt
ave a material adverse impactm
could hll
execute or participat
loans, is dependen
or if we are unable to execute or participate
ii
on our business
utuff
ee
ii
ii
in future securitizat
alii
ii
results.tt
ii
and financi
ii
e i
tt n f
t on numerous factors and if we are not able to achieve our desiredii
transactions, including,
re securitizations
in particular, srr
ii
ii
iontt
s, os
r incii ur losses in connection therewith,tt
tt
ecuritiii zat
ions
ii
level ofo
it
ff
d
tors including the availabila
securitizations in this space. Another factor that impacts the profitabila
ors that can have a significant impact on whether we are able to execute or participate in a
There are a number of fact
securitization transaction, and whether such a transaction is profitable to us or results in a loss. One of these factors is the price
we pay for the mortgage loans that we securitize, which, in the case of residential mortgage loans, is impacted by the level of
competition in the marketplace for acquiring mortgage loans and the relative desirability to originators of retaining mortgage
loans as investments or selling them to third parties such as us. As such, we can provide no assurance that we will be able to
t our
identify and make investments in residential mortgage loans at attractive levels and pricing, which could adversely affecff
ability to execute futuret
ity of a securitization transaction
ilities that we use to finance our holdings of mortgage loans prior to
is the cost to us of the short-term warehouse financing facff
securitization, which cost is affected by a number of facff
ity of this type of financing to us, the interest
ion of the financing we incur, and the percentage of our mortgage loans for which third
rate on this type of financing, the durat
parties are willing to provide short-term financing. After we acquire mortgage loans that we intend to securitize, we can also
suffer losses if the value of those loans declines prior to securitization. Declines in the value of a mortgage loan, for example,
can be dued
to, among other things, changes in interest rates, changes in the credit quality of the loan, changes in the projected
yields required by investors to invest in securitization transactions and changes in the mark-to-market value of the loan. To the
extent we seek to hedge against a decline in loan value due to changes in interest rates, there is a cost of hedging that also
affeff cts whether a securitization is profitablea
. Other factors that can significantly affeff ct whether a securitization transaction is
profitable to us include the criteria and conditions that rating agencies apply and require when they assign ratings to the
mortgage-backed securities issued in our securitization transactions, including the percentage of mortgage-backed securities
issued in a securitization transaction that the rating agencies will assign a triple-A rating to, which is also referred to as a rating
agency subordination level. Rating agency subordination levels can be impacted by numerous factors, including, without
limitation, the credit quality of the loans securitized, the geographic distribution of the loans to be securitized, and the structure
of the securitization transaction and other applicablea
rating agency criteria. All other factors being equal, the greater the
percentage of the mortgage-backed securities issued in a securitization transaction that the rating agencies will assign a triple-A
rating to, the more profitablea
the transaction will be to us.
The price that investors in mortgage-backed securities will pay for securities issued in our securitization transactions also has a
significant impact on the profitability of the transactions to us, and these prices are impacted by numerous market forces and
factors. In addition, the underwriter(s) or placement agent(s) we select for securitization transactions, and the terms of their
39
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
the profitability of our securitization transactions. Also, transaction costs incurred in executing
engagement, can also impactm
ty that we may incur, or may be required to
a
transactions impactm
reserve for, in connection with executing a transaction can cause a loss to us. To the extent that we are not able to profitably
execute future securitizations of residential mortgage loans or other assets, including for the reasons described above
or for
other reasons, it could have a material adverse impacm t on our business and finaff
ity of our securitization transactions and any liabili
the profitabila
ncial results.
a
Risks Related to Our Business Structure
On June 30, 2020, we closed our Internalization. Pursuant to the Internalization Agreement, we acquired the equitq
y interests of
our Former Manager and its affiff liates, which were owned by certain of our executive officers, for a nominal cash purchase price
($1.00), and transitioned from an externally-managed REIT to an internally-managed REIT.
We may ba
e exposed
ee
to risks to which we have not historic
ii
ally been exposed
ee
tt
izat
ion.
ll
as a result of the Internal
tt
The Internalization which closed on June 30, 2020, may expose us to risks to which we have not historically been exposed.
Pursuant to the Internalization Agreement, we acquired our Former Manager, including any potential future liabilities our
Former Manager may have, which may be unforeseen. As a result of the Internalization, we now emplom y all the personnel who
provide services to the Company, the majorit
by our Former Manager. Following the
closing of the Internalization, we assumed responsibility for all employee compensation costs. In addition, we are now subject
to those potential liabilities that are commonly facff ed by employe
ity and compensation claims,
potential labor
disputes and other emplom yee-related liabilities and grievances, and we bear the costs of the establishment and
maintenance of employee benefit plans.
f whom were previously employed
rs, such as workers’ disabila
y ot
m
m
a
a
The depadd
rture of ao ny of our key pe
ersonnel could materiall
y all
i
nd adversely affect us.
Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts
of our key personnel.
Our executive officers have extensive experience and strong reputations in the sectors in which we operate and have been
ntal in setting our strategic direction, operating our business, identifying, recruiting, and training our key personnel,
instrume
r
ity to attract and retain highly
and arranging necessary financing. The departure of any of our executive officff ers, or our inabila
qualified personnel, could adversely affect
ities, and weaken our relationships
with lenders, business partners and industry personnel, which could materially and adversely affect us.
our business, diminish our investment opportunt
ff
ff
Risks Related to Our Taxation as a REIT
ii
Our faiff
lure
to maintaintt
our qualificat
iontt
ll
as a REITRR
would have adverserr
tax caa
onsequences.
We believe that since 1997 we have qualified forff
taxation as a REIT forff U.S. 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 maintain our qualification 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 faiff
r 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 forff 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
for dividends paid and by
stockholders at least 90% of our REIT taxable income (determined without regard to the deduction
excluding any net capita
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.
al gain). Even a technical or inadvertent mistake could jeopardize our REIT status.
d
t
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 appa
licable 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 forff
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 maintain our qualification 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
40
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
u
be effective to avoid adverse consequences to us. Moreover, even if the “protective” elections were to be effective, the
ry REITs would be subject to regular corporate income tax, and we cannot assure you that we would not fail to satisfy
Subsidia
ent that not more than 20% of the value of our total assets may be represented by the securities of one or more
the requiremq
TRSs. If we fail to maintain our qualification as a REIT, we would be subjec
l income tax at regular corporate
rates. Also, unless the IRS were to grant us relief under certain statutory provisions, we would remain disqualified as a REIT
for four years following the year we first faiff
l to qualify. If we fail to maintain our qualification as a REIT, we would have to
investments or for distributions to our
pay significant income taxes and would therefore have less money available forff
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.
t to U.S. federa
u
ff
A REIT that faiff
ls the quarterly asset tests forff
one or more quarters will not lose its REIT status as a result of such failure if
lure is regarded as a de minimis failure under standards set out in the Code, or (ii) the failure is greater than a de
either (i) the faiff
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 six 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 faiff
lure.
We have certaintt
ii
distri
buti
ii
on requirements, which could all
dversely affect our abilitll y t
ee
tt o ett
xec
ute our business
ii
ll
plan.
As a REIT, we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for
dividends paid and by excluding any net capital gain). The required distribution limits the amount we have availablea
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.
ff
ff
To the extent that we satisfy t
his distribution requirement, but distribute less than 100% of our taxable income, we will be
subju ect to U.S. 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 U.S. federal tax laws. We intend to make distributions to our stockholders to comply with the REIT
qualification requirements of the Code.
in these situations we could be required to (i) borrow funds on unfavorablea
From time to time, we may generate taxablea
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 generally are required to accrete the
discount into taxable income prior to receiving the cash proceeds of the accreted discount at maturity, and in some cases,
ted in our financial statements. If we do not
potentially recognize the discount in taxable income once such amounts are reflecff
terms, (ii) sell
have other funds availablea
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. Also, we or our
subsidiaries may hold debt investments that could require subsequent modifications. If an amendment to an outstanding debt is
a “significant modification” for U.S. federal income tax purposes, the modified debt may be deemed to have been reissued in a
debt-for-debt taxable exchange with the borrower. This deemed reissuance could result in a portion of the modified debt not
qualifying as a good REIT asset if the underlying security has declined in value, and would cause us to recognize income to the
extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt. 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 stock.
ff
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 taxablea
income and the
In such circumstances we may make distributions according to our business plan that are within our
actual receipt of cash.
wherewithal from an economic or cash management perspective, but that are label
ed as returt n of capital for tax reporting
purposes, as they are in excess of taxable income in that period.
a
tt
Distributi
aa
ons to tax-exem
ptm investors may be class
ll
ified as unrelated business taxable i
ll ncomii
e.
Neither ordinary nor capita
constitutet
particular:
unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this ruler
al gain distributions with respect to our stock nor gain from the sale of our stock are anticipated to
. In
41
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
•
•
•
if
m
income
shares of our
part of the income and gain recognized by certain
qualified emplom yee pension trusts with respect to
our stock may be treated as unrelated business
stock are
taxable
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 stock would
constitutet
income if the
unrelated business taxablea
investor incurs debt in order to acquire the stock;
part or all of the income or gain recognized with
to our stock by social clubsu , voluntary
respect
associations,
benefit
ent benefit
supplemental
employe
e
m
trusts and qualified group
m
unemploym
legal services plans which are exempt froff m U.S.
federal
income taxation under the Code may be
treated as unrelated business taxablea
to the extent
that we (or a part of us, or a
disregarded subsidiary of ours) are a “taxablea
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
is allocable to excess inclusion
stockholder that
income may be treated as unrelated business taxable
income.
income;
•
•
future choose to pay dividends idd n oii
We may ia n t
ii
of the cash dividends
ee
xcess
income taxes in eii
hett
they receive.ee
ii
ur own stock, in wii
hich case thett
stockholders
ll
may be required to pay
We may in the future distribute taxable dividends that are payablea
in cash or shares of our 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 forff U.S. federal income tax purposes. As a
result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends
received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be
less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of
the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to
such dividends, including in respect to all or a portion of such dividend that is payable in stock. In addition, if a significant
number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward
pressure on the trading price of our stock.
Our inabiliii tyii
tt
distribut
ions
tt
to deduct for tax purposes certain c
tt
level taxes
to stockholders or pay entityii
ii
m
ompensat
to maintii aintt
our REIT status.
iott n paid to our executives could r
ll
equire us to increase our
ity to deduct forff
Our inabila
tax purposes certain compensation paid to our executives could require us to increase our
distributions to stockholders or pay entity level taxes to maintain our REIT status. Section 162(m) of the Code prohibits
annual compensation in excess of $1 million paid to any of the
publicly held corporations from taking a tax deduction forff
corporation’s “covered emplm oyees,” which, under current law, includes a corpor
ration’s chief executive offiff cer, chief financial
officer and the three other most highly compensated executive officers. In addition, under the Tax Cuts and Jobs Act of 2017
(“TCJA”), once an individual becomes a covered employe
e after December 31, 2016, that individual will remain a covered
years including after termination or death. If we were to pay compensation to “covered employees” in
m
employe
excess of the Section 162(m) deductibility limit, then our taxable income would be greater than it otherwise would have been
had the compensation been fulff
ly deductible, and, as a result, we would be required to distribute a larger amount of dividends to
our stockholders to maintain our REIT status and/or to avoid U.S. federal and state income tax, which could adversely affect
our financial condition.
ff
all future
e forff
m
on ownership of our stock could hll
tsii
Limi
ii
premium on our stock.
ll
ave adverse consequences to you and could l
ll
imi
t yii
tt
our opportunity t
o r
tt
eceive a
To maintain our qualification as a REIT for U.S. federal income tax purposes, not more than 50% in value of the outstanding
al stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal tax laws
shares of our capita
to include certain entities). Primarily to facff
ilitate maintenance of our qualification as a REIT forff U.S. 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 capita
al stock. 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 “individuad ls” if it is satisfieff d that ownership in excess of this limit will not otherwise
jeopardize our
status as a REIT for U.S. federal income tax purposes.
rr
42
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
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 stock in connection with a
change in control.
ff
A REIRR T cannot invest more than 20% of its t
20% of our totaltt
cannot constitute more thantt
assets.
tt ottt altt
assets in the stock or securities of oo
ne or more TRSsTT
; thett
refore, our TRSs
A TRS is a corporat
ion, other than a REIT or a qualified REIT subsidiary, in which a REIT owns stock and with which the
REIT jointly elects TRS status. The term also includes a corporate subsidiary in which the TRS owns more than a 35% interest.
r
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.
t
TRSs are subject to tax aaa
TRS can pay to its ptt
arent REITEE may be limi
teii d byb REITEE gross income test
ii
s.tt
are not requiredii
tt
t thett
regularll
corporate rates,
tt
tt
to distribute
dividends, and the amount of dividends a
A TRS must pay income tax at regular corporate rates on any income that it earnsr
. In certain circumstances, the ability of our
TRSs to deduct interest expenses for U.S. federal income tax may be limited. Such income, however, is not required to be
distributed. Our TRSs will pay corporate income tax on their taxablea
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 maintain our REIT qualification may limit the amount of
our TRSs. Generally, not more than 25% of our gross income can be derived from non-real
dividends that we can receive fromff
estate related sources, such as dividends from a TRS. If, for any taxable year, the dividends we receive from our TRSs, when
added to our other items of non-real estate related income, were to represent more than 25% of our total gross income for the
year, we could be denied REIT status, unless we were abla e 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 abila
form of dividends. Certain asset transfers may, therefore, have to be structured
our TRSs recognize a taxable gain.
t
ity to distribute assets from our TRSs to us in the
as purchase and sale transactions upon which
If interest accrues on indebtedness owed by a TRSTT
or if transactions
subject to a penalty tax.xx
between a REIRR T and a TRSTT
tt
to its parent REIT at a rate i
n other thantt
ii o ott
d int
are enterett
xcee
ess of a commercially
ermtt
tt
arm’s-lengt
h t
ll
ii
s, then thett
reasonable rll
ate,e
REITEE may be
tt n eii
If interest accrues on an indebtedness owed by a TRS to its parent REIT at a rate in excess of a commercially reasonablea
rate,
then the REIT would be 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 payablea
had interest accrued on the indebtedness at a commercially
d on any transaction between a TRS and its parent REIT to the extent the
reasonable rate. A tax at a rate of 100% is also imposem
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 wi
e remain qualifi
ll ed as a REIRR T, we may face other tax liabiliii tieii
s thatt
t reduce our cash flow.
ll
Even if we remain qualified for taxation as a REIT, we may be subju ect to certain federal, state and local taxes on our income
and assets, including taxes on any undistributed income, tax on income from some activities conductd
ed 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,
dealer property or inventory, we
or to avert the imposition of a 100% tax that appl
ies to certain gains derived by a REIT fromff
a
43
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
may hold some of our assets through our TRSs or other subsidiary corporations that will be subjeb ct to corporate level income
tax at regular rates.
ll
Complying
with Rtt
EIRR T requiremii
ents may ca
ause us to forgo otherw
tt
ise attractt
tive opportunitiett s.
To remain qualified as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concernr ing, 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,
complim ance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain
attractive investments.
Complym ing withii REITEE requiremii
ff
ents may fa
orc
ii
iqui
date
ll
e us to l
tt
otherwise attratt
ctivett
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,
and no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. Changes in the
tures of our assets could cause inadvertent violations of the REIT requirements. If we fail to complym with the
values or other feaff
REIT 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.
ff
ii
Liquidati
on of assets may jeopardize our REITEE qualifi
tt
ll cation or create additdd
ional
tax liabilityll
for us.
To remain qualified as a REIT, we must complym
with requirements regarding the composition of our assets and our sources of
income. If we are compellm ed 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 failure of assets subject to r
remain qualifiell
d as a REIRR T.
tt
epurchase agreements t
tt
o qtt
ualifyi
as real estate att
ssets could all
ott
dversely affect our abilitll y t
tt
r
rr
We enter into certain financing arrang
as sale and repurchase agreements pursuant to which we
t
ements that are struct
ured
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, and we treat them as such forff U.S. federal income tax purposes. We believe that we would be treated forff 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 counterpart
the term of the
It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and
agreement.
repurchase agreement, in which case we could fail to remain qualified as a REIT.
y during
d
r
Complym ing withii REITEE requiremii
ents may limit
ii
our abiliii tyii
to hedge effeff ctively and may cause us to incur tax laa
iall bilitll iett s.
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” forff
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
up to five years (for
addition, losses in our TRSs generally will not provide any tax benefit, except forff
being carried back forff
44
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
losses incurred after 2017 but prior to 2021) or carried forward
periods.
ff
potentially to offset taxabla e income in the TRSs forff
such
The failure of a mezzzz anine loan or simi
a REIT.
RR
ii
larii
debt to qualifyi
as a real estattt e att
rr
sset could adverdd
sel
a
y all
ffec
t our abilitll y t
tt o qtt
ualifyi
as
y investments that we treat as mezzanine loans for U.S.
We invest in mezzanine loans and similar debt (including preferred equitq
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 fromff
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 maintain our qualification as a REIT.
Qualifying as a REITRR
involvell
s highlygg
technical and complexm
ii
provisions
of the Code.ee
Qualification as a REIT involves the application of highly technical and complexm
Code provisions for which only limited
judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification.
Our continued 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 qualificat
ion
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 forff U.S. federal income tax purposes.
ff
The tax oaa
CMOs.
n prohibitedtt
transactions willii
ii
limi
t oii ur abilitll y t
o ett
tt
ngage in transactions, includingii
certaintt
methods of structuring
The 100% tax on prohibited transactions will limit our abia lity to engage in transactions, including certain methods of structuring
CMOs, which would be treated as prohibited transactions for U.S. federal income tax purposes.
t
losure property, as discussed below) that is held primarily forff
The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other
sale to customers in the ordinary course of a trade or
ff
than forec
business by us or by a borrower that has issued a shared appre
ciation 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 U.S.
federal income tax purposes.
a
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 forff
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 structuret
our
activities to avoid the prohibited transaction tax.
rr
Certain financing activtt
stockholders.
ll
itiett s may subject us to Utt
.S.UU federal income tax and could have negative taxtt
consequences for our
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 futff ure,
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 attributablea
to such stockholder's ownership.
r
t
45
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
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 forei
gn person, it would be
subject to U.S. fede
ral income tax at the maximum tax rate and withholding will be required on this income without reduction
or exemption pursuant to any otherwise applicablea
income tax treaty.
ff
ff
The lease of qualifi
ll ed healthcare
tt
propertiestt
to a TRSTT
b
is subject
to special requirements.tt
We lease certain qualified healthcare properties we acquired from MTGE Investment Corp. (“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
If any of these conditions is not satisfieff d,
ff
then the rents may not be treated as revenues from real property forff
purposes of the REIT gross income tests.
in the Code.
Uncertaintt
ty exists wtt
tt
ith r
espect to the treat
tt
mett
nt of our TBAs for purposes of to hett REITEE asset and income tests.
ff
We purchase and sell Agency mortgage-backed securities through TBAs and recognize income or gains from the disposition of
. While there is no direct
those TBAs, through dollar roll transactions or otherwise, and may continue to do so in the future
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)tt
or other qualifying income for purposes of the 75% gross
purposes of the REIT asset tests, and we treat income and gains from
income test, we treat our TBAs as qualifying assets forff
our TBAs as qualifying income forff
purposes of the 75% gross income test, based on an opinion of counsel subsu tantially 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,
purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our
and (ii) forff
the sale or disposition of an interest in mortgages on real property. Opinions of counsel are
TBAs should be treated as gain fromff
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 assumptim ons 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
l to remain qualified
were to successfully challenge the opinion of counsel, we could be subject to a penalty tax or we could faiff
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 gTT enerally rll
eceive differe
i
nt tax treatmett
nt than dividend
ii
income fromff
regular corporations.
tt
to capita
al gains. Dividends payablea
d
t to the reduced
Qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is subjec
maximum tax rate applicablea
by REITs, however, generally are not eligible for the reduced
qualified dividend rates. Under current law, 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
al gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S.
capita
icable to qualified
federal income tax rate of 29.6% on such income. Although the reduced
rates
dividend income does not adversely affecff
applicablea
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 stock. Tax rates could be changed in
future legislation.
t the taxation of REITs or dividends payablea
U.S. federal income tax rate appl
the more favorablea
by REITs,
u
d
a
ation
New legisl
ll
e
ii
r impossi
difficult oll
tt
or administ
rati
ii
for us to remain qualifi
ve or judicial action,
bleii
tt
ll ed as a REIRR T.
tt
in each inst
ance
ii
potentially
ii
withii
retroactive effeff ct, could mll
ake it more
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect
judicial or administrative action at any time, which could affect
The U.S. federal income tax ruler
process, the IRS and the U.S. Treasury, which results in statutory changes as well as freque
, by legislative,
the U.S. federal income tax treatment of an investment in us.
s dealing with REITs constantly are under review by persons involved in the legislative
nt revisions to regulations and
ff
ff
ff
46
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
interpret
ations. Additional future
r
investments and commitments and affect
ff
ff
the tax considerations of an investment in us.
revisions in federal tax laws and interpretations thereof could affect or cause us to change our
Risks of Ownership of Our Common Stock
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
The market price and tradingii
shares of oo ur common stocktt
volume of oo
ur shares of co
could cause the market price of our common stock to decline.
ommon stott ck may be volatileii
ii
and issii uances of lo arge
ll
amounts of
If we issue a significant number of shares of common stock or securities convertible into common stock in a short period of
time, there could be a dilution of the existing common stock and a decrease in the market price of the common stock.
The market price of our shares of common stock may be highly volatile and could be subject to wide fluctuations. In addition,
the trading volume in our shares of common stock may fluff ctuate
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 fluff ctuations 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:
and cause significant
ff
t
•
•
•
•
•
•
•
•
ity to meet or exceed securities analysts’
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 inabila
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
indebtedness we incur in the future;
increased
any
to
•
•
t
t
of management personnel;
onal stockholders or activist
additions or departures
actions by instituti
investors;
speculation in the press or investment community;
changes in our distribution policy;
government action or regulation;
general market and economic conditions;
•
•
•
•
• market dislocations
pandemic; and
future
ff
securities convertible into, or exchangeablea
exercisablea
sales of our shares of common stock or
or
for, our shares of common stock.
related to the COVID-19
•
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
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.
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
Under our charter, we have 3,000,000,000 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 arbit
rage
trading activity that may develop involving our common stock, could depress the market price of our common stock and impair
our ability to raise capita
l through the sale of additional equity securities.
a
r
does not permit ownership of over 9.8%,
99
in number of shares oee
ptsm to acquire our common stock or preferred stock in excess of to hett
r value, of our common stock or preferred stock
without prior approval from our
9.8% limit
ii
Our chartertt
and attemtt
Board are void.
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 stock 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 shares of any class of common stock or preferred stock by an individual or
entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding shares of such class of
stock and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common stock or
preferred stock in excess of the ownership limit without the consent of the Board shall be void, or, alternatively, will result in
the shares being transferred by operation of law to a charitablea
trust.
47
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Provisions contained in Mii
potentially
preventingtt
e
aryMM land law that are reflec
tt
rol
a “cont
roff m receivingii
investors frr
“
ii
ted in our charter and bylaws
premium” for their shares.
ll
may have anti-tii akeov
tt
er effee
cts,tt
Provisions contained in our charter and bylaws, as well as the Maryland General Corporation Law (the “MGCL”) corporate
ts that delay, defer or prevent a takeover attempt, which may prevent stockholders from
law, may have anti-takeover effecff
their shares. For example, these provisions may defer or prevent tender offers for our
receiving a “control premium” forff
our stockholders to
common stock or purchases of large blocks of our common stock, thereby limiting the opportunit
receive a premium for their common stock over then-prevailing market prices. These provisions include the folff
lowing:
ies forff
t
•
•
rr
• Maryland
ff
l.
i“interest ded sto kckh lholdder” (d fi
Ownership limit. The ownership limit in our charter
limits related investors including, among other
things, any voting group, from acquirq
ing over 9.8%
of any class our common stock or of our preferred
stock, in each case, in number of shares or value,
without the consent of our Board.
Preferred Stock. Our charter authorizes our Board to
issue preferre
d stock in one or more classes and to
h the preferences and rights of any class of
a
establis
preferred stock issued. These actions can be taken
without soliciting stockholder approva
ivoti gng power off our outst di
fof ours
ffiliate or ass
iperi dod iim dimediatelyly
ywo-year
ie in questiion, was hthe bbe
ivoti gng power
tock) or an faffilifili
fff
rohibited fd forff
hiwhichh thhe
a
Business Combination Act. The Maryland
subject to
providdes hthat, subjec
Business Combination Act provi
imita itions, certaiin b ibusiness
cert iain excep itions a dnd lili
dnd corporatiion a dnd
combibina itions bbetween a Marylaylarr
rallyy as
an
finefi ici lallyly owns 10% or more fof
yany person
ivoti gng stockk or
hthe
yany itime
an affili
iprior to hthe
iwithihin hthe t
fof 10% or
ddat
andi gng
more
fof hthe
ate off a yny iinterest ded
hshares off s
fafter thhe
stockh ld
br becomes
most recent ddate on
ir imposes
an iinterestedd s
requirements
i
kholder v ioti gng
a
yty stockh ld
two super-majori
jori
am gong
hother
on
lunless,
combinatiions,
bi
hthese
ckholdders receiive a
onditions, our common sto kh l
c di i
imi inimum priice, a ds d fiefin ded iin thhe MGCL, ffor h i
their
ktock andd thhe co idnsideratiion iis rec iei dved iin
hshares off s
idpaid byby hthe
ca hsh or iin hthe same fform as
fof stockk. We
iintere
iBusiness
hhave
Combibina ition Act iin our hcharter. However, ifif we
fifive yyears
kk
k
stockh ldholde
tockh ldolder, andd thhereaffte
dsted st kh l
ockholdder ffor iits shhares
out
opted
d
finefici lial owner
fof our thhen outst di
kholder are p hibi
(defi dned ggene ll
rr
yland
hthe Maryland
ously
i
previously
hwho, at
hwho bbe
andi gng
iociate
kh
fof
k)
to st khockh loldder app
am dend our hcharter to opt bba kck iin to hthe statute,
subjbju ect
thhe Marylaryla dnd
iBusiness Combibinatiion Act couldld hhave hthe effffect off
dand fof iincreasingsing
iquire us
ouragi gng ffoffers to ac
didiscouragi
lcultyy off consummatiingg a yny suchh offffers, even
hth de diffi
iffi
ifif our acq iuisi iition w ldould bbe iin our stockh ld
kholders’ bbest
iinterests.
roval,
l
ll
hi
lrol
(defi dned as
iwithh allll othher hshares con
kholder, entiitlle hthe sto kh l
subje
subject
lrol hshares” (d fi
to cert iain excep itions, h ldholders
ownership or contr lol
ntrol hshares”) h) have no
l
approved byby our stockh ld
ie increasiingg r ganges off v ioti gng power
)ors) acqui dired iin a “cont
hthe didirect or
(defi dned as
• Maryland Control Share Acquisition Act. The
Maryland Control Share Acquisition Act
providdes
i
hthat,
fof
“cont
ivoti gng hshares hthat, hwhen
ggaggreggat ded
trolled bd byy thhe
stockh ld
ckholdder to exe ircise one
fof hthre
iin
lelec iti gng didirect
hshare
iqui i isition” (d fi
ac
indirect
i di
ac
iqui i isition fof
fof iissuedd a dnd
outstandingding “co
ivoti gng rights
rights
kholders byby
except to thhe extent
hthe ffaffiifff rmatiive vote fof at lleast two-thihi drds off allll hthe
votes enti l ditled to bbe cast on thhe matter,
excludidi gng
l
ffiofficers, or byby
hshares owned bd byy thhe ac
lalso didirectors
our employee
fof our
m
ployee
subject to hthe MarylaMaryla dnd
co
Cont
T
itle 3, Subtu itle 8 of the MGCL: These provisions
of the MGCL permit our board of directors, without
stockholder approval and regardless of what
is
provided in our charter or bylaws, to implement
certain takeover defenses,
including adopting a
classified board or increasing the vote required to
remove a director.
ympany. We are currentlyly subje
lrol hShare Acq iuisi iition Act.
iquirer, byby our
s whho are
d
•
Broad market fluct
ff
uations could nll
ii
egativtt ely i
ll mpac
t thett market price of our shares of common stock.
ted the market price of many
ff
t
The stock market has experienced extreme price and volume fluct
companim
es 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 publiu
c market analysts and investors or may be lower than those of
izations, which could lead to a material decline in the market price of our shares of
companim
common stock.
es with comparable market capital
ions that have affecff
uat
a
We have not established
the future.
ll
a minimum dividend payment level and cannot assure stockholders
ll
of our abilityii
to ptt
ay divideii nds in
income in each year (subjec
We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all
of our taxablea
s us to qualify for the tax benefits
accorded to a REIT under the Code. We have not establa ished a minimum dividend payment level and our ability to pay
the reasons described in this section. All distributions will be made at the discretion of
dividends may be adversely affecff
our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such other fact
ors as
our Board may deem relevant from time to time.
t to certain adjd ustments) is distributed. This enablea
ted forff
u
ff
48
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 1A. Risk Factors
SUBSIDIARIES
Our reported GAAGG P finff ancial results dtt
dd
iffer
ur GAAP results mtt
requirements and, therefore, oe
tt
distribut
ions.
tt
e resultsll
ll
from the taxabl
e i
ay not be an accurate indicatortt
ncomii
tt
impactm
that
aa
of future taxable
our dividend distritt buti
on
income and dividend
ii
Generally, the cumulative net income we report over the life of an asset will be the same forff GAAP and tax purposes, although
the timing of this income recognition over the life off
nces 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 finaff
ncial results could
materially differ fromff
f the asset could be materially different. Differeff
our determination of taxable income.
Regulatory Risks
Loss of Investment Companym
Act exemptm iontt
from registrati
ii
on 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 abia lity 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 our interests in MSRs and other 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
tation
Ginnie Mae (“Agency Whole Pool Certificates
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.
”) are Qualifying Real Estate Assets under Section 3(c)(5)(C). This interprerr
ff
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) exemptim on. 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 companim
es, 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 forff
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
of these
under Section 3(c)(5)(C), we could be required to restructure our activities or sell certain of our assets. The net effect
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 affecff
l to qualify for this exemption.
ted if we faiff
ff
Changes in laws ow r regulati
adversely affect our business.
ii
ll
ons governing our operations
tt
or our failure to complym
withii
those laws oww r regulations
tt
may
ral level, including securities and tax laws and financial
ff
We are subject to regulation by laws at the local, state and fede
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 failur
material adverse impactm
ff
on our business. Certain of these laws and regulations pertain specifically to REITs.
e to comply with these laws or regulations could have a
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
49
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
SUBSIDIARIES
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive and administrative office is located at 1211 Avenue of the Americas New York, New York 10036, telephone
212-696-0100. This offiff ce is leased under a non-cancelablea
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, 2020, we were not party to any pending material legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
None.
50
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading
symbol “NLY.” As of February 2, 2021, we had 1,398,502,906 shares of common stock issued and outstanding which were
roximately 433,000 beneficial holders. The equity compensation plan information called for by Item 201(d) of
held by appa
tion Plan Information.”
Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensa
m
Dividends
ct to certain adjustments) consistent with the distribution requirements applicabla e to REITs. This will enablea
We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of our taxable income in each
us to
year (subjeu
qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment level
by factors beyond our control. In addition, unrealized changes in the
and our ability to pay dividends may be adversely affected
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
tors as our Board may deem relevant from time to time. See also Item 1A. “Risk Factors.” No dividends can be paid
other facff
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, 2020, we have paid full cumulative dividends on our preferred stock.
ff
ff
Share Performance Graph
ff
certain information comparim ng the yearly percentage change in cumulative total returnt
The following graph and table set forth
on our common stock to the cumulative total returnt
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, 2020 and assumes the reinvestment of dividends. The grapha
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.
51
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
Five-Year Share Performance
225
200
175
150
125
100
75
50
25
12/31/15
12/30/16
12/29/17
12/31/18
12/31/19
12/31/20
Annaly Capital Management, Inc.
S&P 500 Index
BBG Reit Index
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
Annaly Capital Management, Inc.
S&P 500 Index
BBG REIT Index
100
100
100
119
112
122
157
136
147
146
130
143
156
171
177
160
203
137
The information in the share performance graph and table has been obtained froff m sources believed to be reliablea
accuracy nor complem teness can be guaranteed. The historical information set forth above
performance. Accordingly, we do not make or endorse any predictions as to futuret
a
share performance.
, but neither the
is not necessarily indicative of futuret
The above performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the
SEC or subju ect to Regulation 14A or 14C under the Securities Exchange Act or to the liabila
ities 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 filff ing.
Share Repurchase
In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares,
which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In December 2020, we announced that our
Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “New
Share Repurchase Program”). The New Share Repurchase Program replaced the Prior Share Repurchase Program. The
following tablea
the quarter ended December 31,
2020.
sets forth information with respect to the Prior Share Repurchase Program forff
52
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
Total Number of Shares
Purchased
Average Price
Paid Per Share (1)
The Total Number of Shares
Purchased as Part of a
Publicly Announced
Repurchase Program
Maximum Dollar Value of
Shares That May Yet Be
Purchased Under The Plan (1)
(dollars in thousands)
4,699,987 $
4,699,987
7.29
4,699,987 $
4,699,987 $
1,067,886
1,067,886
October 1, 2020 - October
31, 2020
Total
(1)
Excludes commission costs.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
53
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 6. Selected Financial Data
SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
Not required.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
54
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
ff
Certain statements contained in this annual report, and certain statements contained in our futuret
filings with the SEC, 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
period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,”
to a futff uret
l results could differff
“anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actuat
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
o grow our commercial, residential
value of our assets; changes in business conditions and the general economy; our abila
credit and middle market businesses; 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 forff U.S. federal
income tax purposes; our ability to maintain our exemption fromff
Act; and risks and
uncertainties related to Coronavirus Disease 2019 (“COVID-19”), including as related to adverse economic conditions on real-
estate related assets and financing conditions. For a discussion of the risks and uncertainties which could cause actual results to
differ froff m 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.
registration under the Investment Companym
t
ity t
nces to “Annaly,”ll
All refereff
where it is made clear thatt
the end of this Iii
7 forff
temII
t thett
defie nitions of commonly ull
“we,” “us,” or “our” mean Annaly Cll
MM
apCC ital Manageme
term means only the parent company. Refee r to thett
II
nt, It nc.
and all entities owned by us, excepte
section titled “Glossary of Terms” located at
sed terms in this aii
nnual report on FormFF
10-K.KK
This section of our Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons betwett
Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Fii
be found in Part II, Item 7. “Management’s Discussion and Analysi
year ended December 31, 2019.
annual report
inFF ancial Condition and Results ott
on Form 10-K for thett
O
f Oo
f Fo
s oii
e
ll
en 2020 and 2019.
10-K can
ons” of our
perati
ormFF
55
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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
Business Environment and COVID-19
Economic Environment
London Interbank Offered Rate (“LIBOR”) Transition Working Group
Results of Operations
Net Income (Loss) Summary
Non-GAAP Financial Measures
Core earnings (excluding PAA), core earnings (excluding PAA) attributable to common stockholders, 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), Net Interest Margin (excluding PAA) and
Average Economic Cost of Interest Bearing Liabilities
Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities
Realized and Unrealized Gains (Losses)
Other Income (Loss)
General and Administrative Expenses
Return on Average Equity
Unrealized Gains and Losses - Available-for-Sale Investments
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
MSRs
Commercial Real Estate Investments
Interest Rate Swaps
Revenue Recognition
Consolidation of Variable Interest Entities
Use of Estimates
Glossary of Terms
56
Page
57
57
58
59
59
60
61
62
64
64
65
66
66
67
68
69
69
69
70
71
73
73
74
74
75
75
76
76
76
77
78
78
80
81
82
82
83
83
85
85
86
86
86
86
87
87
87
87
87
88
88
89
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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 optimize our returns
through prudent
management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that
has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in Item 1 under “Closing of the
Internalization and Termination of the Management Agreement”) on June 30, 2020, we were externally managed by Annaly
Management Company LLC (our “Former Manager”). Our common stock is listed on the New York Stock Exchange under the
symbol “NLY.”
t
We use our capital
between the yield on our assets and the cost of our borrowings and hedging activities.
coupled with borrowed funds to invest primarily in real estate related investments, earning the spread
a
For a fulff
l discussion of our business, refer to the section titled “Business Overview” of Part I, Item 1. “Business.”
Business Environment and COVID-19
The themes that have dominated financial markets since the elevated volatility seen in March and April 2020 remain
unchanged. Fiscal stimulus has supported
ed by COVID-19 while the Federal
Reserve’s (“Fed”) unprecedented monetary policy actions eased finff ancial conditions and contained interest rate volatility. These
of 5.1% for the fourth quarter and
factors drove our strong performance to close out the year, delivering an economic returnt
1.8% for 2020. Throughout
$1.4 billion aggregate in common and preferred dividends to our
shareholders, signaling meaningful resilience following the historic disruption seen in March and April.
businesses and consumers most negatively impactm
the year, we returned
u
t
Interest rates ended 2020 near their highest levels since the onset of the COVID-19 pandemic reflecting optimism about
the
post-COVID recovery in spite of negative developments of record U.S. virus cases, tighter restrictions and resulting lackluster
economic growth particularly in the U.S. service sector. The rapid COVID-19 vaccine development and plans for deployment,
combined with the relatively healthy consumer balance sheets, suggest that the U.S. economy may rebound at a faster
pace than
during traditional economic downturns once a majority of the population reaches immunity, though meaningful uncertainties
remain about
both the timing of immunity and the subsequent recovery pace.
a
a
ff
ff
al allocation remained tilted towards Agency mortgage-backed securities (“MBS”), representing
At the end of 2020, our capita
78% of the aggregate portfoli
to 74% one year ago. However, this year-over-year snapshot masks more recent
m
o, compared
increases in activity in our residential credit and middle market lending businesses, which saw strong investor sponsorship and
improving fundamentals as markets signal a cyclical recovery. As Agency MBS spreads have continued to tighten given Fed
ies. While
and bank sector demand for the product, select credit sectors have allowed for targeted, attractive opportunit
opportunistic, Annaly continues with its disciplined and defensive-minded credit focus, which is necessary grr
iven overall tight
asset spreads.
t
r
uret
Somewhat offsetting the effect from tight asset spreads, current financing conditions are among the most favorable seen in
low level of rates and a
Annaly’s history. The liquidity created through the Fed’s monetary policy actions have led to absolute
flat term struct
ncing conditions have allowed us to increase our net interest margin
(excluding PAA) from 1.41% at the end of 2019 to 1.98% at the end of 2020, as cheaper finff ancing more than offset the decline
in asset yields driven by the aforementioned spread compression. Additionally, securitization markets have rebounded
substantially, resulting in better execution levels than one year ago, and provide attractive non-recourse term financing to
bolster our residential credit asset investment strategy and diversify financing for our whole loan business.
of the repo curve. Favorable finaff
a
Business Continuity
Our well-established Business Continuity Planning (“BCP”) was designed to ensure continued, effecff
tive operations through a
variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third
parties, and can be adjusted on a real-time basis to address situations as they arise.
The BCP is regularly updau
top
exercise scenarios with management. Key tenets of the planning include active communication between our Crisis Response
Team, which is comprised of senior leaders across a number of funct
ions, and our internal and external stakeholders to affordff
efficient, thoughtful, effective responses to evolving emergency situations
ted and tested. Annual testing includes extensive, remote Disaster Recovery testing and tablea
ff
t
.
Historical tabletop exercises have included use of CDC Influenza Pandemic exercise materials. That exercise documented our
response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and
response/ impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal
and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged
response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and
ng 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our
instituti
t
ilies and communities remote work requirements began in phases in early March, culminating with a
es, their famff
m
employe
57
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
company-wide exercise on March 13, 2020 to test connectivity and functionality. All emplom yees were abla e to successfully
perform their duties in this testing and we have operated largely remotely since that time.
A majority of our business activities continues to be performed remotely, though we have seen a limited number of employees
returnt
nd periodic basis. We continue to monitor guidance from federal, state and local authorities
to gauge how to further proceed in any efforts
to the office on a voluntary arr
to the office.
to returnt
ff
Economic Environment
The pace of economic growth in 2020 slowed sharply, not only in the United States but worldwide, as the outbreak of the
COVID-19 pandemic affecff
ted nearly all ways of life and disrupted many aspects of the economy. The far-reaching
consequences of the COVID-19 pandemic led U.S. gross domestic product (“GDP”) to decline by 3.5% year-over-year in 2020,
in turn marking the largest decline in economic activity during a calendar year in more than 70 years. The disruptu ions caused by
the pandemic were unique in that they primarily impacted the service sector of the economy, a sector that has been a source of
relative stabila
ity during prior economic downturns. Other parts of the economy, including goods consumption and housing,
have recovered froff m the initial pandemic-driven downturn and these sectors are now above 2019 output levels. All of this
suggests that the economy is currently relatively bifurcated, requiring U.S. health officials to work to defeat the virus before
economic activity can returnt
to pre-pandemic levels in aggregate.
m
ent rate seen in Decemberm
2019 according to the Bureau of Labor
The sharp economic contraction led the unemployment rate to rise to 6.7% in December 2020, nearly twice as high as the
ent rate
unemploym
likely understates the number of jobs lost in 2020 as the employm
ment-to-population ratio fell to 57.4%, suggesting that 3.5% of
the population, or roughly 9 million people, no longer held a job at the end of 2020 compared to one year ago. Wage growth, as
measured by the year-over-year change in private sector average hourly earnings rose sharply, reading 5.1% in the month of
December 2020 compared to 3.0% in December 2019. The sharp increase in wages, however, appears to be driven by changes
in the underlying composition of employees by industry, as sectors with generally lower wages, such as leisure and hospitality
services, have seen outsized job losses relative to sectors with higher wages. Alternative measures of wage growth, such as the
Employment Cost Index or the Federal Reserve Bank of Atlanta’s Wage Tracker show meaningfulff
Statistics. The rise in the unemploym
ly less wage growth.
m
a
Inflation remained muted into the economic downturn as measured by the year-over-year changes in the Personal Consumption
Chain Price Index (“PCE”). The headline PCE measure increased by 1.3% year-over-year in December 2020. The
Expendituret
more stablea
core PCE measure, which excludes volatile food and energy prices, registered a similar 1.5% year-over-year
increase. Although both inflation measures remain somewhat below the Fed’s 2.0% inflation target, the Fed expects inflation to
recover towards its target in coming years as the economy begins to recover from the economic downturn.
ff
a
ment and price stabila
olicy with a duald mandate: full
The Fed conducts monetary prr
ity. Given the contraction in economic
employm
activity witnessed following the outbreak of the COVID-19 pandemic, the Fed increased its monetary policy support at
unprecedented speed and size. The target range for the Federal Funds rate was cut fromff
2019 to
0.0% - 0.25% in March 2020. Following the interest rate cuts, the Fed provided guidance that short-term interest rates will
remain near current levels “until labor
market conditions have reached levels consistent with the Fed assessments of maximum
employm
ent and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” as stated in the
m
December 2020 Federal Open Market Committee meeting statement. In addition to the zero-interest rate policy, the Fed
restarted its asset purchase programs, increasing its holdings of Treasury securities and Agency MBS by a total of $2.0 trillion
and $631 billion, respectively. Asset purchases continued at the end of 2020 at a pace of $80 billion per month in Treasury
securities and $40 billion per month in MBS. Beyond rate policy and asset purchases, the Fed also announced several lending
programs to various other market sectors, such as corpora
te bonds, municipals, and small businesses, among others. These
lending programs largely concluded their activities at the end of December 2020 but could be revived should the economic
t
situati
1.50% - 1.75% in Decemberm
on deteriorate.
r
During the year ended December 31, 2020, yields on the 10-year U.S. Treasury note declined by 101 bps primarily in the first
half of the year as a sharp slowdown in global economic growth and heightened uncertainties around the economic recovery led
to strong demand for interest rate products and the aforeff mentioned unprecedented fiscal and monetary stimulus. The mortgage
basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, had a volatile year, rising
meaningfully in the first quarter before retracing given strong demand for MBS in the second half of the year.
58
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
The folff
lowing table below presents interest rates and spreads at each date presented:
30-Year mortgage current coupou n
Mortgage basis
10-Year U.S. Treasury rate
LIBOR
1-Month
6-Month
As of December 31,
2020
1.34%
43 bps
0.91%
0.14%
0.26%
2019
2.71%
79 bps
1.92%
1.76%
1.91%
2018
3.50%
82 bps
2.68%
2.50%
2.88%
London Interbank Offered Rate (
tt
“LIBOR”) Transitiii on Working Group
We have establa ished a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly
transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our
business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders.
The committee also continues to engage with industry working groups and other market participants regarding the transition. In
October 2020, as part of the transition from LIBOR, we participated in the Chicago Mercantile Exchange (“CME”) Group’s
transitioning for price alignment and discounting for USD OTC cleared swaps from the daily effective federal funds rate to the
secured overnight financing rate (“SOFR”). As a result of this activity, our existing swap aa
nd swaption positions have been
ng this transition were sold in the CME
updated with the new SOFR discounting curve and basis swaps entered into durid
Group’s auction on October 19, 2020. We continue to remain on track with our LIBOR transition plan, which requires different
solutions depending on the underlying asset or liability. Most U.S. LIBOR tenors have been extended from December 31, 2021
to June 2023. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as
interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements
require bilateral amendments with transition currently in process and adequate time left tff o resolve. See “Risks Related to Our
Investing, Portfolio Management and Financing Activities-Changes in the method pursuant to which LIBOR is determined and
potential discontinuation of LIBOR may affect our results.”
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 supplu
ement 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.
Referff
to the “Non-GAAP Financial Measures” section for additional information.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
59
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Net Income (Loss
) Ss
((
ummaryr
owing tablea
The foll
ff
31, 2020, 2019 and 2018.
presents financial information related to our results of operations as of and for the years ended December
As of and for the Years Ended December 31,
2020
2019
2018
(dollars in thousands, except per share data)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,229,625
899,112
1,330,513
(2,062,824)
53,314
239,198
(918,195)
(28,423)
(889,772)
1,391
(891,163)
142,036
(1,033,199)
(0.73)
(0.73)
1,414,659,439
1,414,659,439
86,403,446
99,663,704
14,103,589
5.1:1
6.2:1
13.6 %
(0.89)%
(6.31)%
1.46 %
2.44 %
1.09 %
1.35 %
20.2 %
16.4 %
8.92
2,645,069
1,106,989
1,538,080
415,444
1,696,167
1.10
12.03 %
1.74 %
2.90 %
1.34 %
1.56 %
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,787,297
2,784,875
1,002,422
(3,011,127)
136,413
301,634
(2,173,926)
(10,835)
(2,163,091)
(226)
(2,162,865)
136,576
(2,299,441)
(1.60)
(1.60)
1,434,912,682
1,434,912,682
127,402,106
123,202,411
15,325,340
7.1:1
7.2:1
%
12.0
(1.76)%
(14.11)%
0.83 %
%
3.15
2.57 %
0.58
%
12.7 %
13.9
%
9.66
4,042,191
2,433,500
1,608,691
254,894
1,575,396
1.00
10.28 %
%
1.32
3.36 %
2.25
%
1.11 %
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)
1,209,601,809
1,209,601,809
102,340,249
102,544,922
14,332,404
6.3:1
7.0:1
2.1 %
1
0.05 %
0.38 %
1.39 %
.23 %
3
2.15 %
.08 %
1
9.3 %
1
0.1 %
9.39
3,270,542
1,797,307
1,473,235
(62,021)
1,574,920
1.20
10.99 %
.52 %
1
3.17 %
2
.04 %
1.13 %
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
Interest income
Interest expense
Net interest income
Realized and unrealized gains (losses)
Other income (loss)
Less: Total general and administrative expenses
e income taxes
Income (loss) beforff
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
Net interest margin (4)
Average yield on interest earning assets (5)
Average GAAP cost of interest bearing liabilities (6)
Net interest spread
Weighted average experienced CPR for the period
Weighted average projected long-term CPR at period-end
Common stock book value per share
Non-GAAP metrics (7)
Interest income (excluding PAA)
Economic interest expense
Economic net interest income (excluding PAA)
Premium amortization adjustment cost (benefit)
Core earnings (excluding PAA) (8)
Core earnings (excluding PAA) per common share
Annualized core return on average equity (excluding PAA)
Net interest margin (excluding PAA) (4)
Average yield on interest earning assets (excluding PAA) (5)
Average economic cost of interest bearing liabilities (6)
Net interest spread (excluding PAA)
60
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable.
Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are
non-recourse to us.
Computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives 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.
Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin (excluding
PAA) represents the sum of our 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 outstanding TBA contract and CMBX
balances.
Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets
reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using
annualized interest income (excluding PAA).
Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest
bearing liabilities reflects the average balances during
the period. Average economic cost of interest bearing liabilities represents annualized economic
interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest
component of interest rate swaps.
Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
Excludes dividends on preferred stock.
d
GAAP
to noncontrolling interests, or ($1.60) per average basic common share, forff
Net income (loss) was ($889.8) million, which includes $1.4 million attributable to noncontrolling interests, or ($0.73) per
the year ended December 31, 2020 compared to ($2.2) billion, which includes ($0.2) million
average basic common share, forff
attributablea
the same period in 2019. We attribute
ty of the change in net income (loss) to favff orable changes in net gains (losses) on other derivatives, net gains (losses)
a
the majori
changes in the net interest
on disposal of investments and other and net interest income, partially offset by unfavorablea
component of interest rate swaps and net unrealized gains (losses) on instruments measured at faiff
r value through earnings and
realized gains (losses) on termination or maturi
ty of interest rate swaps. Net gains (losses) on other derivatives was $756.3
million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019. Net gains (losses) on
disposal of investments and other was $661.5 million forff
the year ended December 31, 2020 compared to ($47.9) million for
the year ended December 31, 2020 was $1.3 billion compared to $1.0 billion
the same period in 2019. Net interest income forff
for the same period in 2019. The net interest component of interest rate swaps was ($207.9) million forff
the year ended
December 31, 2020 compared to $351.4 million forff
the same period in 2019. Realized gains (losses) on termination or maturity
to ($1.4) billion for the same period
of interest rate swaps was ($1.9) billion for the year ended December 31, 2020 compared
in 2019. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 7 for additional
information related to these changes.
m
t
Non-GAAP
Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.7 billion, or $1.10 per average common share,
the same period in
for the year ended December 31, 2020, compared to $1.6 billion, or $1.00 per average common share, forff
to the same period in
2019. The changes in core earnings (excluding PAA) for the year ended December 31, 2020 compared
ities, and
2019 were primarily dued
n income resulting from a decrease in the average yield on
higher TBA dollar roll income, partially offset by lower coupou
interest earnings assets and lower average interest earning assets, and unfavorablea
changes in the net interest component of
interest rate swaps.a
to lower interest expense from lower borrowing rates and average interest bearing liabila
m
Non-GAAP Financi
ii
alii Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide
the following non-GAAP financial measures:
•
•
•
•
•
(excluding PAA) attributablea
core earnings (excluding PAA);
core earnings
common stockholders;
core earnings (excluding PAA) per average common
share;
annualized core returnt
PAA);
interest income (excluding PAA);
on average equity (excluding
to
•
•
•
•
•
•
economic interest expense;
economic net interest income (excluding PAA);
average yield on interest earning assets (excluding
PAA);
average economic cost of interest bearing liabia lities;
net interest margin (excluding PAA); and
net interest spread (excluding PAA).
61
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
ff
ff
or superior to, financ
ial measures computed in accordance with
These measures should not be considered a substitute for,
GAAP. While intended to offer a full
er 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 (excluding PAA), or the PAA,
differently than our peers making comparam
tive 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.
ff
These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating
performance and business trends, as well as forff
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 (excluding PAA),A core earnings (excluding PAA) aA ttrit butable to common stockhol
ll
ders,
ex(( cluding PAA)PP
PAA) per average common share and annualizedii
core return on average equity (
kk
tt
core earnings (excluding
ff
u
through
Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns
prudent management of our diversified investment strategies. We generate net income by earning a net interest spread on our
investment portfolio, which is a funct
ion of interest income from our investment portfolio less financing, hedging and operating
costs. Core earnings (excluding PAA), 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 excludes (g) the
premium amortization adjustment (“PAA”) 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, is
used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal
business objective.
ff
t
We seek to fulff
fill 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 capita
al 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
ted in GAAP net income (loss) while others are reflected in other comprehensive
fair value where certain instrume
income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to
on average equityt
provide additional transparency into the operating performance of our portfolio. Annualized core returnt
(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 capa ital.
nts are reflecff
q
rr
62
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
The folff
lowing table presents a reconciliation of GAAP finaff
ncial results to non-GAAP core earnings for the periods presented:
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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 and other
Net (gains) losses on other derivatives
Net unrealized (gains) losses on instruments measured at fair value through earnings
Loan loss provision (1)
Other adjustments
Depreciation expense related to commercial real estate and amortization of intangibles (2)
Non-core (income) loss allocated to equity method investments (3)
Non-core other (income) loss (4)
Transaction expenses and non-recurring items (5)
Income tax effect of non-core income (loss) items
TBA dollar roll income and CMBX coupon income (6)
MSR amortization (7)
Plus:
Premium amortization adjustment cost (benefit)
Core earnings (excluding PAA) (8)
Dividends on preferred stock
Core earnings (excluding PAA) attributable to common stockholders (8)
GAAP net income (loss) per average common share
Core earnings (excluding PAA) per average common share (8)
GAAP return (loss) on average equity
Core return on average equity (excluding PAA) (8)
For the Years Ended December 31,
2020
2019
2018
(dollars in thousands, except per share data)
$
(889,772)
$ (2,163,091)
$
54,148
1,391
(226)
(891,163)
(2,162,865)
(260)
54,408
1,917,628
904,532
(661,513)
(756,305)
303,024
151,188
39,108
22,493
—
11,293
(17,603)
355,547
(97,506)
415,444
1,696,167
142,036
1,554,131
(0.73)
1.10
(6.31)%
12.03 %
$
$
$
$
1,442,964
1,210,276
47,944
680,770
(36,021)
16,569
40,058
21,385
—
19,284
(5,961)
123,818
(77,719)
254,894
1,575,396
136,576
1,438,820
(1.60)
1.00
(14.11)%
10.28 %
$
$
$
$
(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)
(62,021)
1,574,920
129,312
1,445,608
(0.06)
1.20
0.38 %
10.99 %
$
$
$
$
(1)
Includes $3.6 million of loss provision on the Company’s unfunded loan commitments for the year ended December 31, 2020, which is reported in Other
income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
Includes depreciation and amortization expense related to equity method investments.
(2)
(3) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other income (loss).
(4) 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.
Includes costs incurred in connection with securitizations of residential whole loans. The year ended December 31, 2020 also includes costs incurred in
connection with the Internalization, the CEO search process and a securitization of Agency mortgage-backed securities. The year ended December 31,
2019 also includes costs incurred in connection with the securitization of commercial loans and Agency mortgage-backed securities. The year ended
December 31, 2018 also includes costs incurred in connection with the acquisition of MTGE Investment Corp.
(5)
(6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled
$5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(7) 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.
(8) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.
From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency mortgage-
an Agency mortgage-backed security
backed securities. A TBA contract is an agreement to purchase or sell, for future delivery,rr
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 froff m 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
63
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
during the financing period. Accordingly, TBA dollar roll income generally represents the economic equq ivalent of the net
interest income earned on the underlying Agency mortgage-backed security less an implied financ
ing cost.
ff
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 in 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).
nce in price between two TBA contracts with the same terms but diffeff rent
TBA dollar roll income is calculated as the differeff
settlement dates multiplied by the notional amount of the TBA contract. Although accounted forff
as derivatives, TBA dollar
rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed securitytt
(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 tradablea
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
t
(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 runni
ng coupon
on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of
principal losses and/dd 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
Comprehensi
alent to interest income
(expense) and therefore included in core earnings (excluding PAA).
ve Income (Loss). The coupon payments received or paid on CMBX positions is equivq
m
r
Premium Amortization
ii
Expex nse
In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency mortgage-backed
securities, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of futuret
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 effecti
ve 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.
ff
Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of our
t of the PAA, which quantifies the component of premium amortization representing the
non-GAAP metrics exclude the effecff
cumulative impactm
on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term Constant
Prepayment Rate (“CPR”).
The following tablea
and residential securities transferred or pledged to securitization vehicles, for the periods presented:
of the PAA on premium amortization expense for our Residential Securities portfolio
illustrates the impactm
For the Years Ended December 31,
2020
2019
2018
(dollars in thousands)
Premium amortization expense
Less: PAA cost (benefit)
Premium amortization expense (excluding PAA)
$
$
1,375,461
415,444
960,017
$
$
1,113,786
254,894
858,892
$
$
705,926
(62,021)
767,947
Interest income (excluding PAA), economic interest expense
x
and economic net interest income (excluding PAA)A
Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjd ustment, and
serves as the basis forff
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 quarter-over-quarter changes in estimated long-term
of premium amortization expense representing the cumulative effect
ff
64
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
prepayment speeds related to our Agency mortgage-backed securities (other than interest-only securities, multifamily and
reverse mortgages), which can obscure underlying trends in the performance of the portfolio.
Economic interest expense is comprisem
d of GAAP interest expense and the net interest component of interest rate swaps.a 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 swapsa
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. We may use market agreed coupon (“MAC”) interest rate swaps
in which we may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-ff
In accordance with GAAP, upfront payments associated with MAC interest rate swaps
market nature of such interest rate swap.a
are not reflecff
nsive Income
in the Consolidated Statements of Comprehe
during the years ended December 31, 2020 and December 31, 2019.
(Loss). We did not enter into any MAC interest rate swapsa
ted in the net interest component of interest rate swapsa
m
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
the aforementioned line items on a non-GAAP basis for each respective period:
a
provide GAAP measures of interest expense and net interest income and details with respect to reconciling
)
Interest Income (excluding PAA)
(
g
For the years ended
December 31, 2020
December 31, 2019
GAAP Interest
Income
PAA Cost
(Benefit)
Interest Income
(excluding PAA) (1)
(dollars in thousands)
$
$
2,229,625
3,787,297
$
$
415,444
254,894
$
$
2,645,069
4,042,191
December 31, 2018
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for
(62,021) $
3,332,563
$
$
3,270,542
additional information on non-GAAP financial measures.
)
Economic Interest Expense and Economic Net Interest Income (excluding PAA)
p
g
(
Add: Net
Interest
Component of
Interest Rate
Swaps
Economic
Interest
Expense (1)
GAAP
Interest
Expense
Less: Net
Interest
Component
of Interest
Rate Swaps
GAAP Net
Interest
Income
(dollars in thousands)
Economic
Net
Interest
Income (1)
Add: PAA
Cost
(Benefit)
Economic
Net Interest
Income
(excluding
PAA) (1)
$
$
$
899,112
2,784,875
1,897,860
$
$
$
207,877
$ 1,106,989
(351,375) $ 2,433,500
(100,553) $ 1,797,307
$
$
$
1,330,513
1,002,422
1,434,703
$
$
$
207,877
$ 1,122,636
(351,375) $ 1,353,797
(100,553) $ 1,535,256
$
$
$
415,444
254,894
$
$
1,538,080
1,608,691
(62,021) $
1,473,235
For the years ended
December 31, 2020
December 31, 2019
December 31, 2018
(1)
Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.
Experienced and Projectedtt Long-Tgg ermTT
CPR
Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial
markets, compem tition and other facff
tors, 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,
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.
thereby reducing the yield on such assets. The following tablea
For the years ended
31, 2020
December 31, 2019
December 31, 2018
Experienced CPR (1)
Long-term CPR (2)
20.2%
12.7%
9.3%
16.4%
13.9%
10.1%
(1)
(2)
For the years ended December 31, 2020, 2019 and 2018, respectively.
At December 31, 2020, 2019 and 2018, respectively.
65
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Averagea
(excludingii
((
Yield on Intertt est Earning Assets (
tt
exc
ludingii
PAA),A Net Intertt est Spread (excluding PAA), Net Interett
st Margin
PAA) and Average Economic Cost of Interest Bearing Ln
ii
iabilities
Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding
PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense
divided by average 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 swapsa
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)
p
g
(
Average
Interest
Earning
Assets (1)
Interest
Income
(excluding
PAA) (2)
Average
Yield on
Interest
Earning
Assets
(excluding
PAA) (2)
Average
Economic
Cost of
Interest
Bearing
Liabilities
(2)(3)
Average
Interest
Bearing
Liabilities
Economic
Interest
Expense (2)(3)
(dollars in thousands)
For the years ended
December 31, 2020
$91,198,821
$2,645,069
December 31, 2019
$120,389,507
$4,042,191
December 31, 2018
$103,227,574
$3,270,542
2.90%
3.36%
3.17%
$82,719,182
$1,106,989
$108,355,575
$2,433,500
$88,216,125
$1,797,307
1.34%
2.25%
2.04%
Economic
Net
Interest
Income
(excluding
PAA) (2)
$1,538,080
$1,608,691
$1,473,235
Net
Interest
Spread
(excluding
PAA) (2)
1.56 %
1.11 %
1.13 %
(1) Based on amortized cost.
(2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(3) Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing
liabilities. Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of GAAP
interest expense and the net interest component of interest rate swaps.
)
Net Interest Margin (excluding PAA)
g
g
(
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, 2020
$2,645,069
December 31, 2019
$4,042,191
December 31, 2018
$3,270,542
355,547
123,818
276,986
(899,112)
(207,877)
$1,893,627
$91,198,821
17,442,023
$108,640,844
(2,784,875)
(1,897,860)
351,375
100,553
$1,732,509
$120,389,507
10,953,117
$131,342,624
$1,750,221
$103,227,574
12,115,869
$115,343,443
Net
Interest
Margin
(excluding
PAA) (1)
1.74%
1.32%
1.52%
(1)
(2)
Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled
$5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively.
Economic Intertt est ExpeEE
nse and Average Economic 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 economic cost of interest bearing liabilities as compared
to average one-month and average six-month LIBOR for the periods presented.
66
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Economic Cost of Funds on Average Interest Bearing Liabilities
g
g
Average
Interest
Bearing
Liabilities
Interest
Bearing
Liabilities at
Period End
Economic
Interest
Expense
Average
Cost of
Interest
Bearing
Liabilities
(1)
Average
One-
Month
LIBOR
Average
Six-
Month
LIBOR
Average
One-
Month
LIBOR
Relative to
Average
Six-
Month
LIBOR
Average Cost
of Interest
Bearing
Liabilities
Relative to
Average
One-
Month
LIBOR
Average
Cost
of Interest
Bearing
Liabilities
Relative to
Average
Six-Month
LIBOR
For the years ended
(dollars in thousands)
December 31, 2020 $ 82,719,182
December 31, 2019 $ 108,355,575
December 31, 2018 $ 88,216,125
$ 71,435,295
$ 1,106,989
$ 111,819,229
$ 2,433,500
$ 88,646,247
$ 1,797,307
1.34%
2.25%
2.04%
0.52%
2.22%
2.02%
0.69%
2.32%
2.49%
(0.17%)
(0.10%)
(0.47%)
0.82%
0.03%
0.02%
0.65%
(0.07%)
(0.45%)
(1) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
2020 Compared with 2019
Economic interest expense decreased by $1.3 billion for the year ended December 31, 2020 compared to the same period in
2019. The change was dued
to lower borrowing rates and decreases in average interest bearing liabilities, partially offset by the
change in the net interest component of interest rate swaps,a which was ($207.9) million for the year ended December 31, 2020
compared to $351.4 million forff
the same period in 2019.
ff
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 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, swaptia
ons
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 froff m period
end borrowings as we implem ment 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
capia tal 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.
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
ity of our debt represented repurchase agreements and other secured financing
At December 31, 2020 and 2019, the majora
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 forff
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.
Realizedii
and Unrealized
ll
Gains (Losses)
Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swapsa , net gains (losses) on disposal of
investments and other, 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, 2020,
2019 and 2018 were as follows:
ff
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
67
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
For the Years Ended December 31,
2020
2019
2018
(dollars in thousands)
Net gains (losses) on interest rate swaps (1)
$
(3,030,037) $
(2,301,865) $
526,043
Net gains (losses) on disposal of investments and other
Net gains (losses) on other derivatives
Net unrealized gains (losses) on instruments measured at
fair value through earnings
Loan loss provision
Total
661,513
756,305
(303,024)
(147,581)
(47,944)
(680,770)
36,021
(16,569)
(1,124,448)
(403,001)
(158,082)
(3,496)
$
(2,062,824) $
(3,011,127) $
(1,162,984)
(1)(1)
l d
Includes hthe net iinterest component
rate swaps
unrealized gains
li d
gains (l
fof iinterest rate swaps,
(losses) on iinterest rate swaps.
dand
)
realized gains
gains (l
li d
(losses) on
)
termination or maturity
maturity fof iinterest
i
i
2020 Compared with 2019
Net gains (losses) on interest rate swaps for the year ended December 31, 2020 was ($3.0) billion compared to ($2.3) billion for
the same period in 2019, attributable to an unfavorablea
change in the net interest component of interest rate swaps and higher
realized losses on termination or maturity of interest rate swaps, partially offset by lower unrealized losses on interest rate
swaps. The net interest component of interest rate swaps was ($207.9) million for the year ended December 31, 2020, compared
to $351.4 million for the same period in 2019, reflecting a decrease in rates combined with the timing of rate resets during the
period and changes in notional balance. Realized gains (losses) on termination or maturity of interest rate swapsa was ($1.9)
billion resulting from interest rate swaps with a notional amount of $104.1 billion for the year ended December 31, 2020
comparem
d to ($1.4) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $88.6
billion for the same period in 2019. Unrealized gains (losses) on interest rate swaps was ($0.9) billion for the year ended
December 31, 2020 compared to ($1.2) billion for the same period in 2019, which reflected a steeper decline in forward
interest
rates during the earlier period.
ff
Net gains (losses) on disposal of investments and other was $661.5 million forff
the year ended December 31, 2020 compared
with ($47.9) million for the same period in 2019. For the year ended December 31, 2020, we disposed of Residential Securities
with a carrying value of $51.8 billion for an aggregate net gain of $637.0 million. For the same period in 2019, we disposed of
Residential Securities with a carrying value of $25.5 billion for an aggregate net loss of ($37.8) million.
Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million
for the same period in 2019. The change in net gains (losses) on other derivatives was primarily comprised of changes in net
gains (losses) on futures contracts, which was ($280.1) million for the year ended December 31, 2020 compared
to ($962.7)
million for the same period in 2019 and higher net gains on TBA derivatives, which was $985.4 million for the year ended
the same period in 2019.
December 31, 2020 comparem
d to $326.8 million forff
m
r value through earnings was ($303.0) million for the year ended
Net unrealized gains (losses) on instruments measured at faiff
December 31, 2020 compared to $36.0 million for the same period in 2019, primarily due to unfavorablea
changes in unrealized
gains (losses) on Agency interest-only securities, non-Agency mortgage-backed securities, commercial securitized loans of
consolidated VIEs and residential credit risk transfer securities, partially offset by favora
bla e changes in unrealized gains (losses)
on commercial debt issued by securitization vehicles for the year ended December 31, 2020 compared to the same period in
2019.
ff
For the year ended December 31, 2020, a loan loss provision of ($147.6) million was recorded on commercial mortgage and
the same period in 2019. Refer to the “Loans” Note located within Item 15 for
corporate loans compared
additional information related to these loan loss provisions.
to ($16.6) million forff
m
II
Other Income
(Loss)
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.
t
68
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
General and Administrativtt e Expenses
EE
General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization
on June 30, 2020) 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.
p
G&A Expenses and Operating Expense Ratios
p
p
g
For the years ended
31, 2020
December 31, 2019
December 31, 2018
Total G&A
Expenses (1)
Total G&A Expenses/
Average Assets (1)
(dollars in thousands)
Total G&A Expenses/
Average Equity (1)
$
$
$
239,198
301,634
329,873
0.24 %
0.24 %
0.32 %
1.70 %
1.97 %
2.30 %
(1)
Includes $11.3 million of transaction costs incurred in connection with securitizations of residential whole loans
and Agency mortgage-backed securities as well as costs incurred in connection with the Internalization and costs
incurred in connection with the CEO search process for the year ended December 31, 2020. Includes $19.3 million
of transaction costs incurred in connection with securitizations of residential whole loans, commercial loans and
Agency mortgage-backed securities for the year ended December 31, 2019. Excluding these transaction costs,
G&A expenses as a percentage of average total assets and as a percentage of average equity were 0.23% and
1.62%, respectively, and 0.23% and 1.84%, respectively, for the years ended December 31, 2020 and 2019,
respectively.
2020 Compared with 2019
G&A expenses decreased $62.4 million to $239.2 million for the year ended December 31, 2020 compared to the same period
in 2019. The change was primarily due to lower compensation costs, reflecting cost savings related to the Internalization and
lower management fees and expense reimbursements to our Former Manager in the first half of 2020 reflecting lower adjusted
stockholders’ equity balances compared to the same period in 2019, and lower transaction costs during the year ended
December 31, 2020 compared to the same period in 2019.
Return on Average Equityii
The following tablea
shows the component
m
s of our annualized return on average equity
q
for the periods presented.
y
Components of Annualized Return on Average Equity
q
p
g
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, 2020
December 31, 2019
7.96 %
8.83 %
(13.15%)
(21.93%)
0.38 %
0.89 %
December 31, 2018
0.76%
10.71 %
(1) Economic net interest income includes the net interest component of interest rate swaps.
(2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps.
(8.81%)
(1.70%)
(1.97%)
(2.30%)
0.20%
0.07%
0.02%
(6.31%)
(14.11%)
0.38%
Unrealizll ed Gainsii
ll
and Losses - Availabl
e-for-Sale
ll
Investmentstt
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 impactm
ted on our balance sheet by changing the carrying value
of the asset and stockholder
nder accumulated other comprehensive income (loss). As a result of this fair value
k
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.
our GAAP net income (loss) but rather are reflecff
s’ equity ut
The tabla e below shows cumulative unrealized gains and losses on our availablea
Consolidated Statements of Financial Condition.
-for-sale investments reflected in the
69
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
gain
Unrealized loss
Accumulated other comprehensive income (loss)
December 31, 2020
December 31, 2019
(dollars in thousands)
3,378,523
$
2,267,577
(4,188)
(129,386)
3,374,335
$
2,138,191
$
$
Unrealized changes in the estimated fair value of availablea
on our potential
earnings and dividends: positive changes will increase our equity base and allow us to increase our borrowing capaa
city while
-sale
negative changes tend to redud ce borrowing capac
Residential Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses
upon sale.
ity. A very large negative change in the net fair value of our available-forff
-for-sale investments may have a direct effect
a
ff
The fair value of these securities being less than amortized cost at December 31, 2020 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
we currently have the abia lity
“AAA” rating. The investments are not considered to be other-than-temporm arily impaired becausea
and intent to hold the investments to maturi
casted 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
ty. Also, we are guaranteed payment of the principal and interest
t
recovery of the amortized cost bases, which may be maturi
amounts of the securities by the respective issuing Agency.
ty or for a period of time sufficient for a foreff
t
Financial Condition
Total assets were $88.5 billion and $130.3 billion at December 31, 2020 and 2019, respectively. The change, consistent with
our portfolio repositioning to strengthen our balance sheet in the first quarter of 2020, was primarily due to a decrease in
including assets transferred or pledged to securitization vehicles,
Agency mortgage-backed securities of $39.3 billion,
investments of $0.4 billion. Our portfolio
residential mortgage loans of $0.7 billion and commercial real estate debt
m
composit
allocation and debt-to-net equity ratio by asset class were as follows at December 31, 2020:
ion, net equity
q
Residential
Commercial
Agency
MBS and
MSRs
TBAs (1)
Residential
CRTs
Assets
Non-
Agency
MBS and
Residential
Mortgage
Loans (2)
CRE Debt &
Preferred
Equity
Investments
(dollars in thousands)
Investments
in CRE
Corporate
Debt
Total (3)
Fair value/carrying value
$74,788,301
$20,373,197
$ 532,403
$ 4,567,253
$
3,619,245
$
656,314
$ 2,239,930
$ 86,403,446
Debt
Repurchase agreements
Other secured financing
Debt issued by
securitization vehicles
Participations issued
Net forward purchases
Mortgages payable
Net equity allocated
Net equity allocated (%)
Debt/net equity ratio
62,744,910
20,277,088
245,686
1,235,162
599,481
4,434
573,413
—
865,081
—
—
—
—
—
—
—
—
—
—
—
25,987
—
2,617,000
2,462,569
39,198
3,076
—
—
—
—
—
—
—
—
—
426,256
—
64,825,239
887,455
917,876
—
—
—
—
5,652,982
39,198
868,157
426,256
$10,600,463
$
96,109
$ 286,717
$
646,830
$
557,195
$
230,058
$ 1,352,475
$ 13,673,738
(4)
78 %
6.1:1
1 %
NM
2 %
0.9:1
5 %
6.1:1
4 %
5.5:1
1 %
1.9:1
10 %
0.7:1
100 %
5.1:1 (5)
(1)
(2)
(3)
(4)
Fair value/carrying value represents implied market value and repurchase agreements represent the cost basis.
Includes loans held for sale, net.
Excludes the TBA asset, debt and equity balances.
Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the
Consolidated Statements of Financial Condition.
Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.
(5)
NM Not meaningful.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
70
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
dd
Residentia
l Secur
SS
ities
u
ially all of our Agency mortgage-backed securities at December 31, 2020 and December 31, 2019 were backed by
Substant
single-family residential mortgage loans and were secured with a first
lien position on the underlying single-family properties.
ff
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 arr
value on the
Consolidated Statements of Financial Condition.
ll of our Agency mortgage-backed securities at fair
ff
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, 2020 and December 31, 2019 we had on our Consolidated Statements of Financial Condition a total of $88.3
million and $156.9 million, respectively, of unamortized discount (which is the difference between the remaining principal
value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization
vehicles, acquired at a price below principal value) and a total of $4.0 billion and $5.3 billion, respectively, of unamortized
premium (which is the differeff
nce between the remaining principal value and the current amortized cost of our Residential
Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above
principal value).
a
The weighted average experienced prepayment speed on our Agency mortgage-backed securities portfolio forff
the years ended
December 31, 2020 and 2019 was 20.2% and 12.7%, respectively. The weighted average projected long-term prepayment speed
on our Agency mortgage-backed securities portfolio as of December 31, 2020 and 2019 was 16.4% and 13.9%, respectively.
Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-
backed securities, all other facff
tors 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 off
f 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.
lowing tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles,
The folff
that were carried at faiff
r value at December 31, 2020 and December 31, 2019.
Agency
Fixed-rate pass-through
Adjustable-rate pass-through
CMO
Interest-only
Multifamily
Reverse mortgages
Total agency securities
Residential credit
Residential CRT
Alt-A
Prime
Prime Interest-only
Subprime
NPL/RPL
Prime jumbo (>= 2010 vintage)
Prime jumbo (>= 2010 vintage) interest-only
Total residential credit securities
Total Residential Securities
December 31, 2020
December 31, 2019
Estimated Fair Value
(dollars in thousands)
71,302,578
477,516
149,767
421,909
1,663,507
51,782
74,067,059
532,403
80,328
181,509
1,240
188,433
475,847
43,283
1,552
1,504,595
75,571,654
$
$
$
$
$
108,723,414
1,524,331
160,016
708,562
1,717,197
59,847
112,893,367
531,322
151,383
276,257
3,167
348,979
164,268
184,664
7,150
1,667,190
114,560,557
$
$
$
$
$
71
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
The folff
lowing tabla e summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed
securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at
December 31, 2020 and December 31, 2019.
Residential Securities (1)
Principal amount
Net premium
Amortized cost
Amortized cost / principal amount
Carrying value
Carrying value / principal amount
Weighted average coupou n 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, 2020
December 31, 2019
(dollars in thousands)
$
$
68,521,464
3,280,439
71,801,903
104.79 %
75,116,466
109.62 %
3.58 %
2.86 %
107,412,143
4,309,668
111,721,811
104.01 %
113,841,402
105.99 %
3.91 %
3.07 %
$
1,257,966
$
2,513,310
$
$
3.20 %
5.20 %
15 Months
0.41 %
1.84 %
4.13 %
3.52 %
13 Months
8.24 %
2.34 %
67,263,498
$
104,898,833
3.58 %
2.82 %
98.16 %
$
3,642,143
602,790
602,790
16.55 %
455,188
12.50 %
3.99 %
NM
3.90 %
3.06 %
97.66 %
5,447,193
876,129
876,129
16.08 %
719,155
13.20 %
3.29 %
1.73 %
(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.
NM Not meaningful.
The following tablea
s summarize certain characteristics of our Residential Credit portfolio at December 31, 2020.
Product
Total
Senior
(dollars in thousands)
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
Prime interest-only
Subprime
Re-performing loan securitizations
Non-performing loan securitizations
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage) interest-only
Total/weighted average (2)
$ 508,685
$
— $
508,685
23,718
80,328
181,509
1,240
188,433
467,702
8,145
43,283
1,552
—
25,286
12,128
1,240
96,468
227,558
8,145
—
1,552
23,718
55,042
169,381
4.03 %
4.81 %
3.73 %
4.44 %
— 0.47 %
91,965
240,144
1.85 %
4.34 %
— 3.67 %
43,283
3.87 %
— 0.35 %
1.28 %
0.97 %
9.70 %
7.02 %
— %
17.95 %
30.93 %
32.18 %
3.35 %
—
$1,504,595
$
372,377
$ 1,132,218
3.88 %
13.86 %
4.66 %
0.86 %
17.40 %
8.94 %
5.21 %
14.08 %
28.12 %
82.18 %
4.23 %
4.59 %
14.62 %
44.40 %
43.63 %
18.86 %
30.73 %
45.03 %
8.80 %
9.95 %
3.70 %
51.33 %
53.22 %
28.20 %
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
(1)(1)
(2)
Represents hthe 3 m honth voluntary
voluntary pre ypayment rate (
(“VPR”).
)
Total investment characteristics exclude the impact of IOs.
72
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Product
ARM
Fixed
Floater
Interest-Only
Bond Coupon
Agency credit risk transfer
Private label credit risk transfer
Alt-A
Prime
Prime interest-only
Subprime
Re-performing loan securitizations
Non-performing loan securitizations
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage) interest-only
(dollars in thousands)
$
— $
—
18,133
40,859
—
7,486
—
—
—
—
— $
508,594
$
—
48,629
135,887
—
71,776
467,702
8,145
43,283
—
23,718
13,566
4,763
—
108,939
—
—
—
—
91
—
—
—
1,240
232
—
—
—
1,552
Estimated
Fair Value
$
508,685
23,718
80,328
181,509
1,240
188,433
467,702
8,145
43,283
1,552
Total
$
66,478
$
775,422
$
659,580
$
3,115
$
1,504,595
Contractual Obligati
i
ons
The following tablea
The tablea
will fluct
ff
of ($1.0) billion.
summarizes the effecff
from contractual obligations at December 31, 2020.
does not include the effect of net interest rate payments on our interest rate swap aa
greements. The net swap payments
uate based on monthly changes in the receive rate. At December 31, 2020, the interest rate swaps had a net fair value
t on our liquidity and cash flows
ff
Within One
Year
One to Three
Years
Three to Five
Years
(dollars in thousands)
More than
Five Years
Total
Repurchase agreements
Interest expense on repurchase agreements (1)
Other secured financing
Interest expense on other secured financing (1)
Debt issued by securitization vehicles (principal)
$
64,641,177
$
184,062
$
41,588
30,420
20,112
—
2,861
—
39,190
—
Interest expense on debt issued by securitization vehicles
133,669
267,338
Participations issued (principal)
Interest expense on participations issued
Mortgages payable (principal)
Interest expense on mortgages payable
Long-term operating lease obligations
Total
—
1,669
9,706
18,426
3,918
—
3,338
41,325
34,211
7,724
— $
—
887,456
15,868
167,670
267,338
—
3,338
289,124
26,184
6,757
— $
64,825,239
—
—
—
5,481,520
2,833,063
37,365
44,989
89,495
58,885
—
44,449
917,876
75,170
5,649,190
3,501,408
37,365
53,334
429,650
137,706
18,399
$
64,900,685
$
580,049
$
1,663,735
$
8,545,317
$
75,689,786
(1)
Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 2020.
In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our
, mortgages payable or other
current operations via repurchase agreements. We may use securitization structures, credit facilities
term financing structures
to finance certain of our assets. During the year ended December 31, 2020, we received $19.6 billion
from principal repayments and $52.6 billion in cash from disposal of Residential Securities. During the year ended December
31, 2019, we received $17.2 billion from principal repayments and $25.5 billion in cash from disposal of Residential Securities.
ff
t
ll
Off-Balance
Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships which would have been establa ished forff
the sole purpose of facilitating off-balance sheet arrangements or other contractuat
lly narrow or limited purposes.
We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, we have
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, 2020.
t
73
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Capital Management
Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of
critical importance to our business strategy. A strong and robust capital
position is essential to executing our investment
al position, which enables us to execute our investment strategy
strategy. Our capita
ng a comprehensive
regardless of the market environment. Our capita
capia tal management practice.
al policy defines the parameters and principles supporti
l strategy is predicated on a strong capita
u
a
a
risks impacm ting capita
The majora
al, liquidity and funding risk, investment/market risk, credit risk, counterparty risk,
operational risk and complim ance, regulatory and legal risk. 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.
al are capita
al requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capita
Capita
al
appropriately reflects our asset mix, market and funding structure. In the event we fall short of our internal thresholds, we will
ate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations,
a
consider appropri
issuance of capital
al enhancing or risk reduction strategies.
or other capita
a
Stockholders’ Equity
The following tablea
provides a summary of total stockholders’ equity at December 31, 2020 and 2019:
Stockholders’ equity
7.50% Series D cumulative redeemable preferred stock
6.95% Series F fixff ed-to-floating rate cumulative redeemable preferred stock
ff
6.50% Series G fixed-to-floating
rate cumulative redeemable preferred stock
ff
6.75% Series I fixed-to-floating
rate cumulative redeemable preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
December 31, 2020
December 31, 2019
(dollars in thousands)
—
696,910
411,335
428,324
13,982
19,750,818
3,374,335
(10,667,388)
$
14,008,316
$
445,457
696,910
411,335
428,324
14,301
19,966,923
2,138,191
(8,309,424)
15,792,017
74
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGE
A
Item 7. Management’s Discussion and Analysis
MENT, INC. ANDAA
SUBSIDIARIES
ii
Capital
Stock
Common Stock
SS
The following tablea
presented:
provides activity related to our Direct Purchase and Dividend Reinvestment Program for the periods
Shares issued through direct purchase and dividend reinvestment program
Amount raised from direct purchase and dividend reinvestment program
$
For the Years Ended
December 31, 2020
December 31, 2019
(dollars in thousands)
166,000
1,175
$
180,000
1,795
During the year ended December 31, 2019, we closed the public offeff
ring of an original issuance of 75.0 million shares of
g, we granted
common stock forff
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 $109.6 million in proceeds before deducting offering expenses.
proceeds of $730.5 million before deducting offering expenses. In connection with the offerin
ff
In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of
common stock, which expired on December 31, 2020 (“the Prior Share Repurchase Program”). In December 2020, we
announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December
31, 2021 (the “New Share Repurchase Program”). The New Share Repurchase Program replaced the Prior Share Repurchase
Program. During the years ended December 31, 2020 and 2019, we repurchased 32.4 million and 26.2 million shares of our
an aggregate amount of $208.9 million and $223.2 million, excluding commission costs, respectively. All
common stock forff
common shares purchased were part of a publicly announced plans in open-market transactions.
No shares were issued under the at-the-market sales program durid
ng the year ended December 31, 2020. During the years ended
December 31, 2019, we issued 56.0 million shares of common stock for proceeds of $569.1 million, net of commissions and
fees, under the at-the-market sales program.
No options were exercised during
d
the years ended December 31, 2020, and 2019.
ff
Preferre
k
d StocSS
During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of
7.50% Series D Cumulative Redeemable Preferred
Stock (“Series D Preferred Stock”) for $460.0 million. The cash redemptim on
amount for each share of Series D Preferred Stock was $25.00.
ff
During the year ended December 31, 2019, we redeemed all 7.0 million of our issued and outstanding shares of 7.625% Series
C Cumulative Redeemable Preferff
red Stock (“Series C Preferred Stock”) for $175.0 million. The cash redemption amount for
each share of Series C Preferred Stock was $25.00 plus accrued and unpaid dividends to, but not including, the redemptim on date
of July 21, 2019.
During the year ended December 31, 2019, we redeemed all 2.2 million of our issued and outstanding shares of 8.125% Series
H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) forff
$55.0 million. The cash redemption amount for
each share of Series H Preferred Stock was $25.00 plus accruedrr
and unpaid dividends to, but not including, the redemptim on date
of May 31, 2019.
During the year ended December 31, 2019, we issued 17.7 million shares of our 6.750% Series I Fixed-to-Floating Rate
Cumulative Redeemable Preferred Stock forff
gross proceeds of $442.5 million before deducting the underwriting discount and
other estimated offering costs.
Leverage and Capital
We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may be continued
l policy governs our capital and leverage position including setting
volatility in the mortgage and credit markets. Our capita
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 management’s opinion of the level
of risk of our assets and liabila
ty of credit, over-
ities, our liquidity position, our level of unused borrowing capacity,t
collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and
the availabili
a
a
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
75
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
international market conditions.
Our debt-to-equity ratio at December 31, 2020 and 2019 was 5.1:1 and 7.1:1, respectively. Our economic leverage ratio, which
is computed as the sum of Recourse Debt, cost basis of TBA derivative and CMBX notional outstanding, and net forward
purchases (sales) of investments divided by total equity, at December 31, 2020 and 2019 was 6.2:1 and 7.2:1, respectively. Our
capia tal ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA
derivatives and shown net of debt issued by securitization vehicles), was 13.6% and 12.0% at December 31, 2020 and 2019,
respectively.
Risk Management
For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business
Environment and COVID-19” within this Item 7.
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 objecb
tive of our risk management framework is to identify, measure
and monitor these risks.
Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. We have built a strong and
throughout Annaly focused on awareness which supports appropriate understanding and
collaborative risk management culturet
management of our key risks. Each employee is accountabla e forff
identifying, monitoring and managing risk within their area of
responsibility.
Riskii Appetiteii
ff
ide risk appetite statement which defines the types and levels of risk we are willing to take in order to
We maintain a firm-w
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 capita
al 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
We generally expect to maintain an economic leverage ratio no greater than 10:1.
Liquidity Risk
We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse
market conditions.
Interest Rate Risk
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.
Credit Risk
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
a
base through disciplined risk management practices.
Compliance
We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption
from registration under the Investment Company Act.
Governance
ework, and executive
Risk management begins with our Board, through the review and oversight of the risk management framff
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”) with support from the other Board Committees. The BRC is responsible for oversight of our risk governance struct
t
ure,
r
risk management and risk assessment guidelines and policies and our risk appetite. The BAC is responsible forff
oversight of the
ial reporting practices, including independent auditor
quality and integrity of our accounting, internal controls and financ
ion. The Management Development and
selection, evaluation and review, and oversight of
Compensation Committee is responsible forff
rate
Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us, and
oversight of risk related to our compensation policies and practices. The Corpor
ff
the internal audit
ff
funct
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
76
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framew
and the annual self-evaluation of the Board.
ff
ork
Risk assessment and risk management are the responsibility of our management. A series of management committees has
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 forff
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 approva
l authority over all aspects of our enterprise risk management.
our risk management
a
Audit Services is an independent function with reporting lines to the BAC. Audit Services is responsible forff
performing our
internal audit activities, which includes independently assessing and validating key controls within the risk management
framework.
Our complim ance group is responsible for oversight of our regulatory complim ance. Our Chief Compliance Officer has reporting
lines to the BAC.
Description of Risks
ii
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 foll
ff
owing primary categories that we utilize to identify, assess, measure and monitor risk.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
77
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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.
ff
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.
ii
Capital
, Lll
iquiditydd
and Fundingii Risk Manage
MM
ment
al, liquidity and funding risk management strategy is designed to ensure the availability of sufficff
Our capita
ient resources to
support our business and meet our financial obligations under both normal and adverse market and business environments. Our
risk management practices consist of the following primary elements:
capia tal, liquidity and funding
ff
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, 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 used to collateralize additional
borrowings or sold.
We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity,t
breadth and depth of counterparties and maintaining a staggered maturity profile.
Our wholly-owned subsidiary, Arcola, provides direct access to third party funding
ember broker-dealer. Arcola
borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central
counterparty. In addition, Arcola has borrowed funds through direct repurchase agreements.
as a FINRA mRR
ff
To reduce our liquidity risk we maintain a laddered appa
December 31, 2019, the weighted average days to maturity was 64 days and 65 days, respectively.
roach to our repurchase agreements. At December 31, 2020 and
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 facff
tors 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.
ncial assets and cash pledged against existing liabilities of $71.7 billion. The weighted
At December 31, 2020, we had total finaff
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 swapsa
did not
materially change at December 31, 2020 compared to the same period in 2019. While haircut and margin requirements related
the year
to the Agency collateral we pledge under repurchase agreements and interest rate swaps were largely unchanged during
d
78
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
ended December 31, 2020, our counterparties did increase haircuts and margin requirements on credit assets beginning in
March 2020, as a result of market disruptions brought on by COVID-19, which have since returner d closer to pre-pandemic
levels.
The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement
balances outstanding forff
the periods presented:
Repurchase Agreements
Reverse Repurchase Agreements
Average Daily
Amount
Outstanding
Ending Amount
Outstanding
Average Daily
Amount
Outstanding
Ending Amount
Outstanding
For the three months ended
(dollars in thousands)
31, 2020
$
65,528,297
$
64,825,239
$
210,484
$
September 30, 2020
June 30, 2020
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
67,542,187
68,468,813
96,756,341
102,760,107
108,389,796
101,983,828
87,781,404
83,984,254
64,633,447
67,163,598
72,580,183
101,740,728
102,682,104
105,181,241
88,554,170
81,115,874
286,792
183,423
461,123
1,006,487
1,459,070
3,478,510
3,937,769
2,741,022
—
—
—
—
—
—
—
523,449
650,040
The following tablea
ty date at
December 31, 2020. The weighted average remaining maturity on our repurchase agreements and other secured financing was
82 days at December 31, 2020:
provides information on our repurchase agreements and other secured financing by maturi
t
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 119 days (1)
Total
December 31, 2020
Principal
Balance
Weighted
Average Rate
% of Total
(dollars in thousands)
$
—
30,841,837
10,567,655
8,568,836
2,154,733
13,610,054
$
65,743,115
— %
0.29 %
0.42 %
0.30 %
0.23 %
0.49 %
0.35 %
— %
46.9 %
16.1 %
13.0 %
3.3 %
20.7 %
100.0 %
(1)
Approximately 2% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.
The tablea
December 31, 2020:
below presents our outstanding debt balances and associated weighted average rates and days to maturity at
Weighted Average Rate
Principal
Balance
As of Period End
For the
Quarter
Weighted Average
Days to Maturity (1)
agreements
$
64,825,239
Other secured financing (2)
Debt issued by securitization vehicles (3)
Participations issued (3)
Mortgages payable (3)
917,876
5,649,190
37,365
429,650
Total indebtedness
$
71,859,320
(dollars in thousands)
0.32 %
2.22 %
2.13 %
4.47 %
4.41 %
0.35 %
2.96 %
1.95 %
4.70 %
4.07 %
64
1,353
9,013
11,664
2,982
(1)
(2)
(3)
Determined based on estimated weighted-average lives of the underlying debt instruments.
Includes financing under credit facilities.
Non-recourse to Annaly.
79
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
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 tablea
o available to support potential collateral obligations and funding
illustrates our asset portfoli
needs.
ff
ff
to
Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer availablea
support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following tablea
also provides the carrying amount of our encumbered and unencumbered financial assets at Decemberm 31, 2020:
Financial assets
Cash and cash equivalents
Investments, at carrying value (1)
Agency mortgage-backed securities (2)
Credit risk transfer securities
Non-agency mortgage-backed securities
Residential mortgage loans (2)
MSRs
Commercial real estate debt investments (2)
Commercial real estate debt and preferred equity, held for investment (2)
Corporate debt, held for investment
Other assets (3)
Total financial assets
Encumbered
Assets
Unencumbered
Assets
Total
$
1,137,809
(dollars in thousands)
$
105,894
$
66,929,821
349,323
735,420
3,438,972
5,541
2,052,642
1,217,329
1,596,536
6,874,366
183,080
236,772
156,089
95,354
194,173
155,101
643,394
—
77,463,393
$
$
69,472
8,713,695
$
1,243,703
73,804,187
532,403
972,192
3,595,061
100,895
2,246,815
1,372,430
2,239,930
69,472
86,177,088
(1)
(2)
(3)
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 instruments.
We maintain liquid assets in order to satisfy our current and futuret
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
ct to certain parameters. The composition is monitored for concentration risk and asset type. We believe the assets we
subjeu
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 tablea
presents our liquid assets as a percentage of total assets at December 31, 2020:
u
Carrying Value (1)
(dollars in thousands)
$
$
1,243,703
74,688,203
345,810
80,742
498,081
1,724,789
78,581,328
99.13 %
Liquid assets
Cash and cash equivalents
Residential Securities (2) (3)
Residential mortgage loans (4)
Commercial real estate debt investments (5)
Commercial real estate debt and preferred equity, held forff
Corporate debt, held for investment (7)
investment (6)
Total liquid assets
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (8)
(1)
Carrying value approximates the market value of assets. The assets listed in this table include $71.7 billion of assets that have been
pledged as collateral against existing liabilities at December 31, 2020. 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 Agency mortgage-backed securities of consolidated VIEs carried at fair value of $0.6 billion
Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $3.2 billion.
Excludes securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.2 billion.
Excludes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $0.9 billion.
Excludes certain second lien loans.
Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding assets
transferred or pledged to securitization vehicles of $6.9 billion.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
80
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Maturity Profilff e
a
and derivatives when managing both liquidity risk as well as investment/market
We consider the profile of our assets, liabilities
risk employi
ng a measurement of both the maturity gap and interest rate sensitivity gap. We determine the amount of liquid
m
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
ities and cash flows of our assets, liabilities and derivatives. The tabla e is
following table illustrates the expected finaff
l maturt
based on a static portfolio and assumes no reinvestment of asset cash floff ws and no futff uret
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 that exhibit prepayment characteristics. Cash and cash equivalents are included in the
‘Less than 3 Months’ maturity bucket, as they are typically held forff
a short period of time.
t
ff
ty bucket, our maturity gap is considered negative when the amount of maturing
liabilities exceeds
With respect to each maturi
t
liabilities. Our interest
the amount of maturing assets. A negative gap increases our liquidity risk as we must enter into futff uret
ence between interest earning assets and interest bearing liabilities maturing or re-pricing within
rate sensitivity gap is the differ
a given time period. Unlike the calculation of maturt
ity 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
ities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive liabila
t net interest income, while
sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affecff
ould tend to result in an increase in net interest income. During a period of falling interest rates, a negative gapa
a positive gap wa
t net interest income
would tend to result in an increase in net interest income, while a positive gap wa
adversely. Because different types of assets and liabia lities with the same or similar maturities may react differen
tly 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 contractuat
l terms of the assets and liabilities, except that
adjustablea
-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
ing
rate and effectively lock in our financing costs forff
a longer term, are also reflected in our interest rate sensitivity gap.
rate and receive a float
ould tend to affecff
ff
ff
ff
The interest rate sensitivity of our assets and liabilities in the following tablea
based on actuat
l prepayment experience.
at December 31, 2020 could vary substantially
81
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Financial assets
Cash and cash equivalents
Agency mortgage-backed securities (principal)
Residential 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)
Total financial assets - interest rate sensitive
Financial liabilities
Repurchase agreements
Other secured financing
Debt issued by securitization vehicles (principal)
Participations issued (principal)
Total financial liabilities - maturity
Effect of utilizing reset dates (1)(2)
Total financial liabilities - interest rate sensitive
Maturity gap
Cumulative maturity gap
Interest rate sensitivity gap
Less than 3
Months
3-12
Months
More than 1
Year to 3
Years
3 Years and
Over
Total
(dollars in thousands)
$
1,243,703
$
— $
— $
— $
1,726,132
65,264,228
—
—
—
—
—
—
63,890
—
63,890
—
1,307,593
8,179,336
8,621
12,954
87,746
—
109,321
—
81,460
30,686
112,146
—
221,467
1,276,252
$
$
$
9,486,929
$
1,497,719
$ 49,978,329
—
$ 14,662,848
30,420
—
—
49,978,329
—
—
14,693,268
219,121
475,874
—
2,421,127
—
423,035
408,983
832,018
—
3,253,145
(976,713)
2,276,432
184,062
—
—
—
184,062
(29,253,956)
$ 20,724,373
(241,423)
$ 14,451,845
$
23,235,886
23,419,948
$ (48,670,736) $ (14,471,801) $
3,069,083
301,972
424,816
89,858
66,080,874
336,525
—
1,869,188
2,205,713
6,916,406
75,202,993
(8,478,875)
$
$
$
$
— $
887,456
5,649,190
37,365
6,574,011
6,259,493
12,833,504
68,628,982
1,243,703
66,998,981
534,047
988,436
89,858
68,611,322
336,525
568,385
2,308,857
3,213,767
6,916,406
79,985,198
64,825,239
917,876
5,649,190
37,365
71,429,670
$
$
71,429,670
8,555,528
66,724,118
$
79,985,198
$ (48,670,736) $ (63,142,537) $ (60,073,454) $
8,555,528
$ (11,237,444) $ (12,954,126) $ (21,143,516) $
53,890,614
$
8,555,528
Cumulative rate sensitivity gap
$ (11,237,444) $ (24,191,570) $ (45,335,086) $
8,555,528
(1) Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap
(2)
utilizes reset dates, if applicable.
Includes effect of interest rate swaps.
The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate “gap,” measurement of the
duration and convexity ott
f our portfolio and sensitivities to interest rates and spreads.
Stress Testing
t
tress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress
We utilize liquidity s
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.
MM
Liquidity Mtt
anageme
nt Policies
We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring
and measurement, along with well-defined key risk indicators. Both quantitative and qualitative targets are utilized to measure
ity and condition of the liquidity position, and include the level and composition of unencumbered assets, as
the ongoing stabila
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-spe
cific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our
escalation protocol.
m
82
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Investmett
nt/Market
//
Riskii Management
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
arket risk. Changes in the level of interest rates can affect our net
One of the primary risks we are subject to is investment/mtt
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 fromff
the sale of these assets. We may utilize a variety of
financial instruments, including interest rate swapsa , 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 utilize contracts linked to LIBOR but may also enter
into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index, particularly in light of
a potential transition away froff m LIBOR. In addition, we may use MAC interest rate swaps in which we may receive or make a
payment at the time of entering such interest rate swap ta
of such interest rate swap. MAC
on which is
interest rate swaps offer price transparency, flexibility and more efficie
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.
nt portfolio administration through compressi
o compensate for the off-market naturet
m
ff
ff
a
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
estimate the
potential losses in the portfolio over various time horizons utilizing various confidence levels. The following tables
potential changes in economic net interest income over a twelve month period and the immediate effecff
t 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 net interest income simulations incorporate the interest expense effect of rate resets on liabia lities 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 tablea
presents
estimates at December 31, 2020. Actual results could differ materially from these estimates.
a
Change in Interest Rate (1)
-75 Basis points
Projected Percentage Change in
Economic Net Interest Income (2)
(34.3%)
Estimated Percentage
Change in Portfolio Value (3)
(0.2)%
Estimated Change as a
% on NAV (3)(4)
(1.3%)
-50 Basis points
-25 Basis points
+25 Basis points
+50 Basis points
+75 Basis points
MBS Spread Shock (1)
-25 Basis points
-15 Basis points
-5 Basis points
+5 Basis points
+15 Basis points
+25 Basis points
(22.7%)
(11.2%)
7.1%
13.5%
20.2%
—%
0.1%
(0.1%)
(0.2%)
(0.4%)
(0.2)%
0.7%
(0.5%)
(1.3%)
(2.7%)
Estimated Change in
Portfolio Market Value
1.5%
Estimated Change as a %
on NAV (3)(4)
9.0%
0.9%
0.3%
(0.3%)
(0.9%)
(1.5%)
5.4%
1.8%
(1.8%)
(5.3%)
(8.9%)
(1)
(2)
(3)
(4)
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.
NAV represents book value of equity.
Credit Risk Manage
MM
ment
Key risk parameters have been established to specify our credit risk appetite. We seek to manage credit risk by making
investments which conform within the firm’s
specific investment policy parameters and optimize risk-return attributes.
ff
While we do not expect to encounter credit risk in our Agency mortgage-backed securities, 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
83
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
residential mortgage loans, commercial real estate investments and corporate debt. MSR values may also be impacted if overall
ct to risk of loss if an issuer
costs to service the underlying mortgage loans increase due to borrower performance. We are subjeu
or borrower faiff
ls to perform its contractual obligations. We have established policies and procedurd es for mitigating credit risk,
including establishing and reviewing limits for credit exposure. We will originate or purchase commercial investments that
ve underwriting process and credit standards and are approved by the appropriate committee. Once a
meet our comprehensi
commercial
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 portfoli
loss.
Additionally, ALCO has oversight of our credit risk exposure.
o risk and determines estimates of provision forff
m
investment
ff
Our portfolio composition, based on balance sheet values, at December 31, 2020 and 2019 was as folff
lows:
Category
Agency mortgage-backed securities
Credit risk transfer securities
Non-agency mortgage-backed securities
Residential mortgage loans(1)
Mortgage servicing rights
Commercial real estate (1) (2)
Corporate debt
December 31, 2020
December 31, 2019
86.4 %
0.6 %
1.1 %
4.2 %
0.1 %
5.0 %
2.6 %
89.5 %
0.4 %
0.9 %
3.3 %
0.3 %
3.9 %
1.7 %
(1)
(2)
Includes assets transferred or pledged to securitization vehicles.
Net of unamortized origination fees.
84
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Counterptt
arty Rtt
isk Managem
MM
ent
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 ot
btaining 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
abla e lender. The collateral we pledge generally exceeds the amount of the
estate investments as collateral to the applic
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 differeff
value of the collateral pledged
by us to the lender including accrued interest receivable on such collateral.
nce between the amount loaned to us plus interest due to the counterparty and the fair
a
ff
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.
t
We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type,
counterparty type, ratings and geography. Additionally, ALCO has oversight of our counterparty exposure.
ff
The foll
owing tablea
summarizes our exposure to counterparties by geography at December 31, 2020:
Geography
North America
Europe
Japan
Total
Number of
Counterparties
Secured Financing (1)
Interest Rate Swaps
at Fair Value
(dollars in thousands)
Exposure - Secured
Financing (2)
Exposure - Interest
Rate Swaps (2)
24
10
4
38
$
$
52,983,020
$
(361,964) $
3,920,875
$
9,044,400
3,715,695
(644,528)
—
1,894,424
205,019
(1,620,846)
(905,245)
—
65,743,115
$
(1,006,492) $
6,020,318
$
(2,526,091)
(1)
Includes repurchase agreements and other secured financing.
(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured
financing and unrealized loss on swaps for each counterparty.
rr
Operational Risk Management
a
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 dued
to uncertainty in model parameters and
te methodologies used. The result of these risks may include financial loss and reputational damage. We manage
inappropria
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
se 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.
-level lines of defenff
m
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 our
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, and the Board via the BRC and the BAC. There is no assurance that
these efforts
rts are not an assurance that no cybersecurity
incidents will occur. We currently maintain cybersecurity insurance, however, there is no assurance that the insurance policy
will cover all cybersecurity breaches or that the policy will cover all losses.
ively mitigate cybersecurity risk and mitigation effoff
will effect
ff
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
85
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Compliance, Regulatory
ll
and Legal
e
Riskii Management
Our business is organized as a REIT, and we seek 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. We also regularly assess our risk management in respect of our
regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola and our subsidi
ary that is
registered with the SEC as an investment adviser under the Investment Advisers Act.
u
The finaff
ncial services industry is highly regulated and receives significant 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, measure and monitor these risks under the oversight of the ERC.
Act, and we
We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Companym
seek to continue to meet the requirements forff
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 complim ance 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 Act, 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,
ealer and Intermediary Oversight or the CFTC, to register as CPOs. On December 7,
absent relief from the Division of Swap Da
no-action relief from the CPO registration requirement for operators of mortgage real
2012, as a result of numerous requests forff
estate investment trusts, the Division of Swap Da
ealer and Intermediary Oversight of the CFTC issued no-action relief entitled
the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain
“No-Action Relief fromff
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 submu
itted 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 froff m 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 filff ings with the Internal Revenue Service. While we disagree with the CFTC’s position that mortgage REITs 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.
rr
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 Financ
ii
ial 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 observablea
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,
aps, reset dates and the expected life of the security. While prepayment rates may
which may include coupon, periodic and life cff
be difficult to predict and require
estimation and judgment in the valuation of Agency mortgage-backed securities, we use
several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal
fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities
repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing
used as collateral forff
additional verification of our internal pricing.
q
86
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Residendd tial Mortgage Loans
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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
the individual loans, which may include loan term, coupou
n, and reset dates. While prepayment rates may be difficult to predict
and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds
against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values
are generally compared to external pricing sources to determine reasonablene
ss.
a
MSRs
inputs in their
Fair value estimates for our investment in MSRs are obtained from models, which use significff ant unobservablea
valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputn
s
including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to
valuations obtained froff m third-party pricing providers. Management reviews the valuations received from third-party pricing
providers and uses them as a point of comparim son to modeled values. The valuation of MSRs requires significant judgment by
management and the third-party pricing providers.
stt
ment
tt
Commercial Real Estate Invest
II
quoted prices
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon
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 impairmm
ent if the fair value of the security is lower than its amortized
cost. Determining whether there is an impairment may require us to exercise significant judgment and make estimates to
determine expected cash flows incorporating assumptim ons such as changes in interest rates and loss expectations. For
y investments classified as held for investment, we apply significant judgment
commercial real estate loans and preferred equitq
in evaluating the need for a loss reserve. Estimated net recoverablea
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 landscapea where the borrower conducts business must be considered in determining the
sale, significant judgment may need to be applied in
allowance forff
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 forff
sale include the borrower’s credit quality, liquidity and other market factors and
the fair value of the underlying collateral.
loan losses. For commercial real estate loans held forff
u
Interest Rate Swap
SS
s
We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps. We
s us to most accurately
believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enablea
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.a
Through this margining process, we may be abla e to compare our
recorded fair value with the faiff
r 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 Recognigg tii on
based on the outstanding principal amounts of the Residential Securities and
Interest income from coupon payments is accruedrr
their contractuat
l 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. To aid in determining projected
lives of the securities, 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.)
casts and expert judgment. Prepayment speeds vary according
and market data, including interest rate and home price index foreff
to the type of investment, conditions in the financial markets and other facff
tors 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
tive yield.
cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effecff
Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.
87
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Consolidation of Vo
arVV iable Intertt est Entitiii es
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 perforff mance. We
must also identify explicit and implicit variablea
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 significff ant 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.
Use of Estimaii
tes
The use of GAAP requires management to make estimates and assumptions that affecff
liabilities and disclosure of contingent assets and liabilities at the date of the finaff
revenues and expenses during the reporting period. Actual
t
results could differ materially from those estimates.
t the reported amounts of assets and
ncial statements and the reported amounts of
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
88
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 adjud sted at
regular intervals according to predetermined criteria. The
adjusd
table interest rate is tied to an objective, published
interest rate index.
ff
Agency
Refers to a fede
rally chartered corporation, such as the
Federal National Mortgage Association, or the Federal
Home Loan Mortgage Corporat
ion, or an agency of the
U.S. Government, such as the Government National
Mortgage Association.
r
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
maturi
ty. The global financial market typically looks to
t
U.S. Treasury securities as benchmarks.
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.
Agency Mortgage-Backed Securities
Refers to residential mortgage-backed securities that are
issued or guaranteed by an Agency.
B-Note
Subordinate mortgage notes and/or subordinate mortgage
loan participations.
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 GAAP Cost of Interest Bearing Liabilities and
Average Economic Cost of Interest Bearing Liabilities
Average GAAP cost of
interest bearing liabilities
represents annualized interest expense divided by average
interest bearing liabilities. Average
interest bearing
liabilities reflects the average balances during the period.
Average economic cost of
interest bearing liabilities
represents annualized economic interest expense divided
by average interest bearing liabila
ities.
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.
Average Yield on Interest Earnings Assets and Average
Yield on Interest Earnings Assets (excluding PAA)
represents
Average yield on interest earning assets
annualized interest
income divided by average interest
earning assets. Average interest earning assets refleff cts the
average amortized cost of our investments during the
period. Average yield on interest earning assets (excluding
PAA)
income
is calculated using annualized interest
(excluding PAA).
B
Basis Point (“bp”)
One hundredth of one percent, used in expressing
differences in interest rates. One basis point is 0.01% of
89
B-Piece
The most
security bond class.
subordinate
commercial mortgage-backed
Board
Referff
s 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 formul
determining that
ff
rate, and maturing on a date certain, on which date and
d sum of money plus interest
upon presentation a fixeff
(usually represented by interest coupons attached to the
bond) is payablea
to the holder or owner. Bonds are long-
term securities with an original maturity of greater than one
year.
a forff
Book Value Per Share
Calculated by summing common stock, additional paid-in
al, accumulated other comprehensive income (loss)
capita
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.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
Capital Ratio
divided by total
Calculated as total stockholders’ equity
assets inclusive of outstanding market value of TBA
positions and exclusive of consolidated VIEs.
q
Carry
ncing
The amount an asset earns over its hedging and finaff
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.
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
(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
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.
amount. Additionally,
contracted
notional
Collateral
Securities, cash or property pledged by a borrower or partyt
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 Loan Obligation (“CLO”)
A securitization collateralized by loans and other debt
instruments.
Collateralized Mortgage Obligation (“CMO”)
A multiclass bond backed by a pool of mortgage pass-
through securities or mortgage loans.
t
Commodity Futures Trading Commission (“CFTC”)
An independent U.S. federal agency established by the
Commodity Futures
Trading Commission Act of 1974. The
and options
CFTC regulates the swaps, commodity futures
markets. Its goals include the promotion of competitive and
efficien
s markets and the protection of investors
against manipulation, abusive trade practices and fraud.
t future
ff
ff
ff
t
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.
Constant Prepayment Rate (“CPR”)
The percentage of outstanding mortgage loan principal that
prepays in one year, based on the annualization of the
90
Single Monthly Mortality, which reflects the outstanding
mortgage loan principal that prepays in one month.
Convexity
A measure of the change in a security’s duration with
respect to changes in interest rates. The more convex a
ion will change with interest
security is, the more its durat
rate changes.
d
Core Earnings (excluding PAA) and Core Earnings
(excluding PAA) Per Average Common Share
Core earnings (excluding PAA) 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
expense related to commercial real estate and amortization
of 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
the
non-core income (loss)
premium amortization
the
on prior periods, but not the current
cumulative impactm
period, of quarter-over-quarter changes in estimated long-
term prepayment speeds related to our Agency mortgage-
backed securities. Core earnings (excluding PAA) per
average common share is calculated by dividing core
earnings (excluding PAA) by average basic common
shares forff
items) and excludes (g)
representing
adjustment
the period.
Corporate Debt
Non-government debt instruments issued by corporat
Long-term corporate debt can be issued as bonds or loans.
r
ions.
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 dued
on a periodic basis.
Credit and Counterparty Risk
Risk to earnings, capital or business, resulting fromff
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
investing,
funding and hedging activities.
in lending,
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 referff encing the commercial mortgage-
backed securities index.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
(“CRT”) Securities
Credit Risk Transferff
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/odd r third parties to private
investors.
Current Face
The current remaining monthly principal on a mortgage
security. Current face is computed by multiplying the
original facff e value of the security by the current principal
balance facff
tor.
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 faiff
interest when due.d
l to pay principal or
Derivative
A finff ancial product that derives its value from the price,
uations and price expectations of an underlying
ff
price fluct
instrument, index or reference pool (e.g. futures contracts,
options, interest rate swaps, interest rate swaptia
ons and
certain to-be-announced securities).
purchases (sales) of investments divided by total equity.
Recourse debt consists of repurchase agreements and other
secured financing (excluding certain non-recourse credit
facilities). Certain credit facilities (included within other
secured financing), debt issued by securitization vehicles,
participations issued,
are non-
recourse to us and are excluded from this measure.
and mortgages payablea
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 liabia lity.
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 maturi
a
security appeari
ng on the face of the instrument.
t
ty value) of a
Factor
the
A decimal value
outstanding principal balance of a mortgage security,
which changes over
in relation to its original
principal value.
ting the proportion of
reflecff
time,
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 maturi
ty of a fixff ed-income investment’s cash
flows, used in the estimation of the price sensitivity of
fixed-income securities for a given change in interest rates.
t
E
Economic Capital
A measure of the risk a firff m is subject to. It is the amount
al a firff m needs as a buffer to protect against risk. It
of capita
is a probabilistic measure of potential futuret
losses at a
given confidence level over a given time horizon.
Economic Interest Expense
Non-GAAP financial measure that is comprisem
d of GAAP
interest expense and the net interest component of interest
rate swaps.a
Economic Leverage Ratio (Economic Debt-to-Equity
Ratio)
Calculated as the sum of recourse debt, cost basis of TBA
forward
and CMBX derivatives outstanding and net
91
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 instituti
ons for safety and soundness
t
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 generally provide
reliablea
to
support housing finance and community investment.
liquidity to member
institutions
ncial
finaff
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.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Industry Regulatory Authority,
Financial
(“FINRA”)
FINRA iRR
s 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.
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 adjud sted periodically
according to a predetermined formul
a, usually linked to an
ff
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 future
rs from an option
in that an option gives one of the counterparties a right and
s
the other an obligation to buy or sell, while a future
contract represents an obligation of both counterparties,
one to deliver and the other to accept delivery. A future
s
contract is part of a class of finff ancial instruments called
derivatives.
s contract diffeff
ff
ff
ff
G
GAAP
U.S. generally accepted accounting principles.
Ginnie Mae
Government National Mortgage Association.
92
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.
Interest Bearing Liabilities
Refers
repurchase
securitization vehicles and credit
interest bearing liabila
agreements,
to
ities is based on daily balances.
debt
by
issued
ilities. Average
facff
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,
hedging
techniques are utilized to mitigate this risk. Interest rate
risk is a formff
of market risk.
deleveraging
and
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 a
greement at
some specified date in the future. The swaption agreement
on will be a
will specify whether the buyer of the swaptia
fixed-rate receiver or a fixeff
d-rate payer.
a
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
International Swaps and Derivatives Association
(“ISDA”) Master Agreement
Standardized contract developed by ISDA used as an
umbrella under which bilateral derivatives contracts are
entered into.
Inverse IO Bond
An interest-only bond whose coupon is determined by a
formula expressing an inverse relationship to a benchmark
rate, such as LIBOR. As the benchmark 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, capita
al 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 Advisers Act
Refers to the Investment Advisers Act of 1940, as
amended.
Investment Company Act
Refers to the Investment Companym
amended.
Act of 1940, as
L
Leverage
The use of borrowed money to increase investing power
.
and economic returt nsr
Leverage Ratio (Debt-to-Equity Ratio)
Calculated as total debt to total stockholders’ equity. For
includes
purposes of calculating this ratio total debt
repurchase agreements, other secured financing, debt
issued by securitization vehicles, participations issued and
(included
Certain credit
mortgages payable.
by
ing),
ff
financ
within
securitization vehicles, participations issued and mortgages
payablea
are non-recourse to us.
a
secured
facilities
ff
debt
issued
other
Long-Term CPR
Our projected prepayment speeds for certain Agency
mortgage-backed securities using third-party model and
market
information. Our 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 forec
asts. Changes to model assumptim ons, including
ff
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 maturet
s in more than one year.
M
Market Agreed Coupon (“MAC”) Interest Rate Swap
An interest rate swap contract strucrr
ture with pre-defined,
market agreed terms, developed by SIFMA and ISDA with
the purpose of promoting liquidity and simplified
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”)
in a pool of
A security representing a direct
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.
interest
Mortgage Loan
A mortgage loan granted by a bank, thrift or other financial
on that is based solely on real estate as security and
t
instituti
is not insured or guaranteed by a government agency.
t
Mortgage Servicing Rights (“MSRs”)
ng the right to service an
t
Contractual
existing mortgage where the holder receives the benefits
and bears the costs and risks of servicing the mortgage.
agreements constituti
ff
LIBOR (London Interbank Offered
Rate)
short-term Eurodollar
The rate banks charge each other forff
loans. LIBOR is frequently used as the base for resetting
rates on floating-rate securities and the floaff
ting-rate legs of
interest rate swaps.a
N
NAV
Net asset value.
Liquidity Risk
Risk to earnings, capita
inabila
without incurring unacceptablea
to liquidate assets or obtain adequate funding.
l or business arising from our
ity to meet our obligations when they come dued
losses because of inability
a
93
Net Interest Income
Represents
interest
investments, less interest expense paid forff
income earned on our portfolio
borrowings.
Interest Margin and Net
Net
(excluding PAA)
Net interest margin represents our interest income less
interest expense divided by average interest earning assets.
Net interest margin (excluding PAA) represents the sum of
Interest Margin
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
our 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 outstanding TBA contract and CMBX balances.
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.
Net Interest Spread and Net Interest Spread (excluding
PAA)
Net interest spread represents the average yield on interest
earning assets less the average GAAP cost of interest
bearing liabilities. Net interest spread (excluding PAA)
represents the average yield on interest earning assets
(excluding PAA) less the average economic cost of interest
bearing liabilities.
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.
O
Operational Risk
Risk to earnings, capita
al, reputation or business arising
from inadequate or failed internal processes or systems,
human facff
tors 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.
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.
Overnight Index Swaps (“OIS”)
An interest rate swap in which a fixed rate is exchanged forff
an overnight floating rate.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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 structuret
where a GSE or other entityt
“passes” the amount collected from the borrowers every
month to the investor, afteff
r deducd ting 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.
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.
d
Premium Amortization Adjustment
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.
(“PAA”)
Prepayment
The unscheduled partial or complem te 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
forcing the
prepayments of mortgage or other
investor to reinvest at lower prevailing rates.
loans,
Prepayment Speed
The estimated rate at which mortgage borrowers will pay
off the mortgages that underlie an MBS.
Prime Rate
The indicative interest rate on loans that banks quote to
their best commercial customers.
94
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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 adjud stment of the interest rate on a floating-rate
security according to a prescribed formff
ula.
Real Estate Investment Trust (“REIT”)
A special purpose investment vehicle that provides
investors with the ability to participate directly in the
ing of real-estate related assets by
ownership or financ
pooling their capita
al to purchase and manage mortgage
loans and/or income property.tt
ff
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
(included within other secured financing), debt issued by
and
securitization
mortgages payablea
are non-recourse to us and are excluded
from this measure.
lities). Certain credit
participations
vehicles,
issued,
ff
faci
Reinvestment Risk
The risk that interest income or principal repayments will
have to be reinvested at lower rates in a declining rate
environment.
Re-Performing Loan (“RPL”)
A type of
delinquent by at least 90 days but have resumed.
loan in which payments were previously
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 formff
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 securitizations, the residual is the tranche that collects
any cash flow from the collateral
remains after
obligations to the other tranches have been met.
that
95
Return on Average Equity
Calculated by taking earnings divided by average
stockholders’ equity.
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.
S
Secondary Market
Ongoing market for bonds previously offered or sold in the
primary mrr
arket.
Secured Overnight Financing Rate (“SOFR”)
Broad measure of the cost of borrowing cash overnight
collateralized by Treasury srr
ecurities 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
complem te a transaction.
Short-Term Debt
Generally, debt which matures in one year or
However, certain securities that maturet
may be considered short-term debt.
less.
in up to three years
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, and sometimes a service fee. Spreads differ
based on several factors including liquidity.
T
Target Assets
to-be-
Includes Agency mortgage-backed
announced forward contracts, CRT securities, MSRs, non-
Agency mortgage-backed securities, residential mortgage
loans, commercial real estate investments, and corporate
debt.
securities,
Taxable REIT Subsidiary (“TRS”)
An entity that is owned directly or indirectly by a REIT
and has jointly elected with the REIT to be treated as a
tax purposes. Annaly and certain of its direct and
TRS forff
indirect subsidiaries have made separate joint elections to
treat these subsidiaries as TRSs.
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Item 7. Management’s Discussion and Analysis
SUBSIDIARIES
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
income
income on the
represents
underlying security less an implied cost of financing.
q
the equivale
interest
nt of
roll
Total Return
Investment performance measure over a stated time period
interest, interest on interest, and
which includes coupon
any realized and unrealized gains or losses.
u
Total Return Swap
A derivative instrument where one party makes payments
at a predetermined rate (either fixed or variable)
while
receiving a returnt
on a specific asset (generally an equity
index, loan or bond) held by the counterparty.
a
U
Unencumbered Assets
Assets on our balance sheet which have not been pledged
as collateral against an existing liability.
U.S. Government-Sponsored Enterprise (“GSE”)
Obligations
Obligations of Agencies originally established or chartered
by the U.S. government
to serve public purposes as
specified by the U.S. Congress, such as Fannie Mae and
Freddie Mac;
explicitly
guaranteed as to the timely payment of principal and
and credit of the U.S. government.
interest by the fulff
these obligations
are not
l faithff
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
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.
Voting Interest Entity (“VOE”)
q
An entity that has sufficient equity
to finance its activities
ted finff ancial support from
without additional subordina
other parties and in which equity investors have a
controlling financial interest.
u
W
Warehouse Lending
A line of credit extended to a loan originator to fund
mortgages extended by the loan originators to propertytt
purchasers. The loan typically lasts froff m 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.
ff
Weighted Average Coupon
The weighted average interest
mortgage loans or pools that serve as collateral forff
security, weighted by the size of
balances.
the underlying
a
loan
the principal
rate of
ff
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
and
realized
unscheduled, is paid on the loans underlying the MBS.
at which
scheduled
principal,
rate
V
Y
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/odd r (ii)
the entity to finance
do not have sufficient equity at risk forff
its activities without additional subordinated financial
support from other parties.
Yield-to-Maturity
The expected rate of returnt
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
ns are
and time to maturity and assuming all coupou
reinvested at the same rate; equivalent to the internal rate
of return.
96
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
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 effecff
tiveness 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
ts under the Securities
effective in ensuring that information required to be disclosed by Annaly in reports it files
Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropri
ate to allow
timely decisions regarding required disclosure and (2) were effective in ensuring that information required to be disclosed by
Annaly 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.
u
or submi
a
ff
ff
There have been no changes in our internal controls over financial reporting that occurred during the three months ended
December 31, 2020 that have materially affected, or are reasonably likely to materially affeff ct our internal control over financial
reporting.
Management’s Annual Report On Internal Control Over Financial Reporting
Management of Annaly is responsible for establishing and maintaining adequate internal control over financ
ial 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, Annaly’s CEO and CFO and
effected by the Annaly’s board of directors, management and other personnel to provide reasonable assurance regarding the
reliabila
ity 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:
ff
•
•
records that
in
rly reflect the
the assets of
pertain to the maintenance of
reasonable detail accurately and faiff
transactions and dispositions of
Annaly;
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
•
t
expenditures
of Annaly are being made only in
accordance with authorizations of management and
directors of Annaly; and
assurance regarding prevention
provide reasonablea
or timely detection of unauthorized acquisition, use
or disposition of Annaly’s assets that could have a
material
consolidated financial
statements.
effect on the
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
periods are subject to the
presentation of financial statements. Moreover, projections of any evaluation of effecff
risks that controls may become inadequate becausea
of changes in conditions or that the degree of compliance with the policies
or procedures may deteriorate.
tiveness to futff uret
97
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
veness of the Company’s internal control over financial reporting as of December 31,
In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring
Annaly’s management assessed the effecti
2020.
Organizations of the Treadway Commission’s (“COSO”) Internal Control-Integrated Framework (2013).
ff
Based on the Annaly’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013),
Annaly’s management concluded that its internal control over financial reporting was effecff
tive as of December 31, 2020.
Annaly’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Annaly’s
internal control over financial reporting, which is included herein.
98
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Annaly Capia tal 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, 2020, 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, 2020, based on the COSO criteria.
a
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, 2020 and 2019, the related
nd cash flows for each of the three years in the
consolidated statements of comprehe
period ended December 31, 2020, the related notes and financial statement schedules III and IV as of December 31, 2020, and
our report dated February 18, 2021 expressed an unqualified opinion thereon.
nsive income (loss), stockholders’ equity att
m
Basis forff Opinion
management is responsible forff maintaining effective internal control over financial reporting and for its
The Company’s
m
assessment of the effecff
tiveness of internal control over financial reporting included in the accompam nying 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 appa
licable
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 reasonablea
whether effective internal control over financial reporting was maintained in all
material respects.
assurance about
a
Our audit included obtaining an understanding of internal control over finff ancial 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
ity of finff ancial reporting and the preparation of financial statements forff
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
external purposes in accordance with generally
reliabila
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 reasonablea
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 reasonablea
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effecff
t on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
d
/s/ Ernst & Young LLP
New York, NY
February 18, 2021
99
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
SUBSIDIARIES
ITEM 9B. OTHER INFORMATION
None.
100
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
d by Item 10
with the SEC within 120 days after December 31, 2020. The information regarding our executive officers require
appears in Part I of this Form 10-K. The information required by Item 10 as to our complim ance 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, 2020.
q
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 finff ancial 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.
ff
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
ff December
31, 2020.
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 afteff
r December 31, 2020.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
On May 20, 2020, at our 2020 Annual Meeting of Stockholders, our stockholders approved the 2020 Equity Incentive Plan. The
2020 Equity Incentive Plan authorizes us to grant options, stock appreciation rights, dividend equivalent rights, or other share-
based awards, including restricted shares up to an aggregate of 125,000,000 shares, subject to adjustments for any awards that
were outstanding under our 2010 Equity Incentive Plan (the “Prior Incentive Plan,” together with the 2020 Equity Incentive
Plan, the “Incentive Plans”) on the effecff
y Incentive Plan and subsequently expire, terminate, or are
surrendered or forfeited.
tive date of the 2020 Equitq
Since the adoption of the 2020 Equity Incentive Plan, no further awards will be made under the Prior Incentive Plan, although
existing awards will remain effective.
The following tablea
issuance under the Incentive Plans.
provides information as of December 31, 2020 concerning shares of our common stock authorized for
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’)
— $
—
— $
—
—
—
124,798,986
—
124,798,986
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, 2020.
101
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 afteff
r December 31, 2020.
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 afteff
r December 31, 2020.
102
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
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 istatement 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
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
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).
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 May 23, 2019).
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
liquidation preference $25.00 (incorporated by reference to Exhibit 3.12 to the Registrant’s
Stock,
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).
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).
103
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
3.15
3.16
3.17
3.18
3.19
3.20
3.21
3.22
3.23
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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).
Articles Supplementary reclassifying and designating 2,200,000 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 undesignated Common Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed June 3, 2019).
Articles Supplementary designating Annaly’s 6.750% Series I Fixed-to-Floating Rate Cumulative
Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.20 to the Registrant’s Registration Statement on Form 8-A filed June 26, 2019).
Articles Supplementary reclassifying and designating 7,000,000 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 Current Report on Form 8-K filed July 22, 2019).
Articles Supplementary filed with the State Department of Assessments and Taxation of Maryland
effective on January 4, 2021 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report
on Form 8-K filed January 5, 2021).
Amended and Restated Bylaws of the Registrant, 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 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).
Specimen Series I Preferred Stock Certificate (incorporated by reference to Exhibit 4.7 to the Registrant’s
Registration Statement on Form 8-A filed June 26, 2019).
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).
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
104
ANNALY CAPITAL MANAGE
A
MENT, INC. ANDAA
SUBSIDIARIES
4.10
4.11
4.12
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
21.1
23.1
31.1
31.2
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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).
Description of Securities. †
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).
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).
Internalization Agreement, dated February 12, 2020, by and among the Registrant, Annaly Management
Company LLL, AMCO Acquisition LLC, AMCO Holding Management Company LLC, the Persons
named on Schedule 1 thereto, AMCO OpCo Holding Company LLC, AMCO LP Holding Company LP
and AMCO Manager Holdings LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed February 12, 2020).
Severance Rights Agreement between Timothy P. Coffey and the Registrant, dated as of February 12,
2020 (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed
February 12, 2020).*
Severance Rights Agreement between Anthony C. Green and the Registrant, dated as of February 12, 2020
(incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed February
12, 2020).*
Restricted Stock Unit Award Agreement between Glenn A. Votek and the Registrant, dated February 11,
2020 (incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed
February 12, 2020).*
2020 Equity Incentive Plan (incorporated herein by reference to Annex A to the Registrant’s proxy
statement dated April 8, 2020).*
Form of Deferred Stock Unit Award for Directors (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed May 21, 2020).*
Annaly Capital Management, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed July 1, 2020).*
Form of Performance Stock Unit Award (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed July 1, 2020).*
Form of Restricted Stock Unit Award (incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed July 1, 2020).*
Employment Agreement between David L. Finkelstein and the Company, dated as of November 9, 2020
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November
10, 2020).*
Employment Agreement between Serena Wolfe and the Company, dated as of November 9, 2020
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed November
10, 2020).*
Employment Agreement between Timothy P. Coffey and the Company, dated as of November 9, 2020
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed November
10, 2020).*
Employment Agreement between Anthony C. Green and the Company, dated as of November 9, 2020
(incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed November
10, 2020).*
Subsidiaries of Registrant. †
Consent of Ernst & Young LLP. †
Certification of David L. Finkelstein, Chief Executive Officer and Chief Investment Officer (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 Serena Wolfe, 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.
†
105
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
32.1
32.2
101.INS XBRL
Certification of David L. Finkelstein, Chief Executive Officer and Chief Investment Officer (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 Serena Wolfe, 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.
†
because its Extensible Business
The instance document does not appear in the interactive data fileff
Reporting Language (XBRL) tags are embedded within the Inline XBRL document. The following
documents are forma
tted in Inline XBRL: (i) Consolidated Statements of Financial Condition at December
31, 2020 and 2019; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2020, 2019 and 2018; (iii) Consolidated Statements of Stockholders’ Equity forff
the years
ended December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of Cash Flows for the years
ended December 31, 2020, 2019 and 2018; and (v) Notes to Consolidated Financial Statements.
ff
101.SCH XBRL Taxonomy Extension Schema Document †
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document †
101.DEF XBRL Additional Taxonomy Extension Definition Linkbase Document Created†
101.LAB XBRL Taxonomy Extension Labea
l Linkbase Document †
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document †
104
*
†
The cover page for the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020
(formatted in Inline XBRL and contained in Exhibit 101).
Exhibit Numbers 10.2, 10.3, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13, 10.14, 10.15, 10.16 and 10.17 are
management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K.
Submitted electronically herewith.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
106
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
SUBSIDIARIES
ITEM 16. FORM 10-K SUMMARY
None.
107
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, 2020 and 2019 and forff
the Years Ended December 31, 2020, 2019 and 2018
F-3
F-4
F-5
F-6
F-7
F-7
F-7
F-11
F-11
F-15
F-24
F-24
F-29
F-30
F-35
F-38
F-39
F-42
F-44
F-45
F-46
F-46
F-47
F-48
F-49
F-49
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.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Description of Business
Basis of Presentation
Significant Accounting Policies
Financial Instruments
Securities
Loans
Mortgage Servicing Rights
Variable Interest Entities
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.
Long-Term Stock Incentive Plan
Note 16.
Interest Income and Interest Expense
Note 17.
Net Income (Loss) Per Common Share
Note 18.
Income Taxes
Note 19.
Risk Management
Note 20.
Related Party Transactions
Note 21.
Lease Commitments and Contingencies
Note 22.
Arcola Regulatory Requirements
108
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Annaly Capia tal Management, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompam nying consolidated statements of financial condition of Annaly Capital Management, Inc. and
Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income
(loss), stockholders' equity at
nd cash flows for each of the three years in the period ended December 31, 2020, the related notes,
and finaff
ncial statement schedules III and IV as of December 31, 2020, (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, 2020 and 2019, and the results of its operations and its cash floff ws for each of the three years
in the period ended December 31, 2020, 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, 2020, 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 18, 2021 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 applicablea
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
to
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether dued
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether dued
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the finaff
ncial statements and (2) involved our especially challenging, subjective or complem x judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Allowance for loan losses
Description of
the Matter
Allowance forff
loan losses on commercial real estate loans totaled $129.9 million and allowance for loan
losses on corporate debt totaled $39.6 million as of Decembem r 31, 2020. As disclosed in Note 6 to the
ncial statements, the Company establishes an allowance at origination or acquisition
consolidated finaff
f the loan. In
that reflects management's estimate of the total expected credit loss over the expected life off
ity of default and loss given
estimating the lifetime expected credit losses, management utilizes a probabila
the reasonable and
default methodology, which considers projected economic conditions over
supporta
rent
u
methodology such as discounted cash flow model analysis or faiff
r value of the collateral to determine the
expected credit losses.
forecast period. For loans experiencing credit deterioration, management may use a diffeff
blea
F-1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Auditing the allowance for loan losses on commercial real estate loans and corporate debt is complex dued
to the high degree of judgment in management’s assumptim ons used in the estimation process including
borrower risk ratings, unemploym
collateral-
ent rate, certain indexes, and faiff
dependent loans, where foreclosure is probable. These factors could have a significant effect on the
allowance for loan losses.
r value of collateral forff
m
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s processes to estimate the allowance for loan losses on its commercial real estate
loans and corporate debt, including controls over management’s review of the loan losses methodology,
the completeness and accuracy of key inputs used in the estimation process, management’s review of the
risk ratings,
reasonableness of
unemploym
r value of collateral) based on current industry and market
data, and management’s review of the expected credit losses.
the assumptions used in the estimation process (i.e., borrower
ent rate, certain indexes, and faiff
m
To test the allowance for loan losses, our audit procedures included, among others, utilizing the support
of an internal specialist to independently evaluate the reasonableness of the Company’s expected loan
loss methodology, which considered the results of various sensitivity analyses and analytical procedures.
We compared management’s inputs and assumptim ons related to borrower risk ratings, unemploym
ent rate
estimates and certain indexes to the inpn uts and assumptim ons developed by our specialists using internal
and external data. In cases for loans for which an allowance has been developed based on fair value of
the collateral, we engaged internal specialists to independently value the underlying collateral and
compared that valuation to management’s valuation.
m
Amortization of net premiums on residential securities
Description of
the Matter
Amortization of net premiums on residential securities totaled $1.4 billion for the year ended Decemberm
31, 2020. As disclosed in Note 3 to the consolidated finaff
ncial statements, the Company amortizes or
accretes premiums or discounts into interest income for its residential mortgage-backed securities.
Amortization or accretion is derived taking into account estimates of future principal prepayments, which
are derived using third-party model and market information, in the calculation of the effective yield.
Auditing the amortization of net premiums on Agency residential mortgage-backed securities is complex
due to the high degree of judgment in management's assumptions used in the measurement process
including prepayment rates which are uncertain in nature.
t on
t
the amortization of net premiums on securities.
These assumptions have a significaff
nt effecff
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effecti
veness of controls
over the Company’s processes to calculate amortization of net premiums on its Agency mortgage-backed
securities, including management’s review of third party models and assumptions (i.e., prepayment rates)
and the completeness and accuracy of data used in the cash flow models and the calculation of projected
cash flows.
ff
To test the amortization of net premiums, our audit procedures included, among others, evaluating the
Company's methodology and utilizing the support of internal specialists to independently develop ranges
of prepayment rates for a samplem of securities based on current industry, market and economic data. We
compared management’s prepayment rates to the ranges developed by the internal specialist to assess
management’s estimate. We also recalculated management’s projected cash flows and the amortization
of premiums or accretion of discounts for a samplem of securities.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY
February 18, 2021
F-2
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
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 $1,137,809 and $1,648,545, respectively) (1)
Securities (includes pledged assets of $67,471,074 and $108,809,569, respectively) (2)
Loans, net (includes pledged assets of $2,231,035 and $3,240,583, respectively) (3)
Mortgage servicing rights (includes pledged assets of $5,541 and $3,336, respectively)
Assets transferred or pledged to securitization vehicles
Real estate, net
Derivative assets
Receivable for unsettled trades
Principal and 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
Participations issued
Mortgages payable
Derivative liabilities
Payable for unsettled trades
Interest payable
Dividends payable
Other liabilities
Total liabilities
Stockholders’ equity
December 31,
December 31,
2020
2019
$
1,243,703
$
1,850,729
75,652,396
114,833,580
3,083,821
100,895
6,910,020
656,314
171,134
15,912
268,073
127,341
225,494
4,462,350
378,078
7,002,460
725,638
113,556
4,792
449,906
92,772
381,220
$
88,455,103
$ 130,295,081
$
64,825,239
$ 101,740,728
917,876
5,652,982
39,198
426,256
1,033,345
884,069
191,116
307,613
155,613
4,455,700
5,622,801
—
485,005
803,866
463,387
476,335
357,527
93,388
74,433,307
114,498,737
Preferred stock, par value $0.01 per share, 85,150,000 authorized, 63,500,000 and 81,900,000 issued and
outstanding, respectively
1,536,569
1,982,026
Common stock, par value $0.01 per share, 2,914,850,000 authorized, 1,398,240,618 and 1,430,106,199
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
13,982
14,301
19,750,818
19,966,923
3,374,335
2,138,191
(10,667,388)
(8,309,424)
14,008,316
15,792,017
13,480
4,327
14,021,796
15,796,344
$
88,455,103
$ 130,295,081
(1)
(2)
(3)
Includes cash of consolidated Variable Interest Entities (“VIEs”) of $22.2 million and $67.5 million at December 31, 2020 and 2019, respectively.
Excludes $81.5 million and $102.5 million at December 31, 2020 and 2019, respectively, of agency mortgage-backed securities, $576.6 million and
$468.0 million at December 31, 2020 and 2019, respectively, of non-Agency mortgage-backed securities and $391.0 million and $500.3 million at
December 31, 2020 and December 31, 2019, respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and
eliminated froff m the Company’s Consolidated Statements of Financial Condition.
Includes $47.0 million and $66.7 million of residential mortgage loans held for sale.
See notes to consolidated financial statements.
F-3
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
For The Years Ended December 31,
2020
2019
2018
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
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)
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
$
2,229,625
$
3,787,297
$
899,112
1,330,513
2,784,875
1,002,422
(207,877)
(1,917,628)
(904,532)
(3,030,037)
661,513
756,305
(303,024)
(147,581)
967,213
(2,062,824)
53,314
131,685
107,513
239,198
(918,195)
(28,423)
(889,772)
1,391
(891,163)
142,036
351,375
(1,442,964)
(1,210,276)
(2,301,865)
(47,944)
(680,770)
36,021
(16,569)
(709,262)
(3,011,127)
136,413
170,628
131,006
301,634
(2,173,926)
(10,835)
(2,163,091)
(226)
(2,162,865)
136,576
$
$
$
(1,033,199) $
(2,299,441) $
(0.73) $
(0.73) $
(1.60) $
(1.60) $
3,332,563
1,897,860
1,434,703
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
(74,904)
(0.06)
(0.06)
1,414,659,439
1,434,912,682
1,209,601,809
1,414,659,439
1,434,912,682
1,209,601,809
$
(889,772) $
(2,163,091) $
54,148
2,012,878
(776,734)
1,236,144
346,372
1,391
344,981
142,036
4,135,862
(17,806)
4,118,056
1,954,965
(226)
1,955,191
136,576
(2,004,166)
1,150,321
(853,845)
(799,697)
(260)
(799,437)
129,312
Comprehensive income (loss) attributable to common stockholders
$
202,945
$
1,818,615
$
(928,749)
See notes to consolidated financial statements.
F-4
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,
2020
2019
2018
1,982,026
$
1,778,168
$
1,720,381
—
—
(445,457)
1,536,569
14,301
—
(324)
—
3
2
13,982
19,966,923
(93)
(209,094)
—
6,452
(14,543)
1,173
19,750,818
2,138,191
2,012,878
(776,734)
$
$
$
$
$
$
$
$
$
$
428,324
—
(224,466)
1,982,026
13,138
1,422
(261)
—
—
2
14,301
18,794,331
1,397,484
(223,313)
—
2,162
(5,534)
1,793
411,335
55,000
(408,548)
1,778,168
11,596
1,103
—
436
—
3
13,138
17,221,265
1,116,409
—
455,507
1,961
(3,952)
3,141
19,966,923
$
18,794,331
(1,979,865) $
(1,126,020)
4,135,862
(17,806)
(2,004,166)
1,150,321
3,374,335
$
2,138,191
$
(1,979,865)
(8,309,424) $
(4,493,660) $
(2,961,749)
(39,641)
(8,349,065)
(891,163)
(142,036)
(1,285,124)
—
(4,493,660)
(2,162,865)
(136,576)
(1,516,323)
—
(2,961,749)
54,408
(129,312)
(1,457,007)
(10,667,388) $
(8,309,424) $
(4,493,660)
14,008,316
4,327
1,391
7,762
13,480
14,021,796
$
$
$
$
15,792,017
5,689
(226)
(1,136)
4,327
15,796,344
$
$
$
$
14,112,112
6,100
(260)
(151)
5,689
14,117,801
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
Stock-based award activity
Direct purchase and dividend reinvestment
End of period
Additional paid-in capital
Beginning of period
Issuance
Buyback of common stock
Acquisition of subsidiary
Stock-based award activity
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 - unadjusted
Cumulative effect of change in accounting principle for credit losses
Beginning of period - adjusted
Net income (loss) attributable to Annaly
Dividends declared on preferred stock (1)
Dividends and dividend equivalents declared on common stock and share-based awards (1)
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
(1)
Refer to the “Capital Stock” Note for dividends per share for each class of shares.
See notes to consolidated financial statements.
F-5
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For The Years Ended December 31,
2019
2018
2020
Cash flows from operating activities
income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
of premiums and discounts of investments, net
ing costs
ff
Amortization of securitized debt premiums and discounts and deferred financ
Depreciation, amortization and other noncash expenses
Net (gains) losses on disposals of investments and other
Net (gains) losses on investments and derivatives
Income from unconsolidated joint ventures
Loan loss provision
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
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 securities
Proceeds from sales of securities
Principal payments on securities
Payments on purchases and origination of loans
Proceeds from sales of loans
Principal payments on loans
Payments on purchases of MSRs
Proceeds from sales of MSRs
Investments in real estate
Proceeds from sales of real estate
Proceeds from reverse repurchase agreements
Payments on reverse repurchase agreements
Distributions in excess of cumulative earnings from unconsolidated joint ventures
Cash acquired (paid) in asset acquisition, net
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
ff
Net proceeds from stock offerings, direct purchases and dividend reinvestments
Redemptions of preferred stock
Proceeds from participations issued
Net principal receipts (payments) on mortgages payable
Net contributions (distributions) from (to) noncontrolling interests
Net payments on share repurchases
Dividends paid
cost
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
Interest paid (excluding interest paid on interest rate swaps)
Net interest received (paid) on interest rate swaps
Taxes received (paid)
Noncash investing and financing activities
Receivable for unsettled trades
Payable for unsettled trades
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification
adjd ustment
Dividends declared, not yet paid
Derecognition of assets of consolidated VIEs
Derecognition of securitized debt of consolidated VIEs
See notes to consolidated financial statements.
F-6
$
(889,772)
$
(2,163,091)
$
54,148
1,371,178
(11,576)
41,357
(661,513)
2,368,879
7,072
147,581
(147,833)
168,716
(1,958,131)
249,778
159,320
(285,219)
(31,870)
527,967
(32,676,856)
52,639,778
19,571,476
(2,257,314)
624,026
2,222,500
—
72,160
(7,450)
149,600
58,800,000
(58,800,000)
7,590
6,264
40,351,774
1,113,273
(11,854)
31,559
47,944
1,855,025
6,893
16,569
(250,348)
282,693
(1,939,634)
(39,880)
(85,951)
(94,593)
31,838
(1,199,557)
(63,465,822)
25,606,504
17,199,893
(4,126,123)
365,787
3,139,084
—
—
(39,144)
24,955
98,339,755
(97,689,715)
3,155
—
(20,641,671)
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
(44,795,176)
33,256,888
11,488,342
(3,149,224)
150,059
2,107,689
(381)
—
(22,722)
—
85,318,562
(85,030,351)
26,228
(258,334)
(908,420)
2,776,331,362
(2,816,805,618)
2,385,374
(1,238,962)
(553)
1,175
(460,000)
38,741
(60,980)
7,762
(209,418)
(1,475,650)
(41,486,767)
(607,026)
1,850,729
,
,
1,243,703
,
,
3,681,826
,
,
,
,
4,643
,
,
,
,
1,166,977
296,621
,,
,,
1,515
,
,
15,912
,
,
,
,
884,069
1,236,144
307,613
,,
1,222,221
,
,
,
,
1,141,311
,
,
,
,
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,470,733,256
(5,449,836,013)
3,444,055
(2,031,959)
(12,228)
1,829,025
(230,000)
—
(26,202)
(1,136)
(223,574)
(1,689,016)
21,956,208
114,980
1,735,749
,
,
1,850,729
,
,
4,811,218
,
,
,
,
8,395
,
,
,
,
2,902,644
,
,
(323,028)
)
,
(
)
,
(
,,
2,284
4,792
,
,
,,
,
463,387
4,118,056
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
,,
357,527
$
— $
— $
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
,
,
3,894,478
,
,
,
,
7,564
,
,
,
,
1,726,887
(1,894)
)
( ,
)
( ,
)
(
(295)
)
(
,
,
68,779
,
,
,,
,
583,036
(853,845)
,,
394,129
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
ANNALY CAPITAL MANAA
Financial Statements
GEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED December 31, 2020, 2019 and 2018
________________________________________________________________________________________________________________________________
1. DESCRIPTION OF BUSINESS
tion that commenced operations on
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corpora
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 optimize its returns through prudent management of its diversified investment strategies.
r
The Company’s four investment groups are primarily comprim sed of the folff
lowing:
Investment Groups
Description
Annaly Agency Group
Annaly Residential Credit Group
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 product
and whole 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,
primarily on senior debt within select industries.
focusing
r
The Company is an internally-m
that 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”). Prior to
the closing of the Internalization (as defined in Note 19) on June 30, 2020, the Company was externally managed by Annaly
Management Company LLC (the “Former Manager”).
anaged companym
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 durid
results could differ materially from those estimates.
ng the reporting period. Actual
t
Certain line items in the Company’s
periods have been adjusted to conform to the current presentation.
m
Consolidated Statements of Cash Flows were aggregated to simplify presentation. Prior
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.
ii
esll
of Consolidatidd
on – The consolidated financ
Principl
ial 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 firff st 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.
ff
Interett
VoVV tingii
financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.
st Entittt iett s – A VOE is an entity that has sufficient equity and in which equity investors have a controlling
tt
ll
nteII
rest EntEE ities
– A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a
Variable I
controlling financial interest, and/or (ii) do not have sufficient equitq
e its activities without
y at risk forff
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 significff antly impact the VIE’s
the entity to financ
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
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.
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. Referff
Interest Entities”
Note for further information.
to the “Variablea
tt
etMM hod
Investmentstt
- For entities that are not consolidated, but where the Company has significaff
nt influence over the
Equity Mtt
operating or financial decisions of the entity, the Companym
y 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-
under the equity method. These investments are included in real
than-temporary impairmm
estate, net and Other assets with income or loss included in Other income (loss).
accounts for the investment under the equitq
ent of joint ventures accounted forff
Cash and cash equivq
Cash and Cash Equivalents –tt
alents 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,
of cash
roximates fair value. Cash and securities deposited with clearing organizations and collateral held in the formff
which appa
on margin with counterparties to the Company’s interest rate swapsa
and other derivatives totaled $1.1 billion and $1.6 billion at
December 31, 2020 and December 31, 2019, respectively.
– The Company may invest in equity securities that are not accounted forff
Equityii Securitiestt
under the equity method or do not
r value with unrealized gains and losses reported
result in consolidation. These equity securities are required to be reported at faiff
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 determinabla e fair
values. For such equity securities
fair values, the Company has elected to carry the securities at cost less impairment, if any, plus or
without readily determinablea
the identical or similar investment of the
price changes in orderly transactions forff
minus changes resulting from observablea
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 fromff
net accumulated earnings.
ff
alVV ue Measurements and the Fair Value Option – The Company reports various investments at faiff
r value, including
Fair Vii
r value option (“FVO”). The Company chooses to
certain eligible financial instruments elected to be accounted forff
r
ents. Items for which the faiff
elect the fair value option in order to simplify t
r value in the Consolidated Statements of Financial Condition and any change
value option has been elected are presented at faiff
value through earnings in the
in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair
Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for
which the Company has elected the fair value option see the tablea
he accounting treatment for certain financial instrumr
in the “Financial Instruments” Note.
under the faiff
ff
ff
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.
ii
Assets and Liabil
Offsettingtt
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 forff
further discussion on reverse repurchase and repurchase agreements.
- The Companym
itll iestt
Derivative Instruments – Derivatives are accounted forff
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 faiff
r
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 forff
accounting purposes. Refer to
the “Derivative Instruments” Note for further discussion.
m
– The Company measures compensa
tion expense for stock-based awards at fair value, which is
Stock-Based Compensation
generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over
the vesting or requisite service period of the award. Compensation expense for awards with performance conditions is
ance condition at each reporting date. Stock-based awards that do not
recognized based on the probable outcome of the performff
are recorded when they occur. The Companym
require future service (i.e., vested awards) are expensed immediately. Forfeitures
generally issues new shares of common stock uponu
delivery of stock-based awards.
m
t
F-8
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
Interestee
Income - The Company recognizes interest income primarily on Residential Securities, residential mortgage loans,
commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on
the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated
Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion.
ff
m
of interest income, based upon the
For its securities, the Company recognizes coupon income, which is a component
terms. In addition, the Company amortizes or
outstanding principal amounts of the financial instruments and their contractual
accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only
securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation
of the effect
ive 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,
ed as if it had been in place from the date of the security’s
the effective interest rate determined for each security is appli
acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effeff ctive
yield been applie
d since the acquisition date, which results in a cumulative premium 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 impactm
prepayment speed projections and the amount of premium amortization recognized in any given period.
a
a
t
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 adjusd
tment 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
ff
discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).
r value or held forff
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 faiff
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
ity of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a
principal until collectabila
cash basis. Generally, a loan is returned
amount of the
to accrual status when the borrower has resumed paying the full
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. Refer to the
“Interest Income and Interest Expense” Note for further discussion on interest.
ff
t
accrued interest
The Company has made an accounting policy election not to measure an allowance forff
receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual dued
date for
commercial loans or 120 days for corporate debt carrir ed at amortized cost, it is written off through a reversal of interest income.
Any interest written off that is recovered is recognized as interest income.
loans losses forff
Referff
to the “Interest Income and Interest Expense” Note for further discussion of interest income.
– The Company has elected to be taxed as a REIT and intends to complym
Income Taxesaa
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
aries as taxable REIT subsidiaries (“TRSs”). As such, each of these TRSs is taxable as a domestic C corporation and
subsidi
u
subject to federa
r
l, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for furthe
discussion on income taxes.
ff
ff
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below
not expected to have a significant impact on the Company’s consolidated financial statements when
were not applicable,
adopted or did not have a significant impact on the Company’s consolidated finaff
ncial statements upon adoption.
a
F-9
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Standard
Description
Effective Date
Effect on the Financial Statements or Other Significant Matters
Standards that have been adopted
ASU 2016-13
Financial
instruments -
Credit losses
(Topic 326):
Measurement of
credit losses on
financial
instruments
(“ASU 2016-13”)
pp
ASU 2020-04
Reference Rate
(
Reform (Topic
848): Facilitation
)
of the
Effects of
Reference Rate
Reform on
Financial
Reporting
January 1, 2020 The Company adopted ASU 2016-13 using the modified retrospective method for
all financial assets and off-balance-sheet credit exposures in scope. The modified
retrospective approach requires an adjustment to beginning retained earnings for
the cumulative effect of adopting the standard. Results for reporting periods
beginning after January 1, 2020 are presented in accordance with ASU 2016-13,
while prior periods continue to be reported in accordance with previously
applicable GAAP. As a result of the adoption, the Company recorded an increase
to the loan loss allowance of $37.4 million and a liaba ility of $2.2 million for
unfunded loan commitments, which reduced beginning retained earnings by $39.6
million as of January 1, 2020.
u
forff
fair
at
earnings.
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
value
The
through
amendments affect cash and cash
reverse repurchase
equivalents,
agreements, certain 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.
This ASU provides optional,
temporary relief to accounting for
contract modifications resulting
from reference rate reform.
January 1, 2020 The Company has elected to retrospectively apply the practical expedients to
modifications of qualifying contracts as continuation of the existing contract
rather than as a new contract. The adoption had no immediate impact and is not
expected to have a material impact on the Company’s consolidated financial
statements as the guidance continues to be applied to contract modifications until
the ASU’s termination date.
F-10
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
4. FINANCIAL INSTRUMENTS
The following tablea
2019.
presents characteristics for certain of the Company’s financial instruments at December 31, 2020 and
Financial Instruments (1)
Balance Sheet Line Item
Type / Form
Assets
Agency mortgage-backed securities (2)
Agency mortgage-backed securities (3)
Residential credit risk transfer securities
Non-agency mortgage-backed securities
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
Commercial real estate debt investments
- CMBS
Fair value, with unrealized gains (losses)
through other comprehensive income
Commercial real estate debt investments
- CMBS (4)
Commercial real estate debt investments
- credit risk transfer securities
Fair value, with unrealized gains (losses)
through earnings
Fair value, with unrealized gains (losses)
through earnings
Residential mortgage loans
Commercial real estate debt and
preferred equity, held for investment
Fair value, with unrealized gains (losses)
through earnings
345,810
1,647,787
Amortized cost
498,081
669,713
Corporate debt held for investment, net
Amortized cost
Securities
Securities
Securities
Securities
Securities
Securities
Securities
Total securities
Loans, net
Loans, net
Loans, net
Total loans, net
Assets transferred or pledged
to securitization vehicles
Assets transferred or pledged
to securitization vehicles
Assets transferred or pledged
to securitization vehicles
Assets transferred or pledged
to securitization vehicles
Agency mortgage-backed securities
Residential mortgage loans
Commercial mortgage loans
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
Commercial mortgage loans
Amortized cost
Total assets transferred
ff
or pledged to securitization vehicles
Repurchase agreements
Repurchase agreements
Liabilities
Other secured financing
Loans
Debt issued by securitization
vehicles
Securities
Participations issued
Mortgages payable
Participations issued
Loans
Amortized cost
Amortized cost
Fair value, with unrealized gains (losses)
through earnings
Fair value, with unrealized gains (losses)
through earnings
Amortized cost
December
31, 2020
December
31, 2019
$ 73,562,972
$ 112,124,958
504,087
768,409
532,403
531,322
972,192
1,135,868
31,603
64,655
45,254
208,368
3,885
—
75,652,396
114,833,580
2,239,930
3,083,821
2,144,850
4,462,350
620,347
1,122,588
3,249,251
2,598,374
2,166,073
2,345,120
874,349
6,910,020
936,378
7,002,460
64,825,239
101,740,728
917,876
4,455,700
5,652,982
5,622,801
39,198
426,256
—
485,005
(1)
(2)
(3)
(4)
Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted forff
at cost.
Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities.
Includes interest-only securities and reverse mortgages.
Includes single-asset / single borrower CMBS.
5. SECURITIES
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 faiff
ve 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
ve Income (Loss). Transactions for securities are recorded on trade date, including
the Consolidated Statements of Comprehensi
r value recognized in other comprehensi
m
m
ff
F-11
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
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.
nt – Management evaluates availabla e-for-sale securities and held-to-maturity debt securities forff
Impairme
ent at least
ii
quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an
available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired,
the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the
security beforeff
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
Comprehensi
ve Income (Loss) as a Securities Loss Provision and reflected as an Allowance forff Credit Losses on Securities on
the Consolidated Statements of Financial Condition, 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
Companym
performs an analysis to determine whether it expects to recover the entire cost basis of the security. There was no
impairment recognized for the years ended December 31, 2020, 2019 and 2018.
impairmm
m
m
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage
obligations and other MBS 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 Corpor
ration (“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.
CRT SecSS uritiestt
- 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.
rr
- The Company invests in non-Agency mortgage-backed securities such as those
Non-Agency Mortgage-Backed Securitiestt
issued in prime loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential 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.
m
Commercialii Mortgage-Backed Securitiii es (“Commercial Securities”) -”
Certain commercial mortgage-backed securities are
classified as availablea
-for-sale and reported at faiff
r value with unrealized gains and losses reported as a component of Other
comprehe
nsive income (loss). Management evaluates such Commercial Securities for impairment at least quarterly. The
commercial mortgage-backed
Companym
elected the fair
securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through
earnings.
value option on certain Commercial Securities, including conduitd
ff
The following represents a rollforward of the activity forff
to securitization vehicles, for the year ended December 31, 2020:
the Company’s securities, excluding securities transferred or pledged
Residential Securities
Commercial Securities
Total
(dollars in thousands)
$
Beginning balance January 1, 2020
Purchases
Sales and transfers (1)
Principal paydowns
(Amortization) / accretion
Fair value adjustment
$
114,560,557
33,082,119
(52,367,095)
(19,531,705)
(1,374,490)
1,202,268
$
273,023
25,285
(204,061)
(4,933)
652
(9,224)
Ending balance December 31, 2020
$
75,571,654
$
80,742
$
114,833,580
33,107,404
(52,571,156)
(19,536,638)
(1,373,838)
1,193,044
75,652,396
(1)
Includes transfers to securitization vehicles with a carrying value of $533.3 million during the year ended December 31,
2020.
F-12
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
owing tables
The foll
ff
vehicles, that was carried at their fair value at December 31, 2020 and 2019:
a
present the Company’s securities portfolio, excluding securities transferred or pledged to securitization
December 31, 2020
Principal /
Notional
Remaining
Premium
Remaining
Discount
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
(dollars in thousands)
$ 64,800,235
455,675
$
3,325,020
2,869
$
(22,143) $ 68,103,112
455,175
(3,369)
$
3,200,542
22,341
$
(1,076) $ 71,302,578
477,516
—
Agency
Fixed-rate pass-through
Adjustable-rate pass-through
CMO
Interest-only
Multifamily (1)
Reverse mortgages
Total agency securities
Residential credit
CRT (2)
Alt-A
Prime
Prime interest-only
Subprime
NPL/RPL
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage)
Interest-only
Total residential credit securities
Total Residential Securities
Commercial
139,664
2,790,537
1,910,384
47,585
$ 70,144,080
$
544,780
$
$
93,001
177,852
194,687
197,779
475,108
44,696
2,177
564,297
50,148
4,183
3,948,694
7,324
51
5,126
1,882
584
821
207
—
—
141,841
564,297
(1,057)
1,604,913
—
51,768
(26,569) $ 70,921,106
(2,430) $
538,941
$
$
(17,368)
(15,999)
—
(18,181)
(2,416)
(5,300)
75,684
166,979
1,882
180,182
473,513
39,603
291,624
2,019,527
$
$ 72,163,607
6,803
22,798
3,971,492
$
$
$
$
—
(61,694) $
6,803
1,483,587
(88,263) $ 72,404,693
7,926
3,513
59,548
252
3,294,122
3,062
4,644
14,607
—
8,312
3,782
3,680
—
38,087
3,332,209
54
3,332,263
$
$
$
$
$
$
Principal /
Notional
Remaining
Premium
Remaining
Discount
Unrealized
Gains
Commercial Securities
$
89,858
— $
(7,471) $
82,387
Total securities
$ 72,253,465
$
3,971,492
$
(95,734) $ 72,487,080
Agency
Fixed-rate pass-through
Adjustable-rate pass-through
CMO
Interest-only
Multifamily
Reverse mortgages
Total agency investments
Residential credit
CRT (2)
Alt-A
Prime
Prime interest-only
Subprime
NPL/RPL
Prime jumbo (>=2010 vintage)
Prime jumbo (>=2010 vintage)
Interest-only
Total residential credit securities
Total Residential Securities
Commercial
Commercial Securities
Total securities
$ 102,448,565
1,474,818
156,937
4,486,845
1,619,900
54,553
$ 110,241,618
$
517,110
160,957
277,076
391,234
370,263
164,180
182,709
554,189
$
2,617,718
$ 112,859,336
$
263,965
$ 113,123,301
$
4,345,053
72,245
$
2,534
862,905
19,981
5,053
5,307,771
15,850
250
3,362
3,757
1,356
351
1,026
9,001
34,953
5,342,724
10,873
5,353,597
$
$
$
$
$
$
$
$
$
$
$
$
December 31, 2019
Amortized
Cost
(dollars in thousands)
$
(46,614) $ 106,747,004
1,545,663
(1,400)
—
—
(2,280)
159,471
862,905
1,637,601
—
59,606
(50,294) $ 111,012,250
(2,085) $
(22,306)
(17,794)
—
(59,727)
(440)
(4,281)
515,950
138,901
262,644
3,757
311,892
164,091
179,454
9,001
—
(106,633) $
1,585,690
(156,927) $ 112,597,940
(9,393) $
265,445
(166,320) $ 112,863,385
$
$
$
$
$
$
2,071,583
10,184
545
2,787
82,292
550
2,167,941
16,605
12,482
14,142
—
37,205
191
5,360
—
85,985
2,253,926
7,710
2,261,636
—
(145,901)
(954)
(238)
149,767
421,909
1,663,507
51,782
(148,169) $ 74,067,059
(9,600) $
532,403
—
(77)
(642)
(61)
(1,448)
—
80,328
181,509
1,240
188,433
475,847
43,283
(5,251)
(17,079) $
1,552
1,504,595
(165,248) $ 75,571,654
(1,699) $
80,742
(166,947) $ 75,652,396
Unrealized
Losses
Estimated
Fair Value
(95,173) $ 108,723,414
1,524,331
(31,516)
—
(157,130)
(2,696)
160,016
708,562
1,717,197
(309)
59,847
(286,824) $ 112,893,367
(1,233) $
—
(529)
(590)
(118)
(14)
(150)
531,322
151,383
276,257
3,167
348,979
164,268
184,664
(1,851)
(4,485) $
7,150
1,667,190
(291,309) $ 114,560,557
(132) $
273,023
(291,441) $ 114,833,580
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Principal/Notional amount includes $354.6 million and $0 million of an Agency CMBS interest-only security as of December 31, 2020 and December 31,
2019, respectively.
F-13
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
(2) Principal/Notional amount includes $10.7 million and $14.9 million of a CRT interest-only security as of December 31, 2020 and December 31, 2019,
respectively.
The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferredr
pledged to securitization vehicles, by issuing Agency at December 31, 2020 and 2019:
or
Investment Type
Fannie Mae
Freddie Mac
Ginnie Mae
Total
December 31, 2020
December 31, 2019
(dollars in thousands)
$
$
56,218,033
$
17,735,041
113,985
74,067,059
$
76,656,831
36,087,100
149,436
112,893,367
Actual
maturities of the portfolio are affecff
t maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual
ted by periodic payments and prepayments of principal on the underlying mortgages.
The following tablea
securitization vehicles, at December 31, 2020 and 2019, according to their estimated weighted average life classifications:
summarizes the Company’s Residential Securities, excluding securities transferred or pledged to
Estimated weighted average life
ss than one year
Greater than one year through five years
Greater than five years through ten years
Greater than ten years
Total
December 31, 2020
December 31, 2019
Estimated Fair
Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
(dollars in thousands)
$
110,203
$
109,540
$
3,997
$
4,543
45,643,138
28,509,058
1,309,255
43,404,877
27,610,923
1,279,353
36,290,254
77,732,756
533,550
35,581,833
76,504,845
506,719
$
75,571,654
$
72,404,693
$ 114,560,557
$ 112,597,940
The estimated weighted average lives of the Residential Securities at December 31, 2020 and 2019 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 tablea
securities, accounted for as available-forff
securities have been in a continuous unrealized loss position at December 31, 2020 and 2019.
presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed
-sale where the fair value option has not been elected, by length of time that such
December 31, 2020
December 31, 2019
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)
$
$
777,586
—
777,586
$
$
(2,030)
—
(2,030)
30
—
30
$
$
7,388,239
11,619,280
19,007,519
$
$
(24,056)
(105,329)
(129,385)
139
352
491
Less than 12 months
12 Months or more
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. Substa
ntially all of
the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered
ty or for a period of
to be impaired because the Company currently has the abia lity and intent to hold the investments to maturi
time sufficient for a foreca
sted 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.
u
ff
t
During the years ended December 31, 2020 and 2019, the Company disposed of $51.8 billion and $25.5 billion, respectively, of
Residential Securities. The foll
presents the Company’s net gains (losses) from the disposal of Residential Securities
for the years ended December 31, 2020 and 2019.
owing tablea
ff
F-14
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
For the year ended
December 31, 2020
December 31, 2019
6. LOANS
Gross Realized Gains
Gross Realized Losses
(dollars in thousands)
Net Realized Gains
(Losses)
$
$
942,450
172,518
$
$
(305,449)
(210,317)
$
$
637,001
(37,799)
rate loans. Loans are classifiedff
The Company invests in residential, commercial and corpor
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, 2020 and 2019, the Company reported $0.3 billion and $1.6 billion, respectively, 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 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 forff
sale. If loans are held for sale and
the fair value option was not elected, they are accounted forff
at the lower of cost or fair value. Any origination fees and costs or
and recognized upon sale. The Company determines the fair value of loans held
purchase premiums or discounts are deferredr
for sale on an individual loan basis.
ll
e forff
Losses – The Company evaluates the need forff
Allowanc
investment where the fair value option is not elected. Allowance forff
deemed uncollectible.
a loss reserve on each of its loans classified as held-for-
loan losses are written off in the period the loans are
ity of defaul
Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each
individual loan held-for-investment. A provision is established at origination or acquisition that reflects management’s estimate
of the total expected credit loss over the expected life off
ff me expected credit losses, management
t and loss given default methodology (“Loss Given Default methodology”), which considers
ff
utilizes a probabila
projected economic conditions over the reasonable and supportablea
ast incorporates primarily market-
forecast period. The forec
based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes
sourced fromff
third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable
period, the Company reverts to historical losses on a straight-line basis. Management uses third-party vendors’ loan pool data
for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s
loan
portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss provision in the Consolidated Statements of
Comprehensi
f the loan. In estimating the lifeti
ve Income (Loss).
m
m
ff
ent methodology to determine the expected credit
For loans experiencing credit deterioration, the Company may use a differ
losses such as a discounted cash floff w analysis. For collateral-dependent loans, if foreclosure is probable, expected credit losses
are based on the fair value of the collateral at the reporting date, adjusted for any selling costs, if appa
licable. Additionally, the
Company may elect the practical expedient for a finaff
ncial asset for which the repayment is expected to be provided
substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty by measuring
the allowance as the difference between the fair value of the collateral, less costs to sell, if applicable, and the amortized cost
basis of the financial asset at the reporting date. The Company’s commercial loans are collateralized by commercial real estate
including, but not limited to, multifamily real estate, office and retail space, hotels and industrial space. At origination, the fair
value of the collateral generally exceeds the principal loan balance.
ff
Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more
frequently as necessary.rr 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 loans as well as other fact
ors, 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
landscapea 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
, and analyzes current results relative to budgets and sensitivities perforff med at inception of the
packages, if applicablea
investment. Because these determinations are based upon projections of futuret
economic events, which are inherently
subjective, the amounts ultimately realized may differ materially fromff
the carrying value as of the reporting date.
ff
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 the underlying borrowers’ ability to manage and operate 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.
F-15
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
The Company recorded loan loss provisions of $147.6 million, $16.6 million and $3.5 million for the years ended December 31,
2020, 2019 and 2018, respectively. As of December 31, 2020 and 2019, the Company’s loan loss allowance was $169.5 million
and $20.1 million, respectively.
The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans
transferred or pledged to securitization vehicles, for the year ended December 31, 2020:
Beginning balance January 1, 2020
$
1,647,787
$
669,713
$
2,144,850
$
4,462,350
Residential
Commercial
Corporate
Total
(dollars in thousands)
Impact of adopting CECL
Purchases / originations
Sales and transfers (1)
Principal payments
Gains / (losses) (2)
(Amortization) / accretion
—
1,168,830
(2,298,391)
(154,864)
(11,854)
(5,698)
(3,599)
217,329
(235,533)
(77,422)
(74,965)
2,558
(29,653)
1,061,644
(357,930)
(576,759)
(14,429)
12,207
(33,252)
2,447,803
(2,891,854)
(809,045)
(101,248)
9,067
Ending balance December 31, 2020
$
345,810
$
498,081
$
2,239,930
$
3,083,821
(1)
(2)
Includes securitizations, syndications and transfers to securitization vehicles or REO. Includes transfer of residential loans to
securitization vehicles with a carrying value of $1.9 billion during the year ended December 31, 2020.
Includes loan loss allowances.
The carrying value of the Company’s residential loans held for sale was $47.0 million and $66.7 million at December 31, 2020
and 2019, respectively.
The Company also has off-balance-sheet credit exposures related to unfunded loan commitments, including revolvers, delayed
funding commitments that are not unconditionally cancelable by the Company. The Company
draw term loans and futuret
utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does forff
the calculation of the allowance for loan losses. In determining the estimate of credit losses for off-balance-sheet credit
exposures, the Company will consider the contractual period in which the entity is exposed to credit risk and the likelihood that
funding will occur, if material. Estimated credit losses for off-balance-sheet credit exposures are included in Other liabia lities on
m
the Company’s
Consolidated Statements of Financial Condition.
Residential
tt
d-rate whole loans.
The Company’s residential mortgage loans are primarily comprisem
The Company’s residential loans are accounted forff
ted in Net
unrealized gains (losses) on instruments measured at fair value through earnings in the Statements of Comprehensive Income.
Additionally, the Company consolidates a collateralized finff ancing entity that securitized prime adjd ustable-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. Refer to the “Variable Interest Entities” Note forff
further information related to the Company’s consolidated residential mortgage loan trusts.
under the fair value option with changes in faiff
d of performing adjud stable-rate and fixeff
r value reflecff
The following tablea
including loans transferred or pledged to securitization vehicles, at December 31, 2020 and 2019:
presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio,
December 31, 2020
December 31, 2019
(dollars in thousands)
Fair value
Unpaid principal balance
$
$
3,595,061 $
3,482,865 $
4,246,161
4,133,149
F-16
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The foll
ff
m
Comprehensi
owing table provides information regarding the line items and amounts recognized in the Consolidated Statements of
ve Income (Loss) for December 31, 2020 and 2019 for these investments:
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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, 2020
December 31, 2019
(dollars in thousands)
$
$
170,259
$
(38,372)
37,693
169,580
$
150,066
(18,619)
51,290
182,737
The following tablea
2019 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
provides the geographic concentrations based on the unpaid principal balances at December 31, 2020 and
Geographic Concentrations of Residential Mortgage Loans
December 31, 2020
December 31, 2019
Property location
California
New York
Florida
All other (none individually greater than 5%)
Total
% of Balance
48.9%
14.0%
6.0%
31.1%
100.0%
Property location
California
New York
Florida
All other (none individually greater than 5%)
% of Balance
52.1%
10.5%
5.3%
32.1%
100.0%
The following tablea
pledged to securitization vehicles, at December 31, 2020 and 2019:
provides additional data on the Company’s residential mortgage loans, including loans transferred or
December 31, 2020
December 31, 2019
Portfolio
Range
Portfolio
Weighted
Average
Portfolio
Range
Unpaid principal balance
Interest rate
Maturity
FICO score at loan origination
Loan-to-value ratio at loan origination
$1 - $3,448
0.50% - 9.24%
7/1/2029 - 1/1/2061
505 - 829
8% - 104%
(dollars in thousands)
$473
4.89%
4/17/2046
755
67%
$1 - $3,448
2.00% - 8.38%
1/1/2028 - 12/1/2059
505 - 829
8% - 105%
Portfolio
Weighted
Average
$459
4.94%
12/29/2047
758
67%
At December 31, 2020 and 2019, approximately 37% and 36%, respectively, of the carryirr ng value of the Company’s residential
mortgage loans, including loans transferred or pledged to securitization vehicles, were adjud stable-rate.
Commercial
The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. 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
and preferred equity interests that are designated as held forff
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.
Management generally reviews the most recent financial informff
ation and metrics derived therefrom 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
commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and
Company’s
ors management deems important. Management also reviews market pricing to assess each borrower’s
may consider other fact
abia lity to refinance their respective assets at the maturity
of each loan, in addition to 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
m
ff
t
F-17
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
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 rubri
commercial loans has nine categories as
depicted below:
c forff
r
Risk Rating - Commercial Loans
Description
1-4 / Performing
Meets all present contractual obligations.
5 / Performing - Closely Monitored
Meets all present contractual obligations, but are transitional or could be
exhibiting some weaknesses in both leverage and liquidity.
6 / Performing - Special Mention
7 / Substandard
8 / Doubtful
9 / Loss
Meets all present contractual obligations, but exhibit potential weakness that
deserves management’s close attention and,
in
deterioration of repayment prospects.
if uncorrected, may result
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.
Substandard loans whereby collection of all contractual principal and interest is
highly questionable or improbable.
Considered uncollectible.
Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent
a tabular disclosure of
ff
financi
the amortized cost basis of the Company’s
al information produced by the borrower and consideration of economic conditions. See below forff
commercial loans by year of origination and internal
risk rating.
m
r
The Company’s commercial loans are collateral-dependent and, as such, for loans experiencing credit deterioration, the
Companym
is required to record an allowance based upon the fair value of the underlying collateral if foreclosure is probable or
if the practical expedient is elected. For the year ended December 31, 2020, the Company recorded a loan loss provision on
impaired commercial loans of $78.4 million with a principal balance and carrying value, net of allowances of $181.2 million
and $113.6 million, respectively, based upon the fair value of the underlying collateral. The Company uses a discounted cash
flow or market based valuation technique based uponu
the underlying property to project property cash floff ws. In projecting these
ors management
cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other fact
deems important. These nonrecurring fair value measurements are considered to be in level three of the fair value measurement
hierarchy as there are unobservabla e inputs, which are significant to the overall fair value. For the year ended December 31,
2019, the Company recorded a loan loss provision of $9.2 million on commercial loans with a principal balance and carrying
value, net of allowances of $43.6 million and $30.9 million, respectively.
ff
As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a
cumulative effect
the Companym
Loan loss provision in the Consolidated Statements of Comprehensive Income (Loss).
ff
recorded a net loan loss provision of $54.8 million based upon its Loss Given Default methodology recorded in
loan loss allowance of $7.8 million was recorded on January 1, 2020. For the year ended December 31, 2020,
During the year ended December 31, 2020,
loans with a carrying value of
$243.8 million at December 31, 2020. The maturity dates on four commercial loans were extended and one commercial loan
was granted a 120 day forbearance. Additionally, as part of the restructuring two loans had partial paydowns totaling
$4.5 million. The loan loss allowance recorded for these commercial loans was $23.6 million at December 31, 2020. Futuret
funding commitments on the restrucr
the Company modified five commercial
turt ed loans total $4.1 million.
At December 31, 2020 and December 31, 2019, the amortized cost basis of commercial loans on nonaccrual
status was
$46.8 million and $175.2 million, respectively. For the years ended December 31, 2020 and 2019, the Company recognized
interest income on commercial loans on nonaccrual statust
of $2.1 million and ($0.1) million, respectively.
rr
At December 31, 2020 and December 31, 2019, the Company had unfunded commercial real estate loan commitments of
$99.3 million and $181.4 million respectively. At December 31, 2020, the liabia lity related to the expected credit losses on the
unfunded commercial loan commitments was $5.1 million.
At December 31, 2020 and 2019, approximately 94% and 92%, respectively, of the carrying value of the Company’s CRE Debt
and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles and excluding commercial
loans held forff
sale, were adjustable-rate.
F-18
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
The sector attributes of the Company’s commercial real estate investments held forff
pledged to securitization vehicles, at December 31, 2020 and December 31, 2019 were as follows:
investment, including loans transferred or
Office
Retail
Multifamily
Hotel
Industrial
Other
Healthcare
Total
Sector Dispersion
December 31, 2020
December 31, 2019
Carrying
Value
% of Loan
Portfolio
Carrying
Value
(dollars in thousands)
% of Loan
Portfolio
$
650,034
256,493
250,095
115,536
60,097
20,302
19,873
47.4% $
18.7%
18.2%
8.4%
4.4%
1.5%
1.4%
681,129
389,076
262,302
135,681
82,441
36,589
18,873
42.4%
24.2%
16.3%
8.4%
5.1%
2.3%
1.3%
$
1,372,430
100.0% $
1,606,091
100.0%
At December 31, 2020 and 2019, commercial real estate investments held for investment were comprised of the following:
December 31, 2020
December 31, 2019
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
Senior securitized mortgages (3)
Mezzanine loans
Total
$
$
387,124
$
938,859
181,261
373,925
874,349
124,156
25.7 % $
503,499
$
62.3 %
12.0 %
940,546
183,064
499,690
936,378
170,023
1,507,244
$
1,372,430
100.0 % $
1,627,109
$
1,606,091
30.9 %
57.8 %
11.3 %
100.0 %
(1)
(2)
(3)
Carrying value includes unamortized origination fees of $4.9 million and $8.3 million at December 31, 2020 and 2019, respectively.
Based on outstanding principal.
Assets of consolidated VIEs.
The following tablea
investment at December 31, 2020 and 2019:
s represent a rollforward of the activity for the Company’s commercial real estate investments held forff
Beginning balance (January 1, 2020) (2)
Originations & advances (principal)
Principal payments
Principal write off
Transfers (3)
Net (increase) decrease in origination fees
Realized gain
Amortization of net origination fees
Allowance for loan losses
Beginning allowance, prior to CECL adoption
Impact of adopting CECL
Current period allowance
Write offs
Ending allowance
December 31, 2020
Senior
Mortgages
Senior
Securitized
Mortgages (1)
Mezzanine
Loans
(dollars in thousands)
Total
$
499,690
$
936,378
$
182,726
$
1,618,794
206,090
(77,344)
—
(245,120)
(1,055)
204
2,371
—
(2,263)
(8,648)
—
—
(144,308)
—
142,621
(653)
—
2,460
—
(4,166)
(57,983)
—
(10,911)
(62,149)
12,374
(78)
(7,000)
(7,100)
(80)
—
187
(12,703)
(1,336)
(66,521)
23,687
(56,873)
218,464
(221,730)
(7,000)
(109,599)
(1,788)
204
5,018
(12,703)
(7,765)
(133,152)
23,687
(129,933)
Net carrying value (December 31, 2020)
$
373,925
$
874,349
$
124,156
$
1,372,430
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-19
ANNALY CAPITAL MANAGE
Financial Statements
A
MENT, INC. AND SUBSIDIARIES
Net carrying value (January 1, 2019)
Originations & advances (principal)
Principal payments
Transfers (3)
Net (increase) decrease in origination fees
Amortization of net origination fees
Net (increase) decrease in allowance
December 31, 2019
Senior
Mortgages
Senior
Securitized
Mortgages (1)
Mezzanine
Loans
Total
(dollars in thousands)
$
981,202
$
— $
315,601
$
1,296,803
572,204
(16,785)
(1,034,754)
(4,200)
2,023
—
—
(150,245)
1,083,487
—
3,136
21,709
(149,633)
(8,675)
(184)
412
— $
(9,207)
593,913
(316,663)
40,058
(4,384)
5,571
(9,207)
Net carrying value (December 31, 2019)
$
499,690
$
936,378
$
170,023
$
1,606,091
(1)
(2)
(3)
Represents assets of consolidated VIEs.
Excludes loan loss allowances.
Includes transfers to securitization vehicles or REO.
The following tablea
December 31, 2020.
provides the internal loan risk ratings of commercial real estate investments held for investment as of
Amortized Cost Basis by Risk Rating and Vintage (1)
Risk Rating
Total
2020
2019
(dollars in thousands)
Vintage
2018
2017
2016
Prior
/ Performing
$
300,623
$
111,177
$
134,923
$
— $
12,972
$
— $
41,551
5 / Performing - Closely Monitored
6 / Performing - Special Mention
7 / Substandard
8 / Doubtful
9 / Loss (2)
Total
145,231
628,224
205,026
93,326
—
—
58,648
9,368
—
—
145,231
135,868
78,407
—
—
—
267,555
66,294
39,704
—
—
96,982
—
53,622
—
—
69,171
—
—
—
—
—
50,957
—
—
$
1,372,430
$
179,193
$
494,429
$
373,553
$
163,576
$
69,171
$
92,508
(1)
(2)
The amortized cost basis excludes accrued interest. As of December 31, 2020, the Company had $3.8 million of accrued interest receivable on
commercial loans which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition.
Includes two commercial mezzanine loans for which the Company recorded a full
loan loss allowance of $46.6 million.
ff
Corporate Dtt
ebt
The Company’s investments in corporate loans 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. Interest income froff m coupou
n
the outstanding principal amounts of the debt and its contractual terms. Premiums and
payments is accrued based uponu
ive interest method.
discounts are amortized or accreted into interest income using the effect
ff
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-20
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below:
Risk Rating - Corporate Debt
1-5 / Performing
6 / Performing - Closely Monitored
7 / Substandard
8 / Doubtful
9 / Loss
Description
Meets all present contractual obligations.
Meets all present contractual obligations but exhibits a defined weakness in either
leverage or liquidity, but not both. Loans at this rating will require closer
monitoring, but where we expect no loss of interest or principal.
A loan that has a defined weakness in either leverage and/or liquidity, and which
may require substantial changes to strengthen the asset. Loans at this rating level
have a higher probability of loss, although no determination of the amount or
timing of a loss is yet possible.
A loan that has missed a scheduled principal or interest payment or is otherwise
deemed a non-earning account. The probability of loss is increasingly certain due
to significant performance issues.
Considered uncollectible.
Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent
financi
a tabular disclosure of
ff
the amortized cost basis of the Company’s
al information produced by the borrower and consideration of economic conditions. See below forff
investment by year of origination and internal risk rating.
corporate debt held forff
m
For the year ended December 31, 2020, the Company recorded a loan loss provision of $4.5 million on impaim red corporate
loans using a discounted cash flow methodology. During the year ended December 31, 2020, the loan was restructured and the
Company received $2.8 million of second lien debt and $4.8 million of equity. As a result of the restructuring, $19.6 million of
first lien debt was written off and the related allowance of $11.9 million was charged off. For the year ended December 31,
2019, the Company recorded a loan loss provision of $7.4 million on a corpor
rate loan with a principal balance and carrying
value of $19.6 million and $12.2 million, respectively. There was no provision for loan loss recorded for the year ended
December 31, 2018.
As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a
cumulative effect loan loss allowance on corporate loans of $29.7 million was recorded on January 1, 2020. For the year ended
December 31, 2020, the Company recorded a net loan loss provision on corporate loans of $9.9 million, based upon
its Loss
Given Defaul
t methodology.
u
ff
As of December 31, 2020 and December 31, 2019, the amortized cost basis of corporate loans on nonaccrual status was $0.0
and $12.2 million, respectively. For the years ended December 31, 2020 and 2019, the Company recognized interest income
on corporate loans on nonaccrual status of $0.0 million and $1.5 million, respectively.
At December 31, 2020 and December 31, 2019, the Company had unfunded corporate loan commitments of $87.3 million and
$81.2 million, respectively. At December 31, 2020, the liabila
ity related to the expected credit losses on the unfunded corporate
loan commitments was $0.7 million.
F-21
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
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, 2020 and 2019 are as follows:
Industry Dispersion
December 31, 2020
December 31, 2019
Total (1)
Total (1)
(dollars in thousands)
Computer programming, data processing & other computer
related services
Management and public relations services
Industrial Inorganic Chemical
Public warehousing and storage
Metal cans & shipping containers
Offices and clinics of doctors of medicine
Surgical, medical, and dental instruments and supplies
Electronic components & accessories
Engineering, architectural & surveying
Miscellaneous Industrial & Commercial
Insurance agents, brokers and services
Research, development and testing services
Miscellaneous Food Preparations
Telephone communications
Miscellaneous equipment rental and leasing
Electrical work
Petroleum and petroleum products
Medical and dental laboratories
Schools and educational services, not elsewhere classified
Home health care services
Metal Forgings and Stampings
Legal Services
Grocery stores
Coating, engraving and allied services
Chemicals & Allied Products
Miscellaneous business services
Drugs
Mailing, reproduction, commercial art and photography, and
stenographic
Machinery, Equipment & Supplies
Offices of clinics and other health practitioners
Nonferrous foundries (castings)
Motor vehicles and motor vehicle parts and supplies
483,142
300,869
156,391
132,397
115,670
104,781
83,161
78,129
77,308
77,163
67,193
62,008
58,857
58,450
49,587
41,128
33,890
30,711
29,040
28,587
27,523
26,399
22,895
19,484
14,686
12,980
12,942
12,733
12,096
9,730
—
—
394,193
339,179
—
107,029
118,456
106,993
102,182
24,000
124,201
78,908
75,410
45,610
—
61,210
49,776
43,175
24,923
41,344
19,586
29,361
—
—
23,248
47,249
15,002
164,033
15,923
14,755
—
10,098
30,191
28,815
Miscellaneous plastic products
Total
$
—
2,239,930
$
10,000
2,144,850
(1) All middle market lending positions are floating rate.
The tabla e below reflects the Company’s aggregate positions by their respective place in the capita
December 31, 2020 and 2019.
a
l structure
r
of the borrowers at
rst lien loans
Second lien loans
Total
$
$
December 31, 2020
December 31, 2019
(dollars in thousands)
1,489,125
750,805
2,239,930
$
$
1,396,140
748,710
2,144,850
F-22
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
lowing tables represent a rollforward of the activity for the Company’s corporate debt investments held forff
The folff
December 31, 2020 and December 31, 2019:
investment at
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
Beginning balance (January 1, 2020) (1)
Originations & advances
Principal payments
Amortization & accretion of (premium) discounts
Loan restructuring
Sales (2)
Allowance for loan losses
Beginning allowance, prior to CECL adoption
Impact of adopting CECL
Current period allowance
Write offs
Ending allowance
December 31, 2020
First Lien
Second Lien
(dollars in thousands)
Total
$
1,403,503
$
748,710
$
834,211
(444,759)
8,374
(19,550)
(273,887)
(7,363)
(10,787)
(12,510)
11,893
(18,767)
227,433
(132,000)
3,832
2,818
(79,203)
—
(18,866)
(1,919)
—
(20,785)
2,152,213
1,061,644
(576,759)
12,206
(16,732)
(353,090)
(7,363)
(29,653)
(14,429)
11,893
(39,552)
Net carrying value (December 31, 2020)
$
1,489,125
$
750,805
$
2,239,930
(1) Excludes loan loss allowances.
(2) Includes syndications.
Net carrying value (January 1, 2019)
Originations & advances
Principal payments
Amortization & accretion of (premium) discounts
Sales
Net (increase) decrease in allowance
Net carrying value (December 31, 2019)
December 31, 2019
First Lien
Second Lien
(dollars in thousands)
Total
$
1,346,356
$
540,826
$
542,463
(228,302)
5,960
(262,974)
(7,363)
345,573
(140,625)
2,936
—
—
$
1,396,140
$
748,710
$
1,887,182
888,036
(368,927)
8,896
(262,974)
(7,363)
2,144,850
The following tablea
year and internal risk rating.
provides the amortized cost basis of corporate debt held forff
investment as of December 31, 2020 by vintage
Amortized Cost Basis by Risk Rating and Vintage (1)
Risk Rating
Total
2020
(dollars in thousands)
2019
Vintage
2018
2017
2016
2015
1-5 / Performing
$1,760,669
$ 499,186
$ 400,873
$ 402,712
$ 355,369
$
68,191
$
34,338
6 / Performing - Closely Monitored
7 / Substandard
8 / Doubtful
9 / Loss
Total
337,386
141,875
—
—
38,495
—
—
—
—
47,742
—
—
283,464
43,206
—
—
15,427
50,927
—
—
—
—
—
—
—
—
—
—
$2,239,930
$ 537,681
$ 448,615
$ 729,382
$ 421,723
$
68,191
$
34,338
(1)
The amortized cost basis excludes accrued interest and includes deferred loan fees on unfunded loans. As of December 31, 2020, the Company had
$11.0 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of
Financial Condition, and $1.4 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial
Condition.
F-23
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
7. MORTGAGE SERVICING RIGHTS
The Company owns variable interests in an entity that invests in MSRs. Refer to the “Variable Interest Entities” Note forff
detailed discussion on this topic.
a
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 accompam nying 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).
m
The following tablea
presents activity related to MSRs for the years ended December 31, 2020 and 2019:
Fair value, beginning of period
Sales
Change in fair value due to
Changes in valuation inputs or assumptions (1)
Other changes, including realization of expected cash flows
Fair value, end of period
December 31, 2020
December 31, 2019
(dollars in thousands)
$
$
378,078
$
(72,160)
(107,517)
(97,506)
100,895
$
557,813
—
(102,016)
(77,719)
378,078
(1)
Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily dued
changes in interest rates.
to
For the years ended December 31, 2020 and 2019, the Company recognized $66.6 million and $108.0 million of net servicing
income from MSRs in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
8. VARIABLE INTEREST ENTITIES
Commercialii Trusts
The Company has invested in subordinate mortgage-backed securities issued by commercial securitization trusts (“Commercial
eneficiary as a result of its abia lity to replace the special servicer without cause
Trusts”) and determined that it is the primary brr
through its ownership of the subordinate securities and its current designation as the directing certificate holder. Information
regarding these securitization trusts are summarized in the tablea
below.
Type of Underlying Collateral
Settlement Date
Cut-off Date Principal Balance
Face Value of Company’s Variable
Interest at Settlement Date
Multifamily
Hotels
Multifamily
Office Building
Multifamily
Multifamily
April 2015
June 2018
August 2019
October 2019
October 2019
December 2019
$
$
$
$
$
$
(dollars in thousands)
1,192,607 $
982,000 $
271,700 $
60,000 $
415,000 $
394,000 $
89,446
93,500
20,270
60,000
75,359
110,350
Upon consolidation, the Company elected the fair value option for the financi
ties 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
r value be reflected in the Company’s Consolidated Statements of Comprehensive
value option requires that changes in faiff
lied the practical expedient under ASU 2014-07, whereby the Company determines whether
Income (Loss). The Company appa
ties is more observable as a basis forff measuring the less observablea
the faiff
financial instruments. The Company has determined that the fair value of the financial liabilities of the Commercial Trusts
are
since the prices for these liabilities are primarily available from third-party pricing services utilized forff
more observable,
r value of the financial assets or financial liabili
al assets and liabili
a
a
a
r
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-24
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
multifamily
ff
precise measurement given their illiquid naturet
m
the Company’s
the faiff
r value of the financial liabilities, the Companym
entirety should be classified in Level 2 of the fair value measurement hierarchy.
and commercial mortgage-backed securities, while the individual assets of the trusts are inherently less capaba le of
and the limitations on available information related to these assets. Given that
methodology for valuing the financial assets of the Commercial Trusts are an aggregate fair value derived fromff
has determined that the fair value of each of the finff ancial assets in their
r
mortgage loans had an aggregate unpaid principal balance of $2.3 billion and $2.3 billion at December
The Commercial Trusts
31, 2020 and 2019, respectively. At December 31, 2020 and 2019, 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 debt issued
by securitization vehicles at December 31, 2020 and 2019 based upon the Company’s process of monitoring events of default
on the underlying mortgage loans.
rr
Commercialii Securitiii zations
ii
The Company also invests in commercial mortgage-backed securities issued by entities that are VIEs because they do not have
the entities to finance their activities without additional subordinated financial support from other
sufficient equity at risk forff
is not the primary beneficiary because it does not have the power to direct the activities that most
parties, but the Companym
significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the
amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other
commitments to these VIEs. See the “Securities” Note for further information on Commercial Securities.
tt
Collat
eral
ll
izell
d Loan Obligationtt
In February 2019, the Company closed NLY 2019-FL2, a managed commercial real estate collateralized loan obligation
(“CLO”) securitization with a facff e value of $857.3 million, which provides non-recourse financing to the Company
collateralized by certain commercial real estate mortgage loans originated by the Company. As of December 31, 2020 a total of
$625.8 million of notes were held by third parties and the Company retained or purchased $202.4 million of subordinated notes
and preferred shares, which eliminate uponu
consolidation. The Company has determined that it is the primary beneficiary
because it has the right to direct the servicer as well as remove the special servicer without cause and it holds variable interests
s of loans to the CLO did not qualify for sale accounting because
that could be potentially significant to the CLO. The transferff
ities
the Companym
issued by the CLO in order to simplify the accounting; however, the commercial loans continue to be carried at amortized cost
as they were not eligible for the fair value option as it was not elected at origination of the loans. The Company incurred $8.3
million of costs in connection with the CLO that were expensed as incurred during the year ended December 31, 2019. The
aggregate unpaid principal balance of loans in the CLO was $856.9 million at December 31, 2020 and 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 debt
securities at December 31, 2020 based uponu
the Company’s process of monitoring events of default on the underlying mortgage
loans. The contractual principal amount of the CLO debt held by third parties was $633.9 million at December 31, 2020.
maintains effeff ctive control over the loans. The Company elected the fair value option for the financial liabila
i
Multifami
lyii Securitization
In November 2019, the Compam ny repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal
cut-off balance of $1.0 billion and retained interest only securities with a notional balance of $1.0 billion and senior securities
with a principal balance of $28.5 million. In March 2020, the Company repackaged Fannie Mae guaranteed multifamily
mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest only securities with a notional
eneficiary based
balance of $0.5 billion. At the inception of the arranr
upon its involvement in the design of these VIEs and through the retention of a significant variablea
interest in the VIEs. The
Companym
elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however,
the financial assets were not eligible for the fair value option as it was not elected at purchase. During the year ended December
31, 2020, the Company deconsolidated the 2019 multifamily VIE since it sold all of its interest only securities and no longer
retains a significant variable interest in the entity. As a result of the deconsolidation of this VIE, the Company derecognized
approximately $1.2 billion of securities and approximately $1.1 billion of debt issued by securitization vehicles and recognized
a realized gain of $104.8 million, which is included in Net gains (losses) on disposal of investments and other in the
Consolidated Statements of Comprehensive Income (Loss). The Company incurred $1.1 million of costs in connection with the
2020 multifamily securitization that were expensed as incurred during the year ended December 31, 2020.
gements, the Company determined that it was the primary brr
tt
Resident
ial
i
Truststt
which is included in “Residential Trusts” in the tables below, that issued
The Company consolidates a securitization trust,
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
r
F-25
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ncial assets and financial
VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the finaff
principal amount of
t
liabilities of the residential mortgage trust are availablea
the residential mortgage trust’s debt held by third parties was $23.0 million and $57.3 million at December 31, 2020 and 2019,
respectively.
from third-party pricing services. The contractual
Residential Securitizationtt
s
The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have
y at risk for the entities to finance their activities without additional subordinated financial support from other
sufficient equitq
parties, but the Companym
is not the primary beneficiary because it does not have the power to direct the activities that most
significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the
amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other
commitments to these VIEs. See the “Securities” Note for further information on Residential Securities.
TT
OBX TBB
rusts
d to collectively as the “OBX Trusts.” These securitizations represent financing
The entities in the table below are referre
transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans
purchased by the Company.
ff
Securitization
Date of Closing
Face Value at Closing
(dollars in thousands)
2018-1
OBX 2018-EXP1
OBX 2018-EXP2
OBX 2019-INV1
OBX 2019-EXP1
OBX 2019-INV2
OBX 2019-EXP2
OBX 2019-EXP3
OBX 2020-INV1
OBX 2020-EXP1
OBX 2020-EXP2
OBX 2020-EXP3
March 2018
August 2018
October 2018
January 2019
April 2019
June 2019
July 2019
October 2019
January 2020
February 2020
July 2020
September 2020
$
$
$
$
$
$
$
$
$
$
$
$
327,162
383,451
384,027
393,961
388,156
383,760
463,405
465,492
374,609
467,511
489,352
514,609
is deemed to be the primary brr
As of December 31, 2020 and 2019, a total of $2.6 billion and $2.0 billion, respectively, of bonds were held by third parties and
retained $653.0 million and $565.7 million, respectively, of mortgage-backed securities, which were eliminated in
the Companym
ary and consolidates the OBX Trusts because it has power to
consolidation. The Companym
’ performance and holds a variable interest that could be
direct the activities that most significantly impact the OBX Trusts
potentially significant to these VIEs. The Company has elected the fair value option for the financ
ial 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
s are available from third-party pricing services. During the years ended December
liabilities of the residential mortgage trust
31, 2020 and 2019, the Company incurred $7.2 million and $9.0 million, respectively, of costs in connection with these
securitizations that were expensed as incurred. The contractual
debt held by third parties
was $2.5 billion and $1.9 billion at December 31, 2020 and 2019, respectively.
principal amount of the OBX Trusts’
ff
enefici
rr
r
ff
r
t
Although the residential mortgage loans have been sold forff
mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflecff
that are eliminated uponu
consolidation.
bankruptcy and state law purposes, the transfers of the residential
ted as intercompany secured borrowings
Credit Facility Vtt
IEsVV
ial institution. As
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financ
of December 31, 2020 and 2019, the borrowing limit on this facff
ility was $625.0 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
te loans with a carrying amount of $786.9 million and $741.3 million at December 31, 2020 and 2019,
facility corpora
respectively. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is
eliminated upon consolidation. At December 31, 2020 and 2019, the subsidiary had an intercompany receivablea
of $441.1
million and $426.6 million, respectively, which eliminates upon
consolidation and an Other secured financing of $441.1 million
u
and $426.6 million, respectively, to the third party financial institution.
r
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-26
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
u
ary of the Company entered into a credit facff
on. As
ility with a third party financ
In July 2017, a consolidated subsidi
ility was $320.0 million. The subsidiary was deemed to be a
of December 31, 2020 and 2019, the borrowing limit on this facff
was determined to be the primary beneficiary due to its role as servicer and because it holds a variable
VIE and the Companym
e loans to the
interest in the entity that could potentially be significaff
ith a carrying amount of $400.4 million and $413.7 million at December 31, 2020 and 2019, respectively, which
subsidiary wrr
continue to be reflecff
ted in the Company’s Consolidated Statements of Financial Condition under Loans, net. At December 31,
2020 and 2019, the subsidiary had an Other secured financing of $209.7 million and $244.2 million, respectively, to the third
ff
party financi
nt to the entity. The Company has transferred corporat
al institution.
ial instituti
r
ff
t
In January 2019, a consolidated subsidiary of the Company (the “Borrower”) entered into a $300.0 million credit facility with a
third party financial institution. At of December 31, 2020 and 2019, the Borrower had an Other secured financing of $236.6
million and $157.5 million, respectively, to the third party finaff
ncial institution.
MSR Siloii
The Company also owns variablea
interests in an entity that invests in MSRs and has structured its operations, funding and
capia talization 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,t
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.
t
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.5
billion at December 31, 2020. 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.
The statements of financial condition of the Company’s VIEs, excluding the CLO, multifamily securitizations, credit facility
VIEs and OBX Trusts as the transfers of loans or securities 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, 2020 and 2019 are as follows:
Assets
Cash and cash equivalents
Loans
Assets transferred or pledged to securitization vehicles
Mortgage servicing rights
Principal and interest receivable
Other assets
Total assets
Liabilities
Debt issued by securitization vehicles (non-recourse)
Other secured financing
Payable for unsettled trades
Interest payable
Other liabilities
Total liabilities
December 31, 2020
Commercial Trusts
Residential Trusts
MSR Silo
(dollars in thousands)
$
$
$
$
— $
—
2,166,073
—
5,509
—
2,171,582
1,836,785
$
$
—
—
1,697
—
— $
—
40,035
—
226
—
40,261
23,351
$
$
—
—
55
246
1,838,482
$
23,652
$
22,241
47,048
—
100,895
—
—
170,184
—
30,420
3,076
—
13,345
46,841
F-27
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
December 31, 2019
Commercial Trusts
Residential Trusts
MSR Silo
Assets
Cash and cash equivalents
Loans
Assets transferred or pledged to securitization vehicles
Mortgage servicing rights
Principal and interest receivable
Other assets
Total assets
Liabilities
Debt issued by securitization vehicles (non-recourse)
Other secured financing
Payable for unsettled trades
Interest payable
Other liabilities
Total liabilities
$
$
$
$
(dollars in thousands)
— $
— $
—
2,345,120
—
7,085
—
2,352,205
1,967,523
$
$
—
—
3,008
—
—
75,924
—
408
—
76,332
57,905
$
$
—
—
137
78
1,970,531
$
58,120
$
67,455
66,722
—
378,078
—
27,021
539,276
—
38,981
18,364
—
2,393
59,738
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, multifamily securitizations, OBX Trusts and CLO, at December 31, 2020 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
(dollars in thousands)
California
Texas
New York
Florida
Washington
Arizona
Other (1)
Total
$
$
1,051,276
459,256
369,691
196,865
182,000
171,102
811,282
3,241,472
(1) No individual state greater than 5%.
32.4 %
14.2 %
11.4 %
6.1 %
5.6 %
5.3 %
25.0 %
100.0 %
$
California
Illinois
Texas
Massachusetts
Other (1)
18,692
5,356
4,972
2,265
8,174
47.4 %
13.6 %
12.6 %
5.7 %
20.7 %
$
39,459
100.0 %
Corporate Dtt
srr
ebt Transferff
The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”).
The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating
rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary
beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the year ended December 31,
2020, the Companym
transferred $159.3 million of loans for cash. The loan transfers were accounted for as sales.
Residentia
i
l CredCC itdd Fund
ff
investing in participations in residential mortgage loans. The residential credit fund is deemed to
The Company manages a fund
e its activities without
be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to financ
additional subordinated financial support provided by any parties, including equity holders, as capita
al commitments are not
considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its
only interest in the r fund
s that it earns, which are not considered variable interests in
the entity. During the year ended December 31, 2020 the Company issued participating interests in residential mortgage loans
of $39.2 million to the residential credit fund. These transfers do not meet the criteria forff
sale accounting and are accounted for
as secured borrowing, thus the residential loans are reported as Loans, net and the associated liabia lity is reported as
Participations issued in the Consolidated Statements of Financial Condition at December 31, 2020. The Company elected to fair
value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans
are carried at fair value through earnings.
is the management and performance feeff
ff
ff
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-28
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
9. REAL ESTATE
Real estate investments are carried at historical cost less accumulated depreciation. Historical cost includes all costs necessaryrr
to bring the asset to the condition and location necessary f
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 are expensed as incurred. Major replacements and improvements that extend the useful life of the asset are
capita
alized and depreciated over their useful life.
orff
rr
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, 2020 or December 31, 2019 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
losure or (ii) the borrower conveys all interest in the residential real
residential real estate property uponu
completm ion of a forec
estate property to the Company to satisfy the loan through completion of a deed in lieu of forec
losure or through a similar legal
agreement.
ff
ff
Real estate investments, including REO, that do not meet the criteria to be classified as held for sale are classifiedff
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.
investment) is reviewed on a quarterly basis, or more
The Company’s real estate portfolio (REO and real estate held forff
frequently as necessary,rr
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
undiscounted cash flows to be generated by the property is less than the carrying value of the property. In
aggregate future
conducting this review, the Company considers U.S. macroeconomic facff
tors, including real estate sector conditions, together
with asset specific and other facff
tors. To the extent impaim rment 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.
rr
ff
During the year ended December 31, 2020, the Company took title of two commercial real estate properties for $79.8 million
through foreclosure or deed-in-lieu of foreclosure. There were no new acquisitions of real estate holdings during the year ended
December 31, 2019. A portfolio of health care properties with a carrying value of $124.5 million, including intangible assets,
ldsold two
was sold during the year ended December 31, 2020 and a gain on sale of $19.7 million was recognized. hThe Compa yny
ognizedd a
fof iits wh llhollyy ownedd t iriplle net lleas ded propertiies during
gaigain on s lale of $7.5 million.
during hthe yyear e dnd ded December 31, 2019 ffor $25.2 million
dand recognize
The weighted average amortization period for intangible assets and liabia lities at December 31, 2020 is 5.5 years. Above market
leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in 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, 2020
December 31, 2019
(dollars in thousands)
$
164,240
$
493,432
6,240
663,912
(100,147)
563,765
92,549
$
656,314
$
121,720
571,396
11,238
704,354
(87,532)
616,822
108,816
725,638
F-29
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
Depreciation expense was $22.7 million and $23.7 million for the years ended December 31, 2020 and 2019, respectively and is
included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
Rentaltt
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 Comprehe
nsive Income (Loss).
m
ff
Approximate future
effect at December 31, 2020 for consolidated investments in real estate are as follows:
minimum rents to be received over the next five years and thereafter for non-cancelablea
ff
operating leases in
December 31, 2020
(dollars in thousands)
$
$
44,267
39,981
36,161
30,645
24,362
60,971
236,387
2021
2022
2023
2024
2025
Later years
Total
10. DERIVATIVE INSTRUMENTS
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptia
ons”),
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.
t
ff
contracts, certain forward
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
t
purchase commitments and credit derivatives to economically hedge its exposure
Eurodollar futff ures
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 coupou
n (“MAC”) interest rate swaps, the Company may make or receive a
payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the
Subsequent changes in fair value from inception of these interest rate swaps are
out of market nature of such interest rate swaps.a
reflected within Unrealized gains (losses) on interest rate swapsa
in the Consolidated Statements of Comprehensive Income
(Loss). 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 FASB 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 faiff
r
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 faiff
r value of centrally cleared
interest rate swaps net of variation margin pledged under such transactions. At December 31, 2020 and 2019, $1.5 billion and
$517.8 million, respectively, of variation margin was reported as an adjust
d ment 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
F-30
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
ff
agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate
ing leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap
swap agreements where the float
rate or another index. 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
including MAC interest rate swaps, are generally fair valued using the DCO’s
values. Centrally cleared interest rate swaps,a
market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap wa
ould be equal to the
difference between the cash received or paid and fair value.
ons provide the option to enter into an interest rate swap agreement forff
Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest
rate swaptia
a predetermined notional amount, stated term
and pay and receive interest rates in the future
swaptions 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 (loss) on the swaptia
rence between the cash
received or the fair
value of the underlying interest rate swap ra
on would be equal to the diffeff
eceived and the premium paid.
. The Company’s
m
ff
ff
The fair value of swaptia
ons are estimated using internal pricing models and compared to the counterparty market values.
TBA Dollar Rolls – TBA dollar roll transactions are accounted forff
derivatives is based on methods similar to those used to value Agency mortgage-backed securities.
as a series of derivative transactions. The fair value of TBA
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.
t
ts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of
CC
Futures Contrac
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.
t
Forward Purchase Commitments – The Company may enter into forwar
d 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.
ff
Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities
index, such as the CMBX index, and synthetic total returnt
swaps.
The tablea
below summarizes faiff
r value information about our derivative assets and liabia lities at December 31, 2020 and 2019:
Derivatives Instruments
December 31, 2020
December 31, 2019
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)
— $
74,470
96,109
506
49
—
171,134
1,006,492
—
19,413
—
7,440
$
$
1,033,345
$
1,199
11,580
15,181
77,889
2,050
5,657
113,556
706,862
11,316
84,781
907
—
803,866
(1) The notional amount of the credit derivatives in which the Company purchased protection was $0.0 and $10.0 million at
December 31, 2020 and December 31, 2019, respectively. The maximum potential amount of future payments is the
notional amount of credit derivatives in which the Company sold protection of $504.0 million and $345.0 million at
December 31, 2020 and December 31, 2019, respectively, plus any coupon shortfalls on the underlying tranche. As of
December 31, 2020 and 2019, the credit derivative tranches referencing the basket of bonds had a range of ratings
between AAA and A, and AA and BBB-, respectively.
F-31
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
The folff
lowing table summarizes certain characteristics of the Company’s interest rate swapsa
at December 31, 2020 and 2019:
Maturity
Current
Notional (1)(2)
Weighted Average
Pay Rate
Weighted Average
Receive Rate
Weighted Average
Years to Maturity (3)
December 31, 2020
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted average
(dollars in thousands)
$
23,680,150
3,600,000
5,565,500
1,484,000
$
34,329,650
0.27 %
0.18 %
1.40 %
3.06 %
0.92 %
0.11 %
0.09 %
0.62 %
0.36 %
0.37 %
1.96
4.21
7.76
20.52
3.94
Maturity
Current
Notional (1)(2)
Weighted Average
Pay Rate
Weighted Average
Receive Rate
Weighted Average
Years to Maturity
December 31, 2019
0 - 3 years
3 - 6 years
6 - 10 years
Greater than 10 years
Total / Weighted average
(dollars in thousands)
$
38,942,400
16,097,450
16,176,500
2,930,000
$
74,146,350
1.60 %
1.77 %
2.20 %
3.76 %
1.84 %
1.84 %
1.87 %
2.02 %
1.86 %
1.89 %
1.29
4.30
9.00
17.88
4.23
(1) As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate
and the Secured Overnight Financing Rate, respectively. As of December 31, 2019, 75% and 25% of the Company’s interest rate
swaps were linked to LIBOR and the overnight index swap rate, respectively.
(2) There were no forward starting swaps at December 31, 2020 and December 31, 2019.
(3) As of December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity
of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.
The following tablea
presents swaptions outstanding at December 31, 2020 and 2019.
December 31, 2020
Current
Underlying
Notional
Weighted Average
Underlying Fixed
Rate
Weighted Average
Underlying
Floating Rate
Weighted Average
Underlying Years to
Maturity
Weighted Average
Months to Expiration
(dollars in thousands)
Long pay
Long receive
$8,050,000
$250,000
1.27%
1.66%
3M LIBOR
3M LIBOR
10.40
10.02
5.42
0.13
December 31, 2019
Current
Underlying
Notional
Weighted Average
Underlying Fixed
Rate
Weighted Average
Underlying
Floating Rate
Weighted Average
Underlying Years to
Maturity
Weighted Average
Months to Expiration
(dollars in thousands)
Long pay
Long receive
$4,675,000
$2,000,000
2.53%
1.49%
3M LIBOR
3M LIBOR
9.22
10.29
4.66
3.40
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-32
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
The folff
lowing table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 2020 and 2019:
Purchase and sale contracts
for derivative TBAs
Notional
Implied Cost Basis
Implied Market Value
Net Carrying Value
Purchase contracts
$
19,635,000
$
20,277,088
$
20,373,197
$
96,109
(dollars in thousands)
December 31, 2020
December 31, 2019
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
$
$
10,043,000
(3,144,000)
6,899,000
$
$
10,182,891
(3,294,486)
6,888,405
$
$
10,192,038
(3,299,768)
6,892,270
$
9,147
(5,282)
3,865
The following tablea
summarizes certain characteristics of the Company’s futures derivatives at December 31, 2020 and 2019:
December 31, 2020
Notional - Long
Positions
(dollars in thousands)
Notional - Short
Positions
Weighted Average
Years to Maturity
U.S. Treasury futures - 5 year
U.S. Treasury futures - 10 year and greater
Total
$
—
—
— $
(1,240,000)
(9,183,800)
(10,423,800)
4.40
6.90
6.60
December 31, 2019
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
$
$
— $
—
2,600,000
2,600,000
$
(180,000)
(2,953,300)
(5,806,400)
(8,939,700)
1.96
4.42
9.74
8.26
The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative
contracts may contain legally enforceablea
with each
counterparty.
provisions that allow for netting or setting off receivables
and payables
a
a
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-33
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
owing tables
The foll
ff
offset on our Consolidated Statements of Financial Condition at December 31, 2020 and 2019, respectively.
present information about derivative assets and liabilities that are subject to such provisions and can be
a
December 31, 2020
Amounts Eligible for Offset
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Assets
(dollars in thousands)
Interest rate swaptions, at fair value
$
74,470
$
— $
— $
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
Liabilities
96,109
506
49
—
(506)
—
—
—
—
74,470
96,109
—
49
Interest rate swaps, at fair value
$
1,006,492
$
— $
(108,757) $
897,735
Futures contracts, at fair value
Credit derivatives
19,413
7,440
(506)
—
(18,907)
(7,440)
—
—
December 31, 2019
Amounts Eligible for Offset
Gross Amounts
Financial Instruments
Cash Collateral
Net Amounts
Assets
(dollars in thousands)
Interest rate swaps, at fair value
$
1,199
$
(951) $
— $
Interest rate swaptions, at fair value
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
Credit derivatives
Liabilities
11,580
15,181
77,889
2,050
5,657
—
(5,018)
(10,902)
—
—
—
—
—
—
—
248
11,580
10,163
66,987
2,050
5,657
Interest rate swaps, at fair value
$
706,862
$
(951) $
(104,205) $
601,706
TBA derivatives, at fair value
Futures contracts, at fair value
Purchase commitments
11,316
84,781
907
(5,018)
(10,902)
—
—
(73,879)
—
6,298
—
907
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)
Net Interest Component of
Interest Rate Swaps
Realized Gains (Losses) on
Termination of Interest
Rate Swaps
(dollars in thousands)
Unrealized Gains (Losses)
on Interest Rate Swaps
For the years ended
December 31, 2020
December 31, 2019
December 31, 2018
$
$
$
(207,877) $
351,375
100,553
$
$
(1,917,628) $
(1,442,964) $
1,409
$
(904,532)
(1,210,276)
424,081
F-34
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as
follows:
Year Ended December 31, 2020
Derivative Instruments
Realized Gain (Loss)
Unrealized Gain (Loss)
(dollars in thousands)
Amount of Gain/(Loss)
Recognized in Net Gains
(Losses) on Other Derivatives
TBA derivatives
$
893,120
$
92,244
$
Net interest rate swaptions
Futures
Purchase commitments
Credit derivatives
Total
11,730
(268,084)
—
6,068
46,301
(12,015)
(1,093)
(11,966)
$
985,364
58,031
(280,099)
(1,093)
(5,898)
756,305
Derivative Instruments
Realized Gain (Loss)
Unrealized Gain (Loss)
Amount of Gain/(Loss)
Recognized in Net Gains
(Losses) on Other Derivatives
Year Ended December 31, 2019
Net TBA derivatives
$
Net interest rate swaptions
Futures
Purchase commitments
Credit derivatives
Total
(dollars in thousands)
464,575
$
(137,823) $
(47,863)
(1,418,143)
—
8,077
(15,961)
455,417
333
10,618
$
326,752
(63,824)
(962,726)
333
18,695
(680,770)
Certain of the Company’s derivative contracts are subject
and Derivatives Association Master
Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to
the applicablea
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 complym with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New
York Stock Exchange.
to International Swapsa
agreement upon
m
u
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty t
o the
r value of all
applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate faiff
derivative instruments with the aforementioned features that are in a net liability position at December 31, 2020 was
approximately $0.9 billion, which represents the maximum amount the Company would be required to pay upon termination.
This amount is fully collateralized.
t
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
11. FAIR VALUE MEASUREMENTS
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSRs that are
and MSR is the amount that would be received to sell an
accounted for at fair value. The fair value of a financ
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
rr
ial instrument
ff
GAAP requires classificat
ion of financial instruments and MSRs 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 liabila
ities (Level 1) and the lowest priority to unobservable inputs (Level 3).
ff
If the inputs used to measure the financial instruments and MSRs 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
r value on the Consolidated Statements of Financial Condition or disclosed in the related notes are
liabilities recorded at faiff
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 liabia lities in active
markets.
F-35
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
term of the financial
inputs that are observablea
instrument.
for the asset or liability, either directly or indirectly, for substantially the full
ff
Level 3 – inputs to the valuation methodology are unobservablea
and significant to overall fair
ff
value.
The Company designates its securities as trading, available-foff r-sale or held-to-maturity depending upon the type of security and
as available-for-sale and trading are
the Company’s intent and ability to hold such security to maturity. Securities classifiedff
reported at faiff
r value on a recurring basis.
The following is a description of the valuation methodologies used for instruments carried at faiff
are applied to assets and liabilities across the three-level faiff
r value hierarchy, with the observabila
appropriate level.
r value. These methodologies
ity of inputs determining the
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally
es common market pricing methods,
estimated prices for similar assets using internal models. The Company incorporat
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,a
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 comparim ng 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.
r
ff
Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives 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, residential mortgage loans, interest rate
f the Company’s securities to those actively
swaps, swaptions, TBA derivatives and MBS options markets and the similarity ot
traded enablea
formulating fair value
measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swapsa ,
swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
the Company to observe quoted prices in the market and utilize those prices as a basis forff
quoted prices
The fair value of commercial mortgage-backed securities classified as availablea
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 faiff
-for-sale is determined based upon
r value are classified as Level 2.
u
For the fair value of debt issued by securitization vehicles, refer to the Note titled “Variable Interest Entities” forff
information.
additional
its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for
The Company classifiesff
inputs in their valuations. These valuations
these investments are obtained from models, which use significant unobservablea
market data inputs including prepayment rates,
primarily utilize discounted cash flow models that incorporate unobservablea
to valuations obtained from third-
delinquency levels, costs to service and discount rates. Model valuations are then compared
party pricing providers. Management reviews the valuations received froff m 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 observablea
ntly impact the resulting
fair value and therefore the Company’s financial statements.
inputs may significaff
m
The following tables
basis. There were no transfers between levels of the faiff
a
present the estimated fair values of financial instruments and MSRs measured at fair
ff
value on a recurring
r value hierarchy during the periods presented.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-36
ANNAA ALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Assets
Securities
December 31, 2020
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Agency mortgage-backed securities
$
— $
74,067,059
$
— $
74,067,059
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
Other derivatives
Total assets
Liabilities
Debt issued by securitization vehicles
$
Participations issued
Derivative liabilities
Interest rate swaps
Other derivatives
Total liabilities
Assets
Securities
—
—
—
—
—
—
506
506
—
—
—
19,413
532,403
972,192
80,742
345,810
—
6,035,671
170,628
—
—
—
—
100,895
—
—
532,403
972,192
80,742
345,810
100,895
6,035,671
171,134
$
82,204,505
$
100,895
$
82,305,906
5,652,982
39,198
1,006,492
7,440
—
—
—
—
5,652,982
39,198
1,006,492
26,853
$
19,413
$
6,706,112
$
— $
6,725,525
December 31, 2019
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Agency mortgage-backed securities
$
— $
112,893,367
$
— $
112,893,367
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
—
—
—
—
—
—
—
77,889
531,322
1,135,868
273,023
1,647,787
—
—
—
—
—
378,078
6,066,082
1,199
34,468
—
—
—
531,322
1,135,868
273,023
1,647,787
378,078
6,066,082
1,199
112,357
$
$
$
77,889
$
122,583,116
— $
5,622,801
$
$
378,078
$
123,039,083
— $
5,622,801
—
84,781
706,862
12,223
—
—
706,862
97,004
84,781
$
6,341,886
$
— $
6,426,667
Quantitaii
tive Information about Level 3 FairFF
Value MeMM asurementstt
a
inputs to be those for which market data is not available and that are developed using the
The Company considers unobservablea
the assumptions that market participants would use when pricing the asset. Relevant
best information available to us about
value. The sensitivities of significant unobservablea
inputs vary depending on the nature of the instrument being measured at fair
inputs and their impact on the fair value
inputs along with interrel
measurements are described below. The effecff
t 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
and
always have a linear effecff
t on the inputs discussed below. Interrelationships may also exist between observablea
ationships between and among the significant unobservablea
r
ff
F-37
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
inputs. Such relationships have not been included in the discussion below. For each of the individual relationships
unobservablea
y. For MSRs, in general, increases in the discount,
described below, the inverse relationship would also generally appl
prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower faiff
r 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 turnt
to the Note titled “Mortgage Servicing
Rights” for additional information.
could result in a decline in the estimated fair value of MSRs. Referff
a
The tablea
Level 3 MSRs. The table does not give effecff
these Level 3 investments.
below presents information about the significant unobservable inputs used forff
recurring fair value measurements forff
t to the Company’s risk management practices that might offset risks inherent in
December 31, 2020
December 31, 2019
Valuation Technique
Discounted cash flow
Unobservable Input (1)
Discount rate
Prepayment rate
Delinquency rate
Cost to service
Range
(Weighted Average ) (2)
9.0% - 12.0% (9.4%)
19.3% - 55.5% (42.0%)
0.0% - 6.0% (2.5%)
$83 - $108 ($98)
Unobservable Input (1)
Discount rate
Range
(Weighted Average ) (2)
9.0% - 12.0% (9.3%)
Prepayment rate
6.3% - 26.6% (13.7%)
Delinquency rate
0.0% - 4.0% (2.2%)
Cost to service
$81 - $135 ($107)
(1)
Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these
assets.
(2) Weighted average discount rate computed based on the fair value of MSRs, weighted average prepayment rate, delinquency rate and
cost to service based on unpaid principal balances of loans underlying the MSRs.
The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at faiff
December 31, 2020 and 2019.
r value at
Financial assets
Loans
December 31, 2020
December 31, 2019
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(dollars in thousands)
Commercial real estate debt and preferred equity, held for investment (1)
$
1,372,430
$
1,442,071
$
1,606,091
$
1,619,018
Corporate debt held for investment
Assets transferred or pledged to securitization vehicles
2,239,930
874,349
2,226,045
928,732
2,144,850
936,378
2,081,327
944,618
Financial liabilities
Repurchase agreements
Other secured financing
Mortgage payable
(1)
Includes assets of consolidated VIEs.
$
64,825,239
$
64,825,239
$ 101,740,728
$ 101,740,728
917,876
426,256
917,876
474,779
4,455,700
485,005
4,455,700
515,994
investment, corporate debt, held for investment and mortgages
are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing
value measurements. Long term other secured financing are valued
Commercial real estate debt and preferred equq ity, held forff
payablea
approximates fair value and are considered Level 2 fair
using Level 2 inputs.
ff
12. GOODWILL AND INTANGIBLE ASSETS
Goodwillll
using the acquisition method if the acquisition is deemed to be a business. Under
The Company’s acquisitions are accounted forff
ial
the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financ
statements fromff
the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiablea
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.
ff
F-38
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Company tests goodwill for impairmm
ent 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 impaim rment test for goodwill compares the fair value of a reporting unit
with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its faiff
loss is
recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At December
31, 2020 and 2019, goodwill totaled $71.8 million.
r value, an impairment
r
Intangible all
ssets, net
Finite life intangible assets are amortized over their expected useful lives. The following tablea
lived intangible assets for the year ended December 31, 2020.
presents the activity of finite
Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2019
Intangible assets acquired
Intangible assets divested
Less: amortization expense
Balance at December 31, 2020
$
$
20,957
50,360
(5,320)
(10,471)
55,526
13. SECURED FINANCING
Reverse Repurchase and Repurchase
finances a significant portion of its assets with repurchase
agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers
and Servicing, and has determined that each of the finff ancing agreements meet the specified criteria in this guidance.
Agreementstt – The Companym
ee
ff
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 maturt
ity 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 floff ws 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 $64.8 billion and $101.7 billion of repurchase agreements with weighted average borrowing
rates of 0.82% and 1.99%, after
giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted
ies of 64 days and 65 days at December 31, 2020 and 2019, respectively. The Company has select
average remaining maturit
arrangements with counterparties to enter into repurchase agreements for $2.4 billion with remaining capacity of $1.9 billion at
December 31, 2020.
ff
t
At December 31, 2020 and 2019, the repurchase agreements had the following remaining maturities, collateral types and
weighted average rates:
December 31, 2020
Agency
Mortgage-
Backed
Securities
Non-Agency
Mortgage-
Backed
Securities
CRTs
Residential
Mortgage
Loans
Commercial
Loans
(dollars in thousands)
Commercial
Mortgage-
Backed
Securities
Total
Repurchase
Agreements
Weighted
Average
Rate
1 day
2 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 119 days (1)
$
— $
— $
— $
— $
— $
— $
—
30,151,875
10,247,972
8,181,410
2,154,733
12,008,920
129,993
16,073
99,620
—
—
354,904
161,274
259,401
—
76,799
—
—
—
—
—
—
—
128,267
142,336
28,406
—
30,841,838
10,567,655
8,568,837
2,154,733
274,860
107,924
271,801
28,671
12,692,176
Total
$ 62,744,910
$
245,686
$
1,050,439
$
184,723
$
271,801
$
327,680
$ 64,825,239
— %
0.29 %
0.42 %
0.30 %
0.23 %
0.36 %
0.32 %
F-39
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
December 31, 2019
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 119 days (1)
$
— $
— $
— $
— $
— $
— $
—
36,030,104
15,079,989
21,931,335
9,992,914
16,557,123
237,897
—
30,841
—
—
698,091
115,805
151,920
—
58,712
—
—
—
—
303,078
416,439
104,363
3,639
—
28,478
—
—
—
—
—
37,382,531
15,300,157
22,117,735
9,992,914
16,947,391
Total
$ 99,591,465
$
268,738
$
1,024,528
$
303,078
$
552,919
$
— $101,740,728
— %
2.15 %
2.00 %
1.97 %
1.97 %
1.90 %
2.03 %
(1)
Less than 1% of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020. No repurchase agreements had a remaining
maturity over one year at December 31, 2019.
The following tablea
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, 2020 and 2019. Refeff r to the “Derivative
Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.
December 31, 2020
December 31, 2019
Reverse Repurchase
Agreements
Repurchase
Agreements
Reverse Repurchase
Agreements
Repurchase
Agreements
(dollars in thousands)
Gross amounts
Amounts offset
Netted amounts
$
$
250,000
$
(250,000)
— $
65,075,239
(250,000)
64,825,239
$
$
100,000
$
101,840,728
(100,000)
(100,000)
— $
101,740,728
ff
Financing - The Company previously financ
Other Secured
ed a portion of its financial assets with advances froff m the Federal
SS
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, 2020, the Company did not hold
advances from the FHLB Des Moines. At December 31, 2019, $1.4 billion of advances from the FHLB Des Moines maturet
d in
less than one year and $2.1 billion matured between one to three years. The weighted average rate of the advances from the
FHLB Des Moines was 2.16% at December 31, 2019. The Company held $4.4 million and $147.9 million of stock in the FHLB
Des Moines at December 31, 2020 and December 31, 2019, respectively, which is reported at cost and included in Other assets
on the Company’s Consolidated Statements of Financial Condition. Referff
to the Note titled “Variable Interest Entities” for
additional information on the Company’s other secured financing arrangements.
excluding residential and
Investments pledged as collateral under secured financing arrangements and interest rate swaps,a
senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $70.6
billion and $0.2 billion, respectively, at December 31, 2020 and $112.8 billion and $357.9 million, respectively, at December
31, 2019.
F-40
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
Mortgage loans payablea
at December 31, 2020 and 2019, were as follows:
Property
Mortgage
Carrying
Value
Mortgage
Principal
December 31, 2020
Interest Rate
(dollars in thousands)
Fixed/Floating
Rate
Maturity Date
Priority
Joint Ventures
$
316,686
$
318,302
4.03% - 4.96%
Fixed
2024 - 2029
First liens
Joint Ventures
Virginia
Texas
Utah
Utah
Minnesota
Wisconsin
Total
16,607
24,464
31,127
9,706
6,969
13,039
7,658
16,325
25,000
32,582
9,706
6,986
13,072
7,677
L+2.15%
L+2.85%
3.28%
L+2.75%
3.69%
3.69%
3.69%
Floating
Floating
Fixed
Floating
Fixed
Fixed
Fixed
2/27/2022
5/1/2023
2048 - 2053
1/31/2021
6/1/2053
6/1/2053
6/1/2053
First liens
First liens
First liens
First liens
First liens
First liens
First liens
$
426,256
$
429,650
December 31, 2019
Property
Mortgage
Carrying
Value
Mortgage
Principal
Interest Rate
Fixed/Floating
Rate
Maturity Date
Priority
(dollars in thousands)
Joint Ventures
$
316,566
$
318,562
4.03% - 4.96%
Fixed
2024 - 2029
First liens
Joint Ventures
Virginia
Texas
Utah
Utah
Minnesota
Wisconsin
Total
16,029
82,940
31,667
9,706
7,077
13,243
7,777
16,325
84,702
33,167
9,706
7,096
13,276
7,797
L+2.15%
Floating
2.34% - 4.55%
3.28%
L+3.50%
3.69%
3.69%
3.69%
Fixed
Fixed
Floating
Fixed
Fixed
Fixed
2/27/2022
2036 - 2053
2048 - 2053
1/31/2020
6/1/2053
6/1/2053
6/1/2053
First liens
First liens
First liens
First liens
First liens
First liens
First liens
$
485,005
$
490,631
The following tablea
details futuret mortgage loan principal payments at December 31, 2020:
Mortgage Loan Principal Payments
(dollars in thousands)
2021
2022
2023
2024
2025
Later years
Total
$
$
11,123
17,890
26,626
105,635
186,929
81,447
429,650
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-41
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
14. CAPITAL STOCK
(A) Common Stock
The following tablea
31, 2020 and 2019.
provides a summary of the Company’s common shares authorized and issued and outstanding at December
Shares authorized
Shares issued and outstanding
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019 Par Value
Common stock
2,914,850,000
2,914,850,000
1,398,240,618
1,430,106,199
$0.01
During the year ended December 31, 2019, the Company closed the public offeff
ring of an original issuance of 75.0 million
shares of common stock for proceeds of $730.5 million before deducting offering expenses. In connection with the offering, the
Companym
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 $109.6 million in proceeds before deducting offering
expenses.
In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.5 billion
of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In
December 2020, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding
common shares through December 31, 2021 (the “New Share Repurchase Program”). The New Share Repurchase Program
replaced the Prior Share Repurchase Program. During the year ended December 31, 2020,
repurchased
32.4 million shares of its common stock for an aggregate amount of $208.9 million, excluding commission costs. During the
year ended December 31, 2019, the Company repurchased 26.2 million shares of its common stock for an aggregate amount of
$223.2 million, excluding commission costs. All common shares purchased were part of a publicly announced plan in open-
market transactions.
the Companym
The following table provides a summary orr
Program.
f activity related to the Company’s Direct Purchase and Dividend Reinvestment
Shares issued through direct purchase and dividend reinvestment program
Amount raised from direct purchase and dividend reinvestment program
$
(dollars in thousands)
166,000
1,175
$
180,000
1,795
December 31, 2020
December 31, 2019
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 Capita
l Inc.,
Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC,
Keefe,ff 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 tu
o $1.5 billion from time to time through any
of the Sales Agents. No shares were issued under the at-the-market sales program during the year ended December 31, 2020.
During the year ended December 31, 2019, the Company issued 56.0 million shares of common stock forff
proceeds of $569.1
million, net of commissions and fees, under the at-the-market sales program.
a
(B)
Preferred Stock
The following is a summary orr
f the Company’s cumulative redeemable preferred stock outstanding at December 31, 2020 and
2019. 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.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-42
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
Shares Authorized
Shares Issued And
Outstanding
Carrying Value
December
31, 2020
December
31, 2019
December
31, 2020
December
31, 2019
December
31, 2020
December
31, 2019
Contractual
Rate
Fixed-rate
(dollars in thousands)
Date At
Which
Dividend
Rate
Becomes
Floating
Floating
Annual
Rate
Earliest
Redemption
Date (1)
Series D
18,400,000
18,400,000
—
18,400,000
—
445,457
7.50%
9/13/2017
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
19,550,000
17,000,000
17,000,000
411,335
411,335
6.50%
3/31/2023
3/31/2023
Series I
18,400,000
18,400,000
17,700,000
17,700,000
428,324
428,324
6.75%
6/30/2024
6/30/2024
3M LIBOR
+ 4.993%
3M LIBOR
+ 4.172%
3M LIBOR
+ 4.989%
Total
(1)
85,150,000
85,150,000
63,500,000
81,900,000
$ 1,536,569
$ 1,982,026
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, 2020, the Company had declared and paid all
required quarterly dividends on the Company’s preferredr
stock.
During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of
7.50% Series D Cumulative Redeemable Preferre
d Stock (“Series D Preferred Stock”) for $460.0 million. The cash redemptim on
amount for each share of Series D Preferred Stock was $25.00.
ff
During the year ended December 31, 2019, the Companym
redeemed all 7.0 million of its issued and outstanding shares of
7.625% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) for $175.0 million. The cash
redemption amount for each share of Series C Preferred Stock was $25.00 plus accruedrr
and unpaid dividends to, but not
including, the redemption date of July 21, 2019.
During the year ended December 31, 2019, the Company redeemed all 2.2 million of its issued and outstanding shares of
d Stock (“Series H Preferred Stock”) for $55.0 million. The cash redemption
8.125% Series H Cumulative Redeemable Preferre
amount for each share of Series H Preferred Stock was $25.00 plus accruedr
and unpaid dividends to, but not including, the
redemption date of May 31, 2019.
ff
During the year ended December 31, 2019, the Company issued 17.7 million shares of its 6.750% Series I Fiixedd-to-Flloa iti gng
Rate
drred Stock )k”) ffor ggross proceedds ofo $442.5 million before
iative
l
Cumul
d ddeduc iti gng hthe u d
nderwri iti gng didiscount andd o hther e istima dted fofffefff
dd Sto kck ((“Seriies I P frefe
ringring expenses.
dRedeem blable
ff
fPreferre
i
The Series D Cumulative Redeemable Preferred Stock, Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred
Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company.
F-43
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
(C) Distributions to Stockholders
The following tablea
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 C preferred stockholders
Dividends declared per share of series C preferred stock
Dividends declared to series D preferred stockholders
Dividends declared per share of series D 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
Dividends declared to series I preferred stockholders
Dividends declared per share of series I preferred stock
For the Years Ended
December 31, 2020
December 31, 2019
(dollars in thousands, except per share data)
1,285,124
0.91
307,613
0.22
$
$
$
$
1,516,323
1.05
357,527
0.25
January 29, 2021
January 31, 2020
— $
— $
34,500
1.875
50,040
1.738
27,625
1.625
$
$
$
$
$
$
— $
— $
29,871
1.688
$
$
7,414
1.060
34,500
1.875
50,040
1.738
27,624
1.625
1,862
0.846
15,135
0.86
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
15. LONG-TERM STOCK INCENTIVE PLAN
Employees, Directors and other service providers of the Company are eligible to participate in the Company’s 2020 Equity
of stock options, share appreciation
Incentive Plan (the “Plan”), which provides for equity-based
rights, dividend equivalent rights, restricted shares, restricted stock units (“RSUs”), and other share-based awards. The
Companym
has the ability to award up to an aggregate of 125,000,000 shares under the terms of the Plan, subject to adjustment
for any awards that were outstanding under the Company’s 2010 Equity Incentive Plan (the “Prior Plan”, collectively the
tive date of the Plan and subsu equently expire, terminate, or are surrendered or forfeited. No new awards are
“Plans") on the effecff
permitted to be made under the Prior Plan, although existing awards remain effective.
compensation in the formff
tt
Restrict
ted Stock UnitsUU
The Company grants RSUs (including RSUs subject to performance conditions (“PSUs”)) to employees, which are generally
valued based on the closing price of the underlying shares on the date of grant. For RSUs that vest, the underlying shares of
common stock are delivered (net of required withholding tax) as outlined in the applicable award agreements. PSUs are subject
to the Company’s achievement of specified performance criteria and the number of awards that vest can range from zero to
150% of the grant amount. Award agreements generally provide that vesting is accelerated in certain circumstances, such as
ity. Delivery of the underlying shares of common stock, which generally occurs over a three-year period, is
death and disabila
conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements.
F-44
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The folff
lowing table sets forth activity related to the Company’s RSUs and PSUs awarded under the Plans:
For the year ended
December 31, 2020
Number of Shares
Weighted Average Grant
Date Fair Value
(dollars in thousands)
— $
1,790,759
(100,100)
(19,921)
1,670,738
—
$7.24
$9.99
$9.59
$7.05
Beginning balance
Granted (1)
Vested
Forfeited (1)
Ending balance (2)
(1) Includes dividend equivalent rights.
(2) The ending balance includes 404,589 PSUs and related dividend equivalent rights subject to performance
conditions and future service requirements, and represents the target amount of such PSUs that may be earned.
The Company recognized stock based compensation expense of $3.7 million forff
the year ended December 31, 2020. As of
December 31, 2020, there was $9.0 million of total unrecognized compensation cost related to non-vested share-based
compensa
tion arrangements. This cost is expected to be recognized over a weighted average period of 2.24 years.
m
16. 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 tablea
summarizes the interest income recognition methodology for Residential Securities:
Agency
ate pass-through (1)( )
Adjustable-rate pass-through ( )(1)
Multifamily (1)( )
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)( )
Interest Income Methodology
Effecff
Effecff
tive yield (3)( )
tive yield ( )(3)
Contractual Cash Flows
Effecff
tive yield ( )(3)
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
Prospective
(1)
(2)
(3)
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.
F-45
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
owing presents the components of the Company’s interest income and interest expense for the years ended December
ff
The foll
31, 2020, 2019 and 2018.
Interest income
Residential Securities (1)
Residential mortgage loans (1)
Commercial investment portfolio (1) (2)
U.S. Treasury securities
Reverse repurchase agreements
Total interest income
Interest expense
Repurchase agreements
Debt issued by securitization vehicles
Participations issued
Other
Total interest expense
Net interest income
2020
For the Years Ended December 31,
2019
(dollars in thousands)
2018
$
$
$
1,718,960
170,259
338,763
—
1,643
2,229,625
705,218
142,602
78
51,214
899,112
1,330,513
$
$
$
3,195,546
150,066
378,395
—
63,290
3,787,297
2,513,282
141,981
—
129,612
2,784,875
1,002,422
$
$
$
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
(1)
(2)
Includes assets transferred or pledged to securitization vehicles.
Includes commercial real estate debt and preferred equity and corporate debt.
17. NET INCOME (LOSS) PER COMMON SHARE
The following tablea
(loss) per share for the years ended December 31, 2020, 2019 and 2018.
presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income
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, 2020
December 31, 2019
December 31, 2018
For the Years Ended
(dollars in thousands, except per share data)
(889,772) $
(2,163,091) $
1,391
(891,163)
142,036
(226)
(2,162,865)
136,576
(1,033,199) $
(2,299,441) $
54,148
(260)
54,408
129,312
(74,904)
1,414,659,439
1,434,912,682
1,209,601,809
—
—
—
1,414,659,439
1,434,912,682
1,209,601,809
(0.73) $
(0.73) $
(1.60) $
(1.60) $
(0.06)
(0.06)
The computations of diluted net income (loss) per share availablea
(related) to common share for the year ended December 31,
2020 excludes 1.0 million of potentially dilutive restricted stock units and performance stock units because their effect would
have been anti-dilutive.
18. INCOME TAXES
For the year ended December 31, 2020 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 taxablea
income at the end of a year, the Company distributes such shortfall within the
next year as permitted by the Code.
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-46
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
The Company and certain of its direct and indirect subsiu
diaries, including Annaly TRS, Inc. 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 corporat
ral, state and local income taxes based upon their taxable
ff
income.
ion and subject to fede
r
The provisions of ASC 740, Income Taxes (“ASC 740”), clarify t
uncertainty in income taxes recognized in
ff
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, 2020 and 2019.
he accounting forff
t
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 filff ing feeff
s as well as certain excise, franchise or business taxes. The
ff
Company’s
ral, state and local taxes.
TRSs are subject to fede
m
During the years ended December 31, 2020, 2019 and 2018 the Company recorded ($28.4) million, ($10.8) million and ($2.4)
million, respectively, of income tax benefit attributable to its TRSs. The Company’s federal, state and local tax returns
from
2017 and forward remain open forff
examination.
t
19. RISK MANAGEMENT
The primary risks to the Company are capia tal, liquidity and funding risk, investment/market risk and credit risk. Interest rates
are highly sensitive to many factors, including governmental monetary arr
l economic
tors beyond the Company’s control. Changes in the general level of interest rates can
and political considerations and other facff
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.
nd tax policies, domestic and internationa
ff
r
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
k
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
time when prices are depressed. The
additional financing, the Company could be forced to sell its investments at an inopportune
Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses
and utilizing a range of hedging strategies.
t
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 forff
credit exposure, limiting transactions
with specific counterparties, maintaining qualifying collateral and continually assessing the creditworthiness of issuers,
borrowers, tenants and counterparties.
F-47
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Financial Statements
20. RELATED PARTY TRANSACTIONS
Closing of the IntII ernalization and Termination of Management Agreeg ment
r
es from their respective owners (the “Internalization”) forff
On February 12, 2020, the Company entered into an internaliz
ation agreement (the “Internalization Agreement”) with the
Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed
to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent
companim
nominal cash consideration ($1.00). In connection with the
closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager
(the net effect of which was immaterial in amount), and the Company transitioned fromff
an externally-managed real estate
investment trust (“REIT”) to an internally-managed REIT. At the closing, all employees of the Former Manager became
es of the Company. The parties also terminated the Amended and Restated Management Agreement by and between
m
employe
the Company and the Former Manager (the “Management Agreement”) and therefore the Companym
no longer pays a
management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former
Manager waived any Acceleration Fee (as defined in the Management Agreement).
Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the
sion and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s
supervi
u
investment portfolio; (ii) recommending alternative forms of capita
al raising; (iii) supervising the Company’s financing and
hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and
ropriate. In exchange for the
management services and activities relating to the Company’s assets and operations as appa
management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was
responsible forff
providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid
the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i)
o $17.28 billion, and (ii) 0.75% of Stockholders'
1.05% of Stockholders' Equity (as defined in the Management Agreement) up tu
Equity (as defined in the Management Agreement) in excess of $17.28 billion. The Company did not pay the Former Manager
any incentive fees.
For the six months ended June 30, 2020 prior to the closing of the Internalization, the compensation and management fee
d in accordance with the Management Agreement was $77.9 million. For the year ended Decembem r 31, 2019, the
computem
m
compensa
tion and management fee was $170.6 million.
reimbursed the Former Manager forff
Prior to the closing of the Internalization, the Companym
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 included the cost for certain legal, tax, accounting and other support and advisory
services provided by employees of the Former Manager to the Company. Pursuant to the Management Agreement, until the
closing of the Internalization, the Company reimbursed the Former Manager for the cost of such services, provided such costs
were no greater than those that would be payable to comparable third party providers. Expense reimbursements and related
waivers were routinely reviewed with the Audit Committee of the Board in conformance with established policies. For the years
ended December 31, 2020 and December 31, 2019, reimbursement payments to the Former Manager were $14.2 million and
$21.4 million, respectively. None of the reimbursement payments were attributable to compensation of the Company’s
executive officers.
At December 31, 2020 and December 31, 2019 the Company had amounts payable to the Former Manager of $0 and $15.8
million, respectively.
F-48
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
21. LEASE COMMITMENTS AND CONTINGENCIES
m
s of equity. The Company’s operating leases are primarily comprisem
to retained earnings or other
The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 with no impactm
d of a corporate offiff ce lease with a remaining
component
lease term of fivff e years. The corporat
e office lease includes an option to extend for up to five years, however the extension term
was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on
the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease
cost for the year ended December 31, 2020 was $3.2 million.
r
Supplemental information related to leases as of and for the year ended Decemberm 31, 2020 was as folff
lows:
Operating Leases
Classification
December 31, 2020
Assets
(dollars in thousands)
Operating lease right-of-use assets
Other assets
Liabilities
Operating lease liabilities (1)
Lease term and discount rate
Weighted average remaining lease term
Weighted average discount rate (1)
Other liabilities
Cash paid for amounts included in the measurement of lease liabilities
$
$
13,167
17,184
4.7 years
2.9%
(1)
Operating cash flows from operating leases
3,799
As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the
information available at adoption date in determining the present value of lease payments.
$
The following tablea
provides details related to maturities of lease liabilities:
Years ended December 31,
Maturity of Lease Liabilities
(dollars in thousands)
2022
2023
2024
2025
Later years
Total lease payments
Less imputed interest
Present value of lease liabilities
$
$
$
3,918
3,862
3,862
3,862
2,895
—
18,399
1,215
17,184
ii
Contingenc
ies
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, 2020 and 2019.
ff
22. 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, capia tal structure,
recordkeeping and conduct of directors, officers and employees.
F-49
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
ANNALY CAPITAL MANAGEMENT, INC. ANDAA
Financial Statements
SUBSIDIARIES
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 fromff
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 defauff
lt, to liquidate collateral held and in some
instances, to offset receivablea
s and payables with the same counterparty.tt
t
Arcola is required to maintain a minimum net capital
As a member of the Financial Industry Regulatory Authority (“FINRA”),
balance. At December 31, 2020, Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates
with capital in excess of its regulatory capita
by SEC Rule 15c3-1 at
December 31, 2020 was $422.3 million with excess net capital of $422.0 million.
ents. Arcola’s regulatory net capital
al requiremq
ff
as defined
RR
a
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
F-50
I
I
I
E
L
U
D
E
H
C
S
-
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
e
l
b
a
i
c
e
r
p
e
D
)
s
r
a
e
y
n
i
(
e
f
i
L
e
t
a
D
d
e
r
i
u
q
c
A
f
o
r
a
e
Y
n
o
i
t
c
u
r
t
s
n
o
C
d
e
t
a
l
u
m
u
c
c
A
n
o
i
t
a
i
c
e
r
p
e
D
)
1
(
l
a
t
o
T
n
o
i
t
a
i
c
e
r
p
e
D
d
e
t
a
l
u
m
u
c
c
A
d
n
a
e
t
a
t
s
E
l
a
e
R
-
I
I
I
e
l
u
d
e
h
c
S
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
d
(
0
2
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
d
e
i
r
r
a
C
s
t
n
u
o
m
A
s
s
o
r
G
0
2
/
1
3
/
2
1
d
o
i
r
e
P
f
o
e
s
o
l
C
d
e
z
i
l
a
t
i
p
a
C
t
s
o
C
o
t
t
n
e
u
q
e
s
b
u
S
n
o
i
t
i
s
i
u
q
c
A
y
n
a
p
m
o
C
o
t
t
s
o
C
l
a
i
t
i
n
I
d
n
a
s
g
n
d
i
l
i
u
B
d
n
a
s
g
n
d
i
l
i
u
B
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
s
t
n
e
m
e
v
o
r
p
m
I
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
s
e
c
n
a
r
b
m
u
c
n
E
$
2
4
6
,
8
1
$
2
7
6
,
4
1
$
0
7
9
,
3
$
9
$
2
7
6
,
4
1
$
1
6
9
,
3
$
5
7
8
,
2
1
$
8
3
8
3
8
3
8
3
8
3
8
3
8
3
8
3
7
2
5
2
8
2
4
2
2
3
5
2
8
2
1
3
7
2
9
2
9
2
1
3
6
2
8
2
5
2
4
3
7
2
8
3
4
4
6
3
8
1
8
3
3
3
8
3
4
3
7
3
8
1
2
2
1
3
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
5
2
/
1
1
5
1
0
2
/
4
1
/
8
5
1
0
2
/
7
2
/
0
1
6
9
9
1
4
9
9
1
8
9
9
1
9
9
9
1
4
9
9
1
2
9
9
1
6
9
9
1
5
9
9
1
8
8
9
1
8
8
9
1
)
6
4
5
,
3
(
)
8
6
3
,
3
(
)
3
2
1
,
3
(
)
1
6
4
,
3
(
)
1
0
4
,
2
(
)
4
2
4
,
2
(
)
4
7
7
,
1
(
)
6
4
0
,
2
(
)
5
5
2
,
3
(
)
9
7
9
,
7
(
5
1
0
2
/
0
2
/
0
1
8
0
0
2
,
8
7
9
1
)
5
7
5
,
8
(
4
1
0
2
/
0
1
/
1
1
7
5
9
1
)
7
3
0
,
8
(
4
1
0
2
/
0
1
/
1
1
0
0
0
2
,
7
9
9
1
)
4
4
3
,
5
(
4
1
0
2
/
0
1
/
1
1
4
1
0
2
/
0
1
/
1
1
4
1
0
2
/
0
1
/
1
1
4
1
0
2
/
0
1
/
1
1
4
1
0
2
/
0
1
/
1
1
4
1
0
2
/
0
1
/
1
1
4
1
0
2
/
0
1
/
1
1
8
7
9
1
6
8
9
1
8
9
9
1
2
7
9
1
7
9
9
1
7
9
9
1
8
9
9
1
)
7
1
3
,
3
(
)
1
7
8
,
2
(
)
9
8
1
,
2
(
)
4
2
8
,
4
(
)
9
2
7
,
1
(
)
3
8
7
,
1
(
)
6
1
2
,
1
(
4
1
0
2
/
0
1
/
1
1
8
9
9
1
,
1
8
9
1
)
2
7
8
,
2
(
4
1
0
2
/
0
1
/
1
1
5
1
0
2
/
2
2
/
7
4
1
0
2
/
9
/
4
0
2
0
2
/
3
2
/
3
0
2
0
2
/
8
2
/
8
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
6
9
9
1
5
9
9
1
2
0
0
2
0
9
9
1
7
7
9
1
2
1
0
2
4
0
0
2
3
8
9
1
6
0
0
2
1
0
0
2
6
0
0
2
2
0
0
2
5
0
0
2
6
8
9
1
0
0
0
2
9
9
9
1
)
4
6
4
,
2
(
)
7
0
4
,
2
(
)
0
8
9
,
2
(
)
1
7
5
,
1
(
)
1
8
(
—
—
—
—
—
—
—
—
—
2
1
5
,
7
1
9
4
8
,
8
1
4
5
4
,
9
1
5
1
9
,
3
1
6
5
2
,
0
1
0
7
0
,
2
1
7
8
0
,
6
1
7
0
,
8
1
1
3
0
,
9
3
7
7
7
,
5
7
0
8
0
,
8
2
5
4
0
,
5
2
5
6
4
,
4
1
4
6
0
,
3
1
5
1
4
,
7
8
5
0
,
9
1
1
0
7
,
5
5
3
7
,
5
0
3
5
,
4
8
3
1
,
2
1
7
0
2
,
2
1
7
5
0
,
2
1
2
1
2
,
7
1
9
6
7
,
5
3
9
9
4
,
4
4
—
—
—
—
—
—
—
—
—
6
9
8
,
2
1
6
3
1
,
4
1
1
9
4
,
4
1
3
8
9
,
9
0
6
5
,
7
9
9
4
,
8
8
2
6
,
4
8
9
0
,
3
1
9
5
1
,
9
2
8
7
7
,
3
4
8
5
9
,
3
2
6
5
8
,
0
2
6
2
5
,
2
1
2
3
9
,
0
1
1
4
8
,
6
0
2
6
,
6
1
8
5
3
,
5
5
1
9
,
4
3
2
1
,
4
6
7
8
,
0
1
0
9
9
,
8
5
7
7
,
9
9
0
7
,
3
1
9
6
2
,
2
2
9
9
4
,
6
—
—
—
—
—
—
—
—
—
6
1
6
,
4
3
1
7
,
4
3
6
9
,
4
2
3
9
,
3
6
9
6
,
2
1
7
5
,
3
9
5
4
,
1
3
7
9
,
4
2
7
8
,
9
9
9
9
,
1
3
2
2
1
,
4
9
8
1
,
4
9
3
9
,
1
2
3
1
,
2
4
7
5
8
3
4
,
2
3
4
3
0
2
8
7
0
4
2
6
2
,
1
7
1
2
,
3
2
8
2
,
2
3
0
5
,
3
0
0
5
,
3
1
0
0
0
,
8
3
—
—
—
—
—
—
—
—
—
)
8
2
8
(
)
2
5
4
,
1
(
8
5
6
,
1
1
0
2
4
,
8
8
5
8
,
0
1
0
2
4
,
7
0
0
8
0
0
0
,
1
5
0
2
8
4
2
4
1
1
1
9
0
2
9
1
2
5
9
6
8
2
9
7
4
5
5
1
,
1
6
4
5
,
1
4
2
2
5
4
2
3
9
1
,
1
7
2
5
0
4
6
3
9
,
1
—
6
7
5
4
0
6
9
0
2
0
0
4
4
7
3
—
)
1
3
4
,
5
1
(
)
4
5
0
,
2
1
(
)
0
4
9
,
1
2
(
)
4
6
3
,
5
1
(
)
9
3
7
,
1
1
(
)
1
8
0
,
6
1
(
)
3
9
9
,
2
1
(
)
1
4
7
,
2
1
(
)
8
7
0
,
6
(
—
—
1
9
6
,
2
1
8
8
8
,
3
1
7
7
4
,
4
1
2
7
9
,
9
1
5
3
,
7
0
8
2
,
8
3
3
5
,
4
2
1
8
,
2
1
0
8
6
,
8
2
3
2
6
,
2
4
3
1
4
,
2
2
7
1
6
,
0
2
9
5
2
,
2
1
0
4
7
,
9
3
1
8
,
6
4
8
6
,
4
1
2
2
9
,
4
5
1
9
,
4
7
1
1
,
4
9
1
8
,
0
1
6
8
3
,
8
6
6
5
,
9
9
0
3
,
3
1
5
9
8
,
1
2
9
9
4
,
6
1
6
0
,
5
1
4
9
8
,
1
1
0
3
8
,
8
1
4
9
8
,
3
1
9
4
5
,
1
1
1
4
0
,
4
1
3
2
6
,
2
1
1
8
1
,
2
1
8
6
3
,
5
8
5
8
,
0
1
0
2
4
,
7
6
1
6
,
4
3
1
7
,
4
3
6
9
,
4
2
3
9
,
3
6
9
6
,
2
1
7
5
,
3
9
5
4
,
1
3
7
9
,
4
2
7
8
,
9
9
9
9
,
1
3
1
2
1
,
4
4
0
2
,
4
1
6
9
,
1
1
3
1
,
2
5
7
5
8
3
4
,
2
4
7
3
0
2
8
7
0
4
2
6
2
,
1
7
1
2
,
3
2
8
2
,
2
3
0
5
,
3
0
0
5
,
3
1
0
0
0
,
8
3
0
7
3
0
6
1
0
1
1
,
3
0
7
4
,
1
0
9
1
0
4
0
,
2
0
7
3
0
6
5
0
1
7
0
0
8
0
0
0
,
1
7
1
8
,
1
1
2
9
6
,
2
1
5
8
0
,
3
1
7
9
7
,
9
2
9
4
,
7
9
2
9
,
8
7
3
6
,
4
0
5
7
,
2
1
0
0
9
,
5
2
0
0
5
,
7
5
8
5
5
,
3
2
8
8
8
,
2
1
7
4
4
,
9
0
7
2
,
8
6
0
4
,
5
0
0
0
,
5
1
2
9
4
,
3
6
5
3
,
7
5
1
4
,
3
7
8
8
,
7
0
3
2
,
7
0
0
7
,
7
—
0
0
0
,
5
2
—
—
—
—
—
—
—
—
—
—
7
4
8
,
8
9
5
5
,
6
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
f
o
r
e
b
m
u
N
s
e
i
t
r
e
p
o
r
P
n
o
i
t
a
c
o
L
X
T
,
n
o
t
l
l
o
r
r
a
C
-
l
i
a
t
e
R
X
T
,
o
n
a
l
P
-
l
i
a
t
e
R
X
T
,
e
n
i
v
e
p
a
r
G
-
l
i
a
t
e
R
X
T
,
d
n
u
o
M
r
e
w
o
l
F
-
l
i
a
t
e
R
X
T
,
d
n
u
o
M
r
e
w
o
l
F
-
l
i
a
t
e
R
X
T
,
d
n
u
o
M
r
e
w
o
l
F
-
l
i
a
t
e
R
X
T
,
e
n
i
v
e
p
a
r
G
-
l
i
a
t
e
R
X
T
,
o
n
a
l
P
-
l
i
a
t
e
R
L
F
,
o
g
r
a
L
-
l
i
a
t
e
R
C
D
,
n
o
t
g
n
i
h
s
a
W
-
y
l
i
m
a
f
i
t
l
u
M
A
C
,
y
e
l
l
a
V
s
s
a
r
G
-
l
i
a
t
e
R
Y
N
,
k
r
a
P
d
r
a
h
c
r
O
-
l
i
a
t
e
R
Y
N
,
a
g
a
w
o
t
k
e
e
h
C
-
l
i
a
t
e
R
Y
N
,
d
l
e
i
ff
f
n
e
P
-
l
i
a
t
e
R
Y
N
,
t
s
r
e
h
m
A
-
l
i
a
t
e
R
Y
N
,
o
i
r
a
t
n
O
-
l
i
a
t
e
R
Y
N
,
t
i
o
u
q
e
d
n
o
r
I
-
l
i
a
t
e
R
Y
N
,
n
w
o
t
s
e
m
a
J
-
l
i
a
t
e
R
H
O
,
e
h
t
o
c
i
l
l
i
h
C
-
l
i
a
t
e
R
A
G
,
e
l
l
i
v
n
a
g
o
L
-
l
i
a
t
e
R
H
O
,
e
h
t
o
c
i
l
l
i
h
C
-
l
i
a
t
e
R
N
T
,
e
l
l
i
v
x
o
n
KK
K
-
l
i
a
t
e
R
Y
N
,
w
a
s
r
a
W
-
l
i
a
t
e
R
Y
N
,
y
o
R
e
L
-
l
i
a
t
e
R
A
V
,
h
c
r
u
h
C
s
l
l
a
F
-
e
c
i
ff
f
f
O
C
D
n
o
t
g
n
i
h
s
a
W
-
l
i
a
t
e
R
A
V
,
n
o
d
g
n
i
b
A
-
e
r
a
c
h
t
l
a
e
H
A
V
,
y
t
i
C
e
s
a
h
C
-
e
r
a
c
h
t
l
a
e
H
A
V
,
g
r
u
b
s
k
c
i
r
e
d
e
r
F
-
e
r
a
c
h
t
l
a
e
H
A
V
,
e
l
l
i
v
s
e
n
i
a
G
-
e
r
a
c
h
t
l
a
e
H
A
V
,
p
a
G
n
o
t
g
n
i
n
n
e
P
-
e
r
a
c
h
t
l
a
e
H
A
V
,
s
a
s
s
a
n
a
M
-
e
r
a
c
h
t
l
a
e
H
A
V
,
d
r
o
f
d
a
R
-
e
r
a
c
h
t
l
a
e
H
A
V
,
l
l
e
w
e
p
o
H
-
e
r
a
c
h
t
l
a
e
H
A
V
,
e
g
r
o
F
n
o
t
f
i
l
C
-
e
r
a
c
h
t
l
a
e
H
X
T
,
n
e
l
l
A
-
e
r
a
c
h
t
l
a
e
H
X
T
,
o
c
s
i
r
F
-
e
r
a
c
h
t
l
a
e
H
F-51
I
I
I
E
L
U
D
E
H
C
S
6
3
9
1
6
2
4
3
1
2
1
3
6
3
3
3
1
3
8
3
2
3
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
8
1
0
2
/
7
/
9
4
0
0
2
2
9
9
1
4
0
0
2
3
1
0
2
,
9
0
0
2
4
0
0
2
4
1
0
2
4
1
0
2
1
1
0
2
9
0
0
2
5
0
9
1
/
8
/
7
5
0
9
1
/
7
/
7
)
0
0
0
,
1
(
)
8
7
0
,
1
(
)
7
8
8
(
)
7
9
7
(
)
9
7
5
(
)
8
0
1
,
1
(
)
1
3
0
,
1
(
)
5
6
6
(
)
4
4
7
,
1
(
)
7
0
4
,
1
(
)
4
3
9
,
1
(
5
4
4
,
1
1
5
0
7
,
0
1
7
7
1
,
7
0
9
8
,
7
4
4
1
,
9
0
0
7
,
9
8
2
0
,
7
2
7
4
,
4
1
0
6
3
,
8
8
2
0
,
0
2
7
7
6
,
9
1
4
7
2
,
2
2
7
2
5
,
6
0
2
0
,
7
4
0
9
,
8
0
4
0
,
9
8
1
6
,
6
2
2
4
,
3
1
0
7
6
,
7
8
1
6
,
9
1
7
4
0
,
9
1
6
7
6
,
1
2
0
4
7
0
5
6
0
7
8
0
4
2
0
6
6
0
1
4
0
9
6
0
1
4
0
3
6
8
9
5
0
5
0
,
1
—
—
—
—
—
—
—
—
2
0
4
3
7
1
1
7
4
,
3
5
0
7
,
0
1
7
2
5
,
6
0
2
0
,
7
4
0
9
,
8
0
4
0
,
9
8
1
6
,
6
2
2
4
,
3
1
0
7
6
,
7
6
1
2
,
9
1
6
7
5
,
5
1
1
0
5
,
1
2
0
4
7
0
5
6
0
7
8
0
4
2
0
6
6
0
1
4
0
9
6
0
1
4
0
3
6
0
0
6
0
5
0
,
1
9
9
9
,
8
1
1
2
,
4
6
6
9
,
3
7
7
6
,
7
2
7
3
,
7
0
0
7
,
5
6
0
7
,
9
6
8
9
,
6
0
9
2
,
6
1
9
8
8
,
2
1
7
2
3
,
6
1
1
1
1
1
1
1
1
1
1
1
1
X
T
,
d
n
a
l
r
a
G
-
e
r
a
c
h
t
l
a
e
H
X
T
,
n
o
s
i
n
e
D
-
e
r
a
c
h
t
l
a
e
H
X
T
,
e
l
l
i
v
s
i
w
e
L
-
e
r
a
c
h
t
l
a
e
H
I
W
,
a
n
u
a
k
u
a
K
-
e
r
a
c
h
t
l
a
e
H
N
M
,
o
t
a
k
n
a
M
-
e
r
a
c
h
t
l
a
e
H
N
M
,
o
t
a
k
n
a
M
-
e
r
a
c
h
t
l
a
e
H
T
U
,
e
g
r
o
e
G
.
t
S
-
e
r
a
c
h
t
l
a
e
H
T
U
,
e
g
r
o
e
G
.
t
S
-
e
r
a
c
h
t
l
a
e
H
A
L
,
n
o
t
g
n
i
v
o
C
-
e
r
a
c
h
t
l
a
e
H
A
G
,
e
g
d
i
R
e
u
l
B
-
e
r
a
c
h
t
l
a
e
H
S
K
,
n
o
i
s
s
i
M
-
e
r
a
c
h
t
l
a
e
H
)
7
4
1
,
0
0
1
(
$
2
1
9
,
3
6
6
$
2
7
6
,
9
9
4
$
0
4
2
,
4
6
1
$
)
9
1
2
,
0
1
1
(
$
1
5
8
,
0
0
6
$
0
8
2
,
3
7
1
$
2
5
6
,
9
2
4
$
8
4
.
)
d
e
t
i
d
u
a
n
u
(
n
o
i
l
l
i
m
5
.
1
8
6
$
s
a
w
0
2
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
s
e
s
o
p
r
u
p
x
a
t
e
m
o
c
n
i
l
a
r
e
d
e
F
r
o
f
,
n
o
i
t
a
i
c
e
r
p
e
d
e
r
o
f
e
b
,
s
t
n
e
m
e
v
o
r
p
m
i
d
n
a
s
g
n
i
d
l
i
u
b
,
d
n
a
l
f
o
t
s
o
c
e
t
a
g
e
r
g
g
a
e
h
T
)
1
(
:
d
e
t
n
e
s
e
r
p
s
d
o
i
r
e
p
e
h
t
g
n
i
r
u
d
d
y
t
t
i
v
i
t
c
a
e
t
a
t
s
e
l
a
e
r
r
u
o
s
t
n
e
s
e
r
p
e
l
b
a
t
g
n
i
w
o
l
l
o
f
ff
e
h
T
—
,
1
7
9
1
4
4
3
9
6
9
7
2
,
,
4
6
6
1
2
7
0
2
9
8
4
,
—
6
0
1
8
1
,
6
2
0
7
6
,
8
1
0
2
9
1
0
2
0
2
0
2
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
d
(
$
4
6
6
,
1
2
7
$
4
5
3
,
4
0
7
$
$
1
1
8
,
5
)
1
2
1
,
3
2
(
4
5
3
,
4
0
7
6
2
0
,
7
6
)
6
6
1
,
3
(
2
7
6
,
3
2
$
$
9
7
9
,
3
8
)
1
2
4
,
4
2
1
(
2
1
9
,
3
6
6
2
3
5
,
7
8
)
8
9
0
,
0
1
(
3
1
7
,
2
2
$
2
3
5
,
7
8
$
7
4
1
,
0
0
1
$
$
$
$
s
t
n
e
m
e
v
o
r
p
m
i
d
n
a
s
n
o
i
t
i
s
i
u
q
c
A
n
o
i
t
a
i
c
e
r
p
e
D
d
e
t
a
l
u
m
u
c
c
A
d
l
o
s
y
t
r
e
p
o
r
P
e
c
n
a
l
a
b
g
n
i
d
n
E
e
c
n
a
l
a
b
g
n
i
n
n
i
g
e
B
e
t
a
t
s
E
l
a
e
R
e
c
n
a
l
a
b
g
n
i
n
n
i
g
e
B
d
l
o
s
y
t
r
e
p
o
r
P
n
o
i
t
a
i
c
e
r
p
e
D
e
c
n
a
l
a
b
g
n
i
d
n
E
F-52
V
I
E
L
U
D
E
H
C
S
0
2
0
2
,
1
3
r
e
b
m
e
c
e
D
e
t
a
t
s
E
l
a
e
R
l
a
i
c
r
e
m
m
o
C
n
o
s
n
a
o
L
e
g
a
g
t
r
o
M
-
V
I
e
l
u
d
e
h
c
S
)
3
(
e
t
a
D
y
t
i
r
u
t
a
M
s
m
r
e
T
t
n
e
m
y
a
P
r
o
o
l
F
R
O
B
I
L
)
2
(
e
t
a
R
t
s
e
r
e
t
n
I
t
n
u
o
m
A
g
n
i
y
r
r
a
C
t
n
u
o
m
A
e
c
a
F
)
1
(
s
n
e
i
L
r
o
i
r
P
n
o
i
t
a
c
o
L
n
o
i
t
p
i
r
c
s
e
D
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
d
(
s
t
n
e
m
t
s
e
v
n
i
t
b
e
d
e
n
i
n
a
z
z
e
M
3
2
0
2
/
6
/
9
3
2
0
2
/
1
/
0
1
3
2
0
2
/
1
/
2
1
0
2
0
2
/
5
1
/
9
2
2
0
2
/
3
/
1
2
2
0
2
/
3
/
1
2
2
0
2
/
9
/
9
2
2
0
2
/
8
/
1
1
3
2
0
2
/
9
/
5
3
2
0
2
/
9
/
8
4
2
0
2
/
5
/
3
4
2
0
2
/
9
/
3
6
2
0
2
/
9
/
1
0
2
0
2
/
5
1
/
9
3
2
0
2
/
9
/
8
3
2
0
2
/
9
/
0
1
4
2
0
2
/
5
/
3
4
2
0
2
/
9
/
3
4
2
0
2
/
5
/
3
3
2
0
2
/
1
/
0
1
3
2
0
2
/
8
/
1
1
4
2
0
2
/
9
/
2
1
4
2
0
2
/
9
/
2
1
5
2
0
2
/
9
/
1
5
2
0
2
/
9
/
1
6
2
0
2
/
9
/
1
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
y
l
n
O
t
s
e
r
e
t
n
I
/
A
N
/
A
N
/
A
N
%
5
2
0
.
%
6
1
0
.
%
6
1
0
.
%
6
1
0
.
%
0
2
1
.
%
0
9
1
.
%
5
2
1
.
%
5
2
2
.
%
5
2
2
.
%
5
1
.
%
5
2
0
.
%
5
2
1
.
%
0
0
2
.
%
5
2
2
.
%
5
2
2
.
%
6
0
2
.
%
5
7
1
.
%
5
7
1
.
%
0
6
1
.
%
5
8
1
.
%
5
7
1
.
%
5
7
1
.
%
0
5
1
.
%
4
1
.
0
1
%
5
7
.
0
1
%
0
5
.
9
%
8
4
.
0
1
+
R
O
B
I
L
%
4
8
.
4
+
R
O
B
I
L
%
9
7
.
6
+
R
O
B
I
L
%
5
7
.
9
+
R
O
B
I
L
%
0
0
.
5
+
R
O
B
I
L
%
0
3
.
3
+
R
O
B
I
L
%
5
7
.
3
+
R
O
B
I
L
%
5
4
.
3
+
R
O
B
I
L
%
0
4
.
3
+
R
O
B
I
L
%
0
0
.
3
+
R
O
B
I
L
%
0
4
.
3
+
R
O
B
I
L
%
5
7
.
3
+
R
O
B
I
L
%
5
7
.
3
+
R
O
B
I
L
%
5
4
.
3
+
R
O
B
I
L
—
—
8
5
2
,
8
9
6
3
,
9
2
1
0
,
3
2
1
8
2
,
0
1
6
9
7
,
6
5
0
4
,
3
2
5
0
,
8
1
4
6
0
,
9
1
4
8
8
,
4
1
4
8
6
,
2
1
5
3
,
8
6
5
9
,
0
5
9
6
1
,
6
6
7
2
8
,
7
7
0
9
,
1
1
%
0
4
.
3
+
R
O
B
I
L
0
3
3
%
0
4
.
3
+
R
O
B
I
L
%
0
4
.
3
+
R
O
B
I
L
%
0
9
.
2
+
R
O
B
I
L
%
0
5
.
3
+
R
O
B
I
L
%
5
8
.
2
+
R
O
B
I
L
%
5
2
.
3
+
R
O
B
I
L
6
5
3
,
5
3
3
7
8
,
9
1
7
5
2
,
1
3
2
7
8
,
4
1
1
4
6
,
4
1
2
6
0
,
6
3
%
5
2
.
3
+
R
O
B
I
L
2
3
2
%
0
0
.
3
+
R
O
B
I
L
3
4
4
,
4
8
1
8
0
,
8
9
4
0
0
7
,
8
3
0
6
,
6
3
2
2
9
,
9
3
1
0
,
3
2
1
8
2
,
0
1
0
0
8
,
4
1
6
3
4
,
3
3
6
3
,
8
1
6
3
4
,
9
1
0
0
0
,
5
1
2
9
2
,
3
5
1
4
,
8
8
6
9
,
3
5
1
8
2
,
7
6
8
3
0
,
8
0
0
0
,
2
1
3
9
3
9
2
0
,
0
4
2
5
1
,
0
2
9
6
4
,
1
3
2
1
2
,
5
1
4
7
8
,
5
1
3
0
4
,
7
3
8
3
2
7
6
0
,
5
8
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
0
0
0
,
0
1
$
9
2
3
,
1
6
2
1
2
,
0
6
0
5
7
,
4
2
1
—
—
0
0
2
,
1
8
2
8
6
,
4
0
1
$
$
A
M
A
L
H
O
J
N
A
C
A
C
A
L
O
C
L
F
X
T
X
T
C
N
A
C
J
N
X
T
X
T
X
T
C
N
A
C
A
W
E
D
Z
A
C
N
Y
N
Y
N
L
F
l
i
a
t
e
R
e
c
i
f
f
O
l
i
a
t
e
R
e
c
i
f
f
O
e
c
i
f
f
O
e
c
i
f
f
O
l
e
t
o
H
l
i
a
t
e
R
e
c
i
f
f
O
e
c
i
f
f
O
e
c
i
f
f
O
l
i
a
t
e
R
e
c
i
f
f
O
s
e
g
a
g
t
r
o
m
t
s
r
i
F
e
c
i
f
f
O
e
c
i
f
f
O
l
e
t
o
H
e
c
i
f
f
O
l
i
a
t
e
R
l
i
a
t
e
R
y
l
i
m
a
f
i
t
l
u
M
e
r
a
c
h
t
l
a
e
H
y
l
i
m
a
f
i
t
l
u
M
y
l
i
m
a
f
i
t
l
u
M
e
c
i
f
f
O
l
a
i
r
t
s
u
d
n
I
l
a
i
r
t
s
u
d
n
I
F-53
$
5
8
3
,
8
6
5
$
.
e
t
a
R
r
e
f
ff
f
O
k
n
a
b
r
e
t
n
I
n
o
d
n
o
L
h
t
n
o
m
e
n
o
e
h
t
s
t
n
e
s
e
r
p
e
r
R
O
B
I
L
.
d
e
s
i
c
r
e
x
e
e
r
a
s
n
o
i
t
p
o
n
o
i
s
n
e
t
x
e
l
l
a
s
e
m
u
s
s
A
.
s
n
e
i
l
y
t
i
r
o
i
r
p
y
t
r
a
p
-
d
r
i
h
t
s
t
n
e
s
e
r
p
e
R
)
1
(
)
2
(
)
3
(
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto dulyd
authorized, in the city of New York, State of New York.
ANNALY CAPITAL MANAAA
GEMENT, INC.
Date: February 18, 2021
By: /s/ David L. Finkelstein
David L. Finkelstein
Chief Executive Officer and Chief Investment Officer (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 capaci
ties and on the date indicated.
a
Signature
/s/ David L. Finkelstein
David L. Finkelstein
/s/ Serena Wolfe
Serena Wolfe
/s/ Francine J. Bovich
Francine J. Bovich
/s/ Wellington J. Denahan
g
Wellington J. Denahan
/s/ Katherine Beirne Fallon
Katherine Beirne Fallon
/s/ Thomas Edward Hamilton
Thomas Edward Hamilton
p
/s/ Kathy Hopinkah Hannan
Kathy Hopinkah Hannan
y
/ s/ Michael E. Haylony
Michael E. Haylon
/s/ John H. Schaefer
John H. Schaefer
/s/ Donnell A. Segalas
g
Donnell A. Segalas
/s/ Glenn A. Votek
Glenn A. Votek
/s/ Vicki Williams
Vicki Williams
Title
Date
Chief Executive Officer and Chief Investment Officer (Principal
Executive Officer)
February 18, 2021
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
February 18, 2021
Director
February 18, 2021
Director, Vice Chair of the Board
February 18, 2021
Director
Director
Director
February 18, 2021
February 18, 2021
February 18, 2021
Director, Chair of the Board
February 18, 2021
Director
Director
Director
Director
February 18, 2021
February 18, 2021
February 18, 2021
February 18, 2021
II-1
s
s
e
n
i
s
u
B
s
r
o
t
c
a
F
k
s
i
R
d
e
t
a
l
e
R
,
y
t
i
u
q
E
n
o
m
m
o
C
s
’
t
n
a
r
t
s
i
g
e
R
r
o
F
t
e
k
r
a
M
y
t
i
u
q
E
f
o
s
e
s
a
h
c
r
u
P
r
e
u
s
s
I
d
n
a
s
e
i
t
i
r
u
c
e
S
s
r
e
t
t
a
M
r
e
d
l
o
h
k
c
o
t
S
d
e
t
c
e
l
e
S
a
t
a
D
l
a
i
c
n
a
n
i
F
s
’
t
n
e
m
e
g
a
n
a
M
d
n
A
n
o
i
s
s
u
c
s
i
D
s
i
s
y
l
a
n
A
x
e
d
n
I
t
i
b
i
h
x
E
l
a
i
c
n
a
n
i
F
s
t
n
e
m
e
t
a
t
S
s
e
r
u
t
a
n
g
i
S
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
Glossary of Terms
ACREG:
AMML:
ARC:
BBREMTG:
Refers to Annaly Commercial Real Estate Group
Refers to Annaly Middle Market Lending Group
Refers to Annaly Residential Credit Group
Represents the Bloomberg Mortgage REIT Index as of January 29, 2021, including
Annaly
Continuing Directors:
Represents the eleven members of the Board following the 2021 Annual Meeting
(assuming all nominees are elected)
CRE CLO:
Refers to Commercial Real Estate Collateralized Loan Obligation
CRT:
Refers to Credit Risk Transfer Securities
Dedicated Capital:
Represents the capital allocation for each of the four investment strategies
calculated as the difference between each investment strategies assets and related
financing. This calculation includes TBA purchase contracts and excludes non-
portfolio related activity and will vary from total stockholders equity
ESG:
Refers to Environmental, Social and Governance
Ginnie Mae:
Refers to the Government National Mortgage Association
GSE:
Refers to government sponsored enterprise
mREITs or mREIT Peers:
Represents constituents of the BBREMTG Index, excluding Annaly, as of
January 29, 2021
Non-QM:
Refers to a Non-Qualified Mortgage
OBX Securities:
Refers to Onslow Bay Securities. Onslow Bay is a wholly owned subsidiary of Annaly
Capital Management, Inc.
TBA Securities:
To-Be-Announced securities
Unencumbered Assets:
Represents Annalys 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, other unencumbered
financial assets and capital stock)
17
Annaly Capital Management Inc. 2020 Annual Report
Endnotes
Annaly | Progressive Approach, Proven Resultss
Source: Company filings and Bloomberg. Market data as of January
29, 2021. Financial data as of December 31, 2020.
1. Permanent capital represents Annalys total stockholders equity
as of December 31, 2020.
2. Represents total shareholder return for the period beginning
October 7, 1997 through January 29, 2021.
3. Data shown since Annalys initial public offering in October 1997
through January 29, 2021 and includes common and preferred
dividends declared.
Annaly | Power, Proven, People
1. On March 25, 2021, Annaly announced the planned divestiture of
its Commercial Real Estate business. Subject to customary
closing conditions, including applicable regulatory approvals, the
transaction is expected to be completed by Q3 2021.
Annaly Inveestment Strategies (contd)
4. On March 25, 2021, Annaly announced the planned divestiture of
its Commercial Real Estate business, which is expected to have an
immaterial impact on key financial metrics, including book value,
core earnings and the Companys dividend. Subject to customary
closing conditions, including applicable regulatory approvals, the
transaction is expected to be completed by Q3 2021. Percentages
are based on economic interest and exclude the effects of
consolidated VIEs. The Companys limited and general partnership
interests in a commercial loan investment fund that are accounted
for under the equity method for GAAP are included within
mezzanine investments. Equity includes preferred equity and joint
venture interests in a social impact loan investment fund that is
accounted for under the equity method for GAAP. Whole loans
includes mezzanine loans for which Annaly Commercial Real
Estate Group is also the corresponding first mortgage lender.
Power of Annaly
Source: Company filings and Bloomberg. Market data as of January
29, 2021. Financial data as of December 31, 2020.
1. Representative of the BBREMTG Index. Excludes Annaly.
2. Permanent capital represents Annalys total stockholders equity
as of December 31, 2020.
Our Investment Straategies | Agency
Source: Company filings. Financial data as of December 31, 2020.
1.
Includes TBA purchase contracts (market value) of $20.4bn and is
shown net of debt issued by securitization vehicles of $0.6bn.
2. Represents Agency's hedging profile and does not reflect Annaly's
full hedging activity.
Proven Results
Source: Company filings and Bloomberg. Market data as of January
29, 2021. Financial data as of December 31, 2020.
1. Data shown since Annalys initial public offering in October 1997
through January 29, 2021 and includes common and preferred
dividends declared.
People First
Employee composition statistics as of December 31, 2020. Board
composition as of April 2021.
Message from Our CEO
Source: Company filings. Financial data as of December 31, 2020.
1.
Includes four residential whole loan securitizations totaling $1.8bn
in 2020 and one $257mm residential whole loan securitization in
2021. Intex data as of December 31, 2020. Does not include deals
backed by non-performing, re-performing or seasoned collateral.
2. Represents a non-GAAP financial measure. Refer to the Non-
GAAP Financial Measures section of the 10-K for additional
information.
3. Excludes fees and commissions.
4. Annalys current authorized share repurchase program expires in
December 2021.
Annaly Investment Strategies
Source: Company filings. Financial data as of December 31, 2020.
1. Permanent capital represents Annalys total stockholders equity
2.
as of December 31, 2020.
Includes TBA purchase contracts and MSRs. Other includes ARM,
HECM, CMO, IO, IIO and MSR securities, each equating to less
than 1% of the portfolio.
3. Shown exclusive of securitized residential mortgage loans of a
consolidated VIE and loans held by a master servicer in an MSR
silo that is consolidated by the Company. CRT includes both
Agency and Private CRT. Prime includes $1.2mm of Prime IO. OBX
Retained includes $74.4mm of Prime and Prime Jumbo IO. Prime
Jumbo includes both regular AM and IO.
Our Investmment Strrategies | Residential Credit
Source: Company filings. Financial data as of December 31, 2020.
1. Shown net of debt issued by securitization vehicles of $2.6bn.
Our Inveestmment Strrategies | Middle Market Lending
Source: Company filings. Financial data as of December 31, 2020.
1. Average Investment Size based on AMML principal balance
outstanding as of December 31, 2020.
2. Represents leverage rather than economic leverage and includes
non-recourse debt.
Commercial Real Estate | Planned Divestiture
Source: Company filings. Financial data as of December 31, 2020.
1. Financial data as of year end for each respective period and
shown net of debt issued by securitization vehicles. 2018, 2019
and 2020 portfolio values include CMBX derivatives (market value)
of $416.6mm, $340.7mm and $496.6mm, respectively.
Finaanccingg, Capital & Liquidity
Source: Company filings. Financial data as of December 31, 2020.
1. During Q4 2020, Annaly redeemed all outstanding shares of the
$460mm 7.50% Series D preferred stock and repurchased $34mm
of common stock, excluding fees and commissions.
2. Residential whole loan securitizations since the beginning of 2020
include: (1) a $375mm residential whole loan securitization in
January 2020; (2) a $468mm residential whole loan securitization
in February 2020; (3) a $489mm residential whole loan
securitization in July 2020; (4) a $515mm residential whole loan
securitization in September 2020; and (5) a $257mm residential
whole loan securitization in March 2021.
3. Amount excludes fees and commissions. Annalys current
authorized share repurchase program expires in December 2021.
Annaly Capital Management Inc. 2020 Annual Report
18
Endnotes (cont’d)
Operational Effiiciency
Source: Company filings. Financial data as of December 31, 2020.
1. Represents managements estimates of long-term operating
expense projections for the internalization and planned divestiture
of the Commercial Real Estate business based on historical
experience and other factors, including expectations of future
operational events and obligations, that are believed to be
reasonable. The Companys actual operating expenses and
timeframe for achieving any operating expense savings may differ
materially from managements projections. Managements
projections are based on a number of factors and uncertainties
and actual results may vary based on changes to our expected
general and administrative expenses, changes to the Companys
equity base, changes to the Companys business composition and
strategy, and other circumstances which may be out of
managements control.
2. Represents operating expense as a percentage of average equity
for the year ended December 31, 2020. Operating expense is
defined as: (i) for internally-managed peers, the sum of
compensation and benefits, 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.
Boaard Commpossition & Shareholder Engagement Efforrts
Board composition as of April 2021.
1. Representative of outreach during 2020-2021 proxy season and
shareholder base as of December 31, 2020. Shareholder data per
Ipreo.
Boaard of Directors
Board composition as of April 2021.
1. Donnell A. Segalas has not been renominated as a Director and
will step down from the Board following the Annual Meeting in line
with the Boards refreshment policy.
19
Annaly Capital Management Inc. 2020 Annual Report
Safe Harbor Notice
Annual Report is issued by Annaly Capital Management,
Inc. ("Annaly"), an internally-managed, publicly traded
company that has elected to be taxed as a real estate investment trust for federal income tax purposes. This Annual Report
is provided for investors in Annaly for informational purposes only and is not an offer to sell, or a solicitation of an offer to
buy, any security or instrument.
CCaauuttiioonnaarryy NNoottee RReeggggggggggaarrddiinngggggggggg FFoorrwwaarrdd--LLooookkiinngggggggggg SSttaatteemmeennttss
This Annual Report contains 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. Such statements include those relating to the Company’s future performance, macro outlook,
the interest rate and credit environments, tax reform and future opportunities. Actual results could differ materially from
those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties
related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and
financing conditions; 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 the Company’s assets; changes in business conditions and the
general economy; the Company’s ability to grow our commercial real estate business; the Company’s ability to grow its
residential credit business; the Company’s ability to grow its middle market lending business; credit risks related to the
Company’s 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; the Company’s ability to consummate any contemplated investment opportunities; changes in government
regulations or policy affecting the Company’s business; the Company’s ability to maintain its qualification as a REIT for U.S.
federal income tax purposes; and the Company’s ability to maintain its 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 our most recent Annual Report on Form
10-K and any subsequent Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims 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.
We routinely post important information for investors on our website, www.annaly.com. We intend to use this webpage as a
means of disclosing material information, for complying with our 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 Investors section of our website, in addition to following our press
releases, SEC filings, public conference calls, presentations, webcasts and other information we post from time to time on
our 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, our webpage is not incorporated by reference into, and is not a part of, this document.
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. The information contained herein is not intended
to provide, and should not be relied upon for accounting, legal or tax advice or investment recommendations for Annaly or
any of its affiliates.
Regardless of source, information is believed to be reliable for purposes used herein, but Annaly makes no representation or
warranty as to the accuracy or completeness thereof and does not take any responsibility for information obtained from
sources outside of Annaly. Certain information contained in the presentation discusses general market activity, industry or
sector trends, or other broad-based economic, market or political conditions and should not be construed as research or
investment advice.
RR