ANNUAL REPORT 2023 R
R THE LEADER ACROSS RESIDENTIAL MORTGAGE FINANCE Annaly combines the power of capital together with sound strategy to best serve our shareholders. With a culture that champions diversity and talent, we work relentlessly to optimize risk-adjusted returns. With $11 billion in permanent capital(1), Annaly is a leading source of private capital for the U.S. housing sector. Note: Please refer to Glossary for defined terms and “Leader Across Residential Mortgage Finance” in Endnotes section for footnoted information.
FINANCIAL HIGHLIGHTS Note: Please refer to Glossary for defined terms and “Leader Across Residential Mortgage Finance” in Endnotes section for footnoted information. $74.3bn $11.3bn TOTAL ASSETS ACROSS ANNALY’S DIVERSE INVESTMENT STRATEGIES( 2 ) PERMANENT CAPITAL( 1) $25bn+ 6.0% COMMON AND PREFERRED DIVIDENDS DECLARED( 5 ) 2023 ECONOMIC RETURN COMMUNITY DEVELOPMENT PROJECTS( 7 ) $6.2bn 748% TOTAL ASSETS AVAILABLE FOR FINANCING( 3 ) TOTAL SHAREHOLDER RETURN SINCE IPO(4 ) 850k+ 25+ AMERICAN HOMES FINANCED(6) 3 2023 ANNUAL REPORT
Market Cap ($mm) | Annaly vs. mREIT Peers(1) Annaly’s Size, Scale and Diversification POWER OF ANNALY The industry leading mREIT with a differentiated investing model Note: Please refer to Glossary for defined terms and “Power of Annaly” in Endnotes section for footnoted information. – $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Peer 10 Peer 11 Peer 12 Peer 13 Peer 14 Peer 15 Peer 16 Peer 17 Peer 18 Peer 19 Peer 20 Peer 21 Peer 22 Peer 23 Peer 24 Peer 25 Peer 26 Peer 27 Peer 28 Peer 29 Peer 30 Peer 31 Peer 32 Peer 33 Peer 34 Annaly Market Cap: $9.7bn Peer Median Market Cap: $826mm R Scale 12x 1.42% $11.3bn $6.2bn Operating Efficiency Diversified Liquid At 12x the size of the median mortgage REIT by market cap(1), we are a leader across the residential mortgage finance market Annaly operates a highly institutionalized platform and benefits from its scale and efficiency, operating at lower cost levels than peer averages Annaly is able to efficiently diversify investments across our businesses through a rigorous shared capital model and capital allocation process Our diversified, lower leveraged strategy supports enhanced liquidity, including $6.2bn of total assets available for financing,(3) including $3.8bn of cash and unencumbered Agency MBS Larger than Median mREIT by Market Cap(1) Permanent Capital(2) Total Assets Available for Financing(3) Operating Expense as a Percent of Average Equity 4 ANNALY CAPITAL MANAGEMENT, INC.
Proven over 25 years to be a competitive source of yield for shareholders PROVEN RESULTS Note: Please refer to Glossary for defined terms and “Proven Results” in Endnotes section for footnoted information. Annaly has delivered a total return of 748% since its IPO(2) Since inception, Annaly has delivered $25bn+ in dividends to shareholders(1) ($ in millions) – $4,000 $8,000 $12,000 $16,000 $20,000 $24,000 $28,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Prior Cumulative Dividends Declared Dividends Declared During Year (100%) 100% 300% 500% 700% 900% 1,100% 10/10/1997 1/19/2001 4/30/2004 8/10/2007 11/19/2010 2/28/2014 6/9/2017 9/18/2020 12/29/2023 Annaly Bloomberg Real Estate Investment Trust Mortgage Index 178% 748% 5 2023 ANNUAL REPORT
PEOPLE FIRST OUR GREATEST ASSET IS OUR EMPLOYEES – HIGHLY SKILLED INDIVIDUALS WITH COMPLEMENTARY SETS OF PROFESSIONAL EXPERIENCE ACROSS SECTORS, CREDIT CYCLES AND FUNCTIONS – WHO COME TO WORK EVERY DAY COMMITTED TO THE LONGTERM SUCCESS AND GROWTH OF OUR COMPANY Note: Board composition and Operating Committee statistics as of April 2024. Employee composition statistics as of December 31, 2023. Diversity in Leadership Employee Gender and Racial / Ethnic Diversity of employees identify as women of Directors identify as women or racially / ethnically diverse 7 out of 12 of employees identify as racially / ethnically diverse of Board Committee Chairs identify as women or racially / ethnically diverse 4 out of 5 of Executive Officers identify as women 1 out of 4 of Operating Committee members identify as women or racially / ethnically diverse 7 out of 13 58% 35% 80% 39% 25% 54% Our People The deep and varied expertise of our talented professionals enhances our ability to drive value for our shareholders 6 ANNALY CAPITAL MANAGEMENT, INC. of new hires in 2023 identify as women or racially / ethnically diverse 80% of managers identify as women or racially / ethnically diverse 55%
TABLE OF CONTENTS 18 FINANCING, CAPITAL & LIQUIDITY 19 ONSLOW BAY STRATEGIC MILESTONES Corporate Responsibility & Governance Board Composition & Shareholder Engagement Board of Directors 20 21 22 CORPORATE RESPONSIBILITY & GOVERNANCE 8 MESSAGE FROM OUR CEO Agency Residential Credit Mortgage Servicing Rights 14 15 16 13 ANNALY INVESTMENT STRATEGIES 7 2023 ANNUAL REPORT
MESSAGE FROM OUR CEO DEAR FELLOW SHAREHOLDERS, 2023 was a year of definitive progress in Annaly’s strategic rededication to investing across all aspects of housing finance. Guided by our disciplined portfolio and risk management, we delivered a 6.0% economic return to our shareholders despite substantial market volatility, while also achieving key milestones that expanded our leadership across residential mortgage finance. As I’ve discussed in past letters, Annaly embarked on a strategic transition to shift our capital allocation from our flagship Agency MBS business after I assumed the role of CEO in 2020 towards investing across housing finance. In turn, we have built a platform that allocates capital across the rate and convexity component of the loan in Agency MBS, the credit component in Residential Credit or the interest payment component in MSR. Following the accretive dispositions of our Commercial Real Estate business in 2021 and Middle Market Lending business in 2022, we successfully redeployed capital into our Residential Credit and MSR portfolios, which are now each fully scaled and have become clear leaders within their respective sectors. Their combined presence on our balance sheet differentiates Annaly with a unique platform and capital allocation, which has enabled us to outperform our peer group with respect to economic return over the last two years(1). OPERATING ENVIRONMENT The last few years have proved to be an unusually difficult environment for fixed income investing, particularly Agency MBS. The technical picture has been persistently challenged as the Federal Reserve’s (the “Fed”) campaign to combat inflation has led to a historically rapid increase in the Federal Funds Rate and a notable reduction in the Fed’s balance sheet. Combined with pronounced volatility resulting from events including the regional banking crisis, debt ceiling negotiations, and economic uncertainty, market fundamentals have remained bleak and have led to significant disruption across fixed income sectors. Agency MBS faced additional headwinds given the two largest owners of the asset class, the Fed and banks, reduced their net holdings for much of last year. This led Agency MBS spreads to widen meaningfully above historical averages and, at times such as October 2023, to levels not seen outside of a crisis environment. PORTFOLIO PERFORMANCE Despite this investment landscape, Annaly’s proactive portfolio management and diversified capital allocation enabled us to deliver a strong economic return to shareholders, which outperformed all of our Agency-focused mREIT Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. While Agency MBS remains our core strategy, we believe our three complementary housing finance businesses support superior riskadjusted returns, a strong earnings profile, and stability across different interest rate and macro environments. 8 ANNALY CAPITAL MANAGEMENT, INC. residential mortgage loan – whether through the
peers and the Agency MBS index(2). As we were cognizant of continued elevated volatility entering 2023, we maintained a conservative leverage and liquidity posture. This deliberate positioning enabled us to weather bouts of volatility without the need for forced selling or raising dilutive equity or expensive debt. Critically, we were able to execute our strategic goals at an operating expense ratio of 1.42% – well below our peer group average(3), highlighting the scale and efficiency of our platform. Below are some key highlights from the year for our three businesses: Agency MBS: Throughout 2023, we prudently managed our Agency MBS portfolio with a focus on rotating into higher coupon securities and investing in high-quality specified pools in lieu of TBA securities. Accordingly, our portfolio’s weighted average coupon increased from 4.0% to 4.6% throughout the year. We also grew our fixed rate Agency CMBS position, which provides us with a high-yielding, stable cashflow with minimal negative convexity exposure. Given the evolving interest rate environment, we maintained a conservative hedge profile, navigating the year with an average hedge ratio above 100% and increasing our exposure to SOFR swaps due to their relative attractiveness as a hedge vehicle. Residential Credit: We further established our position as a preeminent buyer and securitizer of non-agency residential whole loans throughout the year. Bolstered by our Onslow Bay whole loan correspondent channel, our portfolio grew 14% year-over-year with $4.7 billion in whole loan purchases. While most of this growth was achieved through our traditional loan products, we also expanded into additional offerings including Home Equity Lines of Credit and Closed End Second-Lien Mortgages. We continue to regularly access the securitization markets, which provide an attractive source of non-recourse term financing. We also maintained our exceptional credit quality with the lowest D60+ ratio across the top 10 non-QM issuers(4). Mortgage Servicing Rights: Our MSR portfolio had another year of outsized growth with assets increasing 50% throughout 2023 to end the year at $2.7 billion. Annaly has now firmly established itself as a top 10 non-bank servicer, servicing 1.7% of the Agency MBS market(5). We are proud to have constructed a differentiated portfolio with one of the lowest weighted average coupons (3.06%) in the industry(6) supported by a pristine credit profile (original FICO of 758 and original LTV of 70%). Crucially, MSR is a natural hedge to Agency MBS with highly stable cash flows and is further supported by elevated float income given current interest rates. FINANCING, CAPITAL & LIQUIDITY Annaly’s ardent focus on liquidity, leverage and risk management has been critical to our ability to manage through the turbulence of the last few years and we have prioritized preserving liquidity and operating at lower leverage in order to protect our shareholders’ capital. We ended the year with economic leverage(7) of 5.7x, down from 6.3x at the end of 2022, and we continue to maintain significant liquidity, with $6.2 billion of total assets available for financing, including $3.8 billion in cash and Agency MBS(8). This provides us with ample dry powder to be opportunistic, while also staying disciplined in light of a shifting Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. 1.42% 2023 operating expense ratio $6.2 billion of total assets available for financing 9 2023 ANNUAL REPORT
operating environment. Throughout the year, we continued to diversify and expand our financing capabilities, including strong production from our securitization platform and expanded financing capacity for our credit businesses. Our Onslow Bay subsidiary remained a programmatic issuer of Prime Jumbo & Expanded Credit MBS, ending the year as the top non-bank issuer and second largest issuer overall(9). Since the beginning of 2023, Onslow Bay has issued 19 securitizations totaling $7.7 billion in proceeds(10). Further, we added $1.3 billion in warehouse capacity across our Residential Credit and MSR strategies, ending the year with $3.6 billion of total credit facility financing capacity. One benefit of Annaly’s diversified housing finance model is that we are able to finance our higher cost, higher barrier-to-entry credit businesses with lower cost repurchase market borrowings afforded by Agency MBS, effectively allowing Annaly to grow these verticals at lower financing costs than other market participants. COMMITMENT TO BEST-IN-CLASS CORPORATE RESPONSIBILITY & GOVERNANCE Core to Annaly’s culture is our long-standing commitment to corporate responsibility, bestin-class corporate governance and a culture that fosters and champions diverse talent and leadership. This past year, we were proud to issue our fourth annual ESG Report, highlighting our history of responsible housing finance leadership and our ongoing efforts to develop and execute our ESG strategy. We also appointed three new highly qualified independent directors to our Board in 2023 – adding a breadth of complementary skills and experiences and underscoring the Board’s goal of bringing a diverse range of backgrounds and perspectives to strengthen our industry leading corporate governance. OUTLOOK & CONCLUSION As we begin 2024, our outlook for each of our three investment strategies is optimistic. While the macro-economic path forward remains somewhat uncertain, all indications suggest that that we are likely entering a phase of less restrictive monetary policy, in which the Fed is expected to gradually lower policy rates and slow its balance sheet runoff. Along with potentially lower interest rate volatility and a more balanced supply and demand picture, the technical outlook for Agency MBS looks much improved entering 2024. Meanwhile, spreads remain at historically elevated levels, which supports compelling new money investment returns. In Residential Credit, with the housing market continuing to perform above expectations supported by historically low inventory, we are well-positioned to continue gaining share in the non-Agency market. In fact, in March 2024 we completed our largest securitization ever – a testament to the strong production from our whole loan correspondent channel(11). While we expect to continue to grow this business, we remain committed to keenly focusing on credit quality. We are also poised to continue growing our MSR business given our unique positioning as a preferred partner to originators. With supply expected to be robust in light of ongoing capital needs from the Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. $3.6 billion total credit facility financing capacity With the largest balance sheet in the sector and the most financing tools at our disposal, we are afforded significant optionality in how we grow and operate our business – a clear competitive advantage. 10 ANNALY CAPITAL MANAGEMENT, INC.
originator community, we stand ready with ample liquidity to acquire bulk MSR when accretive to do so. Further, we recently established strategic partnerships to acquire flow MSR when attractive which bolsters our MSR sourcing capabilities. As always, we are prepared for market turbulence and deliberate with respect to our posture in order to protect our shareholders’ capital. Yet, we are encouraged by the improvements in the operating environment that we have seen year-to-date and believe that Annaly’s diversified housing finance platform will best enable us to continue to deliver superior shareholder returns going forward. Since our inception, Annaly has delivered a 748% total stock return – outpacing the mortgage REIT index and S&P 500 – over a 27-year period marked by multiple crises and substantial changes in the mortgage market(12). Importantly, we have delivered over $25 billion in common and preferred dividends throughout this period and we are proud to have been a consistent source of income for our shareholders(13). On behalf of the entire Board and executive leadership team, we are grateful for your continued support of Annaly and look forward to updating you on our progress throughout the year. Sincerely, David Finkelstein Chief Executive Officer & Chief Investment Officer Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. David L. Finkelstein is Chief Executive Officer and Chief Investment Officer of Annaly. Mr. Finkelstein was elected to serve as a director of Annaly in March 2020. Mr. Finkelstein has over 25 years of experience in fixed income investments. Prior to joining Annaly in 2013, Mr. Finkelstein served for four years as an Officer in the Markets Group of the Federal Reserve Bank of New York where he was the primary strategist and policy advisor for the MBS Purchase Program. Prior to that, Mr. Finkelstein held senior Agency MBS trading positions at Salomon Smith Barney, Citigroup Inc. and Barclays PLC. Mr. Finkelstein is Vice Chair of the Treasury Market Practices Group sponsored by the Federal Reserve Bank of New York as well as a member of the Financial Sector Advisory Council of the Federal Reserve Bank of Dallas. 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. 748% total stock return since IPO 11 2023 ANNUAL REPORT
AT ANNALY, WE LEAD WITH PURPOSE which means being accountable for how we drive durable value for our stakeholders R
ANNALY INVESTMENT STRATEGIES WE ARE A LEADER ACROSS THE RESIDENTIAL MORTGAGE FINANCE MARKET $11.3bn Portfolio Overview(1) Permanent Capital(2) 62% of Dedicated Capital(4) Annaly Agency Group Pass Through Coupon Type(3) <=3.0% 10% 4.5% 14% 4.0% 16% 3.5% 13% 5.0% 18% 5.5% 13% >=6.0% 16% Note: Please refer to Glossary for defined terms and “Annaly Investment Strategies” in Endnotes section for footnoted information. 20% of Dedicated Capital(4) Annaly Residential Credit Group Sector Type(5) OBX Retained 24% Prime 3% Alt A 3% Subprime 4% NPL 7% RPL 14% Prime Jumbo 6% Whole Loans 22% CRT 17% 18% of Dedicated Capital(4) Annaly Mortgage Servicing Rights Group Loan Rate 2.5% to 3.0% 51% >4.0% 3% 3.5% to 4.0% 11% <2.5% 9% 3.0% to 3.5% 26% 13 2023 ANNUAL REPORT
AGENCY The Annaly Agency Group invests in Agency MBS collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae Assets ASSETS(1) DEDICATED CAPITAL(2) $65.7bn $7.0bn Strategic Approach Annaly’s Agency Portfolio is made up of high quality and liquid securities, predominantly specified pools, TBAs and derivatives Portfolio benefits from in-house proprietary analytics that identify emerging prepayment trends and a focus on durable cash flows Diverse set of investment options within the Agency market, including Agency CMBS, which provides complementary duration and return profiles to Agency MBS Access to deep and varied financing sources, including traditional bilateral repo and proprietary broker-dealer repo Seasoned team manages interest rate exposure inherent in Agency MBS through disciplined asset selection and an array of hedging products Note: Please refer to Glossary for defined terms and “Our Investment Strategies | Agency” in Endnotes section for footnoted information. Agency Portfolio Detail NLY Specified Pools and TBA Holdings, % Agency Hedging Composition, % Hedges(3) 0% 25% 50% 75% 100% 2020 2021 2022 2023 Pools TBA 0% 25% 50% 75% 100% 2020 2021 2022 2023 Swaps Swaptions Treasuries 14 ANNALY CAPITAL MANAGEMENT, INC.
OBX Securitization History – UPB Issued ($mm)(2) Top Prime Jumbo & Expanded Credit MBS Issuers ($mm)(3) RESIDENTIAL CREDIT The Annaly Residential Credit Group invests in non-Agency residential mortgage assets within the securitized product and whole loan markets ASSETS(1) DEDICATED CAPITAL $5.7bn $2.3bn Strategic Approach Programmatic securitization sponsor of new origination, residential whole loans with fifty-eight deals comprising $23 billion of issuance completed since the beginning of 2018(2) Agile platform that can deploy capital across both the residential whole loan and the Non-Agency securities markets Continued expansion of whole loan sourcing capabilities through the Onslow Bay correspondent channel Whole loan acquisition and securitization program provides the ability to create proprietary investments tailored to desired credit preferences with control over asset selection, counterparties and loss mitigation Modest use of balance sheet leverage with most positions term financed through securitization Note: Please refer to Glossary for defined terms and “Our Investment Strategies | Residential Credit” in Endnotes section for footnoted information. Annaly Securitization History $1,094 $2,095 $1,846 $3,857 $6,196 $7,693 3 5 4 10 16 19 2018 2019 2020 2021 2022 2023-2024YTD UPB Issued Deal Count 0 2 4 6 8 10 12 14 16 18Rank Issuer 2022–2023 1 JP Morgan 15,287 2 11,147 3 Invictus Capital Partners 11,021 4 Goldman Sachs 9,317 5 Blue River Mtg. / Angelo Gordon 5,179 6 Angel Oak 5,128 7 Lone Star Funds 4,756 8 A&D Mortgage 4,610 9 MFA Financial 3,949 10 Credit Suisse 3,373 15 2023 ANNUAL REPORT
MORTGAGE SERVICING RIGHTS The Annaly Mortgage Servicing Rights Group invests in mortgage servicing rights, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans MSR Holdings (Market Value, $mm) ASSETS(1) DEDICATED CAPITAL $2.7bn $1.9bn Strategic Approach MSR portfolio complements Annaly’s Agency MBS strategy by offering an attractive yield while providing a hedge to mortgage basis volatility and slower discount prepayment speeds As an established and scaled servicer, Annaly is wellpositioned for opportunistic and operationally efficient growth in both the bulk and flow MSR markets Annaly serves as a strategic partner to originators given certainty of capital and complementary business strategy Strong partnerships with network of subservicers Portfolio consists of low coupon, high quality conventional MSR (Fannie and Freddie)(2) Note: Please refer to Glossary for defined terms and “Our Investment Strategies | Mortgage Servicing Rights” in Endnotes section for footnoted information. MSR Portfolio Detail MSR by the Numbers(3) (Excludes Interests in MSR / MSR of LP Interest) $101 $545 $1,748 $2,122 $518 $42 $100 $39 $35 $2,675 $1,787 $645 $143 Q4 2020 Q4 2021 Q4 2022 Q4 2023 Unsettled MSR Commitments Interests in MSR / MSR of LP Interest MSR Portfolio Summary Collateral Characteristics Collateral Performance Market Value ($mm) $2,640 UPB ($bn) $188.3 Loan Count (‘000) 579 WAC 3.06% Avg Loan Size (‘000) $325 Orig FICO 758 Orig LTV 70% 1M CPR 2.7% 3M CPR 2.9% D30 0.7% D60+ 0.5% 16 ANNALY CAPITAL MANAGEMENT, INC.
R
Total Capitalization (as of December 31, 2023) FINANCING, CAPITAL & LIQUIDITY Annaly continued to enhance our leverage and liquidity position throughout the year, while our deep and diverse financing sources provide us with unique competitive advantages Note: Please refer to Glossary for defined terms and “Financing, Capital & Liquidity” in Endnotes section for footnoted information. Preferred Equity $1.5 billion Preferred Equity Agency & Non-Agency Repo(1) $63.4 billion In-House Broker-Dealer Street Repo Direct Repo Secured Financing $14.1 billion Credit Facilities / Warehouse Financing Non-Recourse Term Financing(4) 2023 Financial Highlights 2023 average economic cost of interest-bearing liabilities of 3.01%(2) Closed 19 residential whole loan securitizations totaling $7.7 billion(3) since the start of 2023 Weighted average days to maturity for repurchase agreements of 44 days at year end Total warehouse capacity across both Annaly’s MSR and Residential Credit businesses of $3.6 billion Raised $674 million of accretive common equity throughout 2023(5) Maintained significant liquidity throughout 2023 given market volatility; remained well-positioned for opportunistic growth – Ended the year with a strong liquidity position of $6.2 billion of total assets available for financing(6), including cash and unencumbered Agency MBS of $3.8 billion Common Equity $9.7 billion Common Equity 18 ANNALY CAPITAL MANAGEMENT, INC.
Onslow Bay, Annaly’s wholly owned subsidiary through which we purchase Non-Agency loans, issue securitizations and own MSR, has firmly established itself as a leader in the Residential Credit and MSR markets with significant growth in 2023 ONSLOW BAY STRATEGIC MILESTONES SINCE THE BEGINNING OF 2023 Largest non-bank issuer of Prime Jumbo & Expanded Credit MBS from 2022 to 2023(1) Since the beginning of 2023, completed 19 whole loan securitizations for $7.7 billion in proceeds(2) Purchased $4.7 billion in whole loans throughout 2023, of which $3.9 billion were acquired through our correspondent channel Record year of loan locks in 2023 with $7.6 billion in lock volume, and each quarter surpassed the prior quarter Portfolio continues to exhibit exceptional credit quality, including: – Original FICO of 758 and Original LTV of 68% – Mark-to-market LTV of 60% Top 10 non-bank servicer, servicing 1.7% of the Agency MBS market(4) MSR portfolio grew by nearly 1.5x to $2.7 billion in assets year-over-year(5) Fifth largest buyer of bulk MSR in 2023(6) onboarding over $42 billion of UPB throughout the year Attractive portfolio with very low WAC, stable cash flows and high credit quality collateral – WAC of 3.06% – Original FICO of 758 and LTV of 70% – 3 Month CPR of 2.9% Leading Securitizer Non-Bank Issuer of Prime Jumbo & Expanded Credit MBS and #2 Issuer Overall from 2022 to 2023(1) #1 Exceptional Credit Quality Lowest Delinquencies (D60+) Amongst Top 10 Non-QM Issuers(3) #1 Scaled Platform Non-Bank Servicer of the Agency MBS Market(4) Top 10 Portfolio Growth Largest Buyer of Bulk MSR in 2023(6) 5th Residential Credit Mortgage Servicing Rights Note: Please refer to Glossary for defined terms and “Onslow Bay Strategic Milestones” in Endnotes section for footnoted information. 19 2023 ANNUAL REPORT
CORPORATE RESPONSIBILITY & GOVERNANCE Annaly’s robust commitment to corporate responsibility and sound governance continues to lead the industry, as evidenced by our achievements and recognitions Milestones & Recognitions Environmental Social Governance Climate Risk Developed an in-house tool that provides the ability to estimate exposure to specific climate-related events in a timely manner and allows continual monitoring as conditions warrant >50% of our Operating Committee, managers, and employees identify as women or racially/ ethnically diverse $330k+ donated to more than 50 charitable organizations, along with over 900 companysponsored volunteer hours 58% of Directors are women and/or racially/ethnically diverse 92% of Directors are independent Political Engagement and Contribution Policy Codified our longstanding prohibition on the use of any corporate funds for political contributions or expenditures 4% Voluntary turnover in 2023, nearly 75% lower than the financial services sector average(1) 25+ Community development projects financed through a JV partnership with Capital Impact Partners 100% of Annaly’s Scope 1 and Scope 2 GHG emissions offset with Renewable Energy Certificates New Independent Directors Added three highlyqualified independent directors to our Board Published 4th ESG Report Published our fourth ESG Report, highlighting our continued focus on developing and executing our ESG strategy MSCI ESG Rating Received an “A” ESG rating from MSCI, highlighting our commitment to management of financially relevant ESG risks and opportunities Note: Please refer to Glossary for defined terms and “Corporate Responsibility & Governance” in Endnotes section for footnoted information. FTSE4Good Index Included in the FTSE4Good Index, an equity index measuring strong corporate ESG practices, for the fifth consecutive year in 2023 20 ANNALY CAPITAL MANAGEMENT, INC.
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, governance and strategic matters Board of Directors BOARD COMPOSITION & SHAREHOLDER ENGAGEMENT EFFORTS Tenure Age Diversity Note: Please refer to Glossary for defined terms and “Board Composition & Shareholder Engagement Efforts” in Endnotes section for footnoted information. Represents the average age of Directors of Directors identify as women or racially/ethnically diverse Represents the average tenure of Directors 2023–2024 Global Shareholder Engagement Efforts(1) Outreach included of top 100 institutional investors 100% Investor Meeting Participation investor meetings in 2023, up more than 50% year-over-year 200+ 5.7 Years 58% >10 Years 2 Directors <=5 Years 6 Directors 70’s 2 Directors 50’s 7 Directors Men 8 Directors Women 4 Directors White 7 Directors Racially/ Ethnically Diverse 5 Directors 60’s 3 Directors 6 to 10 Years 4 Directors Directors 12 Standing Board Committees 5 Directors are Independent 11 We take pride in our extensive outreach efforts and are committed to transparency, enhanced disclosure and continued engagement 58.5 Years 21 2023 ANNUAL REPORT
BOARD OF DIRECTORS Annaly’s Board of Directors possess a broad array of complementary skills and experience Note: Board composition as of April 2024. DAVID L. FINKELSTEIN Chief Executive Officer & Chief Investment Officer Annaly Capital Management, Inc. MICHAEL HAYLON Former Managing Director and Head of Conning North America Conning, Inc. Committees Nominating/Corporate Governance Risk Independent Chair of the Board FRANCINE J. BOVICH Former Managing Director Morgan Stanley Investment Management Committees Nominating/Corporate Governance (Chair) Management Development & Compensation MANON LAROCHE Former Managing Director, Head of Global Spread Products Securitized Sales, North America Citigroup Committees Corporate Responsibility Risk ERIC A. REEVES Founder and Chief Executive Officer Prospect Park LLC Committees Corporate Responsibility (Chair) Nominating/Corporate Governance Risk JOHN H. SCHAEFER Former President and Chief Operating Officer Morgan Stanley Global Wealth Management Committees Audit Management Development & Compensation 22 ANNALY CAPITAL MANAGEMENT, INC.
THOMAS HAMILTON Former Strategic Advisor to the Global Head of Fixed Income, Currencies and Commodities Barclays Capital Committees Risk (Chair) Audit Management Development & Compensation KATHY HOPINKAH HANNAN Former National Managing Partner, Global Lead Partner KPMG LLP Committees Audit (Chair) Management Development & Compensation Nominating/Corporate Governance MARTIN LAGUERRE Senior Advisor Warburg Pincus Committees Audit Corporate Responsibility GLENN A. VOTEK Former Chief Financial Officer Annaly Capital Management, Inc. Committees Corporate Responsibility Risk SCOTT WEDE Former Global Head of Securitized Products and Municipal Finance Barclays Capital Committees Audit Risk VICKI WILLIAMS Chief Human Resources Officer NBCUniversal Committees Management Development & Compensation (Chair) Nominating/Corporate Governance Note: Board composition as of April 2024. 23 2023 ANNUAL REPORT
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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, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _________________ COMMISSION FILE NUMBER: 1-13447 ANNALY CAPITAL MANAGEMENT INC (Exact Name of Registrant as Specified in its Charter) Maryland 22-3479661 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 1211 Avenue of the Americas New York, New York 10036 (Address of principal executive offices) (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 NLY New York Stock Exchange 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY.F New York Stock Exchange 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY.G New York Stock Exchange 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY.I New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ 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 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 securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentivebased compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ 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, 2023, the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $9.8 billion, based on the closing sales price of the registrant’s common stock on such date as reported on the New York Stock Exchange. The number of shares of the registrant’s common stock outstanding on January 31, 2024 was 500,080,287. DOCUMENTS INCORPORATED BY REFERENCE The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2023. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.
ANNALY CAPITAL MANAGEMENT, INC. 2023 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page Item 1. Business 1 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 43 Item 1C. Cybersecurity 43 Item 2. Properties 43 Item 3. Legal Proceedings 43 Item 4. Mine Safety Disclosures 43 PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 44 Item 6. Reserved 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 47 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 89 Item 8. Financial Statements and Supplementary Data 89 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 89 Item 9A. Controls and Procedures 89 Item 9B. Other Information 92 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 92 PART III Item 10. Directors, Executive Officers and Corporate Governance 93 Item 11. Executive Compensation 93 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 93 Item 13. Certain Relationships and Related Transactions, and Director Independence 95 Item 14. Principal Accounting Fees and Services 95 PART IV Item 15. Exhibits, Financial Statement Schedules 96 Exhibit Index 96 Item 16. Form 10-K Summary 100 Financial Statements 101 Signatures II-1
Special Note Regarding Forward-Looking Statements This presentation, other written or oral communications, and our public documents to which we refer contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. 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, 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 its residential credit business; the Company's ability to grow its mortgage servicing rights business; credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets; 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; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940; and operational risks or risk management failures by us or critical third parties, including cybersecurity incidents. 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. Website and Social Media Disclosure We use our website (www.annaly.com) and LinkedIn account (www.linkedin.com/company/annaly-capital-management) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Annaly when you enroll your email address by visiting the “Investors” section of our website, then clicking on “Investor Resources” and selecting “Email Alerts” to complete the email notification form. Our website, any alerts and social media channels are not incorporated into this annual report on Form 10-K.
PART I ITEM 1. BUSINESS “Annaly,” “we,” “us,” or “our” refers to Annaly Capital Management, Inc. and our wholly-owned subsidiaries, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” for definitions of certain of the commonly used terms in this annual report on Form 10-K. The following description of our business should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto, and the information set forth under the heading “Special Note Regarding Forward-Looking Statements” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” INDEX TO ITEM 1. BUSINESS Page Business Overview 2 Business and Investment Strategy 2 Our Portfolio and Capital Allocation Policy 3 Risk Appetite 3 Capital Structure and Financing 5 Operating Platform 6 Risk Management 6 Information about our Executive Officers 6 Human Capital 7 Regulatory Requirements 9 Competition 10 Corporate Governance 10 Distributions 10 Available Information 11 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS 1
Business Overview Introduction We are a leading diversified capital manager with investment strategies across mortgage finance. 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 real estate investment trust (“REIT”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities. We believe that our business objectives are supported by our size and conservative financial posture relative to the industry, the extensive experience of our employees, the diversity of our investment strategy, a comprehensive risk management approach, the availability and diversification of financing sources and our operational efficiencies. Investment Groups Our three investment groups are primarily comprised of the following: Investment Groups Description Annaly Agency Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including Agency commercial MBS. Annaly Residential Credit Group Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets. Annaly Mortgage Servicing Rights Group Invests in mortgage servicing rights ("MSR"), which provide the right to service residential mortgage loans in exchange for a portion of the interest payments made on the loans. In April 2022, we entered into a definitive agreement to sell substantially all of the assets that comprise our Middle Market Lending (“MML”) portfolio, including assets held on balance sheet as well as assets managed for third parties. During the year ended December 31, 2022, the assets comprising the MML portfolio were legally transferred. For additional information about this transaction, see the Note titled “Sale of Middle Market Lending Portfolio” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement Schedules.” In March 2021, we entered into a definitive agreement to sell and exit our Commercial Real Estate (“CRE”) business with the platform and the significant majority of the assets transferred during the year ended December 31, 2021. During the year ended December 31, 2022, the remaining CRE assets and associated liabilities were transferred. For additional information about this transaction, see the Note titled “Sale of Commercial Real Estate Business” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement Schedules.” Operating Platform 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 capital allocation modeling, portfolio cash and accounting sub-ledger systems, and other risk and reporting tools, which, coupled with cutting-edge digital transformation applications, support the diversification and operating efficiency of our business and our ability to implement new investment strategies. Our operating platform supports our investments in Agency assets as well as residential credit assets, commercial real estate assets, residential mortgage loans, and mortgage servicing rights. We believe that the diversity of our investment alternatives provides us the flexibility to adapt to changes in market conditions and to take advantage of potential opportunities. Business and Investment Strategy Shared Capital Model Our company is comprised of three investment groups, each of which has multiple investment options to capitalize on attractive relative returns and market opportunities. In aggregate, we maintain numerous investment options across our investment groups. Our shared capital model drives our capital allocation strategy allowing us to rotate our investments based on relative value while also managing risk. Strategic Relationships 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 efficiently manage operating ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS 2
costs, all in an effort to generate attractive risk-adjusted returns for our shareholders. Additionally, we have attracted capital partners to our business, augmenting our public capital markets efforts, 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. We have created multiple strategic and capital partnerships across our investment groups including the following: – Annaly Residential Credit Group has established relationships with key mortgage loan originators and aggregators including well-known money center banks, allowing us to efficiently source proprietary originations suited to our risk parameters. – We have partnered with GIC Private Limited (“GIC”), a leading sovereign wealth fund, 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 institution, to create a social impact joint venture supporting projects in underserved communities across the country. – We have partnered with Fifth Wall Ventures, the largest venture capital firm focused on technology for the real estate industry, through a commitment to invest in their funds that target investments in North American early- and late-stage real estate software and marketplace companies. The partnership aims to identify innovative platforms and services that provide efficiencies across our core investment strategies. Our Portfolio and Capital Allocation Policy Under our capital allocation policy and subject to oversight by our Board of Directors (“Board”), we may allocate our investments within our target asset classes as we determine to be appropriate from time to time. Our Board may adopt changes to our capital allocation policy and targeted assets at its discretion. The nature of our assets and our operations are intended to meet our REIT qualification requirements and our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”). Our portfolio composition and capital allocation at December 31, 2023 and 2022 were as follows: December 31, 2023 December 31, 2022 Asset Classes Percentage of Portfolio Capital Allocation (2) Percentage of Portfolio Capital Allocation (2) Agency (1)(2) 88% 61% 90% 66% Residential Credit (2) 8% 20% 7% 19% MSR (2) 3% 18% 2% 14% Commercial Real Estate 1% 1% 1% 1% (1) Includes to-be-announced forward contracts (“TBAs”). (2) Assets exclude assets transferred or pledged to securitization vehicles, include TBA purchase contracts (market value), unsettled MSR commitments, CMBX derivatives (market value), and retained securities that are eliminated in consolidation and are shown net of participations issued. Risk Appetite We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture. The risk appetite statement asserts the following key risk parameters to guide our investment management activities: ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS 3
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