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
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