Investment Strategy

Diversification is a key component of the Annaly strategy. Since 2010, Annaly has diversified its business model by investing in credit assets which complement its primary portfolio of interest rate sensitive investments. This strategy is designed to achieve stable risk-adjusted earnings and book value performance over various interest rate and economic cycles by pairing shorter duration, floating-rate credit securities with Annaly’s longer duration, fixed-rate agency portfolio. Annaly now has four distinct investment groups, which provide access to over 25 investment options and structures. While managing investment decisions, Annaly combines a robust capital allocation process with careful risk management. This process enables the company to take advantage of market fluctuations and inefficiencies and rotate into credit markets when dislocations occur and pricing is attractive on a risk-adjusted, relative value basis.

Agency

The Agency group invests in agency mortgage-backed securities

Residential Credit

The Residential Credit group invests in non-agency residential mortgage assets, both in the securitized product and whole loan markets

Commercial Real Estate

The Commercial Real Estate group originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments

Middle Market Lending

The Middle Market Lending group provides private equity backed financing to middle-market businesses across the respective capital structure

Under Annaly’s capital allocation policy, subject to oversight by the company’s Board, Annaly may allocate its investments within targeted asset classes as appropriate. As of December 31, 2016, Annaly’s diversification strategy reflected the following allocation of equity across four investment groups:

Evolution of Annaly’s Diversification

Annaly’s portfolio has evolved since inception to support its risk-adjusted return and stability. Pre-diversification, Annaly was a pure play agency mortgage REIT. Annaly is now a diversified capital manager with four distinct investment groups which provide more relative optionality and durability than the company had in the past.

    Pre Diversification(1) Current Diversification(2) Key Takeaways
Portfolio Positioning Market Cap $1.4bn
$11.3bn
  • Largest mREIT globally
Asset Classes Agency MBS Agency MBS
Resi Credit
CRE Debt & Equity
Corporate Debt
Mortgage Servicing Rights
  • More durable earnings and book value
Agency Portfolio Mix ~40% Fixed
~60% ARMs(3)
65% Spec Pools
16% Dollar Roll
13% ARMs
5% Other(4)
  • Agency strategy has evolved over time to manage various rate environments
Hedge Instruments No explicit hedges used
Barbelled portfolio
Pay Fixed/Receiver Swaps
Treasuries
EuroDollar Futures
  • More sophisticated use of hedging to protect earnings and book value
Economic Leverage 9.8x 6.4x
  • Conservative leverage profile relative to industry peers
2s10s Spread -1bps 113bps
  • Reinvestment spreads remain attractive
  1. Source: Financial data and market data as of December 31, 2005.
  2. Source: Financial data as of December 31, 2016. Market data as of March 31, 2017.
  3. ARMs inclusive of adjustable-rate pass-through securities and CMO floaters.
  4. CMO, Derivatives, GSE Credit Risk Sharing debt and Callable debt.

Scale

Annaly is the largest mortgage REIT with a market cap of $11.3 billion as of March 31, 2017. Annaly’s size contributes to its liquidity, diversification and overall optionality. Annaly demonstrated the value of this optionality in 2016 when it completed the acquisition of Hatteras Financial Corp., which was the largest mortgage REIT acquisition ever.

As Annaly has achieved scale across its investment groups, the company has increased the dedicated financing for each group resulting in a more optimal use of equity and yielding enhanced returns on this invested capital. Each of Annaly’s credit groups, Commercial Real Estate, Residential Credit and Middle Market Lending, now have seasoned performance, have grown to scale and have meaningfully contributed to the durability of book value without a single credit loss since their inceptions dating back to 2010.

Performance

Annaly has demonstrated consistent performance on both a long and short-term basis through a variety of market environments and historic periods of volatility. Since Annaly’s IPO in 1997, the company has generated total return of over 750% and declared over $15 billion in cumulative distributions to shareholders. Since restructuring its investment teams in 2013, Annaly has generated total return of over 60%.

Annaly’s fourteen quarter track record of declaring a $0.30 per share quarterly dividend exemplifies the company’s commitment to performance and long-term stability. Since 2014, through the end of 2016, Annaly has continued to pay this dividend while operating at 26% less leverage than its Agency mortgage REIT peers(1) while almost 70% of this peer group has cut dividends at least once.

This performance has been coupled with an efficient operating structure and conservative leverage profile. From 2012 through 2016, Annaly’s operating expenses averaged 1.59% as a percentage of equity and were 51% more efficient than mortgage REIT peers(2).

  1. Consists of AGNC Investment Corp. (“AGNC”), CYS Investments, Inc. (“CYS”), Capstead Mortgage Corp. (“CMO”), Armour Residential REIT, Inc. (“ARR”), and Anworth Mortgage Asset Corp. (“ANH”) (collectively, the “Agency mortgage REIT Peers”), and represent the agency mortgage REITs included in the BBREMTG Index as of March 31, 2017.
  2. BBREMTG Index with market capitalization above $200 million.

Alignment with Shareholders

Members of the Annaly team demonstrate their continued commitment to the company through their participation in the company’s employee stock purchase program which encourages members of the Annaly team to purchase shares in the open market. Establishing an ownership culture throughout the firm is paramount. Since 2011, the company’s current executive officers have purchased over two million common shares with an aggregate purchase price of over $23 million.