Message from our Chairman, CEO and President
Dear Fellow Shareholders,
2017 was a year of realization for Annaly. We enter 2018 having made significant progress on a number of key goals and initiatives further strengthening Annaly’s market leadership. Our size, liquidity, complementary strategies, operational efficiency and talented team are now more fully appreciated as differentiating competitive advantages in the marketplace of “Yield Manufacturers”. Our diversified and scalable model is the predominant reason for our consistent, attractive returns and ability to capitalize on the numerous opportunities we have anticipated. Outlined below is a summary of our competitive advantages, which illustrate how Annaly was able to outperform during the past year and, as importantly, why we are so uniquely positioned for the years ahead.
32% Total Shareholder Return in 2017, Outperforming Both the S&P 500 and Bloomberg mREIT Index by Nearly 50%1
In 2017, we produced a total shareholder return (TSR) of 32%, outperforming both the S&P 500 and the mREIT sector average by nearly 50%. 2017 was the best annual TSR for Annaly in the last decade – a tremendous accomplishment given the rising interest rate environment. Further, since 2014 when we began our diversification strategy, our TSR of 86% far exceeds the 57% return of the S&P 500. In March of 2018, we declared our 18th consecutive quarterly dividend of $0.30. The combination of our performance and durability together with our superior stock trading liquidity has become increasingly valuable as volatility returns to the markets. In fact, our low beta of 0.54 – a measure of a stock’s volatility in relation to the market – is nearly 50% less than the S&P 500 and is demonstrably lower than every single industry sector average in the Index, helping to shield our shareholders from the unpredictability in the broader marketplace.2 One of the most revealing indicators of performance for any yield manufacturing strategy, especially during heightened volatility, is stability in earnings and book value. Since our diversification strategy has begun to scale, our core earnings (excluding PAA) per common share has ranged from $0.29 to $0.34, representing only a 17% differential in earnings, which is 89% less volatile than the peer average in the marketplace.3
DIVERSIFIED SHARED CAPITAL MODEL
4 Businesses with 36 Complementary Investment Options
The strength and stability of our financial results is a function of our diversified shared capital model consisting of our four investment groups: Agency, Residential Credit, Commercial Real Estate and Middle Market Lending. Our three, lower levered, floating rate credit businesses complement the cash flow profile and counter cyclicality of our Agency portfolio and are instrumental to our performance. We have increased our investment options from 16 just three years ago to 36 across the businesses today, enhancing our ability to allocate capital efficiently and with more optionality. It is important to stress that Annaly is neither a mono-line business nor limited dual strategy, constrained to making investments in one or two asset classes, while being dependent on a single type of financing. Rather, our diversified and complementary investment and financing options create healthy internal competition for choosing the optimal alternative. Our shared capital model, which focuses on return on invested capital (“ROIC”) rather than growth of assets, is an inherent risk-return barometer for us. Put simply, our investment teams have the ability to say “no” without being penalized – which is a notable competitive advantage, especially relative to mono-line strategies as volatility has returned to almost every asset class in 2018. Over the past three years we have methodically grown our equity allocation to credit to 24% today, taking advantage of the best risk-adjusted opportunities in each of the businesses over various cycles.
RISK MANAGEMENT & LIQUIDITY
Deep Liquidity Represented by $9.1bn in Unencumbered Assets and Lower Leverage in Every Business4
As our shared capital model facilitates prudent investment decisions and optimal capital allocation, our enhanced size, liquidity and conservative leverage profile contribute to our position as a market leader in risk management. Annaly is now 20x the size of the median mREIT and our $9.1bn in highly liquid unencumbered assets exceed the average peer by a similar amount. On a standalone basis of roughly $3.5bn in equity capital, our three credit businesses would amount to one of the largest hybrid mREITs in the world and would be 5x the size of the median market capitalization for the 33 other mREITs in the industry. At year-end 2017, our economic leverage was demonstrably lower than the Agency sector, with our credit businesses operating at less than half the leverage levels of the rest of the market.5 Our more developed hedging strategies and access to diverse financing sources also combine to reduce our interest rate exposure and can act as a significant cushion in protecting our book value.
FINANCING & CAPITAL MARKETS LEADERSHIP
$2.8bn Raised; Expansion of Financing Options and Diversification of Financing Sources6
As part of our broader capital management strategies this past year, we secured incremental financing capacity, improved terms across our businesses and continued to diversify our counterparty exposure through new relationships unique to us. Financing the 36 product strategies across our investment groups includes numerous funding options, which add to our capacity for growth while insulating us from the obvious risks other, less developed models face today. From July 2017 to January 2018, Annaly successfully returned to the capital markets, opportunistically raising $2.8bn of common and preferred equity in four notable transactions. In July, we completed the 4th largest overnight common stock offering in the U.S. market in 2017. A week later, we issued the largest unrated preferred stock offering in the history of the U.S. capital markets. We raised additional proceeds in October 2017 and January 2018 through strategically timed common and preferred equity offerings, respectively. Our January 2018 preferred equity offering set a new, record low coupon in the unrated markets. Importantly, the proceeds raised from the two preferred equity offerings were used to redeem higher coupon preferred stock, materially reducing our cost of preferred capital. Most significant, the success of these offerings affirm the sponsorship and support we have established with our shareholders.
48% More Efficient than Peers as a Percentage of Equity; 61% More Efficient than Peers as a Percentage of Assets7
While we have made broad and significant investments over the past few years in both our investment platforms and financing strategies, we have not asked our shareholders to bear the incremental costs for this growth and diversification. We currently operate our multi-strategy model with four distinct investment groups on a highly efficient basis, and our outsized returns are in part attributable to our scalability, with an operating expense to equity ratio of 1.68%, 48% lower than the average of our industry peers. As a percentage of assets, this ratio is merely 0.25%, or 61% lower than the average mREIT. Since the beginning of 2014, we have invested over $11bn across our credit businesses, while maintaining these superior operating efficiencies. We have also built a proprietary infrastructure around the investment teams with a dedicated support staff of over 90 professionals to ensure best-in-class risk management, finance, strategy, legal and technology practices.
HUMAN CAPITAL & OWNERSHIP CULTURE
Investing in Intellectual Capital with 125+ New Hires Since 2014; 100% of Employees Subject to Stock Ownership Guidelines Have Purchased Annaly Shares
We have hired over 125 professionals since 2014, including senior members of our diversified investment and management teams, whom I congratulate for successfully executing our differentiated strategy. Across these teams, I have instituted and stressed the significance of an ownership culture. In 2016, we expanded our Employee Stock Ownership Guidelines whereby over 40% of our employees were not granted stock, but rather, were asked to purchase predetermined amounts of shares based on certain criteria including seniority, compensation level and role. I’m pleased that as of March 31, 2018, all individuals either met, or within the applicable period are expected to meet, the stock ownership guidelines. Recently, along with Annaly’s other NEOs, I voluntarily increased my commitment to purchase a total of $15mm of Annaly shares by 2020, to further emphasize my belief in this Company and its future.
Outreach to Shareholders Representing Over 70% of Institutional Ownership; 170 New Institutional Investors8
Throughout the past year, we have continued to expand the shareholder outreach efforts undertaken since I became CEO in 2015. We’ve redoubled our efforts to engage in meaningful dialogue around critical strategic and governance issues. In 2017, our engagement spanned new and existing investors in the U.S., Canada and Europe and included our inaugural investor day, attended by over 100 participants. Across our ownership base, we engaged with shareholders representing over 70% of the Company’s institutional ownership. We concluded 2017 with over 170 new institutional investors and our overall institutional shareholder base has increased over 30% since 2014. We deeply value the insights we have gained from our investors throughout these interactions and look forward to continuing to find new ways to engage with as many of you as possible over the coming year.
GOVERNANCE & SOCIAL RESPONSIBILITY
Increased Percentage of Women on the Board to 36%; Execution of Long-Term ESG Strategy9
Finally, well before ESG (Environmental, Social and Governance) became the popular acronym it is today, we were already highly focused on all aspects of corporate governance, especially since I became CEO. We are very proud of the addition of two new Board members, Vicki Williams and Katie Beirne Fallon, both with experience that is diverse and complementary to the composition of our Board. These additions bring the percentage of women on the Board to 36%. In the fourth quarter of last year, we initiated a firm-wide Women’s Interactive Network with a primary goal to facilitate increased dialogue and create a stronger sense of community across all women at the Firm. Annaly was named as one of only 103 companies globally to the Bloomberg Gender Equality Index – following a year in which we hired and promoted talented female leadership which now make up over one-third of the Company’s senior management. Also, since the announcement of my appointment as Chairman last fall, we have refreshed members on each of the Board Committees and rotated certain Board Committee Chairs. We’ve added a new Public Responsibility Committee to oversee and drive socially dedicated initiatives - including our joint venture with Capital Impact Partners to support community development for underserved areas. I am very proud of our ESG efforts over the past few years. While too many other companies have ignored or are forced to play “catch-up” in these critical areas, Annaly has consistently demonstrated our full commitment to being a market leader in corporate governance.
After 20 years as a publicly-traded company, we have proven our longevity and delivered consistent outperformance while transforming Annaly into an industry leading, diversified “Yield Manufacturer”. Our continuous reflection of the past, self-assessment of the present and strategic planning for the future enables us to be opportunistic rather than reactive. It is humbling to remember where Annaly began and to celebrate the ingenuity and dedication it has taken to get Annaly where it is today. Our performance is attributable to our proprietary model and exceptional people. Each business and every strategic move is the product of our long developed plan. Our architecture is designed to capitalize on the numerous opportunities we are uniquely positioned to realize in the years ahead.
I thank our investors for their support and trust, our Board for its guidance and each one of our employees for their deep commitment to Annaly and its shareholders.
Chairman, Chief Executive Officer & President
April 10, 2018
Source - Financial data per Company filings as of December 31, 2017 unless otherwise noted. Market data per Bloomberg as of December 31, 2017.
“mREIT” and “mREIT peers” refer to companies in the BBREMTG Index as of December 31, 2017 unless otherwise noted.
See footnote 1 under “Market Leadership Drives Results” above.
Annaly’s beta of 0.54 is calculated on a weekly basis using Annaly’s common stock closing price from December 31, 2014 to December 31, 2017.
Represents Q2 2014 to Q4 2017. Core Earnings (excluding PAA) is a non-GAAP financial measure; see Non-GAAP Reconciliation following these Footnotes for additional detail.
See footnote 2 under “Market Leadership Drives Results” above.
Compares Annaly economic leverage of 6.6x to the economic leverage of the 5 largest Agency mREIT peers by market capitalization within the BBREMTG Index as of December 31, 2017.
See footnote 3 under “Market Leadership Drives Results” above.
See footnote 4 under “Market Leadership Drives Results” above.
See footnote 5 under “Market Leadership Drives Results” above.
See footnote 6 under “Market Leadership Drives Results” above.