Proxy Summary

This summary contains highlights about the Company and the Annual Meeting. This summary does not contain all of the information that you should consider in advance of the Annual Meeting, and we encourage you to read the entire proxy statement and our 2016 Annual Report on Form 10-K carefully before voting.

2017 Annual Meeting of Stockholders

Time and Date: Thursday, May 25, 2017 at 9:00 a.m. (Eastern Time)
Place: The Warwick Hotel, 65 West 54th Street,
New York, NY 10019
Record Date: March 28, 2017
Voting: Stockholders are able to vote by Internet at www.proxyvote.com; telephone at 1-800-690-6903; completing and returning their proxy card; or in person at the Annual Meeting

Voting Matters

Board Vote Recommendation Page Number
Proposal No. 1:
Election of Directors
FOR each Director nominee 2
Proposal No. 2:
Approval, on an advisory basis, of our executive compensation
FOR 25
Proposal No. 3:
Advisory vote on the frequency of future advisory votes to approve our executive compensation
EVERY ONE YEAR 29
Proposal No. 4:
Ratification of the appointment of Ernst & Young LLP
FOR 30
Time and Date

Thursday, May 25, 2017
at 9:00 a.m. (Eastern Time)

Place

The Warwick Hotel,
65 West 54th Street,
New York, NY 10019

Record Date

March 28, 2017

Voting

Stockholders are entitled
to vote by

Internet

www.proxyvote.com

Telephone

1-800-690-6903

Mail

completing and returning their proxy card

In Person

at the Annual Meeting

Information

www.annalyannualmeeting.com

Annaly at a Glance

  • New York Stock Exchange (NYSE): NLY
  • Initial public offering (IPO) in 1997
  • Largest mortgage REIT in the world by market capitalization
  • Diversified capital manager with four investment groups – Agency, Commercial Real Estate, Residential Credit and Middle Market Lending
  • Management agreement aligns interests of our manager and our stockholders
  • Conservative leverage ratio relative to specified peers
  • 753% total return since IPO (including reinvestment of dividends) as of March 31, 2017
  • 61.1% total return from the beginning of 2014 through March 31, 2017
  • Since IPO, declared over $15 billion in common and preferred dividends; declared over $1.2 billion in dividends in 2016
  • 2016 total return and economic return (change in book value plus dividends paid) of 19.1%, and 5.4%, respectively
  • Our management team has voluntarily purchased over 2 million common shares since 2011

We have been externally-managed by Annaly Management Company LLC (our "Manager") since July 2013. Our Manager is responsible for managing our affairs pursuant to a management agreement. Our Manager pays all of the compensation, including benefits, to its employees (which includes our named executive officers ("NEOs") other than Mr. Keyes, who receives no compensation for his services as our Chief Executive Officer, but has an interest in the management fee as an indirect equityholder of our Manager). Although certain personnel (but none of our NEOs) are employed by our subsidiaries for regulatory or corporate efficiency reasons, all compensation and benefits paid to such personnel by our subsidiaries reduce, on a dollar-for-dollar basis, the management fee we pay to our Manager. As of December 31, 2016, our Manager had 148 employees and our subsidiaries collectively had 41 employees. For ease of reference, throughout this proxy statement, our NEOs and the other employees of our Manager and our subsidiaries are sometimes referred to as "our" employees.

Highlights and Accomplishments

Despite challenging market conditions for mortgage real estate investment trusts ("REITs") during 2016, we performed strongly and achieved a number of significant accomplishments that are discussed below:

Business Highlights

  • In July 2016, the Company completed the largest mortgage REIT ("mREIT") acquisition in history with the purchase of Hatteras Financial Corp. ("Hatteras")
  • The Company continued its diversification strategy in 2016 with expansion of investment options and targeted growth in select credit assets, including the build out of our residential credit group
  • The Company advanced its funding strategy in 2016 with dedicated financing facilities for our credit groups while also capitalizing on Federal Home Loan Bank term funding In April 2016, the Company further aligned management and shareholder interests by expanding its employee stock ownership guidelines to over 40% of employees
    • As of March 31, 2017, all such individuals met, or were on track to meet, their individual ownership guidelines

Our Diversified Investment Strategy

Diversification is a key component of the Annaly strategy. Since 2010, we have diversified our business model by investing in credit assets, which complement our 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 our 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, we combine a robust capital allocation process with careful risk management. This process enables us 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

Our diversification strategy is reflected in the following allocation of our equity across four investment groups – Agency, Commercial Real Estate, Residential Credit and Middle Market Lending – as of December 31, 2016.

Dividends

From our IPO in 1997 through March 31, 2017, we have declared over $15 billion in dividends to our stockholders. In 2016, we declared over $1.2 billion in dividends.

Delivering Significant Value for Stockholders in 2016

5.4% economic return
(including reinvestment of dividends)
$1.2 billion dividends declared
(including common and preferred stock dividends)

Total Common Stock Return Performance

Since 2014 (the first full year we were externally-managed, as more fully described in "Our Management Structure" below), we have performed well against relevant benchmarks. As illustrated by the graph below, shares of our common stock (including reinvestment of dividends) have returned significant value to our stockholders over the long term relative to both our mREIT peers and other yield-focused investments.

Note: Graph reflects daily market data from December 31, 2013 through March 31, 2017. For a share performance graph for the five-year period ended December 31, 2016, please see pages 42-43 of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission ("SEC") on February 23, 2017.

Source: Bloomberg. mREITs represent the members of the Bloomberg mREIT ("BBREMTG") Index; Utilities represent the members of the Russell 3000 Utility Index; MLPs represent the members of the Alerian MLP Index; Asset Managers represent the members of the S&P 500 Asset Management and Custody Bank Index; Banks represent the members of the KBW Bank Index; and S&P represents the members of the S&P 500 Index.

Economic Return Performance

Since we have elected to be taxed as a REIT and therefore must distribute at least 90% of our taxable income to our stockholders annually, we believe that economic return, comprised of dividends paid and changes in book value measured over a specified period, is an especially meaningful performance metric for the Company. Concerns over increases in interest rates led us to maintain relatively conservative leverage from the beginning of 2014 through the end of 2016 compared to our Agency mREIT peers. Our Agency mREIT Peers consist 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 mREIT Peers"), and represent the agency mortgage REITs included in the BBREMTG Index as of December 31, 2016 with market capitalization above $200 million. From the beginning of 2014 through the end of 2016, we generated an economic return of 21.7% and operated at 26.2% less leverage than this peer group.

Results of 2016 Say-on-Pay Vote and Stockholder Outreach

Since September 2015, we have had a renewed focus on developing and maintaining relationships with both our retail and institutional stockholders and have received investor feedback on a variety of topics, including the Company's diversified investment strategy and our corporate governance, compensation and management structures. From September 2015 through the end of March 2017, our shareholder outreach included:

  • 10 non-deal roadshows encompassing 81 investor meetings
  • 116 additional one-on-one meetings / phone calls with stockholders
  • New corporate website with enhanced disclosure

In addition, following the results of our 2016 advisory resolution on executive compensation (commonly known as a "Say-on-Pay" vote), which received support from 53% of votes cast, we promptly embarked on a multi-pronged effort to solicit feedback from key stakeholders regarding our compensation and external management structures. These efforts included:

  • Outreach to investors representing 65% of shares held by institutional stockholders, including 45 of our 50 largest stockholders
  • Internal discussions with our Manager's employees
  • Analysis of market practices at peer companies
  • Advice from compensation consultants
  • Attendance at investor conferences
  • Discussions with proxy advisory services and corporate governance research firms

Our stockholders generally were supportive of the enhanced 2016 proxy disclosure we provided to help investors understand the robust governance processes and procedures around our external management structure, as well as to enable them to measure the management fee we pay to our Manager relative to the performance of the Company. Although a number of our stockholders indicated that they were satisfied with and appreciated the level and type of disclosure in our 2016 proxy statement, others indicated that they would like expanded disclosure on our Manager's executive compensation program in order to enable them to fully evaluate such program, including the degree of alignment between executive pay and Company performance.

Our Manager has agreed to provide information about its executive compensation program following extensive stockholder feedback

Given that we do not provide any compensation to our NEOs, we have not previously provided information related to our Manager's executive compensation program for our NEOs and such information has not previously been provided to us. However, at the request of our Independent Directors and in response to our conversations with stockholders and our commitment to continuous improvement and transparency, our Manager has furnished the following information to the Company about its executive compensation program:

  • With the exception of Mr. Keyes (who does not receive any direct or indirect compensation from our Manager or the Company for his services as our Chief Executive Officer, but does have an interest in the fees paid to our Manager as an equityholder of the parent of our Manager), each of our other NEOs receives a base salary and is eligible for a performance-based cash incentive bonus;
  • A significant majority of the NEOs' target compensation is performance-based and "at-risk";
  • Payout of performance-based bonuses is based on achievement of both rigorous Company and investment group performance metrics, along with individual performance objectives; and
  • Our Manager considers a list of specified peer companies, together with advice from compensation consultants, when it develops appropriate compensation packages for our NEOs.

In addition, our Independent Directors have also requested that our Manager establish a framework for isolating the portion of the management fee allocable to 2017 NEO compensation. While the parameters of this framework are currently under review, our Independent Directors have asked our Manager to consider the guidance issued by proxy advisory firms regarding the level of compensation disclosure sufficient to facilitate an assessment of an externally-managed issuer's pay programs.

Specifically, the Independent Directors have requested that our Manager establish a compensation framework that will enable it to provide the Company can disclose with the following information for disclosure in our 2018 proxy statement:

  • The portion of the management fee that is allocated to NEO compensation paid by our Manager;
  • Of this compensation, the breakdown of fixed vs. variable/incentive pay; and
  • The metrics our Manager uses to measure performance to determine our NEOs' variable/incentive pay.

We will continue to consider the outcome of future Say-on-Pay votes, as well as stockholder feedback received throughout the year, and invite stockholders to express their views to the Independent Directors as described under "Communications with the Board."

Development and Promotion of Key Executives

In 2016 and early 2017, the Company announced management promotions within its senior executive team. In November 2016, David L. Finkelstein, who had been serving as Annaly's Chief Investment Officer, Agency and RMBS, was named Annaly's Chief Investment Officer with oversight of all of Annaly's investments and their related investment operations, and Timothy P. Coffey, Annaly's Chief Credit Officer, was promoted to assume expanded management responsibilities for the Company's risk department and credit groups. In March 2017, Anthony C. Green, who had been serving as Annaly's Deputy General Counsel, succeeded R. Nicholas Singh as the Company's Chief Legal Officer and Secretary.

Our Manager and Our Management Agreement

  • All of our NEOs are indirect owners and/or employees of our Manager
  • With the exception of Mr. Keyes, each of our other NEOs receives compensation paid by our Manager. Mr. Keyes receives no compensation for his services as our Chief Executive Officer, although, as an equityholder of the parent of our Manager, Mr. Keyes has an interest in the fees paid to our Manager
  • Our Manager is responsible for the compensation of its employees (including our NEOs other than Mr. Keyes) who provide services to the Company. We do not pay any cash or equity compensation to our executive officers, do not provide pension benefits, perquisites or other personal benefits, and have no employment agreements or arrangements to pay any cash severance upon their termination or a change in control of the Company
  • Our Manager receives a flat management fee equal to 1.05% of our stockholders' equity (as defined in our Management Agreement), which is used to pay the compensation and benefits of its employees (including our NEOs). However, the Company does not allocate any specific portion of the management fee we pay to the compensation of our NEOs
  • For 2016, the management fee was approximately $152 million

Over the past several years, our Manager has made significant investments in personnel corresponding to the diversification of our investment strategy into more people-intensive asset classes (including Residential Credit, Commercial Real Estate and Middle Market Lending assets), as well as to the enhancement of our corporate infrastructure. These investments include the build out of teams for our Agency, Residential Credit, Commercial Real Estate and Middle Market Lending groups, and significant hires in our business support functions, such as risk management, legal and compliance, finance and information technology, among others.

The costs of these personnel expansions and improvements have been paid by our Manager rather than by us. Unlike a number of other externally-managed REITs, we do not reimburse our Manager for any portion or subset of employment costs, all of which are borne by our Manager. An increase to these costs does not result in any increase to the management fee, which is a fixed percentage of our stockholders' equity as described above.

The Independent Directors review the efforts of our Manager to ensure that our Manager continues to invest in our personnel. The Board has concluded that the efforts of our Manager to develop and enhance our personnel have resulted in the establishment of a robust and high quality management team having a full complement of human capital to drive our business performance. We believe our management team is best in class in terms of size, scope and experience compared with our mREIT peers.

Despite the costs associated with the diversification of our investment strategy, our Manager has continued to operate the business in an efficient manner with appropriately scaled operating costs (including the management fee). As illustrated by the table below, Annaly's average operating expense levels have remained significantly lower than both our internally- and externally-managed mREIT peers over the last five years.

    2012 2013 2014 2015 2016   Average
OpEx as
% of Avg Assets
0.19% 0.22% 0.24% 0.25% 0.25%   0.23%
Internally-
Managed Peers
0.54% 0.91% 0.87% 0.73% 0.44%   0.70%
Externally-
Managed Peers
0.60% 0.66% 0.75% 0.79% 0.66%   0.69%
    2012 2013 2014 2015 2016   Average
OpEx as
% of Avg Equity
1.45% 1.66% 1.61% 1.58% 1.65%(1)   1.59%
Internally-
Managed Peers
2.72% 3.83% 4.13% 3.84% 2.48%   3.40%
Externally-
Managed Peers
2.20% 3.06% 3.57% 3.75% 4.06%   3.33%

Source: Company Filings, SNL and Bloomberg. Averages are market weighted based on market capitalization as of Dec. 31st of each respective year.

Note: Internally-Managed Peers and Externally-Managed Peers represent the respective internally- and externally-managed members of the BBREMTG Index with market capitalization above $200 million as of December 31st of each respective year. The average for each excludes Annaly and companies during years in which they became public or first listed. Operating Expense is defined as: (i) for Internally-Managed Peers, the sum of compensation & benefits, general & administrative expenses and other operating expenses, and (ii) for Externally-Managed Peers, the sum of net management fees, compensation & benefits (if any), general & administrative expenses and other operating expenses.

  1. Excludes costs of $49 million related to the Company’s acquisition of Hatteras.

For additional information about our Manager, our management agreement and executive compensation, see "Certain Relationships and Related Party Transactions," "Our Management Structure", "Compensation Paid by our Manager to our Named Executive Officers" and "Compensation Discussion and Analysis."

Governance Highlights

We regularly review and update our practices related to our corporate governance, compensation and management structures to align the interests of our management team with those of our stockholders and to respond to stockholder feedback, changes in applicable laws, regulations and stock exchange requirements, and the evolving needs of our business. Our current best practices are highlighted below:

Director Independence
and Oversight

  • 7 of 9 Directors are Independent
  • Lead Independent Director
  • Regular executive sessions of Independent Directors
  • Independent Board committees
  • Board oversees a succession plan for the CEO and other senior executives

Director
Qualifications

  • Annual Board and committee self-evaluations
  • Annual assessment of all Directors to ensure continued match of their skills against the Company's needs
  • Over-boarding policy limits the number of outside boards on which our Directors can serve
  • 2 "audit committee financial experts"

Stockholder Rights
and Engagement

  • Majority vote standard for uncontested elections
  • Annual stockholder advisory vote on executive compensation
  • No restrictions on stockholders' ability to amend the Company's by-laws
  • Active stockholder engagement program

Good Governance /
Corporate Citizenship

  • Clawback policy with manager
  • Anti-hedging and pledging policies
  • Director and employee stock ownership guidelines
  • Four-year stock holding period requirement for employees
  • Corporate sustainability initiatives
  • Whistleblower procedures and hotline for auditing and accounting concerns

Board Composition and Refreshment

The Nominating/Corporate Governance Committee (the "NCG Committee") of the Board seeks to achieve a balance of knowledge, experience and capability on the Board. Newer directors offer fresh ideas and perspectives, while deeply experienced directors bring extensive knowledge of our complex operations. On an annual basis, the NCG Committee evaluates its overall composition, including director tenure, and rigorously evaluates all directors to ensure a continued match of their skill sets against the needs of the Company. The table below summarizes key qualifications, skills, and attributes most relevant to our Directors' service on our Board. For additional information about individual Director's qualifications and experience, please see the Director biographies beginning on page 3.

Skill / experience No. of Directors Total
Audit committee financial expert 2
Complex and regulated industries 8
Compliance 5
Corporate governance 8
Ethics and social responsibility oversight 4
Finance and accounting experience 8
Financial services 8
Government, public policy and regulatory affairs 4
Industry knowledge 9
Information technology 3
Legal expertise 4
Mergers & acquisitions 6
Operations 9
Other public company board experience 3
Private company board experience 5
Public company CEO 2
Risk management 9
Strategy development and implementation 7