What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2021-02-19 compared with 2020-02-14 · 409 added, 517 removed, 716 unchanged (56% of the section changed)

Risk Management

Risk is a natural element of our business.

Effective risk management is of critical importance to our success.

The objective of our risk management framework is to identify, measure, monitor and control the key risks to which we are subject.

Our approach to risk management is comprehensive and has been designed to foster a holistic view of risk.

For a full discussion of our risk management process and policies please refer to the section titled “Risk Management” of Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Management Agreement

Until the closing of the Internalization, management of Annaly will continue to be conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies established by our Board.

The Management Agreement was amended and restated on August 1, 2018, and further amended on March 27, 2019 (the management agreement, as amended and restated, is referred to as the “Management Agreement”).

On February 12, 2020, we entered the Internalization Agreement with our Manager pursuant to which, upon closing, the Management Agreement will be terminated.

If the closing does not occur, the Management Agreement will remain in place on the terms and conditions described herein.

The Management Agreement’s current term ends on December 31, 2021 and will automatically renew for successive two-year terms unless at least two-thirds of our independent directors or the holders of a majority of our outstanding shares of common stock in their sole discretion elect to terminate the agreement for any or no reason.

At any time during the term or any renewal term we may deliver to the Manager written notice of our intention to terminate the Management Agreement upon 365 days notice (such notice, a “Termination Notice”).

During any period between the date we deliver a Termination Notice (the “Notice Delivery Date”) and the date designated by us as the date on which the Manager shall cease to provide management services (the “Termination Date”), the Manager shall continue to perform its duties and obligations under the Management Agreement and cooperate with us to execute an orderly transition to a new manager.

If we elect to terminate the Management Agreement, we may elect to accelerate the Termination Date to a date that is between seven and 90 days after the Notice Delivery Date.

If we do not elect to do so, then the Manager may elect to accelerate the Termination Date to the date that is 90 days after the Notice Delivery Date.

If the Termination Date is accelerated (such date, the “Accelerated Termination Date”) by either us or the Manager, we shall pay the Manager an acceleration fee (the “Acceleration Fee”) in an amount equal to the average annual management fee earned by the Manager during the 24-month period immediately preceding such Accelerated Termination Date multiplied by a fraction with a numerator of 365 minus the number of days from the Notice Delivery Date to the Accelerated Termination Date, and a denominator of 365.

The Management Agreement also provides that the Manager may terminate the Management Agreement by providing to us prior written notice of its intention to terminate the Management Agreement no less than 365 days prior to the date designated by the Manager on which the Manager would cease to provide services or such earlier date as determined by us in our sole discretion.

Under the Management Agreement, the Manager, subject to the supervision and direction of our Board, is responsible for (i) the selection, purchase and sale of assets for our investment portfolio;

(ii) recommending alternative forms of capital raising;

(iii) supervising our financing and hedging activities;

and (iv) day to day management functions.

The Manager also performs such other supervisory and management services and activities relating to our assets and operations as may be appropriate.

In exchange for the management services, we pay the Manager a monthly management fee, and the Manager is responsible for providing personnel to manage us and determining all compensation and benefit expenses associated with such personnel.

Prior to the most recent amendment to the Management Agreement, which was executed on March 27, 2019, we had paid the Manager a flat monthly management fee equal to 1/12th of 1.05% of Stockholders' Equity (as defined in the Management Agreement) for management services.

Pursuant to the March 27, 2019 amendment to the Management Agreement, we now pay the Manager a monthly management fee for management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $17.28 billion, and (ii) 0.75% of Stockholders' Equity (as defined in the Management Agreement) in excess of $17.28 billion.

We do not pay the Manager any incentive fees.

In addition to the management fee, in August 2018, we began reimbursing the Manager for the cost of certain legal, tax, accounting and other support and advisory services provided by employees of the Manager to us.

Such reimbursements are permitted pursuant to the terms of the Management Agreement provided the related costs are no greater than those that would be payable to comparable third party providers.

The Management Agreement provides that during the term of the Management Agreement and, in the event of termination of this Agreement by the Manager without cause, for a period of one year following such termination, the Manager will not, without our prior written consent, manage, operate, join, control, participate in, or advise any person other than us without the prior written consent of the Risk Committee of the Board.

The Management Agreement may be amended or modified by agreement between us and the Manager.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Information about our Executive Officers

The following table sets forth certain information as of January 31, 2020 concerning our executive officers:

Interim Chief Executive Officer and President

Chief Financial Officer

Chief Investment Officer

Chief Credit Officer

Chief Corporate Officer, Chief Legal Officer and Secretary

Votek has served as Interim Chief Executive Officer and President of Annaly and a member of Annaly’s Board since November 2019.

Votek previously served as Chief Financial Officer of Annaly from August 2013 until December 2019 and as Chief Financial Officer of Fixed Income Discount Advisory Company (“FIDAC”), a former wholly-owned subsidiary of the Company, from August 2013 until October 2015.

Votek joined Annaly in May 2013 from CIT Group where he had been an Executive Vice President and Treasurer since 1999 and President of Consumer Finance since 2012.

Prior to that, Mr.

Votek worked at AT&T and its finance subsidiary from 1986 until 1999 in various financial management roles.

Votek has a B.S.

in Finance and Economics from the University of Arizona/Kean College and a M.B.A.

in Finance from Rutgers University.

Serena Wolfe has served as Chief Financial Officer of Annaly since December 2019.

Prior to joining Annaly in 2019, Ms.

Wolfe served as a Partner at Ernst & Young (“EY”) since 2011 and as its Central Region Real Estate Hospitality & Construction (“RHC”) leader from 2017 to November 2019, managing the go-to-market efforts and client relationships across the sector.

Wolfe was previously also EY’s Global RHC Assurance Leader.

Wolfe practiced with EY for over 20 years, including six years with EY Australia and 16 years with the U.S.

Wolfe graduated from the University of Queensland with a Bachelor of Commerce in Accounting.

She is a Certified Public Accountant in the states of New York, California, Illinois and Pennsylvania.

Finkelstein has served as Chief Investment Officer of Annaly since November 2016.

Finkelstein previously served as Annaly’s Chief Investment Officer, Agency and RMBS beginning in February 2015 and as Annaly’s Head of Agency Trading beginning in August 2013.

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.

Finkelstein has over 20 years of experience in fixed income investment.

Prior to the Federal Reserve Bank of New York, Mr.

Finkelstein held Agency MBS trading positions at Salomon Smith Barney, Citigroup Inc.

and Barclays PLC.

Finkelstein received his B.A.

in Business Administration from the University of Washington and his M.B.A.

from the University of Chicago, Booth School of Business.

Finkelstein also holds the Chartered Financial Analyst® designation.

Coffey has served as Chief Credit Officer of Annaly since January 2016.

Coffey served as Annaly’s Head of Middle Market Lending from 2010 until January 2016.

Coffey has over 20 years of experience in leveraged finance and has held a variety of origination, execution, structuring and distribution positions.

Prior to joining Annaly in 2010, Mr.

Coffey served as Managing Director and Head of Debt Capital Markets in the Leverage Finance Group at Bank of Ireland.

Prior to that, Mr.

Coffey held positions at Scotia Capital, the holding company of Saul Steinberg’s Reliance Group Holdings and SC Johnson International.

Coffey received his B.A.

in Finance from Marquette University.

Green has served as Chief Corporate Officer of Annaly since January 2019 and as Chief Legal Officer and Secretary of Annaly since March 2017.

Green previously served as Annaly’s Deputy General Counsel from 2009 until February 2017.

Prior to joining Annaly, Mr.

Green was a partner in the Corporate, Securities, Mergers & Acquisitions Group at the law firm K&L Gates LLP.

Green has over 20 years of experience in corporate and securities law.

Green holds a B.A.

in Economics and Political Science from the University of Pennsylvania and a J.D.

in International and Comparative Law from Cornell Law School.

Annaly has been externally-managed by our Manager since July 2013.

As of December 31, 2019, our Manager directly employed 175 of the 185 individuals who provide services to Annaly.

The remaining 10 individuals are employed by subsidiaries of Annaly for regulatory or corporate efficiency reasons.

If the Internalization closes, we would expect all of the employees of our Manager to become our employees (either directly or indirectly).

In response to COVID-19, our employees have largely worked remotely since March 2020.

We supported our employees’ remote working through stipends to upgrade home office equipment.

Since September 2020, there are a limited number of employees who voluntarily work in the office on occasion.

We implemented a regular Coronavirus testing protocol to optimize our ability to provide a safe work environment.

In addition to addressing physical health and safety concerns, we recognize that the pandemic has affected people’s daily emotional lives and mental health.

As a result, we have increased our mental health offerings and hosted a multitude of virtual seminars to help keep our employees connected with one another and to equip them with tools to help alleviate some of the increased stress and burdens.

Diversity & Inclusion

The diversity of our employees brings a critical range of thought and experience throughout our company, cultivating innovation, fresh perspectives and vital new ideas.

Diversity and inclusion are essential tenets of our corporate culture.

Our human capital management group, in coordination with our recently named Head of Inclusion and Inclusion Support Committee of Executive Sponsors, is responsible for overseeing and continuing to improve our diversity and inclusion initiatives.

We are committed to achieving diversity, including gender and racial/ethnic diversity, across all levels of our company.

With 50% of total employees in 2020 identifying as either female or racially/ethnically diverse, we are driven by the belief that having a diverse group of employees supports our continued long-term growth.

In 2017, we launched the Women’s Interactive Network, which provides targeted development and networking opportunities, knowledge exchanges, mentorship, coaching and volunteer efforts.

Our diversity and inclusion efforts also include firm-wide initiatives like an unconscious bias training program offered in 2020 to establish foundational knowledge, language and understanding to support the strategic diversity and inclusion efforts of the firm, organizing forums to discuss employees’ views and actively seeking out feedback from employee surveys.

Employee Development, Benefits and Wellness

We seek to invest in and promote talent to cultivate a high-performance culture and build on the capabilities and full potential of our employees.

We invest in a wide range of benefits and wellness initiatives for our employees to support healthy lifestyles and choices.

Our employee compensation program includes base salary, annual incentive bonuses and stock-based awards.

Employee compensation packages are designed to align employee and stockholder interests and to provide incentives to attract, retain and motivate talented employees.

In addition, we offer employees benefits including health and insurance coverage, health savings and flexible spending accounts, telemedicine benefits, 401(K) plans, paid time off and family care resources.

We also have a tuition reimbursement plan to cover all or part of the cost of education that furthers employee education in a field directly related to their specific job.

We offer a number of learning and development programs tailored to our employee needs and interests as well as our overall strategic business objectives.

For example, we offer targeted professional development training for employees at various stages in their career.

In 2020, we began offering firm-wide culture sessions where we facilitate discussions to gain insights on our company’s culture enhancement priorities.

Corporate and Employee Philanthropy and Volunteerism

Our corporate giving has been focused on high-impact programs that seek to advance social issues we are committed to, including combating homelessness and advancing the professional development of women and underrepresented groups.

In 2020, we also provided support to COVID-19 relief efforts in our New York City community.

Annaly and our employees endeavor to meaningfully contribute to the communities where we live, work, and invest through Annaly’s corporate giving, employee volunteerism and our employee charity match program.

Regulatory Requirements

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

We have elected, organized and operated in a manner that qualifies us to be taxed as a REIT under the Internal Revenue Code of 1986, as amended and regulations promulgated thereunder (the “Code”).

So long as we qualify for taxation as a REIT, we generally will not be subject to federal income tax on our taxable income that is distributed to our stockholders.

So long as we qualify for taxation as a REIT, we generally will not be subject to U.S.

federal income tax on our taxable income that is distributed to our stockholders.

Furthermore, substantially all of our assets, other than our taxable REIT subsidiaries (“TRSs”), consists of qualified REIT real estate assets (of the type described in Section 856(c)(5) of the Code).

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Arcola consistently operates with capital in excess of its regulatory capital requirements as defined by SEC Rule 15c3-1.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

We have a subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act.

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“Risk Factors.”

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Corporate Governance

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Our notable governance practices and policies include:

Our Board is composed of a majority of independent directors, and our Audit, Compensation and Nominating/Corporate Governance Committees are composed exclusively of independent directors.

In November 2019, we separated the roles of Chair of the Board and Chief Executive Officer, and appointed our company’s first independent Chair of the Board.

• We closed our management internalization transaction on June 30, 2020 and transitioned from an externally-managed REIT to an internally-managed REIT.

• Our Board is composed of a majority of independent directors, and our Audit, Management Development and Compensation, and Nominating/Corporate Governance Committees are composed exclusively of independent directors.

• We have separated the roles of Chair of the Board and Chief Executive Officer, and appointed an independent Chair of the Board.

• In December 2018, we amended our bylaws to declassify our Board over a three-year period with all directors standing for annual election by our company’s annual meeting of stockholders in 2021.

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• We have adopted a Code of Business Conduct and Ethics, which sets forth the basic principles and guidelines for resolving various legal and ethical questions that may arise in the workplace and in the conduct of our business.

This code is applicable to our directors, officers and employees as well as those of our Manager and subsidiaries.

This code is applicable to our directors, officers and employees.

• We have adopted Corporate Governance Guidelines which, in conjunction with the charters of our Board committees, provide the framework for the governance of our company.

We have procedures by which any of our employees, including employees of our Manager as well as those of our subsidiaries, officers or directors may raise concerns confidentially about our company’s conduct,

accounting, internal controls or auditing matters with the Chair of the Board, the independent directors, or the chair of the Audit Committee or through our company’s whistleblower phone hotline or e-mail inbox.

We have an Insider Trading Policy that prohibits our directors, officers and employees, including employees of our Manager, as well as those of our subsidiaries from buying or selling our securities on the basis of material nonpublic information and prohibits communicating material nonpublic information about our company to others.

• We have procedures by which any of our employees, officers or directors may raise concerns confidentially about our company’s conduct, accounting, internal controls or auditing matters with the Chair of the Board, the independent directors, or the Chair of the Audit Committee or through our whistleblower phone hotline or e-mail inbox.

• We have an Insider Trading Policy that prohibits our directors, officers and employees, as well as those of our subsidiaries from buying or selling our securities on the basis of material nonpublic information and prohibits communicating material nonpublic information about our company to others.

Our Insider Trading Policy prohibits our directors, officers and employees, from (1) holding our stock in a margin account as eligible collateral, or otherwise pledging our stock as collateral for a loan, or (2) engaging in any hedging transactions with respect to our equity securities held by them.

Our Board has instituted expansive employee stock ownership guidelines, pursuant to which more than 40% of our employees are asked to hold predetermined amounts of our company’s common stock .

On February 12, 2020, we entered into the Internalization Agreement with our Manager, pursuant to which we will transition from an externally-managed REIT to an internally-managed REIT.

If the Internalization closes, we expect to achieve greater alignment of interests between management and shareholders.

• Our executive officers are subject to a robust clawback policy, which includes triggers for financial restatements and misconduct.

• Our executive officers are subject to stock ownership guidelines and holding restrictions.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Distributions

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Subject to the limitations of applicable securities and state corporation laws, we can return capital by making purchases of our own capital stock or through payment of dividends.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Available Information

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Our website and the information contained therein are not incorporated into this annual report on Form 10-K.

Also posted on our website, and available in print upon request of any stockholder to our Investor Relations Department, are charters for our Audit Committee, Compensation Committee, Nominating/Corporate Governance Committee, Risk Committee and Corporate Responsibility Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics.

Also posted on our website, and available in print upon request of any stockholder to our Investor Relations Department, are charters for our Audit Committee, Management Development and Compensation Committee, Nominating/Corporate Governance Committee, Risk Committee and Corporate Responsibility Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics.

Within the time period required by the SEC, we will post on our website any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior financial officer.

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INDEX TO ITEM 1A.

Summary Risk Factors

Risks Related to the Coronavirus Disease 2019 (“COVID-19”)

Risks Related to Our Investing, Portfolio Management and Financing Activities

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Risks Related to Our Residential Credit Business

Risks Related to Our Relationship with Our Manager

Risks Related to Internalization

Risks Related to Our Business Structure

Risks Related to Our Taxation as a REIT

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Regulatory Risks

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Summary Risk Factors

Risks Related to COVID-19

• COVID-19 has affected, and will likely continue to affect, the U.S.

economy, the mortgage REIT industry and our business.

• We cannot predict the effect that government policies, laws and plans in response to the COVID-19 pandemic will have on us.

Risks Related to Our Investing, Portfolio Management and Financing Activities

• We may change our policies without stockholder approval.

• Our strategy involves the use of leverage, which increases the risk that we may incur substantial losses.

• Our leverage may cause margin calls and defaults and force us to sell assets under adverse market conditions.

• We may exceed our target leverage ratios, or we may not be able to achieve our optimal leverage.

• Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition.

• Failure to effectively manage our liquidity would adversely affect our results and financial condition.

• Risk management policies and procedures may not adequately identify all risks to our businesses.

• An increase or decrease in prepayment rates may adversely affect our profitability.

• We are subject to reinvestment risk.

• Volatile market conditions for mortgages and mortgage-related assets can result in a significant contraction in liquidity.

• Competition may limit our ability to acquire desirable investments in our target assets and also affect the pricing of these assets.

• Increases in interest payments on our borrowings relative to interest earned on our assets may adversely affect profitability.

• Differences in timing of interest rate adjustments on our interest earning assets and borrowings may adversely affect profitability.

• Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results.

• An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value.

• We may experience declines in market value of our assets resulting in us recording impairments, which may effect on our results.

• The soundness of other financial institutions could adversely affect us.

• Our hedging strategies may be costly or ineffective and our use of derivatives may expose us to counterparty and liquidity risks.

• It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts.

• Any incorrect, misleading or incomplete information used in connection with analytical models would subject us to potential risks.

• Accounting rules related to certain of our transactions are highly complex and involve significant judgment and assumptions.

• We are dependent on information systems and third parties;

system failures or cybersecurity incidents could disrupt our business.

• Securitizations, including non-recourse securitizations, may expose us to additional risks.

• Counterparties may require us to enter into restrictive covenants relating to our operations that may inhibit our ability to grow.

• We may enter into new lines of business, acquire other companies or engage in other strategic initiatives.

• We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other accounts.

• Investments in MSRs may expose us to additional risks.

• We depend on third-party service providers, including mortgage loan servicers, for a variety of services related to our business.

• Purchases and sales of Agency MBS by Federal Reserve may adversely affect the price and return associated with Agency MBS.

• New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac and the federal government.

Risks Related To Our Credit Assets

• We invest in securities in the credit risk transfer sector that are subject to mortgage credit risk.

• Prolonged economic slowdown or declining real estate values could impair the assets we may own and adversely affect our results.

• Geographic concentration exposes investors to greater risk of default and loss.

• Inadequate property insurance coverage could have an adverse impact on our operating results.

• We may incur losses when a borrower defaults on a loan and the underlying collateral value is less than the amount due.

• Our assets may become non-performing or sub-performing assets, which are subject to increased risks relative to performing loans.

• We may be required to repurchase commercial or residential mortgage loans or indemnify investors.

• Our due diligence of potential assets may not reveal all liabilities and other weaknesses.

• When we foreclose on an asset, we may come to own and operate the property securing the loan.

• Financial covenants could adversely affect our ability to conduct our business.

• Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets.

• Our investments in corporate loans and debt securities for middle market companies carry risks.

Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets and Other Equity

• The real estate assets we acquire are subject to risks particular to real property, which may adversely affect our returns

• Commercial loan assets we originate and/or acquire depend on the ability of property owner to generate net income from operating.

• Commercial and non-Agency mortgage-backed securities we acquire may be subject to losses.

• Borrowers may be unable to repay the Remaining Principal Balance on the Maturity Date.

• The B-Notes that we originate and acquire may be subject to risks related to their privately negotiated structure and terms.

• The mezzanine loan assets and other subordinate debt positions that we originate and acquire involve greater risks of loss.

• We are subject to additional risks associated with loan participations and co-lending arrangements.

• Construction loans involve an increased risk of loss.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

• We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their lease obligations.

• Lease expirations, lease defaults and lease terminations may adversely affect our revenue.

• Our real estate investments are illiquid.

• We may not control the special servicing of the mortgage loans included in the commercial MBS in which we invest.

• Joint venture investments could be adversely affected by our lack of sole decision-making authority.

Risks Related To Our Residential Credit Business

• Our investments in non-Agency MBS or other investment assets of lower credit quality involve credit risk.

• Our investments in non-Agency MBS are collateralized by non-prime loans and may also include subprime mortgage loans.

• Our investments may include subordinated tranches of non-Agency MBS, which are subordinate in payment to senior securities.

• We are subject to counterparty risk and may be unable to seek indemnity or demand repurchase of residential whole loans.

• Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure.

• Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial condition.

• We may be subject to liability for potential violations of truth-in-lending or other similar consumer protection laws and regulations.

• We may not be able to obtain or maintain the governmental licenses required to operate our Residential Credit business.

• Our ability to profitably execute or participate in future securitizations transactions, including, in particular, securitizations of residential mortgage loans, is dependent on numerous factors and if we are not able to achieve our desired level of profitability or if we are unable to execute or participate in future securitizations, or incur losses in connection therewith, it could have a material adverse impact on our business and financial results.

Risks Related to Our Business Structure

• We may be exposed to risks to which we have not historically been exposed as a result of the Internalization.

• The departure of any of our key personnel could materially and adversely affect us.

Risks Related to Our Taxation as a REIT

• Our failure to maintain our qualification as a REIT would have adverse tax consequences.

• We have certain distribution requirements, which could adversely affect our ability to execute our business plan.

• Distributions to tax-exempt investors may be classified as unrelated business taxable income.

• We may choose to pay dividends in our own stock, which may require stockholders to pay taxes in excess of cash dividends.

• Our inability to deduct certain compensation paid to our executives could require us to increase our distributions to stockholders.

• Limits on ownership of our stock could have adverse consequences to you and limit your opportunity to receive a premium.

• Our TRSs cannot constitute more than 20% of our total assets.

• TRSs are subject to regular corporate tax and REIT gross income tests limit the amount of dividends they can pay to REIT parents.

• Certain circumstances relating to a TRS may subject the REIT to a penalty tax.

• Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

• Complying with REIT requirements may cause us to forgo or liquidate otherwise attractive opportunities.

• Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

• Failure of certain investments to qualify as real estate assets could adversely affect our status as a REIT.

• Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

• Qualifying as a REIT involves highly technical and complex provisions of the Code.

• The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring CMOs.

• Some financing activities may subject us to U.S.

federal income tax and could have negative tax consequences for our stockholders.

• The lease of qualified healthcare properties to a TRS is subject to special requirements.

• Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.

• Dividends payable by REITs generally receive different tax treatment than dividend income from regular corporations.

• New legislation or administrative or judicial action could make it more difficult or impossible for us to remain qualified as a REIT.

Risks of Ownership of Our Common Stock

• The market price and trading volume of our common stock may be volatile and negatively impacted by broad market fluctuations.

• Our charter does not permit ownership of over 9.8% of our common or preferred stock without prior approval from our Board.

• Provisions contained in Maryland law that are reflected in our charter and bylaws may have anti-takeover effects.

• We have not established a minimum dividend payment level and cannot assure stockholders of our ability to pay dividends.

• Our reported GAAP financial results differ from the taxable income results that impact our dividend distribution requirements.

Regulatory Risks

• Loss of Investment Company Act exemption from registration would adversely affect us.

• Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may affect us.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Risks Related to COVID-19

COVID-19 has adversely affected, and will likely continue to adversely affect, the U.S.

economy, the mortgage REIT industry and our business.

COVID-19 is causing significant disruptions to the U.S.

and global economies and has contributed to volatility and negative pressure in financial markets.

COVID-19 and the related social distancing measures have had a broad negative impact on the U.S.

and global economies as many businesses, particularly smaller ones within the service-sector, have been forced to close, furlough and/or lay off employees.

As a result, U.S.

unemployment claims have dramatically risen at unprecedented rates.

Other economic activity, including retail sales and industrial production, have slowed as well.

The pace, timing and strength of any recovery are still unknown and difficult to predict.

federal government, as well as many state and local governments, have adopted a number of emergency measures and recommendations in response to the COVID-19 pandemic, including imposing travel bans, “shelter in place” restrictions, curfews, cancelling events, banning large gatherings, closing non-essential businesses, and generally promoting social distancing (including in the workplace, which has resulted in a significant increase in employees working remotely).

Across the country, moratoriums are in place in certain states to stop evictions and foreclosures in an effort to lessen the financial burden created by the COVID-19 outbreak and various states have even promulgated guidance to regulated servicers requiring them to formulate policies to assist mortgagors in need as a result of the COVID-19 pandemic.

A number of states have enacted laws which impose significant limits on the default remedies of lenders secured by real property.

While some states have begun a phased relaxation of certain of these measures, substantial restrictions on economic activity remain in place.

Although it cannot be predicted, additional policy action at the federal, state and local level is possible in the near future.

The COVID-19 pandemic (and any future COVID-19 outbreaks) and resulting emergency measures has led (and may continue to lead) to significant disruptions in the global supply chain, global capital markets, the economy of the United States and the economies of other nations.

Concern about the potential effects of the COVID-19 pandemic and the effectiveness of measures being put in place by governmental bodies and reserve banks at various levels as well as by private enterprises to contain or mitigate its spread has adversely affected economic conditions and capital markets globally, and has led to significant volatility in global financial markets.

There can be no assurance that the containment measures or other measures implemented from time to time will be successful in limiting the spread of the virus and what effect those measures will have on the economy.

While non-essential economic activity is to some extent returning in certain jurisdictions, the timing of such return remains uncertain, and may vary substantially depending on the location and the type of activity.

The disruption and volatility in the credit markets and the reduction of economic activity in severely affected sectors may continue for an extended period or indefinitely, and may worsen the recession in the United States and/or globally.

Beginning in the first quarter of 2020, particularly in March, COVID-19 began to adversely affect the mortgage REIT industry generally.

In addition to negative general economic conditions, the impact of COVID-19 caused severe volatility across asset classes, including mortgage-related assets.

In order to increase liquidity, fixed income investors were forced to sell U.S.

Treasuries and Agency MBS, leading to an excess supply of these assets in need of redistribution.

Pressure in financing markets and the need to meet margin obligations (particularly in the mortgage REIT industry in connection with repurchase financing obligations) created additional selling pressure in U.S.

Treasury and Agency MBS markets, and widening of credit spreads.

Other markets, including the market for residential credit and commercial real estate securities, also experienced similar trends, albeit on a relatively lesser scale.

Economic Conditions

The conditions related to COVID-19 discussed above have also adversely affected our business and we expect these conditions to continue during 2021.

The significant decrease in economic activity and/or resulting decline in the housing market could have an adverse effect on the value of our investments in mortgage real estate-related assets, particularly residential real estate assets.

In addition, as interest rates continue to decline as a result of demand for U.S.

Treasury securities and the activities of the Federal Reserve, prepayments on our assets are likely to increase due to refinancing activity, which could have a material adverse effect on our results of operations.

Further, in light of COVID-19’s impact on the overall economy, such as rising unemployment levels or changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates.

Elevated levels of delinquency or default would have an adverse impact on the value of our mortgage real estate related-assets.

In addition to residential mortgage-related assets, the adverse economic conditions could negatively impact tenants on our commercial property assets and/or businesses in which we lend to in connection with our middle market lending activities, resulting in potential delinquencies, defaults or declines in asset values.

To the extent current

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conditions persist or worsen, we expect there to be a negative effect on our results of operations, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

The continued spread of COVID-19 could also negatively impact the availability of key personnel necessary to conduct our business.

Financing Conditions

We may also experience more difficulty in our financing operations.

COVID-19 has caused mortgage REITs to experience severe disruptions in financing operations (including the cost, attractiveness and availability of financing), especially the ability to utilize repurchase financing and the margin requirements related to such financing.

The less liquid markets that make up a significant portion of our credit portfolio, including residential securities and whole loans, commercial real estate securities and loans and middle market lending, experienced significant disruption over this crisis period, marked by a sharp retraction in volumes and a lack of access to credit for borrowers.

If conditions related to COVID-19 persist, we could experience an unwillingness or inability of our potential lenders to provide us with or renew financing, increased margin calls, and/or additional capital requirements.

These conditions could force us to sell our assets at inopportune times or otherwise cause us to potentially revise our strategic business initiatives, which could adversely affect our business.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this Annual Report on Form 10-K for the year ended December 31, 2020, such as our risks related to our use of leverage, management of our liquidity, exposure to counterparties, our ability to pay dividends in the future and our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing and other events that could have a security impact as a result of our remote working environment or otherwise.

We cannot predict the effect that government policies, laws and plans adopted in response to the COVID-19 pandemic and global recessionary economic conditions will have on us.

The extent of the COVID-19-related disruptions and the duration of the pandemic as well as the long-term impacts of the social, economic, and financial disruptions caused by the COVID-19 pandemic are unknown at this time and may be severe.

Governments have adopted, and we expect will continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial and mortgage markets.

While the U.S.

Federal Reserve, the U.S.

government and other governments have implemented unprecedented financial support or relief measures in response to concerns surrounding the economic effects of the COVID-19 pandemic, the likelihood of such measures calming the volatility in the financial markets or addressing a long-term national or global economic downturn cannot be predicted and we cannot assure you that these programs will be effective or sufficient at addressing the adverse impacts of the pandemic or otherwise have a positive impact on our business.

Risks Related to Our Investing, Portfolio Management and Financing Activities

We may change our policies without stockholder approval.

Our Board has established very broad investment guidelines that may be amended from time to time.

Our Board and management determine all of our significant policies, including our investment, financing, capital and asset allocation and distribution policies.

They may amend or revise these policies at any time without a vote of our stockholders.

They may amend or revise these policies at any time without a vote of our stockholders, or otherwise initiate a change in asset allocation.

For example, in the first quarter of 2020, we proactively reduced the size of our Agency MBS portfolio in order to manage our leverage profile in response to COVID-19.

Policy changes could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions.

Our investment in new business strategies and new assets is inherently risky, and could disrupt our ongoing businesses.

To date, a significant portion of our total assets have consisted of Agency mortgage-backed securities which carry an implied or actual “AAA” rating.

Nevertheless, pursuant to the ongoing diversification of our assets, we also acquire assets of lower credit quality.

While we remain committed to the Agency market and have grown our Agency assets, given the current environment, we believe it is prudent to diversify a portion of our investment portfolio.

For example, during 2018 we began our focus on growth in our three credit businesses;

such trend continued through 2019 and is expected to continue in 2020.

We invest in a range of targeted asset classes and continue to explore new business strategies and assets and expect to continue to do so in the future.

Additionally, we may enter into or engage in various types of securitizations, transactions, services and other operating businesses that are different than the types into which we have traditionally entered or engaged.

Such endeavors may involve significant risks and uncertainties, including credit risk, diversion of management from current operations, expenses associated with these new investments, inadequate return of capital on our investments, less management experience in new types of assets, and unanticipated issues not discovered in our due diligence of such strategies and assets.

Because these new ventures are inherently risky, no assurance can be given that such strategies will be successful and will not materially adversely affect our reputation, financial condition and operating results.

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Our strategy involves the use of leverage, which increases the risk that we may incur substantial losses.

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Leverage, which is fundamental to our investment strategy, creates significant risks.

The risks associated with leverage are more acute during periods of economic slowdown or recession, which the U.S.

economy has experienced in connection with the conditions created by the COVID-19 pandemic.

Because of our leverage, we may incur substantial losses if our borrowing costs increase, and we may be unable to execute our investment strategy if leverage is unavailable or is unavailable on attractive terms.

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• the market value of our investments available to collateralize borrowings decreases;

the “haircut” applied to our assets under the repurchase agreements or other secured financing arrangements we are party to increases;

• the “haircut” applied to our assets under the repurchase agreements or other secured financing arrangements increases;

• interest rate volatility increases;

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• forced sales, particularly under adverse market conditions, such as those which occured as a result of the COVID-19 pandemic;

• there is a disruption in the repo market generally or the infrastructure that supports it;

the avail ability of financing in the market decreases.

• the availability of financing in the market decreases.

Our leverage may cause margin calls and defaults and force us to sell assets under adverse market conditions.

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Margin calls are most likely in market conditions in which the unencumbered assets that we would use to meet the margin calls have also decreased in value.

The risks associated with margin calls are more acute during periods of economic slowdown or recession, which the U.S.

economy has experienced in connection with the conditions created by the COVID-19 pandemic.

We experienced margin calls much higher than historical norms during the onset of COVID-19.

If we are unable to satisfy margin calls, our lenders may foreclose on our collateral.

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However, we may not be able to achieve our desired leverage for any of the following reasons:

we det ermine that the leverage would expose us to excessive risk;

• we determine that the leverage would expose us to excessive risk;

• our lenders do not make funding available to us at acceptable rates;

our lenders require that we provide additional collateral to cov er our borrowings.

• our lenders require that we provide additional collateral to cover our borrowings.

Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition.

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This could potentially increase our financing costs and reduce our liquidity.

Furthermore, if any of our potential lenders or existing lenders is unwilling or unable to provide us

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with financing or if we are not able to renew or replace maturing borrowings, we could be forced to sell our assets at an inopportune time when prices are depressed.

Our business, results of operations and financial condition may be materially adversely affected by disruptions in the financial markets.

We cannot assure you, under such extreme conditions, that these markets will remain an efficient source of long-term financing for our assets.

Furthermore, if any of our potential lenders or existing lenders is unwilling or unable to provide us with financing or if we are not able to renew or replace maturing borrowings, we could be forced to sell our assets at an inopportune time when prices are depressed.

Our business, results of operations and financial condition may be materially adversely affected by disruptions in the financial markets, including disruptions associated with the conditions created by the COVID-19 pandemic.

We cannot assure you that, under such extreme conditions, these markets will remain an efficient source of financing for our assets.

If our strategy is not viable, we will have to find alternative forms of financing for our assets, which may not be available.

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We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us.

If we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common stock and our ability to make distributions to our stockholders.

If we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the

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market price of our common stock and our ability to make distributions to our stockholders.

Moreover, our ability to grow will be dependent on our ability to procure additional funding.

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Potential conditions that could impair our liquidity include:

unwillingness or inability of any of our potential lenders to provide us with or renew financing, margin calls, additional capital requirements applicable to our lenders, a disruption in the financial markets or declining confidence in our reputation or in financial markets in general.

unwillingness or inability of any of our potential lenders to provide us with or renew financing, margin calls, additional capital requirements applicable to our lenders, a disruption in the financial markets (especially in light of the disruption caused by the COVID-19 pandemic) or declining confidence in our reputation or in financial markets in general.

These conditions could force us to sell our assets at inopportune times or otherwise cause us to potentially revise our strategic business initiatives.

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We are subject to reinvestment risk.

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We also are subject to reinvestment risk as a result of changes in interest rates.

Any significant decrease in economic activity or resulting decline in the housing market could have an adverse effect on our investments in mortgage-related assets.

Declines in interest rates are generally accompanied by increased prepayments of mortgage loans, which in turn results in a prepayment of the related mortgage-backed securities.

An increase in prepayments could result in the reinvestment of the proceeds we receive from such prepayments into lower yielding assets.

Conversely, increases in interest rates are generally accompanied by decreased prepayments of mortgage loans, which could reduce our capital available to reinvest into higher-yielding assets.

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Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial markets can result in a significant contraction in liquidity for mortgages and mortgage-related assets, which may adversely affect the value of the assets in which we invest.

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Significant adverse changes in financial market conditions can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related and other financial assets.

Concerns over economic recession, geopolitical issues including events such as the United Kingdom’s recent exit from the European Union (commonly referred to as “Brexit”), trade wars, unemployment, the availability and cost of financing, the mortgage market and a declining real estate market or prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets.

Concerns over economic recession, COVID-19 or other pandemic diseases, geopolitical issues including events such as the United Kingdom’s recent exit from the European Union (commonly referred to as “Brexit”), trade wars, unemployment, the availability and cost of financing, the mortgage market, the repurchase agreement market and a declining real estate market or prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets.

Increased market uncertainty and instability in light of the COVID-19 pandemic in both U.S.

and international capital and credit markets, combined with declines in business and consumer confidence and increased unemployment, have also contributed to volatility in domestic and international markets.

For example, as a result of the financial crises beginning in the summer of 2007 and through the subsequent credit and housing crisis, many traditional mortgage investors suffered severe losses in their residential mortgage portfolios and several major market participants failed or were impaired, resulting in a significant contraction in market liquidity for mortgage-related assets.

This illiquidity negatively affected both the terms and availability of financing for all mortgage-related assets.

Additionally, the recession resulting from the COVID-19 pandemic could be more protracted than the recession caused by the financial crisis, which could result in a significant rise in delinquencies and defaults on mortgage-related assets and further negatively impact market liquidity for mortgage-related assets.

Further increased volatility and deterioration in the markets for mortgages and mortgage-related assets as well as the broader financial markets may adversely affect the performance and market value of our Agency mortgage-backed securities.

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A measure of the cost of borrowing cash overnight collateralized by U.S.

Treasury securities, as published by the Federal Reserve Bank of New Yo rk.

Treasury securities, as published by the Federal Reserve Bank of New York.

These indices generally reflect short-term interest rates.

The interest rates on our borrowings similarly vary with changes in an objective index.

The interest rates on our borrowings similarly reflect short-term interest rates.

Nevertheless, the interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate interest earning assets, which are also typically subject to periodic and lifetime interest rate caps.

Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate interest earning assets.

Changes in the method pursuant to which LIBOR is determined, or a discontinuation of LIBOR, may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.

Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results.

LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform.

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This increases the subjectivity of the calculation process and increases the risk of manipulation.

Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator), may result in changes to the manner in which LIBOR rates are determined or the establishment of alternative reference rates.

Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator), are expected to result in changes to the manner in which LIBOR rates are determined or the establishment of alternative reference rates.

For example, on July 27, 2017, the U.K.

Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.

It is likely that, over time, U.S.

Dollar LIBOR (“USD-LIBOR”) will be replaced by the Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York.

It is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates in the United Kingdom or elsewhere.

Furthermore, in the U.S., efforts to identify a set of U.S.

dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

financial institutions, is considering replacing U.S.

dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities.

The Federal Reserve Bank of New York began publishing SOFR rates in April 2018.

It is likely that U.S.

Dollar LIBOR (“USD-LIBOR”) will be replaced by SOFR published by the Federal Reserve Bank of New York.

The manner and timing of this shift is not known with certainty.

It is possible, but unlikely, that USD-LIBOR will be used in instruments created after 2021.

Global regulators are encouraging regulated institutions to make the shift earlier.

It is possible, but unlikely, that USD-LIBOR will be used in new instruments created after 2021.

Global regulators expect that the most-used tenors of USD-LIBOR will continue to be published through June 2023, but are encouraging regulated institutions to make the shift earlier.

For each existing LIBOR-based instrument, the manner and timing of the switch depends on the terms of the relevant contract and the specifics of future events.

The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated.

Any of these alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could have a material adverse effect on results.

SOFR is not an exact replacement for USD-LIBOR.

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Regulators and other members of the Alternative Reference Rates Committee (“ARRC”) have indicated that market participants should stop using USD-LIBOR now, despite the unavailability of a forward-looking SOFR term rate.

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However, a large majority of new issuance of floating-rate instruments, including some transactions in which we are issuer or sponsor, still reference USD-LIBOR.

Regulators and other members of the ARRC have also indicated that all instruments that reference USD-LIBOR should include robust fallbacks.

The ARRC has published fallbacks for several asset types, and the International Swaps and Derivatives Association (“ISDA”) is preparing documentation to implement fallbacks for derivatives.

ISDA has not yet published its documentation, and there is no certainty about what ISDA’s recommendations will be.

The ARRC has published fallbacks for several asset types, and the International Swaps and Derivatives Association (“ISDA”) has prepared documentation to implement fallbacks for derivatives.

Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread.

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The spread calculation methodology for non-derivatives is currently not known.

The spread calculation is intended

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to minimize value transfer between counterparties, borrowers, and lenders, but there is no assurance that the calculated spread will be fair and accurate.

The fallbacks recommended by the ARRC are different for various non-derivative instruments, the fallbacks recommended by ARRC will likely differ from the fallbacks recommended by ISDA, and not all USD-LIBOR-based instruments will incorporate the recommended fallbacks.

The spread calculation is intended to minimize value transfer between counterparties, borrowers, and lenders, but there is no assurance that the calculated spread will be fair and accurate.

The fallbacks recommended by the ARRC are different for various non-derivative instruments, and not all USD-LIBOR-based instruments will incorporate the recommended fallbacks.

This could result in unexpected differences between our USD-LIBOR-based assets and our USD-LIBOR-based interest rate hedges.

Many existing USD-LIBOR-based instruments either do not contemplate the discontinuation of LIBOR, provide a fallback that in practice will make the instrument fixed-rate, or provide a fallback that one party may believe is contrary to the contractual intent.

We may incur costs amending those instruments to implement fallbacks recommended by the ARRC or ISDA.

We have adhered to the ISDA 2020 IBOR Fallbacks Protocol, but may incur costs amending instruments not covered by that Protocol or by clearinghouse rulebooks to implement fallbacks recommended by the ARRC.

We may decide not to amend, in which case we may bear the cost and risk of litigation.

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Our book value would be reduced by the amount of a decline in the market value of our interest earning assets.

We may experience declines in the market value of our assets resulting in us recording impairments, which may have an adverse effect on our results of operations and financial condition.

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We may experience declines in the market value of our assets resulting in us recording impairments, which may have an adverse effect on our results of operations and financial condition.

A decline in the market value of our mortgage-backed securities or other assets may require us to recognize an “other-than-temporary” impairment (“OTTI”) against such assets under GAAP.

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Financial services institutions are interrelated as a result of trading, clearing, counterparty, borrower, or other relationships.

We have exposure to many different counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients.

Many of these transactions expose us to credit or counterparty risk in the event of default of our counterparty or, in certain instances, our counterparty’s customers.

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In the event of a default by the DCO or FCM, we also bear market risk, because the asset or liability being hedged is no longer effectively hedged.

Most swaps must be cleared through a DCO.

Most swaps must be or are traded on a Swap Execution Facility.

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Therefore, we bear the credit risk of the dealer with which we executed the swaption.

TBA contracts and CMBX indexes are also not cleared, and we bear the credit risk of the dealer.

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TBA contracts and swaps on CMBX indexes are also not cleared, and we bear the credit risk of the dealer.

Derivative transactions are subject to margin requirements.

The relevant contract or clearinghouse rules dictate the method of determining the required amount of margin, the types of collateral accepted and the timing required to meet margin calls.

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Additionally, for cleared swaps and futures, FCMs may have the right to require more margin than the clearinghouse requires.

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These risks include, but are not limited to, the following:

(i) collateral

(i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled

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cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors;

based on simplifying assumptions that lead to errors;

(ii) information about collateral may be incorrect, incomplete, or misleading;

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Furthermore, since predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data and the ability of these historical models to accurately reflect future periods.

Additionally, such models may be more prone to inaccuracies in light of the unprecedented conditions created by the COVID-19 pandemic.

In particular, the economic, financial and related impacts of COVID-19 is and will be very difficult to model (including as related to the housing and mortgage markets), as the catalyst for these conditions (i.e., a global pandemic) is an event that is unparalleled in modern history and therefore is subject to wide variables, assumptions and inputs.

Therefore, historical data used in analytical models may be less reliable in predicting future conditions.

Further, the conditions created by COVID-19 have increased volatility across asset classes.

Extreme volatility in any asset class, including real estate and mortgage-related assets, increases the likelihood of analytical models being inaccurate as market participants attempt to value assets that have frequent, significant swings in pricing.

Many of the models we use include LIBOR as an input.

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Our business is highly dependent on communications and information systems.

Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading activities, including mortgage-backed securities trading activities.

Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading

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activities, including mortgage-backed securities trading activities.

A disruption or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or personal or confidential information of our employees or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements.

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Certain third parties provide information needed for our financial statements that we cannot obtain or verify from other sources.

If one of those third

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parties experiences a system failure or cybersecurity incident, we may not have access to that information or may not have confidence in its accuracy.

If one of those third parties experiences a system failure or cybersecurity incident, we may not have access to that information or may not have confidence in its accuracy.

We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks.

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and international information privacy and security regulations.

In addition, due to the transition to remote working environments as a result of the COVID-19 pandemic, there is an elevated risk of such events occurring.

Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and we are from time to time subject to such attempted attacks.

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The notes are secured by the pool of assets.

In exchange for the transfer of assets to the issuing entity, we receive the cash proceeds of the sale of non-recourse notes and a 100% interest in the subordinate interests of the issuing entity.

In exchange for the transfer of assets to the issuing entity, we receive the cash proceeds of the sale of non-recourse notes and a 100% interest in certain subordinate interests of the issuing entity.

The securitization of all or a portion of our commercial or residential loan portfolio might magnify our exposure to losses because any subordinate interest we retain in the issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses.

Moreover, we cannot be assured that we will be able to access the securitization market or be able to do so at favorable rates.

Moreover, we cannot assure you that we will be able to access the securitization market or be able to do so at favorable rates (particularly in light of the

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unpredictable impact of the COVID-19 pandemic on the securitization markets).

The inability to securitize our portfolio could adversely affect our performance and our ability to grow our business.

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We may sell assets or reduce leverage at an inopportune time to avoid breaching these restrictions.

If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare

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outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral.

If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral.

We may also be subject to cross-default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default.

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A default could also significantly limit our financing alternatives such that we would be unable to pursue our leverage strategy, which could adversely affect our returns.

Final rules issued by the FHFA relating to captive insurance company membership in the FHLB System prohibit us from taking new advances or renewing existing advances that mature beyond February 19, 2021.

On January 12, 2016, the FHFA issued final rules (“FHFA Final Rules”) providing that captive insurance companies will no longer be eligible for membership in the FHLB System.

Because our wholly-owned subsidiary Truman was admitted as a member of the FHLB of Des Moines (“FHLB Des Moines”) prior to September 2014, it is eligible under the FHFA Final Rules to remain as a member of the FHLB Des Moines through February 19, 2021.

In addition, under the FHFA Final Rules, the FHLB Des Moines is permitted to allow advances that were outstanding prior to February 19, 2016 to remain outstanding until scheduled maturity, however we are not permitted to increase our existing FHLB advances.

It is possible for Congress or the FHFA to change the FHFA Final Rules, but there is no assurance that they will do so.

We may be forced to find alternative financing for assets currently financed with FHLB Des Moines, which could result in increased financing cost;

a decreased weighted average duration of liabilities;

and an increase in risks described above related to securitizations, credit facilities, and other types of borrowings.

Many of the assets currently financed with FHLB Des Moines are expected to remain outstanding past the date on which advances are no longer available.

We may enter into new lines of business, acquire other companies or engage in other strategic initiatives, each of which may result in additional risks and uncertainties in our businesses.

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To the extent we pursue strategic investments or acquisitions, undertake other strategic initiatives or consider new lines of business, we will face numerous risks and uncertainties, including risks associated with:

the avail ability of suitable opportunities;

• the availability of suitable opportunities;

• the level of competition from other companies that may have greater financial resources;

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• failure to realize the full benefits of an acquisition, including expected synergies, cost savings, or sales or growth opportunities, within the anticipated timeframe or at all;

post-acquisition deterioration in an acquired business that could result in lower or negative earnings contribution and/or goodwill impairment charg es.

• post-acquisition deterioration in an acquired business that could result in lower or negative earnings contribution and/or goodwill impairment charges.

Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk.

Our strategy to increase investments in a line of business, such as our middle market lending, residential credit or commercial real estate business, may lead to additional risks and uncertainties.

The decision to increase or decrease investments within a line of business may lead to additional risks and uncertainties.

In addition, if a new or acquired business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected.

Our strategic initiatives may include joint ventures, in which case we will be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control.

We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment accounts, including potential regulatory risks.

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We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment accounts, including potential regulatory risks.

We have, and may in the future, sponsor, manage and serve as general partner and/or manager of new funds or investment accounts, including collateralized loan obligations (“CLO”).

Such sponsorship and management of, and investment in, such funds and accounts may involve risks not otherwise present with a direct investment in such funds, and accounts’ target investments, including, for example:

the possibility that inve stors in the funds/accounts might become bankrupt or otherwise be unable to meet their capital commitment obligations;

• the possibility that investors in the funds/accounts might become bankrupt or otherwise be unable to meet their capital commitment obligations;

• that operating and/or management agreements of a fund/account may restrict our ability to transfer or liquidate our interest when we desire or on advantageous terms;

that our relationships with the investors will be generally contractual in nature and may be terminated or dissolved under the terms of the agreements, or we may be removed as general partner and/or manager (with or without cause), and in such event, we may

not continue to manage or invest in the applicable fund/account;

• that our relationships with the investors will be generally contractual in nature and may be terminated or dissolved under the terms of the agreements, or we may be removed as general partner and/or manager (with or without cause), and in such event, we may not continue to manage or invest in the applicable fund/account;

• that disputes between us and the investors may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the investments owned by the applicable fund/account to additional risk;

that we may incur liability for obligations of a fund/accou nt by reason of being its general partner or manager.

• that we may incur liability for obligations of a fund/account by reason of being its general partner or manager.

Further, in relation to our operations, we have a subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act.

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Investments in MSRs may expose us to additional risks.

Our investments in MSRs may subject us to certain additional risks, including the following:

Investments in MSRs are hig hly illiquid and subject to numerous restrictions on transfer and, as a result, there is risk that we would be unable to locate a willing buyer or get required approval to sell MSRs in the future should we desire to do so.

We invest in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral for the investment.

We expect to increase our exposure to MSR-related investments in 2021.

Generally, we have the right to receive certain cash flows from the owner of the MSRs that are generated from the servicing fees and/or excess servicing spread associated with the MSRs.

While we do not directly own MSRs, our investments in MSR-related assets indirectly expose us to risks associated with MSRs, including the following:

• Investments in MSRs are highly illiquid and subject to numerous restrictions on transfer and, as a result, there is risk that we would be unable to locate a willing buyer or get required approval to sell MSRs in the future should we desire to do so.

• Our rights to the excess servicing spread are subordinate to the interests of Fannie Mae, Freddie Mac and Ginnie Mae, and are subject to extinguishment.

Fannie Mae and Freddie Mac each

require approval of the sale of excess servicing spreads pertaining to their respective MSRs.

Fannie Mae and Freddie Mac each require approval of the sale of excess servicing spreads pertaining to their respective MSRs.

We have entered into acknowledgment agreements or subordination of interest agreements with them, which acknowledge our subordinated rights.

• Changes in minimum servicing compensation for agency loans could occur at any time and could negatively impact the value of the income derived from MSRs.

If we are not able to successfully manage these and other risks related to investing in MSRs, it may adversely affect our business, results of operations and financial condition.

Purchases and sales of Agency mortgage-backed securities by the Federal Reserve may adversely affect the price and return associated with Agency mortgage-backed securities.

The Federal Reserve owns approximately $1.4 trillion of Agency mortgage-backed securities as of December 31, 2019.

Starting in October 2017, the Federal Reserve has begun to phase out its policy of reinvesting principal payments from its holdings of

• The value of MSRs is highly sensitive to changes in prepayment rates.

Decreasing market interest rates are generally associated with increases in prepayment rates as borrowers are able to refinance their loans at lower costs.

Prepayments result in the partial or complete loss of the cash flows from the related MSR.

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Agency mortgage-backed securities into new Agency mortgage-backed securities purchases, therefore causing a decline in Federal Reserve security holdings over time.

While it is very difficult to predict the impact of the Federal Reserve portfolio runoff on the prices and liquidity of Agency mortgage-backed securities, returns on Agency mortgage-backed securities may be adversely affected as private investors seek higher yields to purchase larger amounts of Agency mortgage-backed securities.

If we are not able to successfully manage these and other risks related to investing in MSRs, it may adversely affect the value of our MSR-related assets.

We depend on third-party service providers, including mortgage loan servicers and sub-servicers, for a variety of services related to our business.

We are, therefore, subject to the risks associated with third-party service providers.

We depend on a variety of services provided by third-party service providers related to our investments in MSRs as well as for general operating purposes.

For example, we rely on the mortgage servicers who service the mortgage loans underlying our MSRs to, among other things, collect principal and interest payments on such mortgage loans and perform loss mitigation services in accordance with applicable laws and regulations.

Mortgage servicers and other service providers, such as trustees, bond insurance providers, due diligence vendors and document custodians, may fail to perform or otherwise not perform in a manner that promotes our interests.

For example, any legislation or regulation intended to reduce or prevent foreclosures through, among other things, loan modifications may reduce the value of mortgage loans, including those underlying our MSRs.

Mortgage servicers may be required or otherwise incentivized by the Federal or state governments to pursue actions designed to assist mortgagors, such as loan modifications, forbearance plans and other actions intended to prevent foreclosure even if such loan modifications and other actions are not in the best interests of the beneficial owners of the mortgage loans.

Similarly, legislation delaying the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limiting the ability of mortgage servicers to take actions that may be essential to preserve the value of the mortgage loans may also reduce the value of mortgage loans underlying our MSRs.

Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increase servicing costs.

As a consequence of the foregoing matters, our business, financial condition and results of operations may be adversely affected.

Purchases and sales of Agency mortgage-backed securities by the Federal Reserve may adversely affect the price and return associated with Agency mortgage-backed securities.

The Federal Reserve owns approximately $2.0 trillion of Agency mortgage-backed securities as of December 31, 2020.

In response to the market conditions created by the COVID-19 pandemic, the Federal Reserve has taken a number of proactive measures, including cutting its target benchmark interest rate to 0%-0.25%, instituting a quantitative easing program, including the purchase of an unconstrained amount of Agency residential mortgage-backed securities, and putting in place a commercial paper funding facility and term and overnight repurchase agreement financing facilities, all to bolster liquidity and to promote price stability and the smooth functioning of the mortgage-backed securities market.

Certain actions taken by the U.S., including the Federal Reserve, in response to the COVID-19 pandemic may have a negative a impact on our results.

For example, decreases in short-term interest rates, such as those announced by the Federal Reserve during the first quarter of 2020, may have a negative impact on our results.

The Federal Reserve significantly further lowered interest rates in response to COVID-19 pandemic concerns.

These market interest rate declines may negatively affect our results of operations.

New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac, on the one hand, and the federal government, on the other, which could adversely affect the price of, or our ability to invest in and finance Agency mortgage-backed securities.

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The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements.

Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future.

Treasury could also stop providing

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credit support to Fannie Mae and Freddie Mac in the future.

Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an Agency mortgage-backed security and could have broad adverse market implications.

If Fannie Mae or Freddie Mac was eliminated, or their structures were to change in a material manner that is not compatible with our business model, we would not be able to acquire Agency mortgage-backed securities from these entities, which could adversely affect our business operations.

The implementation of the Single Security Initiative may adversely affect our results and financial condition.

The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac (the Enterprises), under the direction of the FHFA, the Enterprises’ regulator and conservator, to develop a common security MBS issued by the Enterprises.

Our liquidity is typically reduced each month when we receive margin calls related to factor changes, and typically increased each month when we receive payment of principal and interest on Fannie Mae and Freddie Mac securities.

Legacy Freddie Mac securities pay principal and interest earlier in the month than Fannie Mae and Uniform Mortgage Backed Securities (“UMBS”), meaning that legacy Freddie Mac positions reduce the period of time between meeting factor-related margin calls and receiving principal and interest.

The percentage of legacy Freddie Mac positions in the market and in our portfolio will likely decrease over time as those securities are converted to UMBS or pay off.

The FHFA recently released a Request For Input regarding pooling practices and other topics relating to aligning the prepayment speeds of UMBS issued by each of the Enterprises.

There is no certainty about what, if any, changes may result from the Request For Input.

Some of the proposals described in the Request For Input, if implemented, could negatively impact the Agency mortgage-backed securities market and could make it more difficult for us to comply with our Investment Company Act exemption.

The recent U.S.

elections may result in changes in federal policy with significant impacts on the legal and regulatory framework affecting the mortgage industry.

These changes, including personnel changes at the applicable regulatory agencies, may alter the nature and scope of oversight affecting the mortgage finance industry generally (particularly with respect to the future role of Fannie Mae and Freddie Mac).

Risks Related To Our Credit Assets

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The holder of the securities in the CRT sector has the risk that the borrowers may default on their obligations to make full and timely payments of principal and interest.

Investments in securities in the CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal

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and/or interest on the pool of mortgages referenced in the transaction.

Investments in securities in the CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on the pool of mortgages referenced in the transaction.

The holder of the CRT may also bear the risk of the default of the issuer of the security.

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Our non-Agency mortgage-backed securities, mortgage loans, and mortgage loans for which we own the servicing rights, along with our commercial real estate debt, preferred equity, and real estate assets may be susceptible to economic slowdowns or recessions, which could lead to financial losses in our assets and a decrease in revenues, net income and asset values.

Investors should consider the impact that the current recession resulting from the COVID-19 pandemic will have on the mortgage market and ability of mortgagors to make timely payments on their mortgage loans.

Furthermore, the economic impact of the COVID-19 pandemic may result in a decline in real estate values (particularly in certain geographic areas).

Owners of Agency mortgage-backed securities are protected from the risk of default on the underlying mortgages by guarantees from Fannie Mae, Freddie Mac or, in the case of the Ginnie Mae, the U.S.

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Geographic concentration exposes investors to greater risk of default and loss.

Repayments by borrowers and the market value of the related assets could be affected by economic conditions generally or specific to geographic areas or regions of the United States, and concentrations of mortgaged commercial and residential properties in particular geographic areas may increase the risk that adverse economic or other developments or natural or man-made disasters affecting a particular region of the country could increase the frequency and severity of losses on mortgage loans or other real estate debt secured by those properties.

Repayments by borrowers and the market value of the related assets could be affected by economic conditions generally or specific to geographic areas or regions of the United States, and concentrations of mortgaged commercial and residential properties in particular geographic areas may increase the risk that adverse economic or other developments (including events of conditions related to the COVID-19 pandemic) or natural or man-made disasters affecting a particular region of the country could increase the frequency and severity of losses on mortgage loans or other real estate debt secured by those properties.

From time to time, regions of the United States experience significant real estate downturns when others do not.

Regional economic declines or conditions in regional real estate markets could adversely affect the income from, and market value of, the mortgaged properties.

In addition, local or regional economies may be adversely affected to a greater degree than other areas of the country by developments affecting industries concentrated in such area.

In addition, local or regional economies may be adversely affected to a greater degree than other areas of

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the country by developments affecting industries concentrated in such area.

A decline in the general economic condition in the region in which mortgaged properties securing the related mortgage loans are located would result in a decrease in consumer demand in the region, and the income from and market value of the mortgaged properties may be adversely affected.

Other regional factors – e.g., rising sea levels, earthquakes, floods, forest fires, hurricanes or changes in governmental rules or fiscal policies – also may adversely affect the mortgaged properties.

Other regional factors – e.g., rising sea levels, earthquakes, floods, forest fires, hurricanes or changes in governmental rules (including rules related to the COVID-19 pandemic) or fiscal policies – also may adversely affect the mortgaged properties.

Assets in certain regional areas may be more susceptible to certain hazards (such as earthquakes, widespread fires, floods or hurricanes) than properties in other parts of the country and collateral properties located in coastal states may be more susceptible to hurricanes than properties in other parts of the country.

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There is no assurance that borrowers have maintained or will maintain the insurance required under the applicable loan documents or that such insurance will be adequate.

In addition, since the residential mortgage loans generally do not require maintenance of

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terrorism insurance, we cannot assure you that any property will be covered by terrorism insurance.

In addition, since the residential mortgage loans generally do not require maintenance of terrorism insurance, we cannot assure you that any property will be covered by terrorism insurance.

Therefore, damage to a collateral property caused by acts of terror may not be covered by insurance and may result in substantial losses to us.

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In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower before a default, and, as a result, the value of the collateral may be reduced by acts or omissions by owners or managers of the assets.

In addition, the value of the underlying real estate may be adversely affected by some or all of the risks referenced above with respect to our owned real estate.

In addition, the value of the underlying real estate may be adversely affected by some or all of the risks referenced below with respect to our owned real estate.

Some of our loans may be backed or supported by individual or corporate guarantees from borrowers or their affiliates that are not secured.

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Bankruptcy and borrower litigation can significantly increase collection costs and the time needed for us to acquire title to the underlying collateral (if applicable), during which time the collateral and/or a borrower’s financial condition may decline in value, causing us to suffer additional losses.

If the value of collateral underlying a loan declines or interest rates increase during the term of a loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing because the underlying property revenue cannot satisfy the debt service coverage requirements necessary to obtain new financing.

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cannot satisfy the debt service coverage requirements necessary to obtain new financing.

If a borrower is unable to repay our loan at maturity, we could suffer additional loss that may adversely impact our financial performance.

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Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us.

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any costs or delays involved in the foreclosure of a loan or a liquidation of the underlying property will further reduce the proceeds and thus increase our loss.

Furthermore, any costs or delays involved in the foreclosure of a loan or a liquidation of the underlying property will further reduce the proceeds and thus increase our loss.

Any such reductions could materially and adversely affect the value of the commercial loans in which we invest.

It is anticipated that as a result of financial difficulties due to the COVID-19 pandemic, borrowers will continue to request forbearance or other relief with respect to their mortgage payments.

In addition, across the country, moratoriums are in place in certain states to stop evictions and foreclosures in an effort to lessen the financial burden created by the COVID-19 pandemic and various states have even promulgated guidance to regulated servicers requiring them to formulate policies to assist mortgagors in need as a result of the COVID-19 pandemic.

It is anticipated that other forbearance programs, foreclosure moratoriums or other programs or mandates will be imposed or extended, including those that will impact mortgage related assets.

Moratoriums on foreclosures may significantly impair the servicer’s abilities or our ability to pursue loss mitigation strategies in a timely and effective manner.

Whether or not we have participated in the negotiation of the terms of a loan, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests.

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Our mortgage loan sale agreements will require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser.

In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan.

In addition, we may be required to repurchase loans as a result of

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borrower fraud or in the event of early payment default on a mortgage loan.

Likewise, we may be required to repurchase or substitute loans if we breach a representation or warranty in connection with our securitizations.

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If we foreclose on and come to own property, our financial performance and returns to investors could suffer.

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Financial covenants could adversely affect our ability to conduct our business.

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Our investments in corporate loans and debt securities for middle market companies carry risks.

We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market companies, and we expect our investments in this space to grow in 2020.

We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market companies.

Non-investment grade or unrated loans to middle market businesses may carry more inherent risks than loans to larger, investment grade publicly traded entities.

These middle market companies generally have less access to public capital markets, and generally have higher financing costs.

These middle market companies generally have less access to public capital

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markets, and generally have higher financing costs.

Such companies, particularly in an economic slowdown or recession, may be in a weaker financial position, may need more capital to expand or compete, and may be unable to obtain financing from their respective private capital providers, public capital markets or from traditional sources, such as commercial banks.

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• environmental conditions of the real estate.

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Under various U.S.

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The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower.

In light of the COVID-19 pandemic and related stay-at-home orders, certain businesses may not be able to open or to open at full capacity to customers, which may have an effect on their ability to generate income.

If the income of the property is reduced, the borrower’s ability to repay the loan may be impaired.

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• increases in interest rates, real estate tax rates and other operating expenses;

• tenant mix;

• success of tenant businesses and the tenant’s ability to meet their lease obligations;

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• competition from comparable types of properties;

• government orders regulating the operation of a tenant’s business;

• changes in laws that increase operating expenses or limit rents that may be charged;

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• eviction moratoriums;

• costs of remediation, and liabilities associated with environmental conditions;

• the potential for uninsured or underinsured property losses;

changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance;

acts of God, terrorist attacks, social unrest and civil disturbances;

• changes in governmental laws and regulations, including fiscal policies, zoning ordinances and

environmental legislation and the related costs of compliance;

• acts of God, terrorist attacks, pandemics, social unrest and civil disturbances;

• litigation and condemnation proceedings regarding the properties;

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In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal and interest on these securities.

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Borrowers may be unable to repay the remaining principal balance on the maturity date.

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A borrower’s ability to achieve either of these goals will be affected by a number of factors, including:

the availability of, and com petition for, credit for commercial real estate projects, which fluctuate over time;

• the availability of, and competition for, credit for commercial real estate projects, which fluctuate over time;

• the prevailing interest rates;

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• the availability of credit for multi-family and commercial properties;

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• prevailing general and regional economic conditions;

the availability of funds in the credit markets which fluctuat es over time.

• the availability of funds in the credit markets which fluctuates over time.

Whether or not losses are ultimately sustained, any delay in the collection of a balloon payment on the maturity date will likely extend the weighted average life of our investment.

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We originate and acquire mezzanine loans, which take the form of subordinated loans secured by a pledge of the ownership interests by an entity that directly or indirectly owns the property-owning entity.

We also make commercial real estate preferred equity investments, which, unlike mezzanine loans, are generally not secured by a pledge of equity interests and may be less liquid investments.

We also make commercial real estate preferred equity investments, which, unlike mezzanine loans, generally are not secured by a pledge of equity interests and may be less liquid investments.

Although as a holder of preferred equity we may protect our position with covenants that limit the activities of the entity in which we hold an interest and protect our equity by obtaining a contractual right to control the underlying property or force a sale after an event of default, should such a default occur, we would only be able to proceed against the entity in which we hold an interest, and not the real property owned by such entity and ultimately underlying the investment.

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As a result, we may not recover some or all of our investment.

In addition, mezzanine loans and preferred equity investments may have higher loan-to-value ratios than conventional mortgage loans, resulting in the borrower

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having less equity in the property and increasing the risk of loss of principal.

In addition, mezzanine loans and preferred equity investments may have higher loan-to-value ratios than conventional mortgage loans, resulting in the borrower having less equity in the property and increasing the risk of loss of principal.

Further, any subordinate debt investment may give rise to sudden liquidity needs in order for us to protect our position.

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If we fail to fund our entire commitment on a construction loan or if a borrower otherwise fails to complete the construction of a project, there could be adverse consequences associated with the loan, including:

a loss of the value of the property securing the loan, especially if the borrower is unable to raise funds to complete it from other sources;

a loss of the value of the property securing the loan, especially if the

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borrower is unable to raise funds to complete it from other sources;

a borrower claim against us for failure to perform under the loan documents;

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If we are not successful in identifying suitable replacements on a timely basis we may be required to fund certain expenses and obligations (e.g., real estate taxes, debt costs and maintenance expenses) to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned.

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addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator, which could adversely affect our business, results of operations and financial condition.

In addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator, which could adversely affect our business, results of operations and financial condition.

The risks associated with properties leased to tenants are more acute during periods of economic slowdown or recession, especially if these periods are accompanied by high unemployment and declining real estate values.

A weakening economy, high unemployment and declining real estate values significantly increase the likelihood that a tenant’s creditworthiness may deteriorate, which in turn may adversely affect us.

In any of the foregoing circumstances, our financial performance could be materially adversely affected.

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Lease expirations and lease terminations may result in reduced revenues if the lease payments received from replacement tenants are less than the lease payments received from the expiring or terminating tenants.

In addition, lease defaults or lease terminations by one or more significant tenants or the failure of tenants under expiring leases to elect to renew their leases, could cause us to experience long periods of vacancy with no revenue from a facility and to incur substantial capital expenditures and/or lease concessions to obtain replacement tenants.

The real estate investments we currently own and expect to acquire will be illiquid.

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expenditures and/or lease concessions to obtain replacement tenants.

The risk of lease expirations and lease terminations is more acute during periods of economic slowdown or recession, especially if these periods are accompanied by high unemployment and declining real estate values.

Our real estate investments are illiquid.

Because real estate investments are relatively illiquid, our ability to adjust the portfolio promptly in response to economic or other conditions will be limited.

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Additionally, our co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals, and we may in certain circumstances be liable for the actions of our co-venturers.

Consequently, actions by any such co-venturer might result in subjecting properties owned by the joint venture

to additional risk, although these risks are mitigated by transaction structure and the terms and conditions of agreements governing the relationship.

Consequently, actions by any such co-venturer might result in subjecting properties owned by the joint venture to additional risk, although these risks are mitigated by transaction structure and the terms and conditions of agreements governing the relationship.

Risks Related To Our Residential Credit Business

Our investments in non-Agency mortgage-backed securities (including re-performing loans (“RPL”) / non-performing loans (“NPL”) which we have acquired in recent periods) or other investment assets of lower credit quality, including our investments in seasoned re-performing and non-performing residential whole loans, involve credit risk, which could materially adversely affect our results of operations.

Our investments in non-Agency mortgage-backed securities (including re-performing loans (“RPL”) / non-performing loans (“NPL”) which we have acquired in recent periods) or other investment assets of lower credit quality, including our investments in MSRs or seasoned re-performing and non-performing residential whole loans, involve credit risk, which could materially adversely affect our results of operations.

Our current investment strategy includes seeking growth in our residential credit business.

The holder of a mortgage or mortgage-backed securities assumes the risk that the related borrowers may default on their obligations to make full and timely payments of principal and interest.

Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities, residential whole loans and other investment assets of lower credit quality.

In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to principal or interest

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Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities, residential whole loans, MSRs and other investment assets of lower credit quality.

In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to principal or interest by the U.S.

Government, any federal agency or any federally chartered corporation.

Non-investment grade, non-Agency securities tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds.

Higher-than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-backed securities or on our residential whole loan investments may adversely affect the value of those assets.

Accordingly, defaults in the payment of principal and/or interest on our non-Agency mortgage-backed securities, residential whole loan investments and other investment assets of less-than-high credit quality would likely result in our incurring losses of income from, and/or losses in market value relating to, these assets.

Higher-than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-backed securities, MSRs or on our residential whole loan investments may adversely affect the value of those assets.

Accordingly, defaults in the payment of principal and/or interest on our non-Agency mortgage-backed securities, residential whole loan investments, MSRs and other investment assets of less-than-high credit quality would likely result in our incurring losses of income from, and/or losses in market value relating to, these assets.

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We have investments in non-Agency mortgage-backed securities collateralized by non-prime loans and may also have investments collateralized by subprime mortgage loans, which, due to lower underwriting standards, are subject to increased risk of losses.

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Any failure by servicers to service these mortgages and related real estate owned (“REO”) properties could negatively impact the value of these investments and our financial performance.

In addition, while we have contracted, and will continue to contract, with unaffiliated servicing companies to carry out the actual servicing of the loans we purchase together with the related MSRs

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(including all direct interface with the borrowers), we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation.

In addition, while we have contracted, and will continue to contract, with unaffiliated servicing companies to carry out the actual servicing of the loans we purchase together with the related MSRs (including all direct interface with the borrowers), we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation.

In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.

When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our subsidiaries.

The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey can be lengthy and expensive, and the delays and costs involved in completing a foreclosure, and then liquidating the property through sale, may materially increase any related loss.

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sale, may materially increase any related loss.

Finally, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition or a previously unknown environmental liability may be discovered that would require expensive and time-consuming remediation.

The COVID-19 pandemic and the resulting economic disruption it has caused may result in liquidity pressures on servicers and other third-party vendors that we rely upon.

For instance, as a result of an increase in mortgagors requesting relief in the form of forbearance plans and/or other loss mitigation, servicers and other parties responsible in capital markets securitization transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to experience financial difficulties if mortgagors do not make monthly payments as a result of the COVID-19 pandemic.

The negative impact on the business and operations of such servicers or other parties responsible for funding such advances could be significant.

Sources of liquidity typically available to servicers and other relevant parties for the purpose of funding advances of monthly mortgage payments, especially entities that are not depository institutions, may not be sufficient to meet the increased need that could result from significantly higher delinquency and/or forbearance rates.

The extent of such liquidity pressures in the future is not known at this time and is subject to continual change.

Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial condition.

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Failure of residential mortgage loan originators or servicers to comply with federal consumer protection laws and regulations could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some violations included the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affected residential mortgage loans, which could adversely impact our business and financial results.

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We may not be able to obtain or maintain the governmental licenses required to operate our Residential Credit business and we may fail to comply with various state and federal laws and regulations applicable to our business of acquiring residential mortgage loans and servicing rights.

While we are not required to obtain licenses to purchase mortgage-backed securities, the purchase of residential mortgage loans and certain business purpose mortgage loans in the secondary market may, in some circumstances, require us to maintain various state licenses.

Acquiring the right to service residential mortgage loans and certain business purpose mortgage loans may also, in some circumstances, require us to maintain various state licenses even though we currently do not expect to directly engage in loan servicing ourselves.

As a result, we could be delayed in conducting certain business if we were first required to obtain a state license.

We cannot assure you that we will be able to obtain all of the licenses we need or that we would not experience significant delays in obtaining these licenses.

Furthermore, once licenses are issued we are required to comply with various information reporting and other regulatory requirements to maintain those licenses, and there is no assurance that we will be able to satisfy those requirements or other regulatory requirements applicable to our business of acquiring mortgage loans on an ongoing basis.

Our failure to obtain or maintain required licenses or our failure to comply with regulatory requirements that are applicable to our business of acquiring mortgage loans may restrict our residential credit business and investment options and could harm our business and expose us to penalties or other claims.

Risks Related to Our Relationship with Our Manager

On February 12, 2020, we entered into the Internalization Agreement with the Manager.

Pursuant to the Internalization Agreement, we will acquire the equity interests of the Manager and its affiliates, which are owned by certain of our current executive officers, for a nominal cash purchase price ($1.00), and transition from an externally-managed REIT to an internally-managed REIT.

The Internalization is subject to certain closing conditions, and is expected to close during the second quarter of 2020.

The management agreement was negotiated between related parties and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party.

Because the Manager is owned indirectly by members of our current management, the management agreement was developed by related parties.

Although our independent directors, who are responsible for protecting our and our stockholders’ interests with regard to the management agreement, had the benefit of external financial and legal advisors, they did not have the benefit of arm’s-length advice from our executive officers.

The terms of the management agreement, including fees payable, may not reflect the terms we may have received if it was negotiated with an unrelated third party.

In addition, particularly as a result of our relationship with the ultimate owners and employees of the Manager, who are members of our current management, our directors may determine that it is in the best interests of our stockholders not to enforce, or to enforce less vigorously, our rights under the management agreement because of our desire to maintain our ongoing relationship with our Manager.

There may be conflicts of interest between us and our executive officers.

The Manager is owned indirectly by members of our current management.

The ultimate owners of the Manager will be entitled to receive any profit from the management fee we pay to our Manager either in the form of distributions by our Manager or increased value of their ownership interests in the Manager.

This may cause our management to have interests that conflict with our interests and those of our stockholders.

We are dependent upon the Manager who provides services to us through the management agreement and we may not find suitable replacements for our Manager if the management agreement is terminated or the Manager’s key personnel are no longer available to us.

Personnel provided by the Manager is responsible for making all of our investment decisions.

We believe that the successful implementation of our investment and financing strategies depend upon the experience of certain of the Manager’s officers and employees.

None of these individuals’ continued service is guaranteed.

If the management agreement is terminated or these individuals leave the Manager, the Manager or we may be unable to replace them with persons with appropriate experience, or at all, and we may not be able to execute our business plan.

The management fee is payable regardless of our performance.

The Manager receives a management fee from us that is based on a percentage of our stockholders’ equity, regardless of the performance of our investment portfolio (except to the extent that performance affects our stockholders’ equity).

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we pay our Manager a management fee for a specific period even if we experienced a net loss during the same period.

The Manager’s entitlement to substantial nonperformance-based compensation may reduce its incentive to provide attractive risk-adjusted returns for our investment portfolio.

This in turn could limit our ability to make distributions to our stockholders and affect the market price of our common stock.

The fee structure of the management agreement may limit the Manager’s ability to retain access to its key personnel.

The management agreement does not provide the Manager with an incentive management fee that would pay the Manager additional compensation as a result of meeting or exceeding performance targets.

Some of our externally managed competitors pay their managers an incentive management fee, which could enable the manager to provide additional compensation to its key personnel.

Thus, the lack of an incentive fee in the management agreement may limit the ability of the Manager to provide key personnel with additional compensation for strong performance, which could adversely affect the Manager’s ability to retain these key personnel.

If the Manager were not able to retain any of the key personnel that will be providing services to the Manager, it would have to find replacement personnel to provide those services.

Those replacement key personnel may not be able to produce the same operating results as the current key personnel.

Conflicts of interest could arise in connection with our executive officers’ discharge of fiduciary duties to our stockholders.

Our current executive officers are indirect owners and employees of the Manager while continuing to be executive officers of Annaly.

Our executive officers, by virtue of their positions, have fiduciary duties to our company and our stockholders.

The duties of our executive officers to us and our stockholders may come into conflict with the interests of such officers in their capacities as owners or employees of the Manager.

If the Manager were to manage any additional entities, our executive officers could face conflicts of interest in allocating their time among us and such additional entities.

Risks Related to Internalization

The Internalization was negotiated between the Special Committee, which is comprised solely of independent and disinterested members of our Board, and our Manager, which is affiliated with certain of our officers and directors.

The Internalization was negotiated with our Manager, which is affiliated with certain of our officers and directors.

As a result, those officers and directors may have different interests than us or our stockholders.

This potential conflict would not exist in the case of a transaction negotiated with unaffiliated third parties.

The Internalization may not be accretive to our stockholders.

While it is expected that the Internalization will be, in the long-term, accretive to our stockholders, there can be no assurance that this will be the case, as, among other things, we may not achieve our anticipated cost savings from the Internalization (including if we incur higher general and administrative expenses than expected).

The failure of the Internalization to be accretive to our stockholders could have a material adverse effect on our business, financial condition and results of operations.

We may not manage the Internalization effectively or realize its anticipated benefits.

We may not manage the Internalization effectively.

The Internalization could be a time-consuming and costly process and we may encounter potential difficulties in the integration process including, among other things:

the inability to successfully internalize corporate management in a manner that permits us to achieve the cost savings anticipated to result from the Internalization (including if we incur higher general and administrative expenses than expected), which could result in the anticipated benefits of the Internalization not being realized in the timeframe currently anticipated or at all;

the risk of not realizing all of the anticipated strategic, operational and financial benefits of the Internalization within the expected time frame or at all;

potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Internalization;

performance shortfalls as a result of the diversion of management’s attention caused by completing the Internalization.

For all these reasons, you should be aware that it is possible that the Internalization process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our operations, any of which could adversely affect our

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ability to achieve the anticipated benefits of the Internalization, or could otherwise materially adversely affect our business and financial results.

We depend on our key executives and other employees of our Manager.

There is no guarantee that such key executives and employees will remain employed or engaged by us for any specified period of time, and will not engage in competitive activities if they cease to be employed with or engaged by us.

We depend on the key executives and employees of our Manager.

It is expected that, following the consummation of the Internalization, we will continue to substantially depend on the services of these individuals.

Votek intends to transition to a temporary advisory role with Annaly and to continue serving as an active member of the Board following the appointment of a permanent chief executive officer and president.

Our other executive officers have entered into employment agreements with us.

These agreements will become effective upon the closing of the Internalization and have been structured to incentivize our executives to stay through the end of their initial terms.

Nevertheless, as is presently the case under the Management Agreement, the departure or the loss of the services of any of these individuals, or other senior management personnel or employees, following the Internalization could have a material adverse effect on our business, financial condition, results of operations and ability to effectively operate our business.

We may be exposed to risks to which we have not historically been exposed.

The Internalization will expose us to risks to which we have not historically been exposed.

Pursuant to the Internalization Agreement, we will acquire the Manager, including any potential future liabilities the Manager may have, which may be unforeseen.

In addition, in our current externally-managed structure, we do not directly employ a meaningful number of employees.

As a result of the Internalization, we are expected to employ all of the Manager’s current employees.

We will assume and be responsible for all employee compensation costs following the closing of the Internalization.

In addition, we will be subject to those potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of employee benefit plans, if established.

There are no assurances that, following the Internalization, these employees of our Manager will be able to provide us with the same level of services as were previously provided to us by our Manager, and there may be other unforeseen costs, expenses and difficulties associated with operating as an internally-managed company.

The Internalization does not contain any indemnities.

The Internalization Agreement does not contain any indemnification provisions or other remedies against the Manager or its owners.

We will acquire the Manager, including any potential future liabilities the Manager may have, which may be unforeseen.

If we were to incur any such liabilities or other unknown costs, we do not have any contractual ability to seek indemnity from the Manager or its owners.

Following the Internalization, our inability to deduct for tax purposes certain compensation paid to our executives could require us to increase our distributions to stockholders or pay entity level taxes to maintain our REIT status.

Section 162(m) of the Code prohibits publicly held corporations from taking a tax deduction for annual compensation in excess of $1 million paid to any of the corporation’s "covered employees." As modified by the Tax Cuts and Jobs Act of 2017 (“TCJA”), Section 162(m) provides that a publicly held corporation’s covered employees include its chief executive officer, chief financial officer and the three other most highly compensated executive officers, effective for taxable years beginning January 1, 2018.

In addition, the TCJA also added that once an individual becomes a covered employee after December 31, 2016, that individual will remain a covered employee for all future years including after termination or death.

Compensation paid to "covered employees" in excess of the Section 162(m) deductibility limit increases our taxable income compared to fully deductible compensation and, as a result, increases the amount of dividends we must distribute to stockholders to maintain our REIT status and/or to avoid U.S.

federal and state income tax, which could adversely affect our financial condition.

Risks Related to Our Taxation as a REIT

Our failure to qualify as a REIT would have adverse tax consequences.

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We believe that since 1997 we have qualified for taxation as a REIT for federal income tax purposes under Sections 856 through 860 of the Code.

We plan to continue to meet the requirements for taxation as a REIT.

The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control.

For example, to qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax laws.

Additionally, our ability to satisfy the REIT asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to precise determination, and for which we will not obtain independent appraisals.

The proper classification of an instrument as debt or equity for U.S.

federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements.

We are also required to distribute to stockholders at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain).

Even a technical or inadvertent mistake could jeopardize our REIT status.

Furthermore, Congress and the Internal Revenue Service (“IRS”) might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult or impossible for us to remain qualified as a REIT.

We also indirectly own interests in entities that have elected to be taxed as REITs under the U.S.

federal income tax laws, or “Subsidiary REITs.” Subsidiary REITs are subject to the various REIT qualification requirements that are applicable to us.

If any Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S.

federal, state, and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions.

While we believe that the Subsidiary REITs have qualified as REITs under the Code, we have joined each Subsidiary REIT in filing “protective” TRS elections under Section 856(l) of the Code.

We cannot assure you that such “protective” TRS elections would be effective to avoid adverse consequences to us.

Moreover, even if the “protective” elections were to be effective, the Subsidiary REITs would be subject to regular corporate income tax, and we cannot assure you that we would not fail to satisfy the requirement that not more than 20% of the value of our total assets may be represented by the securities of one or more TRSs.

If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates.

Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify.

If we fail to qualify as a REIT, we would have to pay significant income taxes and would therefore have less money available for investments or for distributions to our stockholders.

This would likely have a significant adverse effect on the value of our equity.

In addition, the tax law would no longer require us to make distributions to our stockholders.

A REIT that fails the quarterly asset tests for one or more quarters will not lose its REIT status as a result of such failure if either (i) the failure is regarded as a de minimis failure under standards set out in the Code, or (ii) the failure is greater than a de minimis failure but is attributable to reasonable cause and not willful neglect.

In the case of a greater than de minimis failure, however, the REIT must pay a tax and must remedy the failure within 6 months of the close of the quarter in which the failure was identified.

In addition, the Code provides relief for failures of other tests imposed as a condition of REIT qualification, as long as the failures are attributable to reasonable cause and not willful neglect.

A REIT would be required to pay a penalty of $50,000, however, in the case of each failure.

We have certain distribution requirements, which could adversely affect our ability to execute our business plan.

As a REIT, we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain).

The required distribution limits the amount we have available for other business purposes, including amounts to fund our growth.

Also, it is possible that because of the differences between the time we actually receive revenue or pay expenses and the period we report those items for distribution purposes, we may have to borrow funds on a short-term basis to meet the 90% distribution requirement.

To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income.

In addition, we will be subject to a non-deductible 4% excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Code.

From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur.

For example, if we purchase Agency or non-Agency securities at a discount, we are generally required to accrete the discount into taxable income prior to receiving the cash proceeds of the accreted discount at maturity, and in some cases, potentially recognize the discount in taxable income once such amounts are reflected in our financial statements.

If we do not have other funds available in these situations we could be required to (i) borrow funds on unfavorable terms, (ii) sell investments at disadvantageous prices, (iii) distribute our own stock, see below, or (iv) distribute amounts that would otherwise be invested in future acquisitions to make

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distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid the corporate income tax and 4% excise tax in a particular year.

These scenarios could increase our costs or reduce our stockholders’ equity.

Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Conversely, from time to time, we may generate taxable income less than our income for financial reporting purposes due to GAAP and tax accounting differences or, as mentioned above, the timing between the recognition of taxable income and the actual receipt of cash.

In such circumstances we may make distributions according to our business plan that are within our wherewithal from an economic or cash management perspective, but that are labeled as return of capital for tax reporting purposes as they are in excess of taxable income in that period.

Distributions to tax-exempt investors may be classified as unrelated business taxable income.

Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of our common stock are anticipated to constitute unrelated business taxable income to a tax-exempt investor.

However, there are certain exceptions to this rule.

In particular:

part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as unrelated business taxable income if shares of our common stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income;

part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the common stock;

part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under the Code may be treated as unrelated business taxable income;

to the extent that we (or a part of us, or a disregarded subsidiary of ours) are a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit or a CLO;

a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.

We may in the future choose to pay dividends in our own stock, in which case the stockholders may be required to pay income taxes in excess of the cash dividends they receive.

We may in the future distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder.

Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S.

federal income tax purposes.

As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.

stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale.

Furthermore, with respect to certain non-U.S.

stockholders, we may be required to withhold U.S.

tax with respect to such dividends, including in respect to all or a portion of such dividend that is payable in stock.

In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Limits on ownership of our stock could have adverse consequences to you and could limit your opportunity to receive a premium on our stock.

To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal tax laws to include certain entities).

Primarily to facilitate maintenance of our qualification as a REIT for federal income tax purposes, our charter prohibits ownership, directly or by the attribution provisions of the federal tax laws, by any person of more than 9.8% of the lesser of the number or value of the issued and outstanding shares of any class of our capital.

Our Board, in its sole and absolute discretion, may waive or modify the ownership limit with respect to one or more persons who would not be treated as “individuals” if it is satisfied that ownership in excess of this limit will not otherwise jeopardize our status as a REIT for federal income tax purposes.

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The ownership limit may have the effect of delaying, deferring or preventing a change in control and, therefore, could adversely affect our stockholders’ ability to realize a premium over the then-prevailing market price for our common stock in connection with a change in control.

A REIT cannot invest more than 20% of its total assets in the stock or securities of one or more taxable REIT subsidiaries (“TRSs”);

therefore, our TRSs cannot constitute more than 20% of our total assets.

A TRS is a corporation, other than a REIT or a qualified REIT subsidiary, in which a REIT owns stock and with which we jointly elect TRS status.

The term also includes a corporate subsidiary in which the TRS owns more than a 35% interest.

A REIT may own up to 100% of the stock of one or more TRSs.

A TRS may earn income that would not be qualifying income if it was earned directly by the parent REIT.

Overall, at the close of any calendar quarter, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

The stock and securities of our TRSs are expected to represent less than 20% of the value of our total assets.

Furthermore, we intend to monitor the value of our investments in the stock and securities of our TRSs to ensure compliance with the above-described limitation.

We cannot assure you, however, that we will always be able to comply with the limitation so as to maintain REIT status.

TRSs are subject to tax at the regular corporate rates, are not required to distribute dividends, and the amount of dividends a TRS can pay to its parent REIT may be limited by REIT gross income tests.

A TRS must pay income tax at regular corporate rates on any income that it earns.

In certain circumstances, the ability of our TRSs to deduct interest expenses for federal income tax may be limited.

Such income, however, is not required to be distributed.

Our TRSs will pay corporate income tax on their taxable income, and their after-tax net income will be available for distribution to us.

Moreover, the annual gross income tests that must be satisfied to ensure REIT qualification may limit the amount of dividends that we can receive from our TRSs and still maintain our REIT status.

Generally, not more than 25% of our gross income can be derived from non-real estate related sources, such as dividends from a TRS.

If, for any taxable year, the dividends we received from our TRSs, when added to our other items of non-real estate related income, represented more than 25% of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect.

The limitations imposed by the REIT gross income tests may impede our ability to distribute assets from our TRSs to us in the form of dividends.

Certain asset transfers may, therefore, have to be structured as purchase and sale transactions upon which our TRSs recognize a taxable gain.

If interest accrues on indebtedness owed by a TRS to its parent REIT at a rate in excess of a commercially reasonable rate, or if transactions between a REIT and a TRS are entered into on other than arm’s-length terms, the REIT may be subject to a penalty tax.

If interest accrues on an indebtedness owed by a TRS to its parent REIT at a rate in excess of a commercially reasonable rate, the REIT is subject to tax at a rate of 100% on the excess of (i) interest payments made by a TRS to its parent REIT over (ii) the amount of interest that would have been payable had interest accrued on the indebtedness at a commercially reasonable rate.

A tax at a rate of 100% is also imposed on any transaction between a TRS and its parent REIT to the extent the transaction gives rise to deductions to the TRS that are in excess of the deductions that would have been allowable had the transaction been entered into on arm’s-length terms.

While we will scrutinize all of our transactions with our TRSs in an effort to ensure that we do not become subject to these taxes, there is no assurance that we will be successful.

We may not be able to avoid application of these taxes.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes.

In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through our TRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates.

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Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

To remain qualified as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock.

We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT.

Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

To remain qualified as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, U.S.

Government securities and qualified real estate assets.

The remainder of our investment in securities (other than U.S.

Government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer.

In addition, in general, no more than 5% of the value of our assets (other than U.S.

Government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by securities of one or more TRSs.

If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.

As a result, we may be required to liquidate from our investment portfolio otherwise attractive investments.

These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To remain qualified as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income.

If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT.

We enter into certain financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price.

Economically, these agreements are financings that are secured by the assets sold pursuant thereto.

We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement.

It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code could substantially limit our ability to hedge our liabilities.

Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes of the 75% or 95% gross income tests.

To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests.

As a result of these rules, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRSs.

This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.

The failure of a mezzanine loan or similar debt to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

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We invest in mezzanine loans and similar debt (including preferred equity investments that we treat as mezzanine loans for U.S.

federal income tax purposes), for which the IRS has provided a safe harbor but not rules of substantive law.

Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test.

We may acquire mezzanine loans or similar debt that do not meet all of the requirements of this safe harbor.

In the event we own a mezzanine loan or similar debt that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could fail to qualify as a REIT.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist.

Even a technical or inadvertent violation could jeopardize our REIT qualification.

Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.

In addition, our ability to satisfy the REIT qualification requirements depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for federal income tax purposes.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring CMOs.

The 100% tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring CMOs, which would be treated as prohibited transactions for federal income tax purposes.

The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to us.

We could be subject to this tax if we were to dispose of or structure CMOs in a manner that was treated as a prohibited transaction for federal income tax purposes.

We intend to conduct our operations at the REIT level so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business.

As a result, we may choose not to engage in certain transactions at the REIT level, and may limit the structures we utilize for our CMO transactions, even though the sales or structures might otherwise be beneficial to us.

In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances.

No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment.

The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates.

We intend to structure our activities to avoid the prohibited transaction tax.

Certain financing activities may subject us to U.S.

federal income tax and could have negative tax consequences for our stockholders.

We may enter into securitization transactions and other financing transactions that could result in us, or a portion of our assets, being treated as a taxable mortgage pool for U.S.

federal income tax purposes.

If we enter into such a transaction in the future, we could be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as "excess inclusion income," that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities).

In that case, we could reduce distributions to such stockholders by the amount of tax paid by us that is attributable to such stockholder's ownership.

If we were to realize excess inclusion income, IRS guidance indicates that the excess inclusion income would be allocated among our stockholders in proportion to the dividends paid.

Excess inclusion income cannot be offset by losses of a stockholder.

If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code.

If the stockholder is a foreign person, it would be subject to U.S.

federal income tax at the maximum tax rate and withholding will be required on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty.

On December 10, 2020, the Consumer Financial Protection Bureau adopted a set of “bright-line” loan pricing thresholds to replace the previous qualified mortgage 43% debt-to-income threshold calculated in accordance with “Appendix

ANNALY CAPITAL MANAGEMENT, INC.

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Item 1. Business