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Item 5. Market for Registrant’s Common Equity

2021-02-19 compared with 2020-02-14 · 111 added, 105 removed, 100 unchanged (68% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Total Number of Shares Purchased

Average Price Paid Per Share (1)

The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program

Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (1)

Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of February 2, 2021, we had 1,398,502,906 shares of common stock issued and outstanding which were held by approximately 433,000 beneficial holders.

The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”

We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of our taxable income in each year (subject to certain adjustments) consistent with the distribution requirements applicable to REITs.

This will enable us to qualify for the tax benefits accorded to a REIT under the Code.

We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected by factors beyond our control.

In addition, unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on dividends.

All distributions will be made at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board may deem relevant from time to time.

See also Item 1A.

“Risk Factors.” No dividends can be paid on our common stock unless we have paid full cumulative dividends on our preferred stock.

From the date of issuance of our preferred stock through December 31, 2020, we have paid full cumulative dividends on our preferred stock.

Share Performance Graph

The following graph and table set forth certain information comparing the yearly percentage change in cumulative total return on our common stock to the cumulative total return of the Standard & Poor’s Composite 500 stock Index or S&P 500 Index, and the Bloomberg Mortgage REIT Index, or BBG REIT index, an industry index of mortgage REITs.

The comparison is for the five-year period ended December 31, 2020 and assumes the reinvestment of dividends.

The graph and table assume that $100 was invested in our common stock and the two other indices on the last trading day of the initial year shown in the graph.

Upon written request we will provide stockholders with a list of the REITs included in the BBG REIT Index.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

Five-Year Share Performance

12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020

Annaly Capital Management, Inc.

100 119 157 146 156 160

S&P 500 Index 100 112 136 130 171 203

BBG REIT Index 100 122 147 143 177 137

The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither the accuracy nor completeness can be guaranteed.

The historical information set forth above is not necessarily indicative of future performance.

Accordingly, we do not make or endorse any predictions as to future share performance.

The above performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act or to the liabilities of Section 18 of the Securities Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate it by reference into such a filing.

Share Repurchase

In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares, which expired on December 31, 2020 (the “Prior Share Repurchase Program”).

In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “New Share Repurchase Program”).

The New Share Repurchase Program replaced the Prior Share Repurchase Program.

The following table sets forth information with respect to the Prior Share Repurchase Program for the quarter ended December 31, 2020.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

Total Number of Shares Purchased Average Price Paid Per Share (1)

The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (1)

(dollars in thousands)

October 1, 2020 - October 31, 2020 4,699,987 $ 7.29 4,699,987 $ 1,067,886

Total 4,699,987 4,699,987 $ 1,067,886

(1) Excludes commission costs.

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SELECTED FINANCIAL DATA

The selected financial data should be read in conjunction with the more detailed information contained in the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

SELECTED FINANCIAL DATA

As of and for the Years Ended December 31,

Statement of comprehensive income data

(dollars in thousands, except per share data)

Interest income

Interest expense

Net interest income

Realized and unrealized gains (losses)

Other income (loss)

Total general and administrative expenses

Income (loss) before income taxes

Net income (loss)

Net income (loss) attributable to noncontrolling interests

Net income (loss) attributable to Annaly

Dividends on preferred stock

Net income (loss) available (related) to common stockholders

Net income (loss) per share available (related) to common stockholders

Weighted average number of common shares outstanding

1,434,912,682

1,209,601,809

1,065,923,652

1,434,912,682

1,209,601,809

1,066,351,616

Other financial data

Dividends declared per common share

Not required.

ANNALY CAPITAL MANAGEMENT, INC.

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changes in business conditions and the general economy;

our ability to grow our commercial business;

our ability to grow our residential credit business;

our ability to grow our middle market lending business;

our ability to grow our commercial, residential credit and middle market businesses;

credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt;

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our ability to maintain our exemption from registration under the Investment Company Act;

and risks and uncertainties associated with the Internalization, including but not limited to the occurrence of any event, change or other circumstances that could give rise to the termination of the Internalization Agreement;

the outcome of any legal proceedings that may be instituted against the parties to the Internalization Agreement;

the inability to complete the Internalization due to the failure to satisfy closing conditions or otherwise;

risks that the Internalization disrupts our current plans and operations;

the impact, if any, of the announcement or pendency of the Internalization on our relationships with third parties;

and the amount of the costs, fees, expenses charges related to the Internalization;

and the risk that the expected benefits, including long-term cost savings, of the Internalization are not achieved.

and risks and uncertainties related to Coronavirus Disease 2019 (“COVID-19”), including as related to adverse economic conditions on real-estate related assets and financing conditions.

For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in this annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q or current reports on Form 8-K.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Environment

Business Environment and COVID-19

Economic Environment

London Interbank Offered Rate (“LIBOR”) Transition Working Group

Results of Operations

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Non-GAAP Financial Measures

Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings attributable to common stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA)

Core earnings (excluding PAA), core earnings (excluding PAA) attributable to common stockholders, core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA)

Premium Amortization Expense

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Experienced and Projected Long-term CPR

Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin (excluding PAA)

Economic Interest Expense and Average Cost of Interest Bearing Liabilities

Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities 63

Economic Interest Expense and Average Econ o mic Cost of Interest Bearing Liabilities

Realized and Unrealized Gains (Losses)

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Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies.

We are a Maryland corporation founded in 1997 that has elected to be taxed as a REIT.

We are externally managed by the Manager.

We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT.

Prior to the closing of the Internalization (as defined in Item 1 under “Closing of the Internalization and Termination of the Management Agreement”) on June 30, 2020, we were externally managed by Annaly Management Company LLC (our “Former Manager”).

Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

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For a full discussion of our business, refer to the section titled “Business Overview” of Part I, Item 1.

Recent Developments

Interim Chief Executive Officer and Ongoing Permanent Chief Executive Officer Search

On November 20, 2019, our board of directors (“Board”) appointed Glenn A.

Votek, who had served as our Chief Financial Officer since 2013, as Chief Executive Officer and President, on an interim basis.

It is expected that Mr.

Votek, who was also elected to the Board, will serve in such roles until the appointment by the Board of a permanent chief executive officer and president.

The Board is conducting a formal search for a permanent chief executive officer.

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

Internalization

On February 12, 2020, we entered into the Internalization Agreement with our Manager and certain affiliates of our Manager.

Pursuant to the Internalization Agreement, we agreed to acquire all of the outstanding equity interests of our Manager and our Manager’s direct and indirect parent companies from their respective owners for a nominal cash purchase price of one dollar ($1.00).

As a result of the Internalization, our Manager will cease to perform any outside management services for us and we will become an internally-managed REIT.

We anticipate that the closing will occur in the second quarter of 2020.

In connection with the Internalization, we entered into employment and severance contracts with our executive officers (other than Mr.

Votek) that will become effective at the closing of the Internalization.

In addition, the Management Agreement will be terminated at the closing of the Internalization, and our Manager has agreed to waive any Acceleration Fee (as defined in the Management Agreement) solely as related to the closing of the Internalization.

If the closing does not occur, the Management Agreement will revert to the form it was in immediately prior to the execution of the Internalization Agreement in all respects, including with respect to the Acceleration Fee.

Upon closing of the Internalization, all employees of the Manager will become employees of Annaly, Annaly will no longer pay a management fee to the Manager, and Annaly going forward will pay the compensation of all employees.

The Internalization Agreement and the related transactions and agreements were approved by the Board, with the unanimous approval of the independent directors of the Board, following the unanimous recommendation of the Special Committee.

Both the Special Committee and the Manager obtained advice from separate legal and independent financial advisors.

The Special Committee was also assisted by an independent compensation consultant that was retained by the Compensation Committee in connection with the employment arrangements discussed above).

The consummation of the Internalization is subject to the satisfaction or waiver of certain conditions and may not close on the terms or under the conditions described in this annual report on Form 10-K, or at all.

For more information regarding the Internalization, the Internalization Agreement and the various related employment arrangement with our employees (including our senior management), please see our Current Report on Form 8-K filed with the SEC on February 12, 2020.

Business Environment

The year ended December 31, 2019 was characterized by a shift in the continued economic expansion in the United States, as uncertainties around increased trade tensions between the two largest economies in the world, the United States and China, created a drag on business confidence, in turn lowering investment activity by the corporate sector.

These risks to economic growth led the Federal Reserve (“Fed”) to change monetary policy by lowering the Fed Funds Target Rate by an aggregate 75 basis points between July and October 2019 and halting the runoff of its balance sheet.

This effectively ended more than three years of the Fed tightening monetary policy.

Following some turbulence in short-term financing markets in September, as liquidity regulations and declining bank reserve balances made sourcing of repo financing increasingly costly, the Fed also began to offer short-term repo operations and purchased Treasury bills for the first time in more than ten years to support financial markets.

Business Environment and COVID-19

The themes that have dominated financial markets since the elevated volatility seen in March and April 2020 remain unchanged.

Fiscal stimulus has supported businesses and consumers most negatively impacted by COVID-19 while the Federal Reserve’s (“Fed”) unprecedented monetary policy actions eased financial conditions and contained interest rate volatility.

These factors drove our strong performance to close out the year, delivering an economic return of 5.1% for the fourth quarter and 1.8% for 2020.

Throughout the year, we returned $1.4 billion aggregate in common and preferred dividends to our shareholders, signaling meaningful resilience following the historic disruption seen in March and April.

Interest rates ended 2020 near their highest levels since the onset of the COVID-19 pandemic reflecting optimism about the post-COVID recovery in spite of negative developments of record U.S.

virus cases, tighter restrictions and resulting lackluster economic growth particularly in the U.S.

service sector.

The rapid COVID-19 vaccine development and plans for deployment, combined with the relatively healthy consumer balance sheets, suggest that the U.S.

economy may rebound at a faster pace than during traditional economic downturns once a majority of the population reaches immunity, though meaningful uncertainties remain about both the timing of immunity and the subsequent recovery pace.

At the end of 2020, our capital allocation remained tilted towards Agency mortgage-backed securities (“MBS”), representing 78% of the aggregate portfolio, compared to 74% one year ago.

However, this year-over-year snapshot masks more recent increases in activity in our residential credit and middle market lending businesses, which saw strong investor sponsorship and improving fundamentals as markets signal a cyclical recovery.

As Agency MBS spreads have continued to tighten given Fed and bank sector demand for the product, select credit sectors have allowed for targeted, attractive opportunities.

While opportunistic, Annaly continues with its disciplined and defensive-minded credit focus, which is necessary given overall tight asset spreads.

Somewhat offsetting the effect from tight asset spreads, current financing conditions are among the most favorable seen in Annaly’s history.

The liquidity created through the Fed’s monetary policy actions have led to absolute low level of rates and a flat term structure of the repo curve.

Favorable financing conditions have allowed us to increase our net interest margin (excluding PAA) from 1.41% at the end of 2019 to 1.98% at the end of 2020, as cheaper financing more than offset the decline in asset yields driven by the aforementioned spread compression.

Additionally, securitization markets have rebounded substantially, resulting in better execution levels than one year ago, and provide attractive non-recourse term financing to bolster our residential credit asset investment strategy and diversify financing for our whole loan business.

Business Continuity

Our well-established Business Continuity Planning (“BCP”) was designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics.

It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise.

The BCP is regularly updated and tested.

Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management.

Key tenets of the planning include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.

Historical tabletop exercises have included use of CDC Influenza Pandemic exercise materials.

That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/ impact assessments to those scenarios.

Regular meetings were commenced to implement and review active internal and external communications planning.

These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19.

We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements.

To protect the health and well-being of our employees, their families and communities remote work requirements began in phases in early March, culminating with a

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The actions of the Fed taken to prolong the economic expansion and support repo market functioning ultimately worked well, particularly for interest rate and credit products.

Financial market assets recorded some of the strongest performances in recent years, helping us to achieve a 14.1% economic return in 2019.

The strong return was driven by tightening in credit spreads following the temporary weakness in the fourth quarter of 2018 as well as continued healthy economic performance supported by the Fed’s accommodative actions.

As investors continue to need to deploy cash in times of very low interest rates, the credit products benefit from strong investor interest, which has led to tight spreads across nearly the entire sector.

Given these dynamics, we continue to remain highly selective in adding credit assets to achieve greater portfolio diversification, as we view the broader credit sector as fully valued.

Meanwhile, spreads in the agency MBS sector ended 2019 relatively unchanged from the levels seen at 2018 year-end, but such a snapshot obscures a large move in spreads throughout the year.

Agency MBS spreads widened meaningfully into the summer months as high supply continued to provide a major headwind to the sector.

Moreover, declining interest rates led to a spike in refinancing activity, leading to a meaningful spike in prepayments during the second half of the year before ultimately declining in the winter months.

company-wide exercise on March 13, 2020 to test connectivity and functionality.

All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time.

A majority of our business activities continues to be performed remotely, though we have seen a limited number of employees return to the office on a voluntary and periodic basis.

We continue to monitor guidance from federal, state and local authorities to gauge how to further proceed in any efforts to return to the office.

Economic Environment

The pace of economic growth slowed somewhat in 2019 relative to the prior year, with gross domestic product (“GDP”) registering 2.3% growth in the U.S.

economy, in turn expanding the current business cycle into the longest in U.S.

Economic growth continued to be driven by robust personal consumption, which contributed 1.8% to the annualized GDP growth rate, to offset slowdowns primarily in the business sector, which faced headwinds from economic slowdowns in Europe and China.

Moreover, an escalation in the trade dispute between the U.S.

and China kept uncertainty at elevated levels for much of the year.

The Fed currently conducts monetary policy with a dual mandate:

full employment and price stability.

The unemployment rate declined to 3.5% in 2019, reaching the lowest level in fifty years, well below the Fed’s estimate of the long-run unemployment rate of 4.2%, according to the Bureau of Labor Statistics and Federal Reserve Board.

The economy added 176,000 jobs per month in 2019, somewhat below the 223,000 jobs added per month in 2018.

Wage growth, as measured by the year-over-year change in private sector Average Hourly Earnings, slowed, reading 2.9% in the month of December 2019 compared to 3.3% in December 2018.

Inflation remained below the Fed’s 2% target in the fourth quarter of 2019 as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”).

The pace of economic growth in 2020 slowed sharply, not only in the United States but worldwide, as the outbreak of the COVID-19 pandemic affected nearly all ways of life and disrupted many aspects of the economy.

The far-reaching consequences of the COVID-19 pandemic led U.S.

gross domestic product (“GDP”) to decline by 3.5% year-over-year in 2020, in turn marking the largest decline in economic activity during a calendar year in more than 70 years.

The disruptions caused by the pandemic were unique in that they primarily impacted the service sector of the economy, a sector that has been a source of relative stability during prior economic downturns.

Other parts of the economy, including goods consumption and housing, have recovered from the initial pandemic-driven downturn and these sectors are now above 2019 output levels.

All of this suggests that the economy is currently relatively bifurcated, requiring U.S.

health officials to work to defeat the virus before economic activity can return to pre-pandemic levels in aggregate.

The sharp economic contraction led the unemployment rate to rise to 6.7% in December 2020, nearly twice as high as the unemployment rate seen in December 2019 according to the Bureau of Labor Statistics.

The rise in the unemployment rate likely understates the number of jobs lost in 2020 as the employment-to-population ratio fell to 57.4%, suggesting that 3.5% of the population, or roughly 9 million people, no longer held a job at the end of 2020 compared to one year ago.

Wage growth, as measured by the year-over-year change in private sector average hourly earnings rose sharply, reading 5.1% in the month of December 2020 compared to 3.0% in December 2019.

The sharp increase in wages, however, appears to be driven by changes in the underlying composition of employees by industry, as sectors with generally lower wages, such as leisure and hospitality services, have seen outsized job losses relative to sectors with higher wages.

Alternative measures of wage growth, such as the Employment Cost Index or the Federal Reserve Bank of Atlanta’s Wage Tracker show meaningfully less wage growth.

Inflation remained muted into the economic downturn as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”).

The headline PCE measure increased by 1.3% year-over-year in December 2020.

The more stable core PCE measure, which excludes volatile food and energy prices, registered a similar 1.6% year-over-year increase, somewhat below the 2.0% year-over-year growth measured in December 2018.

Despite the slowdown in inflation measures in 2019, the Fed expects the core and headline PCE measures to rebound to levels close to their 2% target over the medium term following the shift in monetary policy seen in the second half of 2019.

In 2019, the Federal Open Market Committee (“FOMC”) reduced the Fed Funds Target Rate a total of three times by 25 bps each to a range of 1.50% - 1.75% given the aforementioned disappointing economic growth overseas, a slowdown in the manufacturing sector growth, and increased downside risks to the U.S.

The interest rate cuts are expected to boost inflation and support the U.S.

economic expansion.

Going forward, market participants expect the FOMC to hold the Fed Funds Target Rate unchanged over the course of 2020 as FOMC members have expressed confidence in the outlook, while remaining vigilant to downside risks to economic growth or inflation.

During the year ended December 31, 2019, the 10-year U.S.

Treasury rate rallied 116 bps in the first eight months as a combination of slowing global economic growth, particularly in the manufacturing sector, and heightened uncertainties around trade led to strong demand for interest rate products.

Following the aggregate 75 bps in Fed Funds Target Rate cuts by the Federal Reserve, sentiment ultimately improved in the fourth quarter, leading interest rates to sell off a portion of the rally over the first part of the year.

The mortgage basis, or the spread between the 30-year Agency mortgage-backed security coupon and 10-year U.S.

Treasury rate, had a volatile year, rising meaningfully through much of the period of declining interest rates amid higher volatility and increased mortgage prepayments before ultimately declining on improved risk sentiment and the relative value offered by mortgages compared to other products.

The more stable core PCE measure, which excludes volatile food and energy prices, registered a similar 1.5% year-over-year increase.

Although both inflation measures remain somewhat below the Fed’s 2.0% inflation target, the Fed expects inflation to recover towards its target in coming years as the economy begins to recover from the economic downturn.

The Fed conducts monetary policy with a dual mandate:

full employment and price stability.

Given the contraction in economic activity witnessed following the outbreak of the COVID-19 pandemic, the Fed increased its monetary policy support at unprecedented speed and size.

The target range for the Federal Funds rate was cut from 1.50% - 1.75% in December 2019 to 0.0% - 0.25% in March 2020.

Following the interest rate cuts, the Fed provided guidance that short-term interest rates will remain near current levels “until labor market conditions have reached levels consistent with the Fed assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” as stated in the December 2020 Federal Open Market Committee meeting statement.

In addition to the zero-interest rate policy, the Fed restarted its asset purchase programs, increasing its holdings of Treasury securities and Agency MBS by a total of $2.0 trillion and $631 billion, respectively.

Asset purchases continued at the end of 2020 at a pace of $80 billion per month in Treasury securities and $40 billion per month in MBS.

Beyond rate policy and asset purchases, the Fed also announced several lending programs to various other market sectors, such as corporate bonds, municipals, and small businesses, among others.

These lending programs largely concluded their activities at the end of December 2020 but could be revived should the economic situation deteriorate.

During the year ended December 31, 2020, yields on the 10-year U.S.

Treasury note declined by 101 bps primarily in the first half of the year as a sharp slowdown in global economic growth and heightened uncertainties around the economic recovery led to strong demand for interest rate products and the aforementioned unprecedented fiscal and monetary stimulus.

The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S.

Treasury rate, had a volatile year, rising meaningfully in the first quarter before retracing given strong demand for MBS in the second half of the year.

The following table below presents interest rates and spreads at each date presented:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity