What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-19 · 417 added, 312 removed, 1198 unchanged (38% of the section changed)

Management’s Discussion and Analysis

As of December 31,

2020 2019 2018

30-Year mortgage current coupon 1.34% 2.71% 3.50%

Mortgage basis 43 bps 79 bps 82 bps

Treasury rate 0.91% 1.92% 2.68%

1-Month 0.14% 1.76% 2.50%

6-Month 0.26% 1.91% 2.88%

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

We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates.

Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders.

The committee also continues to engage with industry working groups and other market participants regarding the transition.

In October 2020, as part of the transition from LIBOR, we participated in the Chicago Mercantile Exchange (“CME”) Group’s transitioning for price alignment and discounting for USD OTC cleared swaps from the daily effective federal funds rate to the secured overnight financing rate (“SOFR”).

As a result of this activity, our existing swap and swaption positions have been updated with the new SOFR discounting curve and basis swaps entered into during this transition were sold in the CME Group’s auction on October 19, 2020.

We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability.

LIBOR tenors have been extended from December 31, 2021 to June 2023.

Similar to the rest of the market, the bulk of our exposure is in derivatives contracts.

Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments with transition currently in process and adequate time left to resolve.

See “Risks Related to Our Investing, Portfolio Management and Financing Activities-Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results.”

Results of Operations

The results of our operations are affected by various factors, many of which are beyond our control.

Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A.

“Risk Factors”.

This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S.

generally accepted accounting principles (“GAAP”) and non-GAAP measurements.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.

Refer to the “Non-GAAP Financial Measures” section for additional information.

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, prior periods have been conformed to the current presentation.

Refer to the “General and Administrative Expenses” section for additional information.

Net Income (Loss) Summary

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Other information

Asset portfolio at period-end $ 86,403,446 $ 127,402,106 $ 102,340,249

Investment portfolio at period-end $ 74,792,041 $ 86,403,446 $ 127,402,106

Average total assets $ 81,925,499 $ 99,663,704 $ 123,202,411

Average equity $ 13,728,352 $ 14,103,589 $ 15,325,340

Leverage at period-end (1)

5.1:1 7.1:1 6.3:1

Economic leverage at period-end (2)

GAAP leverage at period-end (1)

4.7:1 5.1:1 7.1:1

Capital ratio (3)

GAAP capital ratio at period-end (2)

17.2 % 15.9 % 12.1 %

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Economic interest expense (5)

$ 525,385 $ 1,106,989 $ 2,433,500

Economic net interest income (excluding PAA) $ 1,514,809 $ 1,538,080 $ 1,608,691

Premium amortization adjustment cost (benefit) $ 57,158 $ 415,444 $ 254,894

Core earnings (excluding PAA) (8)

Earnings available for distribution (7)

$ 1,768,391 $ 1,696,167 $ 1,575,396

Core earnings (excluding PAA) per common share $ 1.10 $ 1.00 $ 1.20

Annualized core return on average equity (excluding PAA) 12.03 % 10.28 % 10.99 %

Earnings available for distribution per common share $ 1.16 $ 1.10 $ 1.00

Annualized EAD return on average equity (excluding PAA) 12.90 % 12.03 % 10.28 %

Economic leverage at period-end (1)

5.7:1 6.2:1 7.2:1

Economic capital ratio at period-end (2)

14.4 % 13.6 % 12.0 %

Net interest margin (excluding PAA) (3)

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Net interest spread (excluding PAA) 1.89 % 1.56 % 1.11 %

(1) Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable.

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us.

(2) Computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity.

(3) Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs.

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity.

Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to the Company and are excluded from economic leverage.

(2) GAAP capital ratio is computed as total equity divided by total assets.

Economic capital ratio is computed as total equity divided by total economic assets.

Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles.

(3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets.

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(7) Excludes dividends on preferred stock.

Net income (loss) was ($889.8) million, which includes $1.4 million attributable to noncontrolling interests, or ($0.73) per average basic common share, for the year ended December 31, 2020 compared to ($2.2) billion, which includes ($0.2) million attributable to noncontrolling interests, or ($1.60) per average basic common share, for the same period in 2019.

We attribute the majority of the change in net income (loss) to favorable changes in net gains (losses) on other derivatives, net gains (losses) on disposal of investments and other and net interest income, partially offset by unfavorable changes in the net interest component of interest rate swaps and net unrealized gains (losses) on instruments measured at fair value through earnings and realized gains (losses) on termination or maturity of interest rate swaps.

Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019.

Net gains (losses) on disposal of investments and other was $661.5 million for the year ended December 31, 2020 compared to ($47.9) million for the same period in 2019.

Net income (loss) was $2.4 billion, which includes $6.4 million attributable to noncontrolling interests, or $1.60 per average basic common share, for the year ended December 31, 2021 compared to ($0.9) billion, which includes $1.4 million attributable to noncontrolling interests, or ($0.73) per average basic common share, for the same period in 2020.

We attribute the majority of the change in net income (loss) to favorable changes in unrealized gains (losses) on interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps, net unrealized gains (losses) on instruments measured at fair value through earnings and net interest income, partially offset by unfavorable changes in Net gains (losses) on disposal of investments and other and Net gains (losses) on other derivatives and financial instruments.

Net unrealized gains (losses) on interest rate swaps was $2.2 billion for the year ended December 31, 2021 compared to ($0.9) billion for the same period in 2020.

Realized losses on termination or maturity of interest rate swaps was ($1.2) billion for the year ended December 31, 2021 compared to ($1.9) billion for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings for the year ended December 31, 2021 was $183.7 million compared to ($303.0) million for the same period in 2020.

Net interest income for the year ended December 31, 2021 was $1.7 billion compared to $1.3 billion for the same period in 2020.

The net interest component of interest rate swaps was ($207.9) million for the year ended December 31, 2020 compared to $351.4 million for the same period in 2019.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion for the year ended December 31, 2020 compared to ($1.4) billion for the same period in 2019.

Net gains (losses) on disposal of investments and other was ($62.7) million for the year ended December 31, 2021 compared to $661.5 million for the same period in 2020.

Net gains (losses) on other derivatives and financial instruments was $121.7 million for the year ended December 31, 2021 compared to $756.3 million for the same period in 2020.

Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 7 for additional information related to these changes.

Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.7 billion, or $1.10 per average common share, for the year ended December 31, 2020, compared to $1.6 billion, or $1.00 per average common share, for the same period in 2019.

The changes in core earnings (excluding PAA) for the year ended December 31, 2020 compared to the same period in 2019 were primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities, and higher TBA dollar roll income, partially offset by lower coupon income resulting from a decrease in the average yield on interest earnings assets and lower average interest earning assets, and unfavorable changes in the net interest component of interest rate swaps.

Earnings available for distribution were $1.8 billion, or $1.16 per average common share, for the year ended December 31, 2021, compared to $1.7 billion, or $1.10 per average common share, for the same period in 2020.

The changes in earnings available for distribution for the year ended December 31, 2021 compared to the same period in 2020 were primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities, and higher TBA dollar roll income, partially offset by lower coupon income resulting from lower average interest earning assets and an unfavorable change in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures:

• core earnings (excluding PAA);

• core earnings (excluding PAA) attributable to common stockholders;

• core earnings (excluding PAA) per average common share;

• annualized core return on average equity (excluding PAA);

• earnings available for distribution (“EAD”);

• earnings available for distribution attributable to common stockholders;

• earnings available for distribution per average common share;

• annualized EAD return on average equity;

• economic leverage;

• economic capital ratio;

• interest income (excluding PAA);

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

• economic interest expense;

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While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations.

For example, we may calculate our non-GAAP metrics, such as core earnings (excluding PAA), or the PAA, differently than our peers making comparative analysis difficult.

For example, we may calculate our non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than our peers making comparative analysis difficult.

Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium.

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Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.

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)

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity

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 generate net income by earning a net interest spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging and operating costs.

Core earnings (excluding PAA), which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.

Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.

We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital allocation policy and risk governance framework.

We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of our portfolio.

Annualized core return on average equity (excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides investors with additional detail on the core earnings generated by our invested equity capital.

The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings for the periods presented:

In addition, EAD serves as a useful indicator for investors in evaluating the Company's performance and ability to pay dividends.

Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented:

For the Years Ended December 31,

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Net (gains) losses on disposal of investments and other 62,705 (661,513) 47,944

Net (gains) losses on other derivatives (756,305) 680,770 403,001

Net (gains) losses on other derivatives and financial instruments (121,735) (756,305) 680,770

Net unrealized (gains) losses on instruments measured at fair value through earnings (183,663) 303,024 (36,021)

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(148,632) 151,188 16,569

Business divestiture-related (gains) losses 278,559 — —

Other adjustments

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15,225 39,108 40,058

Non-core (income) loss allocated to equity method investments (3)

Non-EAD (income) loss allocated to equity method investments (3)

(10,930) 22,493 21,385

Non-core other (income) loss (4)

Transaction expenses and non-recurring items (4)

5,579 11,293 19,284

Income tax effect of non-core income (loss) items (17,603) (5,961) 4,220

Income tax effect of non-EAD income (loss) items 13,325 (17,603) (5,961)

TBA dollar roll income and CMBX coupon income (5)

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Premium amortization adjustment cost (benefit) 57,158 415,444 254,894

Core earnings (excluding PAA) (8)

Earnings available for distribution (7)

1,768,391 1,696,167 1,575,396

Dividends on preferred stock 107,532 142,036 136,576

Core earnings (excluding PAA) attributable to common stockholders (8)

Earnings available for distribution attributable to common stockholders (7)

$ 1,660,859 $ 1,554,131 $ 1,438,820

GAAP net income (loss) per average common share $ 1.60 $ (0.73) $ (1.60)

Core earnings (excluding PAA) per average common share (8)

Earnings available for distribution per average common share (7)

$ 1.16 $ 1.10 $ 1.00

GAAP return (loss) on average equity 17.45 % (6.31) % (14.11) %

Core return on average equity (excluding PAA) (8)

EAD return on average equity (excluding PAA) (7)

12.90 % 12.03 % 10.28 %

(1) Includes $3.6 million of loss provision on the Company’s unfunded loan commitments for the year ended December 31, 2020, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

(1) Includes ($3.6) million and $3.6 million of loss provision (reversal) on the Company’s unfunded loan commitments for the years ended December 31, 2021 and 2020, respectively, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

(2) Includes depreciation and amortization expense related to equity method investments.

(3) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other income (loss).

(4) Represents the amount of consideration paid for the acquisition of MTGE in excess of the fair value of net assets acquired.

This amount is primarily attributable to a decline in portfolio valuation between the pricing and closing dates of the transaction and is consistent with changes in market values observed for similar instruments over the same period.

(3) The Company excludes non-EAD (income) loss allocated to equity method investments, which represents the unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other income (loss).

(4) Includes costs incurred in connection with securitizations of residential whole loans.

The year ended December 31, 2020 also includes costs incurred in connection with the Internalization, the CEO search process and a securitization of Agency mortgage-backed securities.

The year ended December 31, 2020 also includes costs incurred in connection with the Company’s management internalization, the CEO search process and a securitization of Agency mortgage-backed securities.

The year ended December 31, 2019 also includes costs incurred in connection with the securitization of commercial loans and Agency mortgage-backed securities.

The year ended December 31, 2018 also includes costs incurred in connection with the acquisition of MTGE Investment Corp.

(6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives.

(5) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives and financial instruments.

CMBX coupon income totaled $5.2 million, $5.8 million and $4.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financing cost.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions.

The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives and financial instruments in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract.

Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest income less an implied cost of financing).

TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss).

TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss).

The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage.

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Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur.

We report income (expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in core earnings (excluding PAA).

We report income (expense) on CMBX positions in Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss).

The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution.

Premium Amortization Expense

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Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method.

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Premium amortization expense (excluding PAA) $ 703,660 $ 960,017 $ 858,892

Economic leverage and economic capital ratios

We use capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.

Our capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods of market stress.

To maintain our desired capital profile, we utilize a mix of debt and equity funding.

Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payable or other liabilities.

Equity capital primarily consists of common and preferred stock.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Our economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

The following table presents a reconciliation of GAAP debt to economic debt for purposes of calculating our economic leverage ratio for the periods presented:

December 31, 2021

December 31, 2020

Economic leverage ratio reconciliation (dollars in thousands)

Repurchase agreements

$ 54,769,643 $ 64,825,239

Other secured financing

903,255 917,876

Debt issued by securitization vehicles

5,155,633 5,652,982

Participations issued

1,049,066 39,198

Mortgages payable

Debt included in liabilities of disposal group held for sale 112,144 —

Total GAAP debt

$ 61,989,741 $ 71,861,551

Less Non-Recourse Debt:

Credit facilities (1)

(903,255) (887,455)

Debt issued by securitization vehicles

(5,155,633) (5,652,982)

Participations issued

(1,049,066) (39,198)

Mortgages payable

Non-recourse debt included in liabilities of disposal group held for sale (112,144) —

Total recourse debt $ 54,769,643 $ 64,855,660

Plus / (Less):

Cost basis of TBA and CMBX derivatives

20,690,768 20,780,913

Payable for unsettled trades 147,908 884,069

Receivable for unsettled trades (2,656) (15,912)

Economic debt (2)

$ 75,605,663 $ 86,504,730

$ 13,195,325 $ 14,021,796

Economic leverage ratio (2)

(1) Included in Other secured financing in the Consolidated Statements of Financial Condition.

(2) Represents a non-GAAP financial measure.

Refer to the disclosure within this section above for additional information on non-GAAP financial measures.

The following table presents a reconciliation of GAAP total assets to economic total assets for purposes of calculating our economic capital ratio for the periods presented:

December 31, 2021 December 31, 2020

Economic capital ratio reconciliation (dollars in thousands)

Total GAAP assets

$ 76,764,064 $ 88,455,103

Gross unrealized gains on TBA derivatives (1)

(52,693) (96,109)

Debt issued by securitization vehicles (2)

(5,155,633) (5,652,982)

Implied market value of TBA derivatives

20,338,633 20,373,197

Total economic assets (3)

$ 91,894,371 $ 103,079,209

$ 13,195,325 $ 14,021,796

Economic capital ratio (3)(4)

(1) Included in Derivative assets in the Consolidated Statements of Financial Condition.

(2) Includes debt issued by securitization vehicles reported in Liabilities of disposal group held for sale in the Consolidated Statements of Financial Condition.

(3) Represents a non-GAAP financial measure.

Refer to the disclosure within this section above for additional information on non-GAAP financial measures.

(4) Economic capital ratio is computed as total equity divided by total economic assets.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

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Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

The following tables provide GAAP measures of interest expense and net interest income and details with respect to reconciling the aforementioned line items on a non-GAAP basis for each respective period:

The following tables present a reconciliation of GAAP interest income and interest expense to non-GAAP interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA), respectively, for the periods presented:

Interest Income (excluding PAA)

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Refer to disclosures within this section above for additional information on non-GAAP financial measures.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Economic Interest Expense and Economic Net Interest Income (excluding PAA)

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In general, as prepayment speeds and expectations of prepayment speeds on our Agency mortgage-backed securities portfolio increase, related purchase premium amortization increases, thereby reducing the yield on such assets.

The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency mortgage-backed securities portfolio as of and for the periods presented.

The following table presents the weighted average

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

experienced CPR and weighted average projected long-term CPR on our Agency mortgage-backed securities portfolio as of and for the periods presented.

Experienced CPR (1)

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Net Interest Spread (excluding PAA)

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Average Interest Earning

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TBA Dollar Roll and CMBX Coupon Income (2)

Interest Expense Net Interest Component of Interest Rate Swaps Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal Net Interest Margin (excluding PAA) (1)

Economic Interest Expense (1)

Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal Net Interest Margin (excluding PAA) (1)

For the years ended (dollars in thousands)

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Refer to the “Non-GAAP Financial Measures” section for additional information.

(2) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives.

CMBX coupon income totaled $5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively.

(2) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives and financial instruments.

CMBX coupon income totaled $5.2 million, $5.8 million and $4.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

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The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month LIBOR for the periods presented.

Economic Cost of Funds on Average Interest Bearing Liabilities

Average Economic Cost of Interest Bearing Liabilities

Interest Bearing

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Period End Economic

Expense Average

Expense (1)(2)

Average Economic

Liabilities (2)

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One-Month LIBOR

Month LIBOR Average Cost

Month LIBOR Average Economic Cost

Average Six-Month LIBOR

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December 31, 2019 $ 108,355,575 $ 111,819,229 $ 2,433,500 2.25 % 2.22 % 2.32 % (0.10 %) 0.03 % (0.07 %)

(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

(2) Represents a non-GAAP financial measure.

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2021 Compared with 2020

Economic interest expense decreased by $1.3 billion for the year ended December 31, 2020 compared to the same period in 2019.

Economic interest expense decreased by $581.6 million for the year ended December 31, 2021 compared to the same period in 2020.

The change was due to lower borrowing rates and decreases in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($276.1) million for the year ended December 31, 2021 compared to ($207.9) million for the same period in 2020.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end.

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Since our average borrowings and period end borrowings can be expected to differ, we believe our average borrowings during a period provide a more accurate representation of our exposure to the risks associated with leverage than our period end borrowings.

At December 31, 2020 and 2019, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans.

At December 31, 2021 and 2020, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and corporate loans.

All of our Residential Securities are currently accepted as collateral for these borrowings.

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Realized and Unrealized Gains (Losses)

Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and net unrealized gains (losses) on instruments measured at fair value through earnings.

Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and financial instruments, and net unrealized gains (losses) on instruments measured at fair value through earnings.

These components of realized and unrealized gains (losses) for the years ended December 31, 2021, 2020 and 2019 were as follows:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

For the Years Ended December 31,

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Net gains (losses) on disposal of investments and other (62,705) 661,513 (47,944)

Net gains (losses) on other derivatives 756,305 (680,770) (403,001)

Net gains (losses) on other derivatives and financial instruments 121,735 756,305 (680,770)

Net unrealized gains (losses) on instruments measured at fair value through earnings 183,663 (303,024) 36,021

Loan loss provision 145,066 (147,581) (16,569)

Business divestiture-related gains (losses) (278,559) — —

Total $ 795,195 $ (2,062,824) $ (3,011,127)

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2021 Compared with 2020

Net gains (losses) on interest rate swaps for the year ended December 31, 2020 was ($3.0) billion compared to ($2.3) billion for the same period in 2019, attributable to an unfavorable change in the net interest component of interest rate swaps and higher realized losses on termination or maturity of interest rate swaps, partially offset by lower unrealized losses on interest rate swaps.

The net interest component of interest rate swaps was ($207.9) million for the year ended December 31, 2020, compared to $351.4 million for the same period in 2019, reflecting a decrease in rates combined with the timing of rate resets during the period and changes in notional balance.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion resulting from interest rate swaps with a notional amount of $104.1 billion for the year ended December 31, 2020 compared to ($1.4) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $88.6 billion for the same period in 2019.

Unrealized gains (losses) on interest rate swaps was ($0.9) billion for the year ended December 31, 2020 compared to ($1.2) billion for the same period in 2019, which reflected a steeper decline in forward interest rates during the earlier period.

Net gains (losses) on interest rate swaps for the year ended December 31, 2021 was $686.0 million compared to ($3.0) billion for the same period in 2020, primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $2.2 billion for the year ended December 31, 2021, reflecting a rise in forward interest rates during the period, compared to ($0.9) billion for the same period in 2020, reflecting a decline in forward interest rates during the earlier period.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.2) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $30.9 billion for the year ended December 31, 2021 compared to ($1.9) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $104.1 billion for the same period in 2020.

Net gains (losses) on disposal of investments and other was ($62.7) million for the year ended December 31, 2021 compared with $661.5 million for the same period in 2020.

For the year ended December 31, 2020, we disposed of Residential Securities with a carrying value of $51.8 billion for an aggregate net gain of $637.0 million.

For the same period in 2019, we disposed of Residential Securities with a carrying value of $25.5 billion for an aggregate net loss of ($37.8) million.

For the year ended December 31, 2021, we disposed of Residential Securities with a carrying value of $11.5 billion for an aggregate net loss of ($3.1) million.

For the same period in 2020, we disposed of Residential Securities with a carrying value of $51.8 billion for an aggregate net gain of $637.0 million and we recognized a realized gain of $104.8 million as a result of deconsolidating a multifamily VIE.

Net gains (losses) on other derivatives and financial instruments was $121.7 million for the year ended December 31, 2021 compared to $756.3 million for the same period in 2020.

The change in net gains (losses) on other derivatives and financial instruments was primarily comprised of changes in net gains (losses) on TBA derivatives, which was ($401.7) million for the year ended December 31, 2021 compared to $985.4 million for the same period in 2020, and interest rate swaptions, which was ($76.0) million for the year ended December 31, 2021 compared to $58.0 million for the same period in 2020, partially offset by the change in net gains (losses) on futures contracts, which was $582.3 million for the year ended December 31, 2021 compared to ($280.1) million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $183.7 million for the year ended December 31, 2021 compared to ($303.0) million for the same period in 2020, primarily due to favorable changes in unrealized gains (losses) on MSR, including Interests in MSR, of $275.8 million, securitized commercial loans of $268.4 million, residential securitized debt of consolidated VIEs of $88.5 million and securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of $59.7 million, partially offset by an unfavorable change in commercial securitized debt of consolidated VIEs of ($211.6) million for the year ended December 31, 2021 compared to the same period in 2020.

For the year ended December 31, 2021, a loan loss (provision) reversal of $145.1 million was recorded on commercial mortgage and corporate loans compared to ($147.6) million for the same period in 2020.

Refer to the “Loans” Note located within Item 15 for additional information related to these loan loss provisions.

For the year ended December 31, 2021, a business divestiture-related gain (loss) of ($278.6) million was recorded on the sale of our CRE business to Slate.

There was no comparative transaction for the same period in 2020.

Refer to the “Sale of Commercial Real Estate Business” Note located within Item 15 for additional information related to to the transaction.

Other Income (Loss)

Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, operating costs as well as depreciation and amortization expense, net servicing income on MSR, brokerage and commission fees, due diligence costs and securitization expenses.

We also report in Other income (loss) items

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019.

The change in net gains (losses) on other derivatives was primarily comprised of changes in net gains (losses) on futures contracts, which was ($280.1) million for the year ended December 31, 2020 compared to ($962.7) million for the same period in 2019 and higher net gains on TBA derivatives, which was $985.4 million for the year ended December 31, 2020 compared to $326.8 million for the same period in 2019.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($303.0) million for the year ended December 31, 2020 compared to $36.0 million for the same period in 2019, primarily due to unfavorable changes in unrealized gains (losses) on Agency interest-only securities, non-Agency mortgage-backed securities, commercial securitized loans of consolidated VIEs and residential credit risk transfer securities, partially offset by favorable changes in unrealized gains (losses) on commercial debt issued by securitization vehicles for the year ended December 31, 2020 compared to the same period in 2019.

For the year ended December 31, 2020, a loan loss provision of ($147.6) million was recorded on commercial mortgage and corporate loans compared to ($16.6) million for the same period in 2019.

Refer to the “Loans” Note located within Item 15 for additional information related to these loan loss provisions.

Other Income (Loss)

Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, net servicing income on MSRs, operating costs as well as depreciation and amortization expense.

We report in Other income (loss) items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements.

whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements.

Given the nature of certain components of this line item, balances may fluctuate from period to period.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization on June 30, 2020) and other expenses.

General and administrative (“G&A”) expenses consist of compensation and other expenses.

Prior to the closing of the Company's management internalization transaction (the "Internalization") on June 30, 2020, G&A also consisted of management fees paid to Annaly Management Company LLC (our “Former Manager”).

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, prior periods have been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the years ended December 31, 2020 and 2019 adjusted downward by $17.0 million and $29.9 million, respectively.

The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.

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December 31, 2019 $ 271,768 0.22 % 1.77 %

(1) Includes $11.3 million of transaction costs incurred in connection with securitizations of residential whole loans and Agency mortgage-backed securities as well as costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the year ended December 31, 2020.

Includes $19.3 million of transaction costs incurred in connection with securitizations of residential whole loans, commercial loans and Agency mortgage-backed securities for the year ended December 31, 2019.

Excluding these transaction costs, G&A expenses as a percentage of average total assets and as a percentage of average equity were 0.23% and 1.62%, respectively, and 0.23% and 1.84%, respectively, for the years ended December 31, 2020 and 2019, respectively.

(1) Includes $2.9 million of costs incurred in connection with the Company’s management internalization and costs incurred in connection with the CEO search process for the year ended December 31, 2020.

Excluding these transaction costs, G&A expenses as a percentage of average total assets and as a percentage of average equity were 0.22% and 1.55%, respectively, for the year ended December 31, 2020.

2021 Compared with 2020

G&A expenses decreased $36.2 million to $186.0 million for the year ended December 31, 2021 compared to the same period in 2020.

The change was primarily due to lower compensation costs, reflecting cost savings related to the Internalization and lower management fees and expense reimbursements to our Former Manager in the first half of 2020 reflecting lower adjusted stockholders’ equity balances compared to the same period in 2019, and lower transaction costs during the year ended December 31, 2020 compared to the same period in 2019.

The change was largely attributable to lower professional fees, lower compensation costs due to the sale of the CRE business and cost savings generated from the Company’s management internalization, which closed on June 30, 2020, during the year ended December 31, 2021 compared with the same period in 2020.

Return on Average Equity

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Components of Annualized Return on Average Equity

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Economic Net Interest Income/ Average Equity (1)

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Unrealized Gains and Losses - Available-for-Sale Investments

With our available-for-sale accounting treatment on our Agency mortgage-backed securities, which represent the largest portion of assets on balance sheet, as well as certain commercial mortgage-backed securities, unrealized fluctuations in market values of assets do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting.

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The fair value of these securities being less than amortized cost at December 31, 2021 is solely due to market conditions and not the quality of the assets.

Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating.

The investments are not considered to be other-than-temporarily impaired because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.

Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as the U.S.

The investments do not require an allowance for credit losses because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.

Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency.

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Total assets were $76.8 billion and $88.5 billion at December 31, 2021 and 2020, respectively.

The change, consistent with our portfolio repositioning to strengthen our balance sheet in the first quarter of 2020, was primarily due to a decrease in Agency mortgage-backed securities of $39.3 billion, including assets transferred or pledged to securitization vehicles, residential mortgage loans of $0.7 billion and commercial real estate debt investments of $0.4 billion.

The change was primarily due to a decrease in Agency mortgage-backed securities, including assets transferred or pledged to securitization vehicles, of $13.6 billion and commercial real estate debt investments, including assets transferred or pledged to securitization vehicles, of $1.7 billion, partially offset by an increase in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $4.2 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at December 31, 2021:

Residential Commercial

Agency MBS and MSRs TBAs (1)

Residential CRTs Non-Agency MBS and Residential Mortgage Loans (2)

Investments Investments in CRE Corporate Debt Total (3)

Agency MBS and MSR Residential Credit (1)

Commercial Real Estate (2)

Corporate Debt Total

Assets (dollars in thousands)

Fair value/carrying value $ 61,729,356 $ 10,369,051 $ 692,169 $ 1,968,991 $ 74,759,567

Implied market value of derivatives (3)

20,338,633 — 400,579 — 20,739,212

Repurchase agreements 52,724,923 1,658,817 385,903 — 54,769,643

Implied cost basis of derivatives (3)

20,289,856 — 400,912 — 20,690,768

Other secured financing — — — 903,255 903,255

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Net forward purchases 142,164 3,088 — — 145,252

Mortgages payable — — — — — 426,256 — 426,256

Liabilities of disposal group held for sale — — 112,144 — 112,144

Other assets / liabilities (4)

474,740 7,878 4,024 35,665 522,307

Net equity allocated $ 8,837,219 $ 3,058,892 $ 197,813 $ 1,101,401 $ 13,195,325

Net equity allocated (%) 68 % 24 % — % 8 % 100 %

Debt/net equity ratio 6.1:1 NM 0.9:1 6.1:1 5.5:1 1.9:1 0.7:1 5.1:1 (5)

(1) Fair value/carrying value represents implied market value and repurchase agreements represent the cost basis.

(2) Includes loans held for sale, net.

(3) Excludes the TBA asset, debt and equity balances.

(4) Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the Consolidated Statements of Financial Condition.

Debt/net equity ratio 6.0:1 2.4:1 2.0:1 0.8:1 4.7:1 (5)

(1) Fair value/carrying includes residential loans held for sale.

(2) Fair value/carrying includes commercial real estate investments held for sale.

(3) Derivatives include TBA contracts under Agency MBS and MSR and CMBX balances under Commercial Real Estate.

(4) Dedicated capital allocations assume capital related to held for sale assets will be redeployed within the Agency business line.

(5) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.

NM Not meaningful.

Excludes liabilities of disposal group held for sale.

Residential Securities

Substantially all of our Agency mortgage-backed securities at December 31, 2021 and December 31, 2020 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which carry an actual or implied “AAA” rating.

Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which have an actual or implied credit rating that is the same as that of the U.S.

We carry all of our Agency mortgage-backed securities at fair value on the Consolidated Statements of Financial Condition.

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Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period.

Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period.

Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period.

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at December 31, 2021 and December 31, 2020.

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Residential credit

Residential CRT $ 532,403 $ 531,322

Credit risk transfer $ 936,228 $ 532,403

Alt-A 69,487 80,328

Prime 275,441 182,749

Prime Interest-only 1,240 3,167

Subprime 163,076 188,433

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Prime jumbo (>= 2010 vintage) 171,894 44,835

Prime jumbo (>= 2010 vintage) interest-only 1,552 7,150

Total residential credit securities $ 2,599,564 $ 1,504,595

Total Residential Securities $ 63,125,169 $ 75,571,654

The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at December 31, 2020 and December 31, 2019.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

December 31, 2021 December 31, 2020

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Weighted average yield 6.57 % 5.20 %

Weighted average term to next adjustment 15 Months 13 Months

Weighted average term to next adjustment (2)

11 Months 15 Months

Weighted average lifetime cap (3)

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Weighted average coupon rate 2.01 % 3.99 %

Weighted average yield NM 1.73 %

Weighted average yield NM NM

(1) Excludes interest-only mortgage-backed securities.

(2) Excludes non-Agency mortgage-backed securities and CRT securities.

(3) Excludes non-Agency mortgage-backed securities and CRT securities as this attribute is not applicable to these asset classes.

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(dollars in thousands)

Agency credit risk transfer $ 508,685 $ — $ 508,685 4.03 % 1.28 % 4.66 % 44.40 %

Private label credit risk transfer 23,718 — 23,718 4.81 % 0.97 % 0.86 % 43.63 %

Credit risk transfer $ 936,228 $ — $ 936,228 3.15 % 3.04 % 3.47 % 35.35 %

Alt-A 69,487 14,090 55,397 3.33 % 7.89 % 10.77 % 26.10 %

Prime 275,441 46,820 228,621 3.89 % 8.27 % 3.23 % 18.53 %

Prime interest-only 1,240 1,240 — 0.47 % — % 5.21 % 45.03 %

Subprime 163,076 89,391 73,685 2.14 % 21.34 % 12.79 % 15.29 %

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Prime jumbo (>=2010 vintage) 171,894 663 171,231 3.64 % 3.16 % 3.93 % 8.58 %

Prime jumbo (>=2010 vintage) interest-only 1,552 1,552 — 0.35 % — 4.59 % 53.22 %

Total/weighted average (2)

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(1) Represents the 3 month voluntary prepayment rate (“VPR”).

(2) Total investment characteristics exclude the impact of IOs.

Excludes the impact of interest-only securities.

(2) Total investment characteristics exclude the impact of interest-only securities.

ANNALY CAPITAL MANAGEMENT, INC.

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(dollars in thousands)

Agency credit risk transfer $ — $ — $ 508,594 $ 91 $ 508,685

Private label credit risk transfer — — 23,718 — 23,718

Credit risk transfer $ — $ — $ 936,223 $ 5 $ 936,228

Alt-A 4,960 54,517 10,010 — 69,487

Prime 30,977 234,840 9,341 283 275,441

Prime interest-only — — — 1,240 1,240

Subprime 6,039 65,940 90,925 172 163,076

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Prime jumbo (>=2010 vintage) — 109,883 61,348 663 171,894

Prime jumbo (>=2010 vintage) interest-only — — — 1,552 1,552

Total $ 41,976 $ 1,448,618 $ 1,107,847 $ 1,123 $ 2,599,564

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The following table summarizes the effect on our liquidity and cash flows from contractual obligations at December 31, 2021.

The table does not include the effect of net interest rate payments on our interest rate swap agreements.

The table does not include the effect of net interest rate payments on our interest rate swap agreements and excludes assets and liabilities of the disposal group held for sale.

The net swap payments will fluctuate based on monthly changes in the receive rate.

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Interest expense on participations issued 31,603 63,207 63,207 805,788 963,805

Mortgages payable (principal) 9,706 41,325 289,124 89,495 429,650

Interest expense on mortgages payable 18,426 34,211 26,184 58,885 137,706

Long-term operating lease obligations 3,862 7,724 2,895 — 14,481

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In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our current operations via repurchase agreements.

We may use securitization structures, credit facilities, mortgages payable or other term financing structures to finance certain of our assets.

We may use securitization structures, credit facilities, or other term financing structures to finance certain of our assets.

During the year ended December 31, 2021, we received $18.7 billion from principal repayments and $11.5 billion in cash from disposal of Residential Securities.

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We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at December 31, 2021.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Capital Management

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A strong and robust capital position is essential to executing our investment strategy.

Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment.

Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy

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Management’s Discussion and Analysis

regardless of the market environment.

Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.

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Stockholders’ equity (dollars in thousands)

7.50% Series D cumulative redeemable preferred stock — 445,457

6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock 696,910 696,910

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Total stockholders’ equity $ 13,169,826 $ 14,008,316

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Management’s Discussion and Analysis

Capital Stock

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Amount raised from direct purchase and dividend reinvestment program $ — $ 1,175

During the year ended December 31, 2019, we closed the public offering of an original issuance of 75.0 million shares of common stock for proceeds of $730.5 million before deducting offering expenses.

In connection with the offering, we granted the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters exercised in full resulting in an additional $109.6 million in proceeds before deducting offering expenses.

In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock, 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.

During the years ended December 31, 2020 and 2019, we repurchased 32.4 million and 26.2 million shares of our common stock for an aggregate amount of $208.9 million and $223.2 million, excluding commission costs, respectively.

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

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

In January 2022, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”).

The Current Share Repurchase Program replaced the 2021 Share Repurchase Program, which had replaced the 2019 - 2020 Share Repurchase Program.

During the year ended December 31, 2021, no shares were repurchased under the 2021 Share Repurchase Program.

During the year ended December 31, 2020, we repurchased 32.4 million shares of our common stock for an aggregate amount of $208.9 million, excluding commission costs, respectively.

All common shares purchased were part of a publicly announced plans in open-market transactions.

No shares were issued under the at-the-market sales program during the year ended December 31, 2020.

In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2021 and August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc.

(formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

Morgan Securities LLC, Keefe, Bruyette & Woods,Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”).

The Company may offer and sell shares

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Management’s Discussion and Analysis

of its common stock, having an aggregate offering price of up to $1.5 billion, from time to time through any of the Sales Agents.

During the years ended December 31, 2021, we issued 60.9 million shares of common stock for proceeds of $552.4 million, net of commissions and fees, under the at-the-market sales program.

No options were exercised during the years ended December 31, 2020, and 2019.

No shares were issued under the at-the-market sales program during the year ended December 31, 2020.

Preferred Stock

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The cash redemption amount for each share of Series D Preferred Stock was $25.00.

During the year ended December 31, 2019, we redeemed all 7.0 million of our issued and outstanding shares of 7.625% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) for $175.0 million.

The cash redemption amount for each share of Series C Preferred Stock was $25.00 plus accrued and unpaid dividends to, but not including, the redemption date of July 21, 2019.

During the year ended December 31, 2019, we redeemed all 2.2 million of our issued and outstanding shares of 8.125% Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) for $55.0 million.

The cash redemption amount for each share of Series H Preferred Stock was $25.00 plus accrued and unpaid dividends to, but not including, the redemption date of May 31, 2019.

During the year ended December 31, 2019, we issued 17.7 million shares of our 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock for gross proceeds of $442.5 million before deducting the underwriting discount and other estimated offering costs.

Leverage and Capital

We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may be continued volatility in the mortgage and credit markets.

We believe that it is prudent to maintain conservative GAAP leverage ratios and economic leverage ratios as there may be continued volatility in the mortgage and credit markets.

Our capital policy governs our capital and leverage position including setting limits.

Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1.

Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and

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Management’s Discussion and Analysis

international market conditions.

Our debt-to-equity ratio at December 31, 2020 and 2019 was 5.1:1 and 7.1:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA derivative and CMBX notional outstanding, and net forward purchases (sales) of investments divided by total equity, at December 31, 2020 and 2019 was 6.2:1 and 7.2:1, respectively.

Our capital ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and shown net of debt issued by securitization vehicles), was 13.6% and 12.0% at December 31, 2020 and 2019, respectively.

Our GAAP leverage ratio at December 31, 2021 and 2020 was 4.7:1 and 5.1:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 5.7:1 and 6.2:1, at December 31, 2021 and 2020, respectively.

Our GAAP capital ratio at December 31, 2021 and 2020 was 17.2% and 15.9%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied total market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.4% and 13.6% at December 31, 2021 and 2020, respectively.

Economic leverage ratio and economic capital ratio are non-GAAP financial measures.

Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to their most directly comparable GAAP results.

Risk Management

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Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk.

We have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks.

We believe we have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks.

Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.

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The risk appetite statement asserts the following key risk parameters to guide our investment management activities:

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Management’s Discussion and Analysis

Risk Parameter Description

Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.

Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1.

Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1 considerate of our overall capital allocation framework.

Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.

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Capital Preservation We will seek to protect our capital base through disciplined risk management practices.

Compliance We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act.

Operational We will seek to limit impacts to our business through disciplined operational risk management practices addressing areas including but not limited to, management of key third party relationships (i.e.

originators, sub-servicers), human capital management, cybersecurity and technology related matters, business continuity and financial reporting risk.

Compliance, Regulatory and Legal We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.

Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk.

The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees.

The BRC is responsible for oversight of our risk governance structure, risk management and risk assessment guidelines and policies and our risk appetite.

The BRC is responsible for oversight of our risk governance structure, risk management (operational and market risk) and risk assessment guidelines and policies and our risk appetite.

The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function.

The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices.

The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us, and

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Management’s Discussion and Analysis

the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.

The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices and other human capital matters such as succession and culture.

The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us, and the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.

Risk assessment and risk management are the responsibility of our management.

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Our Chief Compliance Officer has reporting lines to the BAC.

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Management’s Discussion and Analysis

Description of Risks

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We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk.

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Management’s Discussion and Analysis

Risk Description

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This risk is present in funding, hedging and investing activities.

Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events.

Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including business continuity planning), human factors or external events.

This risk also applies to our use of proprietary and third party models, software vendors and data providers and oversight of third-party service providers such as sub-servicers, due diligence firms etc.

Compliance, Regulatory and Legal Risk Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model.

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Management’s Discussion and Analysis

Capital, Liquidity and Funding Risk Management

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Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty.

In addition, Arcola has borrowed funds through direct repurchase agreements.

In addition, Arcola borrows funds through direct repurchase agreements.

To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements.

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The weighted average haircut was approximately 3% on repurchase agreements.

The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at December 31, 2020 compared to the same period in 2019.

While haircut and margin requirements related to the Agency collateral we pledge under repurchase agreements and interest rate swaps were largely unchanged during the year

The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at December 31, 2021 compared to the same period in 2020, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the year ended December 31, 2021.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

ended December 31, 2020, our counterparties did increase haircuts and margin requirements on credit assets beginning in March 2020, as a result of market disruptions brought on by COVID-19, which have since returned closer to pre-pandemic levels.

The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding for the periods presented:

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1,022,188 3.09 % 3.17 % 11,131

Mortgages payable (3)

429,650 4.41 % 4.07 % 2,982

Total indebtedness $ 61,793,871

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(3) Non-recourse to Annaly.

Excess Liquidity

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Management’s Discussion and Analysis

Excess Liquidity

Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs.

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Non-agency mortgage-backed securities 778,792 884,544 1,663,336

Commercial mortgage-backed securities 418,588 111,917 530,505

Residential mortgage loans (2)

6,622,577 1,145,930 7,768,507

MSRs 5,541 95,354 100,895

Commercial real estate debt investments (2)

2,052,642 194,173 2,246,815

Commercial real estate debt and preferred equity, held for investment (2)

1,217,329 155,101 1,372,430

Corporate debt 1,596,536 643,394 2,239,930

MSR — 511,080 511,080

Interests in MSR — 69,316 69,316

Corporate debt, held for investment 1,463,480 505,511 1,968,991

Other assets (3)

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Total financial assets $ 66,573,882 $ 9,318,332 $ 75,892,214

(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the

Consolidated Statements of Financial Condition.

(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition.

(2) Includes assets transferred or pledged to securitization vehicles.

(3) Includes interests in certain joint ventures and equity instruments.

(3) Includes commercial real estate investments held for sale and interests in certain joint ventures.

We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments.

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Residential Securities (2) (3)

Commercial mortgage-backed securities 530,505

Residential mortgage loans (4)

Commercial real estate debt investments (5)

Commercial real estate debt and preferred equity, held for investment (6)

Corporate debt, held for investment (5)

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(4) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $5.5 billion.

(5) Excludes securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.2 billion.

(6) Excludes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $0.9 billion.

(7) Excludes certain second lien loans.

(8) Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $6.9 billion.

(5) Excludes unpledged second lien loans.

(6) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles and certain assets of disposal group held for sale of $6.1 billion.

Maturity Profile

We consider the profile of our assets, liabilities and derivatives when managing both liquidity risk as well as investment/market risk employing a measurement of both the maturity gap and interest rate sensitivity gap.

We determine the amount of liquid

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Maturity Profile

We determine the amount of liquid assets that are required to be held by monitoring several liquidity metrics.

assets that are required to be held by monitoring several liquidity metrics.

We utilize several modeling techniques to analyze our current and potential obligations including the expected cash flows from our assets, liabilities and derivatives.

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The effects of interest rate swaps, whereby we generally pay a fixed rate and receive a floating rate and effectively lock in our financing costs for a longer term, are also reflected in our interest rate sensitivity gap.

The interest rate sensitivity of our assets and liabilities in the following table at December 31, 2020 could vary substantially based on actual prepayment experience.

The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale and corporate loans held for sale, in the following table at December 31, 2021 could vary substantially based on actual prepayment experience.

ANNALY CAPITAL MANAGEMENT, INC.

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Residential mortgage loans (principal) — — — 2,212,587 2,212,587

Commercial real estate debt and preferred equity (principal) 63,890 81,460 423,035 — 568,385

Corporate debt (principal) — — 264,786 1,755,389 2,020,175

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These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans.

Our stress tests are modeled over both short term and longer time horizons.

The stresses applied include market-wide and firm-specific stresses.

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We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators.

Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as both short-term and long-term sustainability of the funding composition under stress conditions.

Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as sustainability of the funding composition under stress conditions.

We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions.

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Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives.

Changes in the level of interest rates and spreads can also affect the value of our securities and potential realization of gains or losses from the sale of these assets.

Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets.

We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results.

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Economic net interest income includes the net interest component of interest rate swaps.

(3) Scenarios include Residential Securities, residential mortgage loans, MSRs and derivative instruments.

(3) Scenarios include Residential Securities, residential mortgage loans, MSR and derivative instruments.

(4) NAV represents book value of equity.

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residential mortgage loans, commercial real estate investments and corporate debt.

MSR values may also be impacted if overall costs to service the underlying mortgage loans increase due to borrower performance.

We are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations.

MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance.

Generally, we are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations.

We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure.

We will originate or purchase commercial investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee.

Once a commercial investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee.

In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool.

Once an investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee.

We review credit and other risks of loss associated with each investment.

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Agency mortgage-backed securities (1)

81.9 % 86.4 %

Credit risk transfer securities 1.3 % 0.6 %

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Mortgage servicing rights 0.7 % 0.1 %

Interests in MSR 0.1 % — %

Commercial real estate (1) (2)

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(2) Net of unamortized origination fees.

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Management’s Discussion and Analysis

Excludes commercial real estate assets held for sale as of December 31, 2021.

Counterparty Risk Management

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In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral.

A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities and certain commercial real estate investments as collateral to the applicable lender.

A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities as collateral to the applicable lender.

The collateral we pledge generally exceeds the amount of the borrowings under each agreement.

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Additionally, ALCO has oversight of our counterparty exposure.

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Management’s Discussion and Analysis

The following table summarizes our exposure to counterparties by geography at December 31, 2021:

Number of Counterparties Secured Financing (1)

Interest Rate Swaps at Fair Value Exposure - Secured Financing (2)

Exposure - Interest Rate Swaps (2)

Interest Rate Swaps at Fair Value Exposure (2)

Geography (dollars in thousands)

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(1) Includes repurchase agreements and other secured financing.

(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and unrealized loss on swaps for each counterparty.

(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and derivatives for each counterparty.

Operational Risk Management

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Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems.

The Cybersecurity Committee periodically reports to the ERC, and the Board via the BRC and the BAC.

The Cybersecurity Committee periodically reports to the ERC and the relevant Board committees.

There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

We currently maintain cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the policy will cover all losses.

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Management’s Discussion and Analysis

We currently maintain cybersecurity insurance, however, there is no assurance that our current policy will cover all cybersecurity breaches or our related losses, or that we will be able to continue to maintain cybersecurity insurance in the future.

We depend on third party service providers to perform various business processes related to our operations, including mortgage loan servicers and sub-servicers.

Our vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third party vendors.

These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

Compliance, Regulatory and Legal Risk Management

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Accordingly, we closely monitor our REIT status within our risk management program.

We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola and our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act.

The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company as well as our business strategy.

We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, and our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer.

The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company and our business strategy.

Our investments in residential whole loans and MSR require us to comply with applicable state and federal laws and regulations and maintain appropriate governmental licenses, approvals and exemptions.

We proactively monitor the potential impact regulation may have both directly and indirectly on us.

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We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration.

The determination that we qualify for this exemption from registration depends on various factual matters and circumstances.

The determination that we qualify for this

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Management’s Discussion and Analysis

exemption from registration depends on various factual matters and circumstances.

Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program.

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While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The preparation of our consolidated financial statement in accordance with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.

Actual results may differ materially from these estimates and changes in assumptions could have a significant effect on the consolidated financial statements.

Our critical accounting policies that require us to make significant judgments or estimates are described below.

For more information on these critical accounting policies and other significant accounting policies, see “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.

For more information on these critical accounting policies and other significant accounting policies, see the Note titled “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 15.

“Exhibits, Financial Statement Schedules.”

Valuation of Financial Instruments

Residential Securities

The Company carries its residential securities at estimated fair value.

There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.

Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value.

Judgments and Uncertainties:

Since we primarily invest in securities that can be valued using quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value.

Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security.

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Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing.

Sensitivity of Estimates to Change:

Changes in underlying assumptions used in estimating fair value impact the carrying value of the residential securities as well as their yield.

For example, an increase in CPR would decrease the carrying value and yield of our Agency mortgage-backed securities.

Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See Experienced and Projected Long-Term CPR, Financial Condition – Residential Securities and the interest rate sensitivity and interest rate and MBS spread shock analysis and discussions within this Item 7.

for further information.

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Residential Mortgage Loans

The Company has elected to account for its Residential Mortgage Loans at fair value.

There is an active market for the residential whole loans in which we invest.

Judgments and Uncertainties:

Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value.

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Internal fair values are generally compared to external pricing sources to determine reasonableness.

Fair value estimates for our investment in MSRs are obtained from models, which use significant unobservable inputs in their valuations.

Sensitivity of Estimates to Change:

Changes to model assumptions, including prepayment speeds may significantly impact the fair value estimate of residential mortgage loans as well as unrealized gains and losses and yield on these assets.

Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 7.

for further information.

The Company has elected to account for its MSR at fair value.

The market for mortgage servicing rights is considered less active and transparent compared to securities.

As such fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations.

Judgments and Uncertainties:

These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates.

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Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values.

The valuation of MSRs requires significant judgment by management and the third-party pricing providers.

Commercial Real Estate Investments

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral.

These securities must also be evaluated for impairment if the fair value of the security is lower than its amortized cost.

Determining whether there is an other-than-temporary impairment may require us to exercise significant judgment and make estimates to determine expected cash flows incorporating assumptions such as changes in interest rates and loss expectations.

For commercial real estate loans and preferred equity investments classified as held for investment, we apply significant judgment in evaluating the need for a loss reserve.

Estimated net recoverable value of the commercial real estate loans and preferred equity investments and other factors such as the fair value of any collateral, the amount and status of senior debt, the prospects of the borrower and the competitive landscape where the borrower conducts business must be considered in determining the allowance for loan losses.

For commercial real estate loans held for sale, significant judgment may need to be applied in determining the fair value of the loans and whether a valuation allowance is necessary.

Factors that may need to be considered to determine the fair value of a loan held for sale include the borrower’s credit quality, liquidity and other market factors and the fair value of the underlying collateral.

The valuation of MSR requires significant judgment by management and the third party pricing providers.

Sensitivity of Estimates to Change:

Changes in the underlying assumptions used to estimate the fair value of MSR impact the carrying value as well as the related unrealized gains and losses recognized.

For further discussion of the sensitivity of the model inputs see the Note titled “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 15.

“Exhibits, Financial Statement Schedules.”

Interest Rate Swaps

The Company is required to account for its derivative assets and liabilities at fair value, which may or may not be cleared through a derivative clearing organization.

We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.

Judgments and Uncertainties:

We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps.

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Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps.

We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.

Sensitivity of Estimates to Change:

Changes in the OIS curve will impact the carrying value of our interest rate swap assets and liabilities.

Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 7.

for further information.

Revenue Recognition

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Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method.

Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

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Management’s Discussion and Analysis

Judgments and Uncertainties:

To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds.

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Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty.

Sensitivity of Estimates to Change:

Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results.

Adjustments are made for actual prepayment activity as it relates to calculating the effective yield.

Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

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Management’s Discussion and Analysis

The sensitivity of changes in interest rates to our economic net interest income is included in the interest rate shock analysis and discussions within this Item 7.

Consolidation of Variable Interest Entities

The Company is required to determine if it is required to consolidate entities in which it holds a variable interest.

Judgments and Uncertainties:

Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance.

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One hundredth of one percent, used in expressing differences in interest rates.

One basis point is 0.01% of

One basis point is 0.01% of yield.

For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points.

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One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank.

Subordinate mortgage notes and/or subordinate mortgage loan participations.

The most subordinate commercial mortgage-backed security bond class.

Refers to the board of directors of Annaly.

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Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.

Capital Ratio (GAAP Capital Ratio)

Calculated as total stockholders’ equity divided by total assets.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Capital Ratio

Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs.

The amount an asset earns over its hedging and financing costs.

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Constant Prepayment Rate (“CPR”)

The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the

Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.

The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.

A measure of the change in a security’s duration with respect to changes in interest rates.

The more convex a security is, the more its duration will change with interest rate changes.

Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share

Core earnings (excluding PAA) is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-core income (loss) items) and excludes (g) the premium amortization adjustment representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.

Core earnings (excluding PAA) per average common share is calculated by dividing core earnings (excluding PAA) by average basic common shares for the period.

Corporate Debt

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An example is credit derivatives referencing the commercial mortgage-backed securities index.

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Credit Risk Transfer (“CRT”) Securities

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Possibility that a bond issuer will fail to pay principal or interest when due.

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A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g.

3 unchanged sentences

The weighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.

Earnings available for distribution (“EAD”) and Earnings available for distribution Per Average Common Share

Earnings available for distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.

Earnings available for distribution per average common share is calculated by dividing earnings available for distribution by average basic common shares for the period.

This metric was previously labeled Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share).

The definition of EAD is identical to the definition of Core Earnings (excluding PAA) from prior reporting periods.

Economic Capital

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It is a probabilistic measure of potential future losses at a given confidence level over a given time horizon.

Economic Capital Ratio

Non-GAAP financial measure that is calculated as total stockholders’ equity divided by total economic assets.

Total economic assets includes the implied market value of TBA derivatives and are net of debt issued by securitization vehicles.

Economic Interest Expense

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Economic Leverage Ratio (Economic Debt-to-Equity Ratio)

Calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding and net forward

purchases (sales) of investments divided by total equity.

Non-GAAP financial measure that is calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

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Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense.

Economic Return

Refers to the Company’s change in book value plus dividends declared divided by the prior period’s book value.

Encumbered Assets

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Federal National Mortgage Association.

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Federal Deposit Insurance Corporation (“FDIC”)

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The interest rate charged by banks on overnight loans of their excess reserve funds to other banks.

Federal Home Loan Banks (“FHLB”)

Government-sponsored banks that generally provide reliable liquidity to member financial institutions to support housing finance and community investment.

Federal Housing Financing Agency (“FHFA”)

The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

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Financial Industry Regulatory Authority, Inc.

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The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments.

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Interest Rate Risk

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The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer.

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International Swaps and Derivatives Association (“ISDA”) Master Agreement

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The use of borrowed money to increase investing power and economic returns.

Leverage Ratio (Debt-to-Equity Ratio)

Leverage Ratio (GAAP Leverage Ratio or Debt-to-Equity Ratio)

Calculated as total debt to total stockholders’ equity.

3 unchanged sentences

The rate banks charge each other for short-term Eurodollar loans.

LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.

LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.The United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.

Liquidity Risk

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A security representing a direct interest in a pool of mortgage loans.

The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis.

The pass-through issuer or servicer collects the payments on the loans in the pool and “passes

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Management’s Discussion and Analysis

through” the principal and interest to the security holders on a pro rata basis.

Mortgage Loan

A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.

Mortgage Servicing Rights (“MSRs”)

Mortgage Servicing Rights (“MSR”)

Contractual agreements constituting the right to service an existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage.

4 unchanged sentences

Net interest margin represents our interest income less interest expense divided by average interest earning assets.

Net interest margin (excluding PAA) represents the sum of

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Management’s Discussion and Analysis

our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

Net Interest Spread and Net Interest Spread (excluding PAA)

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In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

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The amount by which the price of a security exceeds its principal amount.

8 unchanged sentences

The indicative interest rate on loans that banks quote to their best commercial customers.

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Primary Market

Market for offers or sales of new bonds by the issuer.

Principal and Interest

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Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy.

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Secondary Market

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Target Assets

Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSRs, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.

Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSR, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.

Tangible Economic Return

Refers to the Company’s change in tangible book value (calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit less intangible assets) plus dividends declared divided by the prior period’s tangible book value.

Taxable REIT Subsidiary (“TRS”)

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Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs.

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To-Be-Announced Securities (“TBAs”)

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Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided.

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A statistical measure of the variance of price or yield over time.

24 unchanged sentences

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 7. Management’s Discussion and Analysis