What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-02-16 compared with 2022-02-18 · 120 added, 153 removed, 122 unchanged (69% of the section changed)

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As of December 31, 2022, the maximum dollar value of shares that may yet be purchased under this plan was $1.5 billion.

Total Number of Shares Purchased (1)

Average Price Paid Per Share (2)

The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (2)

(dollars in thousands)

December 1, 2021 - December 31, 2021 6,698 $ 8.46 — $ 1,500,000

Total 6,698 — $ 1,500,000

(1) Represents shares acquired in satisfaction of the tax withholding obligations on stock-based awards granted under our equity incentive plans during the three months ended December 31, 2021.

(2) Excludes commission costs.

In November 2022, we announced that our Board authorized a repurchase plan for all of our existing outstanding Preferred Stock (as defined below, the “Preferred Stock Repurchase Program”).

Under the terms of the plan, we are authorized to repurchase up to an aggregate of 63,500,000 shares of Preferred Stock, comprised of up to (i) 28,800,000 shares of our 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), (ii) 17,000,000 shares of our 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series G Preferred Stock”), and (iii) 17,700,000 shares of our 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”, and together with Series F Preferred Stock and Series G Preferred Stock, the “Preferred Stock”).

The aggregate liquidation value of the Preferred Stock that may be repurchased by us pursuant to the Preferred Stock Repurchase Program, as of November 3, 2022, was approximately $1.6 billion.

The Preferred Stock Repurchase Program became effective on November 3, 2022, and shall expire on December 31, 2024.

No shares were repurchased to with respect to the Preferred Stock Repurchase Program during the year ended December 31, 2022.

As of December 31, 2022, the maximum dollar value of shares that may yet be purchased under this plan was $1.6 billion.

Purchases made pursuant to the Preferred Stock Repurchase Program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.

The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors.

The authorization does not obligate us to acquire any particular amount of Preferred Stock and the program may be suspended or discontinued at our discretion without prior notice.

ANNALY CAPITAL MANAGEMENT, INC.

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

Special Note Regarding Forward-Looking Statements

Certain statements contained in this annual report, and certain statements contained in our future filings with the the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain);

changes in interest rates;

changes in the yield curve;

changes in prepayment rates;

the availability of mortgage-backed securities and other securities for purchase;

the availability of financing and, if available, the terms of any financing;

changes in the market value of our assets;

changes in business conditions and the general economy;

operational risks or risk management failures by us or critical third parties, including cybersecurity incidents;

our ability to grow our residential credit business;

our ability grow our middle market lending business;

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

risks related to investments in mortgage-servicing rights (“MSR”);

our ability to consummate any contemplated investment opportunities;

changes in government regulations or policy affecting our business;

our ability to maintain our qualification as a REIT for U.S.

federal income tax purposes;

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

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

We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc.

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

Recent Developments

Business Environment and COVID-19

Reverse Stock Split

Business Environment

Economic Environment

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

London Interbank Offered Rate (“LIBOR”) Transition

Income Tax Reform

Results of Operations

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Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

Realized and Unrealized Gains (Losses)

Other Income (Loss)

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Contractual Obligations

Off-Balance Sheet Arrangements

Commitments and Contractual Obligations with Unconsolidated Entities

Capital Management

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Management’s Discussion and Analysis

We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending.

We are a leading diversified capital manager with investment strategies across mortgage finance.

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.

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

Recent Developments

Sale of Commercial Real Estate Business

On March 25, 2021, we announced that we entered into a definitive agreement to sell our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P.

and Slate Grocery REIT (together, “Slate”).

The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and associated liabilities and commercial mortgage-backed securities (other than commercial CRTs).

Certain employees who primarily supported the CRE business joined Slate in connection with the sale.

During the year ended December 31, 2021, the majority of assets held for sale and the associated liabilities were transferred to Slate with the remaining assets expected to be transferred by the end of the first quarter of 2022, subject to regulatory approvals.

Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing.

Refer to the “Sale of Commercial Real Estate Business” in the Notes to the Consolidated Financial Statements included in Item 15.

“Exhibits, Financial Statement Schedules for additional information related to the transaction.

Business Environment and COVID-19

Financial markets have seen challenging conditions in recent months as the robust performance of the U.S.

economy has made it evident that a withdrawal of pandemic era stimulus is imminent.

Strong consumption and investment activity helped the U.S.

economy record the best annual growth in nearly forty years in 2021.

Meanwhile, the labor market has seen a rapid recovery as employers added 6.7 million jobs last year and the unemployment rate fell to 3.9 percent in December 2021.

Stimulus measures have helped this rapid recovery, which has also spurred inflation to generational highs, as seen in December when the consumer price index reached 7.0% year-over-year.

Although much of this increase in prices was initially considered temporary, ongoing elevated price gains across various categories of goods and services raise the risk inflation could persist for some time.

Accordingly, current macroeconomic conditions have led to a meaningful shift by the Federal Reserve (“Fed"), which now views less accommodative monetary policy as the primary way to ensure both parts of its mandate – full employment and stable prices – are being met.

In November, the Fed announced a reduction of its asset purchases, which up to that point had been running at a monthly pace of $120 billion per month across U.S.

Treasuries and Agency MBS.

At the December Federal Open Market Committee (“FOMC”) meeting, the Fed accelerated the slowdown in its asset purchases, in turn signaling a complete stop in March 2022.

In addition, the Fed has signaled increases in the Federal Funds Target Rate (“Fed Funds Rate”) beginning in 2022 and an earlier introduction of balance sheet runoff to stem inflationary pressures.

Interest rate markets now expect at least five 25 basis point rate hikes in 2022 and balance sheet runoff to begin in the summer months at a pace faster than the 2017 balance sheet runoff of $50 billion per month.

This notable shift in expectations has led to a tightening of financial conditions and an underperformance of assets most closely tied to monetary policy, best seen in the spread widening in Agency MBS in recent weeks.

In this environment, Annaly generated a negative tangible economic return of 2.4% during the fourth quarter and 0.0% for the full year 2021.

Agency MBS spreads widened in light of an increasingly negative supply and demand picture, with the Fed turning from the largest net buyer of Treasuries and agency MBS to a potential seller in the near future.

In anticipation of wider spreads, we managed the portfolio to decrease leverage and optimize our asset allocation, with total assets decreasing by approximately $12.4 billion to $89.2 billion during 2021.

In conjunction, economic leverage declined from 6.2x to 5.7x, marking the lowest leverage level since 2015.

The defensive leverage profile is further supported by low capital structure leverage and minimal asset-level structural leverage, as highly liquid Agency-MBS makes up the majority of Annaly’s portfolio.

Moreover, the firm has substantial liquidity with $9.3 billion of unencumbered assets, up $600 million year-over-year.

Finally, Annaly remains conservatively hedged to mitigate interest rate risk - with a year-end hedge ratio of 95% and expect to remain close to fully hedged for at least the near term.

The portfolio continued to perform strongly, generating GAAP net income of $1.60 for the year and earnings available for distribution of $1.16 which exceeded our aggregate dividend of $0.88 per share.

Reverse Stock Split

On September 8, 2022, we announced that our Board had unanimously approved a reverse stock split of our common stock at a ratio of 1-for-4 (the “Reverse Stock Split”).

The Reverse Stock Split was effective following the close of business on September 23, 2022 (the “Effective Time”).

Accordingly, at the Effective Time, every four issued and outstanding shares of our common stock were converted into one share of our common stock.

No fractional shares were issued in connection with the Reverse Stock Split.

Instead, each stockholder that would have held fractional shares as a result of the Reverse Stock Split received cash in lieu of such fractional shares.

The par value per share of our common stock remained unchanged at $0.01 per share after the Reverse Stock Split.

Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in our Consolidated Statements of Financial Condition.

All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

Business Environment

Financial markets saw meaningful volatility in 2022 as high inflation readings led the Federal Reserve to conduct the most notable tightening in monetary policy in over 40 years.

The Federal Open Market Committee (“FOMC”) raised the Federal Funds Target Rate by 4.25 percentage points between March and December 2022.

In addition, the FOMC announced runoff of its balance sheet, opting to allow up to $95 billion in Treasury and Agency mortgage-backed securities mature on a monthly basis.

The meaningful increase in policy rates, which was emulated by many developed market central banks globally, led to sharp underperformance in fixed income assets, best seen by the negative 13% total return for the Bloomberg Aggregate Fixed Income Index in 2022, underperforming the second worst year in index history by more than four-fold.

With respect to the housing market, activity slowed meaningfully over the course of 2022 given the upward shock in mortgage rates and the resulting reduced affordability.

Existing home sales, for example, are now one-third lower than at the end of 2021.

However, the slowdown in activity has also coincided with a reduction in available inventories.

According to data from the real estate brokerage Redfin, new home listings have declined 18% year-over-year as borrowers opt to stay in their homes in the current higher rate environment.

As long as the labor market remains robust, we foresee few forced sellers, keeping inventories below historical averages.

Home prices have been slower to decline than initially anticipated with the Case-Shiller National Home Price index falling 3.6% from its peak level in June through November 2022, the last month for which data is available.

Despite the weaker activity, the state of the housing market remains relatively robust as consumer balance sheets and lending standards are sound, and the shortage of supply supports prices all else equal.

In light of the extremely turbulent year in financial markets, Annaly delivered an economic return of negative 23.7% for the full year.

Of note, the fourth quarter saw a meaningful slowdown in inflation data and a subsequent decline in interest rate volatility that resulted in a strong finish to the year, generating an 8.7% economic return in the final quarter.

While 2022 was particularly challenging, we are proud of a number of key strategic accomplishments throughout the year, including:

the accretive disposition of our Middle Market Lending portfolio, the successful continued expansion of our Residential Credit and Mortgage Servicing Rights platforms, inclusion in the S&P MidCap 400 Index, and the 25th anniversary of our initial public offering.

In the fourth quarter of 2022, we generated GAAP net income (loss) of ($1.96) per share and earnings available for distribution of $0.89 per share compared to GAAP net income (loss) of ($0.70) per share and earnings available for distribution of $1.06 per share for the prior quarter.

While earnings available for distribution covered our common stock dividend of $0.88 per share for the fourth quarter of 2022, given the moderation in earnings available for distribution and anticipated further pressure on this measure, we expect to reduce the common stock dividend for the first quarter of 2023 to a level closer to our historical yield on book value of 11 – 12%.

We believe that this would set the dividend at a level that is more sustainable in the prevailing environment given current new money returns.

Shifting to portfolio activity, we continued to rotate the Agency MBS portfolio up in coupon to take advantage of wider spreads and improved carry in production coupons.

We grew our allocation to 4.5% coupons and higher, which now represent over 50% of our portfolio, up from 12% at the end of 2021.

We believe historically wide nominal spreads in these coupons provide more

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Allocation to Annaly’s credit businesses increased by approximately 10 percentage points to 32% in 2021 as prospective returns and the strong U.S.

economy continued to favor credit.

This was a transformative year for Annaly marked by the sale of our Commercial Real Estate business, the launch of our Mortgage Servicing Rights platform and the expansion of our residential credit business.

The collective impact of these initiatives has increased our presence throughout the residential housing finance market, enhancing our ability us to allocate capital effectively wherever returns are most attractive.

Our MSR business had a strong year with assets increasing over $500 million throughout 2021 to $645 million.

We successfully established our MSR platform last year through the addition of key hires, procurement of strategic partnerships and buildout of the operations and infrastructure necessary to scale the business efficiently.

As a result of these efforts, we have ended the year as the fifth largest bulk buyer of MSR.

Meanwhile, we continue to see significant growth from our Residential Credit group, which grew assets by nearly 90% last year.

This growth was enhanced by the launch of our residential whole loan correspondent channel, which expanded our whole loan sourcing capabilities through the addition of new strategic partners and product offerings.

Altogether, these efforts helped drive the group’s record $4.5 billion in whole loan originations last year.

Annaly’s subsidiary Onslow Bay remains a programmatic issuer of securitizations - pricing 13 whole loan securitizations totaling $5.3 billion since the beginning of last year and was the fourth largest non-bank issuer of prime jumbo and expanded prime MBS over the last two years.

With housing fundamentals expected to stay strong, residential credit should remain a key driver of our overall portfolio growth in the year ahead.

Lastly, our middle market lending platform continues to demonstrate its differentiated strategy with over $1.5 billion in originations throughout 2021 and a strong credit profile with no loans on non-accrual.

The close of Annaly’s inaugural private middle-market lending focused closed-end fund allowed for increased capital allocation flexibility to further scale the business and provides recurring fee revenue to the REIT.

Notably, fund proceeds have already been deployed at approximately $450 million of assets.

than adequate compensation for taking on the incremental convexity exposure relative to lower coupons.

In addition, we lowered our exposure to TBAs, as roll specialness dissipated over the course of 2022, and we are likely to continue favoring pools over TBAs going forward given their superior return profile.

In Residential Credit, our portfolio ended the year at $5.0 billion in market value, up roughly $400 million year-over-year, and currently represents 19% of the firm’s capital.

In the current decelerating housing market, our loan business represents our preferred approach to investing in the residential credit market given our ability to control our credit strategy, partners, the diligence process, and pricing.

We continue to focus on preserving the credit quality of our portfolio, with fourth quarter whole loan acquisitions exhibiting strong underlying borrower fundamentals.

Our OBX securitization platform had a record year of issuance supported by our correspondent channel, which acquired nearly $2 billion in loans during the year.

Since the beginning of 2022, we closed 17 securitizations totaling $6.6 billion and generated $760 million of proprietary assets with a low to mid double-digit return profile utilizing minimal recourse leverage.

In our MSR business line, we had significant growth in the strategy in 2022, increasing our portfolio by nearly three times to $1.8 billion in market value and ending the year as the third largest buyer of bulk MSR in the market.

We added new originator partners, expanded relationships with subservicers, and put in place new dedicated financing as an additional source of liquidity to support future growth.

Our focus on very high credit quality, low loan rate MSR has proven to be valuable.

The portfolio paid three CPR in the fourth quarter and experienced minimal delinquencies, generating stable cash flows while providing a hedge to current dynamics in the housing market.

Earnings available for distribution is a non-GAAP financial measure.

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

Business Continuity

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

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

The BCP is regularly updated and tested.

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

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

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

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

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

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

In response to COVID-19, our employees largely worked remotely in the first half of 2021 and transitioned to a hybrid model in the second half of 2021 with employees returning to the office on a periodic basis following federal, state and local guidance.

At the present, we expect employees to return to the office more regularly starting in the first quarter of 2022 subject to guidance from federal, state and local authorities.

For additional information about our response to COVID-19, refer to the section titled “Human Capital” of Part I, Item 1.

Economic Environment

The COVID-19 pandemic continued to provide meaningful challenges to the global economy in 2021.

However, U.S.

economic growth rebounded sharply as the development and deployment of vaccines and better COVID-19 treatment methods reduced the impact of the virus on economic activity.

Combined with the provision of significant fiscal stimulus and easy monetary policy, consumption and investment activity rebounded sharply from their depressed levels immediately following the onset of the pandemic.

After registering year-over-year real growth in U.S.

gross domestic product (“GDP”) of 5.7% for 2021, marking the highest real output growth since 1984, real output levels now exceed aggregate output at the end of 2019 by 3.1%.

Of note, a large share of the growth has been driven by real goods consumption, which has risen 12.1% year-over-year in 2021 as consumers opted to spend increased amounts on cars, furniture, recreational goods and similar items.

Services consumption, meanwhile, has seen improvements at a slower rate as COVID-19 restrictions have continued to limit travel and entertainment.

real economic growth slowed in 2022, with U.S.

gross domestic product (“GDP”) rising 2.1% on a year-over-year basis, well below the 5.9% recorded for 2021.

The relative slowdown was mostly a result of weaker growth reported in the first half of the year, as the economy contracted on a seasonally adjusted annualized basis in both Q1 and Q2.

In the second half of the year, economic activity proved more resilient considering the higher interest rate backdrop as GDP rose 3.2% on a seasonally adjusted annualized basis in Q3 and 2.9% in Q4.

Driving the increase in economic activity was strong consumption, inventory rebuilds, and net export growth.

Heading into 2023, however, recession risks are elevated as the impact of the Federal Reserve’s monetary policy tightening flows through to the real economy.

Residential investment continues to contract sharply, given the affordability challenges of a much higher average mortgage rate, while business fixed investments and manufacturing output have weakened.

Meanwhile, total employment growth in 2022 registered as the second strongest year on record since 1950, behind only the robust hiring seen in 2021.

In the fourth quarter alone, the labor market continued to expand at a solid pace as total nonfarm payroll employment rose by an average 274 thousand workers per month.

The unemployment rate ended the year at a historic low of 3.5%, declining 0.4 percentage points from 3.9% in December 2021.

Additionally, job openings remain elevated relative to pre-pandemic averages as labor demand far exceeded labor supply.

As a result of the strong labor demand, wage growth remained elevated all year and above levels consistent with the Federal Reserve’s 2% inflation target.

Average hourly earnings rose 4.6% over the 12 months ending in December.

However, there are some signs of labor market softening at the margin.

The average workweek declined in the fourth quarter and the pace of wage gains slowed, both suggesting employers are moderating their demand for workers.

The Employment Cost Index decelerated from a pace of 1.2% quarter-over-quarter in Q3 to 1.0% in Q4.

The slowdown in economic growth and moderation in labor demand has led to a modest decline in broader inflation, although price pressures remained at elevated levels throughout the year and broadened beyond the initial pandemic-driven dislocations.

Price pressures were driven by the service sector as providers enjoyed peak pricing power in high-demand services and higher rent and home valuations led to an increase in shelter prices.

Meanwhile, goods inflation, which accelerated in 2021 because of healthy household consumption during the depths of the pandemic, subsequently eased throughout 2022 as consumption was focused on services.

The Federal Reserve’s preferred inflation gauge, the headline Personal Consumption Expenditure Chain Price Index (“PCE”), measured 5.0% in December 2022, after peaking at 6.7% on a year-over-year basis in June 2022.

The core measure, which does not include price changes in food and energy sectors, measured 4.4%, after peaking at 5.4% in February 2022.

The Fed conducts monetary policy with a dual mandate:

full employment and price stability.

Given the strength of the labor market and the broadening inflation pressures, the Fed embarked on an aggressive tightening campaign in 2022.

The target range for the Federal Funds rate increased 425 bps from 0.0% - 0.25% in December 2021 to 4.25% - 4.50% by the end of 2022.

At the same time, the Fed transitioned from expanding their balance sheet through asset purchases in 2021 to contracting their balance sheet in 2022 by allowing assets to mature.

The asset side of the balance sheet continues to decline at a pace of

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Private investment activity, meanwhile, rose 7.7% year-over-year on improved activity in structures, equipment, and residential sectors.

In line with economic activity, the labor market has seen a meaningful improvement over the course of 2021, with employers hiring an aggregate 6.7 million workers, leading the unemployment rate to decline 2.8 percentage points.

This marks one of the largest improvements in the labor market in at least 50 years.

At the current level of 3.9 percent, the unemployment rate is below the Federal Reserve’s estimate of the non-accelerating inflation rate of unemployment (“NAIRU”) according to the latest Summary of Economic Projections published following the Federal Open Market Committee meeting held in December 2021.

This suggests that meaningful further employment gains are likely only possible at higher rates of wage compensation, although wage gains have been robust in 2021 already.

The closely tracked Employment Cost Index rose 4.0% year-over-year in the fourth quarter, up from 2.5% year-over-year in the fourth quarter of 2020.

This marks one of the fastest accelerations in wage growth in recent years as workers demanded higher wages, particularly in the highly sought after, lower paid service sector.

More broadly, the economy saw a record number of job openings in 2021 as demand for workers soared in the reopening economy.

Unfortunately for many businesses, many workers have not reengaged in the labor market during the pandemic as the labor force participation rate – the share of people either working or actively looking for a job as share of the population – remains meaningfully below rates seen ahead of the pandemic.

Although adverse demographic trends, such as an aging society, have put downward pressure on the labor force participation rate over a long period of time, the pandemic has accelerated this trend.

Inflation has been a major surprise in 2021.

Although year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”) measured 1.3% in December 2020, well below the Fed’s 2% target, headline PCE rose to 5.8% year-over-year in December 2021.

The meaningful acceleration in inflation has been driven by higher inflation in consumer goods.

For example, goods excluding foods and energy have contributed 18 basis points to the monthly changes in the consumer price index during 2021, meaningfully higher than the 0.2 basis points contribution to monthly changes in the period between 2016 and 2020.

The sharp rise in goods prices has been driven by households, who are beneficiaries of healthy balance sheets and sharply rising asset and house prices.

This has in turn led to strong demand for cars, furniture, recreational goods and similar items.

Services inflation, meanwhile, has been more muted, though sectors that saw strong demand as the pandemic receded, such as travel, and shelter inflation have been increasing.

The Fed conducts monetary policy with a dual mandate:

full employment and price stability.

As the pandemic continued to impact the U.S.

economy in meaningful ways, the Fed continued its easy monetary policy for much of the year in a successful attempt to reinvigorate the labor market following the sharp rise in unemployment in 2020.

The target range for the Federal Funds rate was kept at 0.0% - 0.25% for all of 2021, while simultaneously purchasing assets at a pace of $80 billion per month in Treasury securities and $40 billion per month in agency MBS between January and October 2021.

The Fed announced a slowdown in the pace of its asset purchases at the November Federal Open Market Committee meeting, effectively signaling a gradual end to the asset purchases.

$95 billion per month across U.S.

Treasuries and Agency MBS, almost twice the runoff rate of the prior quantitative tightening period between 2017 and 2019.

During the year ended December 31, 2022, yields on the 10-year U.S.

Treasury note rose by 60 bps primarily in the first half of the year as better economic prospects lead investors to reassess the level of interest rates.

Given high levels of inflation, the vast majority of the repricing has been driving by inflation compensation, as investors require higher compensation in times when rising inflation erodes their bond market returns.

Treasury note rose by 236 bps as market participants assessed the path of the Federal Funds rate.

The 10-year Treasury Inflation Protected Security (“TIPS”), which subtracts the expected inflation rate from the bond’s nominal yield, rose 267 bps, while longer-term inflation expectations declined slightly.

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

Treasury rate, widened gradually over the course of the year, ending the year 13 bps wider than at the end of 2020.

Treasury rate, widened significantly, ending the year 96 bps wider than December 2021.

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

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6-Month 5.14% 0.34% 0.26%

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

OIS SOFR Swaps

1-Month 4.36% 0.05% 0.07%

6-Month 4.80% 0.19% 0.06%

London Interbank Offered Rate (“LIBOR”) Transition

The United Kingdom Financial Conduct Authority (“FCA”), 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.

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These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.

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;

The firm has a plan to facilitate an orderly conversion to alternative reference rates.

The plan includes steps to evaluate exposure;

review contracts;

assess impact to our business;

process and technology and define a communication strategy with shareholders;

process and technology and outline 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.

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

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 and adequate time left to resolve.

The State of New York approved legislative solutions for contracts such as residential whole loans that are governed by New York state law, although more legislative work is needed at the federal level.

We are supportive of the potential legislative solutions at the state and federal level.

We are considering all available options with respect to our preferred stock, which include liability management actions such as tenders, calls, exchange offers, language amendments, changing the calculation agent, and/or allowing fallbacks to trigger.

As LIBOR cessation enters its final stages, we continue to remain on track with our transition plan, which requires different solutions depending on the underlying asset or liability.

federal government enacted a legislative solution for certain LIBOR contracts, which in some cases inserts fallback language into the contract or provides a determining party with a safe harbor from litigation.

The Board of Governors of the Federal Reserve promulgated rules required by this legislation.

We continue to consider all available options with respect to our preferred stock, including those available under the federal legislation.

As of December 31, 2022, we had $1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond the June 30, 2023 cessation date.

See the risk factor titled “The discontinuation of LIBOR may affect our results” in Part I, Item 1A “Risk Factors” for additional information.

Income Tax Reform

On August 16, 2022, tax legislation, informally known as the Inflation Reduction Act (the “IRA”), was enacted, and included several changes impacting U.S.

federal income tax laws applicable to corporations.

The components most relevant to our business are the imposition of a 1% excise tax on stock repurchases by publicly-traded corporations and a 15% corporate minimum tax (“CMT”) on GAAP financial statement income.

However, the new legislation explicitly excludes REITs from the law and we do not expect the CMT to apply to our TRSs.

In the event the application of the CMT were to be imposed on our TRSs, we do not expect a material impact to our operations as it would simply affect the timing of the payment of income taxes already accrued.

While technical corrections or other amendments to the IRA or administrative guidance interpreting the IRA may be forthcoming, we continue to analyze the overall effects of the IRA to our operations, our industry and the economy in general.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Results of Operations

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

Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”).

Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with GAAP, has replaced our prior presentation of Core Earnings (excluding PAA).

In addition, Core Earnings (excluding PAA) results from prior reporting periods have been relabeled Earnings Available for Distribution.

In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends.

The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods.

As such, 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 (“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.

Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income.

Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution.

Beginning with the quarter ended March 31, 2022, in light of the continued growth of our mortgage servicing rights portfolio, we enhanced our financial disclosures by separately reporting servicing income and servicing expense in our Consolidated Statements of Comprehensive Income (Loss).

Servicing income and servicing expense were previously included within Other income (loss).

As a result of this change, prior periods have been adjusted to conform to the current presentation.

In addition, beginning with the quarter ended March 31, 2022, we consolidated certain line items in our Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation.

Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives.

Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net gains (losses) on investments and other.

As a result of these changes, prior periods have been adjusted to conform to the current presentation.

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.

ANNALY CAPITAL MANAGEMENT, INC.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity