ANNALY CAPITAL MANAGEMENT INC 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of January 31, 2025, we had 578,357,904 shares of common stock issued and outstanding which were held by approxima tely 464,395 beneficial holders. The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.” Dividends We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of our taxable income in each year (subject to certain adjustments) consistent with the distribution requirements applicable to REITs. This will enable us to qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected by factors beyond our control. In addition, unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on dividends. All distributions will be made at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board may deem relevant from time to time. See also Item 1A. “Risk Factors.” No dividends can be paid on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance of our preferred stock through December 31, 2024, we have paid full cumulative dividends on our preferred stock. Share Performance Graph The following graph and table set forth certain information comparing the yearly percentage change in cumulative total return on our common stock to the cumulative total return of the Standard & Poor’s Composite 500 stock Index or S&P 500 Index, and a select group of peers operating within the mortgage REIT industry, or Performance Peer Group. The comparison is for the five-year period ended December 31, 2024and assumes the reinvestment of dividends. The graph and table assume that $100 was invested in our common stock, the S&P 500 Index and the Performance Peer Group on the last trading day of the initial year shown in the graph. In previous filings, we included the Bloomberg Mortgage REIT Index, or BBG REIT Index, in the share performance graph and table. As a result of the discontinuation of the BBG REIT Index in 2024, we have replaced the BBG REIT Index with the Performance Peer Group. The Performance Peer Group represents a group of mortgage REIT peers used by the Management Development and Compensation Committee of our Board of Directors to evaluate our performance and to inform certain elements of our executive compensation program. We believe that companies included in the Performance Peer Group have portfolios and investment strategies that most closely resemble our focus on residential mortgage assets. Companies comprising the Performance Peer Group include AGNC Investment Corp., ARMOUR Residential REIT, Inc., Chimera Investment Corporation, Dynex Capital, Inc., Ellington Financial Inc., Invesco Mortgage Capital, Inc., MFA Financial, Inc., New York Mortgage Trust, Orchid Island Capital, Inc., Redwood Trust, Inc., Rithm Capital Corp., and Two Harbors Investment Corp. The cumulative total return of the Performance Peer Group was weighted according to the respective issuer's stock market capitalization at the beginning of the performance period. For the five-year period ended December 31, 2023, an investment of $100 at the beginning of the period would have resulted in a value of $93 in our common stock, $98 in the BBG REIT Index, and $85 in the Performance Peer Group. 45 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities Five-Year Share Performance 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 Annaly Capital Management, Inc. 100 102 105 83 87 94 S&P 500 Index 100 118 152 125 157 197 Performance Peer Group 100 68 79 57 67 71 The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither the accuracy nor completeness can be guaranteed. The historical information set forth above is not necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share performance. The above performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act or to the liabilities of Section 18 of the Securities Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate it by reference into such a filing. Share Repurchase In January 2025, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock through December 31, 2029 (the “Current Common Stock Repurchase Program”). The Current Common Stock Repurchase Program replaces our previous $1.5 billion share repurchase program, which expired on December 31, 2024 (the “Prior Common Stock Repurchase Program”). No shares were repurchased with respect to the Prior Common Stock Repurchase Program during the year ended December 31, 2024. Purchases made pursuant to the Current Common 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 common stock and the program may be suspended or discontinued at our discretion without prior notice. 46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities In January 2025, we announced that our Board authorized a repurchase plan for all of our existing outstanding Preferred Stock (as defined below, the “Current 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 Current Preferred Stock that may be repurchased by us pursuant to the Current Preferred Stock Repurchase Program, as of December 31, 2024, was approximately $1.6 billion. The Current Preferred Stock Repurchase Program replaces our previous repurchase plan for all of our existing outstanding Preferred Stock, which expired on December 31, 2024 (the “Prior Preferred Stock Repurchase Program”). The Current Preferred Stock Repurchase Program became effective on January 1, 2025, and will expire on December 31, 2029. No shares were repurchased with respect to the Prior Preferred Stock Repurchase Program during the year ended December 31, 2024. Purchases made pursuant to the Current 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. 47 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 6. Selected Financial Data ITEM 6. [Reserved] 48 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 7 for definitions of commonly used terms in this annual report on Form 10-K. This section of our Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2023. 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 51 Business Environment 51 Economic Environment 52 Results of Operations 53 Net Income (Loss) Summary 54 Non-GAAP Financial Measures 55 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 55 Premium Amortization Expense 57 Economic Leverage and Economic Capital Ratios 57 Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA) 58 Experienced and Projected Long-term CPR 59 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities 60 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 61 Other Income (Loss) 62 General and Administrative Expenses 62 Return on Average Equity 63 Unrealized Gains and Losses - Available-for-Sale Investments 63 Financial Condition 64 Residential Securities 64 Contractual Obligations 66 Commitments and Contractual Obligations with Unconsolidated Entities 67 Capital Management 67 Stockholders’ Equity 67 Capital Stock 67 Leverage and Capital 68 Risk Management 69 Risk Appetite 69 Governance 69 Description of Risks 71 Liquidity and Funding Risk Management 71 Funding 71 Excess Liquidity 73 Maturity Profile 74 Stress Testing 75 Liquidity Management Policies 75 Investment/Market Risk Management 75 Credit Risk Management 76 Counterparty Risk Management 77 Operational Risk Management 78 Compliance, Regulatory and Legal Risk Management 79 Critical Accounting Estimates 79 Valuation of Financial Instruments 79 Residential Securities 79 Residential Mortgage Loans 80 MSR 80 Interest Rate Swaps 80 Revenue Recognition 81 Consolidation of Variable Interest Entities 81 Use of Estimates 81 Glossary of Terms 82 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Overview 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. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our 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 three investment groups are primarily comprised of the following: Investment Groups Description Annaly Agency Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including Agency commercial MBS. Annaly Residential Credit Group Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets. Annaly Mortgage Servicing Rights Group Invests in mortgage servicing rights (“MSR”), which provide the right to service residential mortgage loans in exchange for a portion of the interest payments made on the loans. For a full discussion of our business, refer to the section titled “Business Overview” of Part I, Item 1. “Business” and see the Note titled "Segments" in the Notes to the Consolidated Financial Statements included in Item 15. "Exhibits, Financial Statement Schedules." Business Environment U.S. real economic growth remained at its above-trend pace in 2024, marking a second consecutive year of strong U.S. economic growth despite continued elevated interest rates. The strength of the U.S. economy was primarily driven by consumption, as individuals benefitted from robust wage growth and a moderation of inflation pressures. Government spending also supported economic growth, while investment activity contributed somewhat less than in 2023. Separately, the U.S. economy broadly appears to have benefitted from recent strong immigration flows, which helped balance labor market supply and demand, and improved productivity gains. Financial markets observed a constructive 2024, with equities recording strong returns given the healthy economic picture, best seen in the 25.0% total return for the S&P 500 Index. Interest rates, however, remained volatile throughout the year, though were generally more rangebound than in 2023. Ten-year Treasury yields traded in a range between 3.6% and 4.7%, generally narrower than in 2023, when the range was 3.3% to 5.0%. Nonetheless, interest rates generally remained elevated relative to the period between the 2008 financial crisis and the 2020 pandemic, which has led to increased speculation that the lower interest rates in that period were more of an outlier than a new normal. For now, the U.S. economy remains strong, which in turn suggests healthy economic growth can occur even at these higher interest rate levels. The Federal Reserve (“the Fed”) lowered the Federal Funds Target Rate (“Fed Funds Rate”) in the second half of 2024. As inflation rates fell from their peak in the summer of 2022 and hiring slowed over the summer months, the risk that a Fed Funds Rate at a peak of 5.25-5.50% would unduly constrain economic growth and the labor market rose. Consequently, the Fed lowered the Fed Funds Rate by 1% over the course of three meetings between September and December, even though inflation remained above 2% annual rates. Given continued strength in both inflation and economic activity, Fed officials have signaled a more gradual approach going forward, waiting for further inflation progress to lower the rate further. Regarding their balance sheet policy, the Fed slowed the decline in their securities portfolio mid-year by reducing the cap on Treasury securities runoff from $60 billion per month to $25 billion. Combined with the decline in their mortgage-backed securities portfolio, the Fed’s security portfolio declined $668 billion in 2024 and continues to decline at a $60 billion per month pace. Of note, given the lower Fed Funds Rate and relatively less movement in long-term Treasury rates, the yield curve steepened, with the 2-year 10-year Treasury spread, the difference between yields of those maturities, turning positive for the first time in over two years. In addition, long-term Treasuries appeared increasingly driven by investors’ increased demand for compensation to hold longer maturity securities, with rising term premia driving much of the increase in long-term Treasury yields seen in 2024. Additionally, the U.S. presidential election outcome amplified the rise in term premia, as expectations for a permanent extension of the 2017 “Tax Cuts and Jobs Act” was estimated to further increase the U.S. budget deficit according to estimates by the Congressional Budget Office. Meanwhile, residential investment slowed as high mortgage rates curbed demand for housing and housing construction, particularly in the second half of the year. In this economic environment, the housing market saw limited changes in aggregate as inventories and activity remain subdued relative to the pre-pandemic averages, which supported home prices. National home prices rose roughly 3.0% in 2024. Historically low affordability for prospective homeowners, as mortgage rates remained above 51 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 6.0% for nearly the entire year and existing homeowners’ inability to move homes without a meaningful increase in housing costs (the so called “lock in effect”), have supported home prices at low levels of sales turnover. However, there has been increased regional differentiation, with larger growth in supply in states and cities in the Southern and Western United States, which in turn saw price changes below the national average. Areas of home price weakness generally correspond to areas with easier zoning restrictions and greater ability to build new homes, though many of them also saw more notable price increases following the pandemic driven by housing shortages and outsized population growth. In this environment, Annaly generated an 11.9% economic return in 2024, underscoring the efficacy of our diversified housing finance model and our disciplined portfolio and risk management. We proactively managed our leverage profile throughout the year, reducing aggregate leverage modestly from 5.7x at the end of 2023 to 5.5x at the end of 2024. Similar to 2023, a portion of the reduced leverage is driven by further diversification into the Residential Credit and mortgage servicing rights (“MSR”) businesses, which now represent 2 percentage points more of our capital than at year end 2023. Both businesses are less levered than Agency MBS. Finally, as a result of constructive financial markets, we were able to raise $1.6 billion in accretive equity capital over the course of the year. Given the increased capital base, Annaly’s aggregate portfolio grew to $80.9 billion as of December 31, 2024, up roughly $6.5 billion relative to the same date a year earlier. Of note, we grew assets and capital in each of our three businesses. The Agency MBS portfolio grew its assets to $70.6 billion as we added a modest amount of assets across the major asset classes in the portfolio. The increases were focused on our continued purchases of prepayment protected Agency MBS specified pools in production coupons, which added attractive cash flows that also offered prepayment protection. In addition, Annaly began to hold a larger balance of “to be announced” (“TBA”) securities after holding a modestly negative balance at the end of 2023, though at $3.1 billion, our TBA position remains small relative to recent years. This smaller share is largely a function of the continued unattractive financing conditions in the TBA market relative to repurchase agreement (“repo”) funding of specified pools. In addition, larger loan sizes have left TBAs with elevated prepayment risks. Finally, Annaly modestly increased our portfolio of Agency commercial mortgage-backed securities to $3.3 billion market value as the asset class continues to offer an attractive stable cash flow in volatile interest rate markets. Our Residential Credit business portfolio continued to grow strongly driven by Annaly’s residential whole loan acquisition strategy, through which the business acquired $13 billion in loans, predominantly through our correspondent channel. The strategy continued to allow us to control all aspects of the loan making process, including asset selection, counterparties and loss mitigation. Extracting favorable economics and long-term non-recourse financing, our Residential Credit business issued a record 21 securitizations under Annaly’s Onslow Bay (“OBX”) shelf in 2024, worth a total of $11.0 billion. Given the stable housing market, a strong network of counterparties and robust demand for residential credit assets, we expect to continue to grow the strategy in 2025. Finally, Annaly also continued to grow its MSR strategy, further increasing assets through purchases predominantly of low-coupon bulk MSR packages, growing the portfolio to $3.3 billion market value. Annaly continued to opportunistically buy MSR bulk packages, which generally saw healthy demand into somewhat lower trading volumes than in 2023.Our strategy continued to focus on predominantly low coupon, high quality MSR. The current weighted average note rate of the MSR portfolio is 3.20%, up only slightly from a year ago and well below prevailing mortgage rates at the end of 2024. Economic Environment In 2024, the U.S. economy performed strongly, with the gross domestic product (“GDP”) rising by 2.8% on a year-over-year (“yoy”) basis. This marks the second consecutive year of robust growth, following a 2.9% increase in real GDP in 2023, despite elevated interest rates. This economic resilience was driven by a strong income growth and sound financial market performance, which generated wealth gains across households. Consequently, consumer spending made up a majority of U.S. aggregate demand in 2024. Personal consumption expenditures rose at a 5.3% annual rate per month in 2024, down from 6.4% in 2024, though slower price gains resulted in stronger inflation-adjusted consumption than in 2023. The labor force benefited from stable employment and sustained wage growth throughout 2024, with the supply and demand of the labor market now in better balance compared to the end of 2023. Monthly employment growth slowed but remained in healthy territory, with the economy adding 186,000 in total nonfarm payroll jobs per month in 2024, compared to 251,000 per month in 2023. The unemployment rate ended the year at 4.1%, increasing only 0.3 percentage points relative to a year earlier, and has remained below 4.3% since November 2021. Job openings trended lower but remained elevated relative to pre-pandemic averages, while layoffs stayed low. As a result of the more balanced labor market, wage growth – as measured by the Employment Cost Index - decelerated from a pace of 4.3% yoy at the end of 2023 to a still healthy 3.8% yoy at the end of 2024. Price pressures moderated throughout 2024, but progress has been slow and inflation is still at levels above the Fed’s 2% target. The headline Personal Consumption Expenditure Chain Price Index (“PCE”), the Fed’s preferred inflation gauge, measured 2.6% in December 2024, modestly slower than the 2.7% pace in December 2023. Notably, energy prices saw a decline, 52 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis particularly in gasoline and fuel. The core measure, which does not include price changes in food and energy sectors, measured 2.8% year-over year, also slightly slower than at the end of 2023. Measures of inflation have shown uneven progress in the services sector, with shelter inflation slowing at a very gradual pace and remaining above pre-pandemic averages. Additionally, survey measures of short-run inflation expectations continued to decline in 2024, while longer-term inflation expectations appear well anchored. The inflation outlook for 2025 is uncertain, as many policy proposals from President Donald Trump’s new administration – such as expansionary fiscal policy, immigration restrictions, and tariffs – indicate potential inflationary pressures. U.S Treasury yields moved higher given the resilience of the U.S. economy and elevated supply of Treasury debt hitting the market during the year. The yield on the 10-year Treasury note ended the year 69 basis points (“bps”) higher at 4.57%, despite the 100 bps move lower in the Fed Funds rate. The 10-year Treasury Inflation Protected Security (“TIPS”), which subtracts the expected inflation rate from the bond’s nominal yield, rose 52 bps as market participants revised upward their estimate of the Fed’s neutral rate in light of the resilient macroeconomy. Meanwhile, the mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, widened slightly, ending the year 11 bps tighter than in December 2023. The following table below presents interest rates and spreads at each date presented: As of December 31, 2024 2023 2022 30-Year mortgage current coupon 5.83% 5.25% 5.39% Mortgage basis 126 bps 137 bps 152 bps 10-Year U.S. Treasury rate 4.57% 3.88% 3.87% OIS SOFR Swaps 1-Month 4.32% 5.35% 4.36% 6-Month 4.25% 5.15% 4.80% 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. 53 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES