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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: December 31, 2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO
_________________
COMMISSION FILE NUMBER: 1-13447
ANNALY CAPITAL MANAGEMENT INC
(Exact Name of Registrant as Specified in its Charter)
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Maryland
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22-3479661 |
(State or other jurisdiction of incorporation or
organization) |
(IRS Employer Identification No.) |
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1211 Avenue of the Americas |
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New York, |
New York
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10036 |
(Address of principal executive offices) |
(Zip Code) |
(212) 696-0100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01 per share |
NLY |
New York Stock Exchange |
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6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable
Preferred Stock |
NLY.F |
New York Stock Exchange |
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable
Preferred Stock |
NLY.G |
New York Stock Exchange |
6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable
Preferred Stock |
NLY.I |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
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No
☐
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes ☐
No
☑
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
☑
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
☑
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer |
☑ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
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Emerging growth company |
☐ |
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Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report.
☑
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes
☐
No
☑
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to
§240.10D-1(b).
☐
At June 30, 2022, the aggregate market value of the voting
common stock held by non-affiliates of the registrant was
approximately $9.5 billion, based on the closing sales price of the
registrant’s common stock on such date as reported on the New York
Stock Exchange.
The number of shares of the registrant’s common stock outstanding
on January 31, 2023 was 493,615,144.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement
pursuant to Regulation 14A within 120 days of the end of the fiscal
year ended December 31, 2022. Portions of such proxy
statement are incorporated by reference into Part III of this Form
10-K.
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ANNALY CAPITAL MANAGEMENT, INC.
2022 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Special Note Regarding Forward-Looking Statements
This presentation, other written or oral communications, and our
public documents to which we refer 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. Such
statements include those relating to the Company’s future
performance, macro outlook, the interest rate and credit
environments, tax reform and future opportunities. Actual results
could differ materially from those set forth in forward-looking
statements due to a variety of factors, including, but not limited
to, changes in interest rates; changes in the yield curve; changes
in prepayment rates; the availability of mortgage-backed securities
(“MBS”) and other securities for purchase; the availability of
financing and, if available, the terms of any financing; changes in
the market value of the Company’s assets; changes in business
conditions and the general economy; the Company’s ability to grow
its residential credit business; the Company's ability to grow its
mortgage servicing rights business; credit risks related to the
Company’s investments in credit risk transfer securities and
residential mortgage-backed securities and related residential
mortgage credit assets; risks related to investments in mortgage
servicing rights; the Company’s ability to consummate any
contemplated investment opportunities; changes in government
regulations or policy affecting the Company’s business; the
Company’s ability to maintain its qualification as a REIT for U.S.
federal income tax purposes; the Company’s ability to maintain its
exemption from registration under the Investment Company Act of
1940; operational risks or risk management failures by us or
critical third parties, including cybersecurity incidents; and
risks and uncertainties related to the COVID-19 pandemic, including
as related to adverse economic conditions on real estate-related
assets and financing conditions. For a discussion of the risks and
uncertainties which could cause actual results to differ from those
contained in the forward-looking statements, see “Risk Factors” in
our most recent Annual Report on Form 10-K and any subsequent
Quarterly Reports on Form 10-Q. The Company does not undertake, and
specifically disclaims 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, except as required by law.
Website and Social Media Disclosure
We use our website (www.annaly.com) and LinkedIn account
(www.linkedin.com/company/annaly-capital-management) as channels of
distribution of company information. The information we post
through these channels may be deemed material. Accordingly,
investors should monitor these channels, in addition to following
our press releases, SEC filings and public conference calls and
webcasts. In addition, you may automatically receive email alerts
and other information about Annaly when you enroll your email
address by visiting the “Investors” section of our website, then
clicking on “Investor Resources” and selecting “Email Alerts” to
complete the email notification form. Our website, any alerts and
social media channels are not incorporated into this annual report
on Form 10-K.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
PART I
“Annaly,” “we,” “us,” or “our” refers to Annaly Capital Management,
Inc. and our wholly-owned subsidiaries, 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 Part II, Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” for definitions of
certain of the commonly used terms in this annual report on Form
10-K.
The following description of our business should be read in
conjunction with the Consolidated Financial Statements and the
related Notes thereto, and the information set forth under the
heading “Special Note Regarding Forward-Looking Statements” in Item
7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
INDEX TO ITEM 1. BUSINESS
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Business Overview
Introduction
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 real estate investment trust (“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.
We believe that our business objectives are supported by our size
and conservative financial posture relative to the industry, the
extensive experience of our employees, the diversity of our
investment strategy, a comprehensive risk management approach, the
availability and diversification of financing sources and our
operational efficiencies.
Investment Groups
Our three investment groups are primarily comprised of the
following:
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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 mortgage-backed
securities. |
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 MSR, which provide the right to service residential
mortgage loans in exchange for a portion of the interest payments
made on the loans. |
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In April 2022, we entered into a definitive agreement to sell
substantially all of the assets that comprise our Middle Market
Lending (“MML”) portfolio, including assets held on balance sheet
as well as assets managed for third parties. During the year ended
December 31, 2022, the assets comprising the MML portfolio were
legally transferred. For additional information about this
transaction, see the Note titled “Sale of Middle Market Lending
Portfolio” in the Notes to the Consolidated Financial Statements
included in Item 15. “Exhibits, Financial Statement
Schedules.”
In March 2021, we entered into a definitive agreement to sell and
exit our Commercial Real Estate (“CRE”) business with the platform
and the significant majority of the assets transferred during the
year ended December 31, 2021. During the year ended December 31,
2022, the remaining CRE assets and associated liabilities were
transferred. For additional information about this transaction, see
the Note titled “Sale of Commercial Real Estate Business” in the
Notes to the Consolidated Financial Statements included in Item 15.
“Exhibits, Financial Statement Schedules.”
Operating Platform
Our operating platform reflects our investments in systems,
infrastructure and personnel. Our technology investments have led
to the development of proprietary portfolio analytics, financial
and capital allocation modeling, portfolio cash and accounting
sub-ledger systems, and other risk and reporting tools, which,
coupled with cutting-edge digital transformation applications,
support the diversification and operating efficiency of our
business and our ability to implement new investment strategies.
Our operating platform supports our investments in Agency assets as
well as residential credit assets, commercial real estate assets,
residential mortgage loans, and mortgage servicing rights. We
believe that the diversity of our investment alternatives provides
us the flexibility to adapt to changes in market conditions and to
take advantage of potential opportunities.
Business and Investment Strategy
Shared Capital Model
Our company is comprised of three investment groups, each of which
has multiple investment options to capitalize on attractive
relative returns and market opportunities. In aggregate, we
maintain numerous investment options across our investment groups.
Our shared capital model drives our capital allocation strategy
allowing us to rotate our investments based on relative value while
also managing risk.
Strategic Relationships
A key element of our strategy is to establish and grow strategic
relationships with industry leading partners in order to develop
and broaden access to quality originations flow as well as to
leverage third party operations to efficiently manage
operating
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
costs, all in an effort to generate attractive risk adjusted
returns for our shareholders. Additionally, we have attracted
capital partners to our business, augmenting our public capital
markets efforts, which has resulted in increased scale without
sacrificing balance sheet liquidity. Certain of our strategic
relationships also afford us the opportunity to support communities
through socially responsible investing.
We have created multiple strategic and capital partnerships across
our investment groups including the following:
–Annaly
Residential Credit Group has established relationships with key
mortgage loan originators and aggregators including well-known
money center banks, allowing us to efficiently source proprietary
originations suited to our risk parameters.
–We
have partnered with GIC Private Limited (“GIC”), a leading
Sovereign Wealth Fund, through the creation of a joint venture with
the purpose of investing in residential credit assets, including
newly-originated residential loans and securities issued by our
subsidiaries.
–We
have partnered with Capital Impact Partners, a national community
development financial institution, to create a social impact joint
venture supporting projects in underserved communities across the
country.
–We
have partnered with Fifth Wall Ventures, the largest venture
capital firm focused on technology for the real estate industry,
through a commitment to invest in their funds that target
investments in North American early- and late-stage real estate
software and marketplace companies. The partnership aims to
identify innovative platforms and services that provide
efficiencies across our core investment strategies.
Our Portfolio and Capital Allocation Policy
Under our capital allocation policy and subject to oversight by our
Board of Directors (“Board”), we may allocate our investments
within our target asset classes as we determine to be appropriate
from time to time.
Our Board may adopt changes to our capital allocation policy and
targeted assets at its discretion.
The nature of our assets and our operations are intended to meet
our REIT qualification requirements and our exemption from
registration as an investment company under the Investment Company
Act of 1940, as amended (“Investment Company Act”).
Our portfolio composition and capital allocation at December 31,
2022 and 2021 were as follows:
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December 31, 2022 |
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December 31, 2021 |
Asset Classes |
Percentage of Portfolio |
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Capital
Allocation
(1)(3)
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Percentage of Portfolio |
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Capital
Allocation
(1)(3)
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Agency
(2)(3)
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90% |
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66% |
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91% |
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63% |
Residential Credit
(3)
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7% |
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19% |
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5% |
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24% |
MSR |
2% |
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14% |
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1% |
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5% |
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Commercial Real Estate
(4)
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1% |
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1% |
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1% |
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—% |
Corporate Debt
(5)
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—% |
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—% |
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2% |
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8% |
(1)
Capital allocation for each of the investment strategies is
calculated as the difference between each of the investment
strategy’s allocated assets and liabilities. It represents the
percentage of equity allocated to each category. Dedicated capital
allocations as of December 31, 2021 assume capital related to held
for sale assets will be redeployed with the Agency business.
Dedicated capital allocations as of December 31, 2021 exclude
commercial real estate assets.
(2)
Includes to-be-announced forward contracts (“TBAs”).
(3)
Assets exclude assets transferred or pledged to securitization
vehicles, include TBA purchase contracts (market value), unsettled
MSR commitments, CMBX derivatives (market value), and retained
securities that are eliminated in consolidation and are shown net
of participations issued.
(4)
During the year ended December 31, 2021, a significant majority of
assets were transferred in connection with a definitive agreement
to sell and exit our CRE business. During the year ended December
31, 2022, the remaining CRE assets and liabilities were
transferred.
(5)
During the year ended December 31, 2022, we sold all of the assets
that comprised the MML portfolio.
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Risk Appetite
We maintain a firm-wide risk appetite statement which 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. We engage in risk activities based on our core
expertise that aim to enhance value for our stockholders. Our
activities focus on income generation and capital preservation
through proactive portfolio management, supported by a conservative
liquidity and leverage posture.
The risk appetite statement asserts the following key risk
parameters to guide our investment management
activities:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
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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 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. |
Interest Rate Risk |
We will seek to manage interest rate risk to protect the portfolio
from adverse rate movements utilizing derivative instruments
targeting both income and capital preservation. |
Credit Risk |
We will seek to manage credit risk by making investments which
conform within our specific investment policy parameters and
optimize risk-adjusted returns. |
Capital Preservation |
We will seek to protect our capital base through disciplined risk
management practices. |
Operational Risk |
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. |
Our Board has reviewed and approved the investment and operating
policies and strategies that support our risk appetite statement
set forth in this Form 10-K. Our Board has the power to modify or
waive these policies and strategies to the extent that our Board,
in its discretion, determines that the modification or waiver is in
our best interests. Among other factors, market developments that
affect our policies and strategies or that change our assessment of
the market may cause our Board to revise our policies and
strategies.
We may seek to expand our capital base in order to further increase
our ability to acquire new and different types of assets when the
potential returns from new investments appear attractive relative
to the targeted risk-adjusted returns. We may in the future acquire
assets or companies by offering our debt or equity securities in
exchange for such opportunities.
Target Assets
Within the confines of the risk appetite statement, we seek to
generate the highest risk-adjusted returns on capital invested,
after consideration of the following:
•The
amount, nature and variability of anticipated cash flows from the
asset across a variety of interest rate, yield, spread, financing
cost, credit loss and prepayment scenarios;
•The
liquidity of the asset;
•The
ability to pledge the asset to secure collateralized
borrowings;
•When
applicable, the credit of the underlying borrower;
•The
costs of financing, hedging and managing the asset;
•The
impact of the asset to our REIT compliance and our exemption from
registration under the Investment Company Act; and
•The
capital and operational requirements associated with the purchase
and financing of the asset.
We target the purchase and sale of the assets listed below as part
of our investment strategy. Our targeted assets and asset
acquisition strategy may change over time as market conditions
change and as our business evolves.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
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Investment Group |
Targeted Asset Class |
Description |
Annaly Agency Group |
Agency mortgage-backed securities |
Agency pass-through certificates issued or guaranteed by Agencies.
Other Agency MBS include collateralized mortgage obligations
(“CMOs”), interest-only securities and inverse floaters |
To-be-announced forward contracts (“TBAs”) |
Forward contracts for Agency pass-through certificates |
Agency commercial mortgage-backed securities |
Pass-through certificates collateralized by commercial mortgages
guaranteed by the Agencies |
Annaly Residential Credit Group |
Residential mortgage loans |
Residential mortgage loans that are not guaranteed by the
Agencies |
Residential mortgage-backed securities |
Securities collateralized by pools of residential loans that are
not guaranteed by one of the Agencies |
Agency or private label credit risk transfer securities
(“CRT”) |
Risk sharing transactions issued by Freddie Mac and Fannie Mae and
similarly structured transactions arranged by third party market
participants, designed to synthetically transfer mortgage credit
risk to private investors |
Annaly Mortgage Servicing Rights Group |
Mortgage Servicing Rights (“MSR”) |
Rights to service a pool of residential mortgage loans in exchange
for a portion of the interest payments made on the
loans |
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We believe that future interest rates and mortgage prepayment rates
are very difficult to predict. Therefore, we seek to acquire assets
which we believe will provide attractive returns over a broad range
of interest rate and prepayment scenarios.
Capital Structure and Financing
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.
We finance our Agency mortgage-backed securities and residential
credit investments primarily with repurchase agreements. We seek to
diversify our exposure and limit concentrations by entering into
repurchase agreements with multiple counterparties. We enter into
repurchase agreements with broker-dealers, commercial banks and
other lenders that typically offer this type of financing. We enter
into collateralized borrowings with financial institutions meeting
internal credit standards and we monitor the financial condition of
these institutions on a regular basis. At December 31, 2022, we had
$59.5 billion of repurchase agreements outstanding.
Additionally, our wholly-owned subsidiary, Arcola Securities, Inc.
(“Arcola”), provides direct access to third party funding as a
member broker-dealer of the Financial Industry Regulatory Authority
(“FINRA”). As an eligible institution, Arcola also raises funds
through the General Collateral Finance Repo service offered by the
Fixed Income Clearing Corporation (“FICC”), with FICC acting as the
central counterparty. Arcola provides us greater depth and
diversity of repurchase agreement funding while also limiting our
counterparty exposure.
To reduce our liquidity risk we maintain a laddered approach to our
repurchase agreements. At December 31, 2022, the weighted average
days to maturity was 27 days.
We also finance our investments in residential mortgage loans
through the issuance of securitization transactions sponsored by
our wholly-owned subsidiary Onslow Bay Financial LLC (“Onslow Bay”)
under the Onslow Bay private-label securitization program (“OBX”).
We are a programmatic securitization sponsor of new origination,
residential whole loans with 39 deals comprising $15.5 billion of
issuance since the beginning of 2018. During the year ended
December 31, 2022, we issued 16 OBX securitizations backed by $6.2
billion of residential whole loans.
We utilize leverage to enhance the risk-adjusted returns generated
for our stockholders. We generally expect to maintain an economic
leverage ratio of no greater than 10:1 considerate of our overall
capital allocation framework. This 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 mix of assets,
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, lastly, our
assessment of domestic and international market conditions. Since
the financial crisis beginning in 2007, we have maintained an
economic leverage ratio below 8:1, and since the Coronavirus
Disease 2019 (“COVID-19”) pandemic began an economic leverage ratio
closer to or below 7:1. For
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
purposes of calculating this ratio, our economic leverage ratio is
equal to the sum of Recourse Debt, cost basis of TBA and CMBX
derivatives outstanding, and net forward purchases (sales) of
investments divided by total equity.
Our target economic leverage ratio is determined under our capital
management policy. Should our actual economic leverage ratio
increase above the target level, we will consider appropriate
measures. Our actions may include asset sales, changes in
asset mix, reductions in asset purchases or originations, issuance
of capital or other capital enhancing or risk reduction
strategies.
The following table presents our leverage and capital ratios as of
the periods presented.
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December 31, 2022 |
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December 31, 2021 |
GAAP leverage ratio |
6.0:1 |
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4.7:1 |
Economic leverage ratio
*
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6.3:1 |
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5.7:1 |
GAAP capital ratio |
13.9% |
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17.2% |
Economic capital ratio
*
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13.4% |
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14.4% |
* Represents a non-GAAP financial measure. Refer to the “Non-GAAP
Financial Measures” section for additional
information.
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Operating Platform
We maintain a flexible and scalable operating platform to support
the management and maintenance of our diverse asset portfolio. We
have invested in our infrastructure to enhance resiliency,
efficiency, cybersecurity and scalability while also ensuring
coverage of our target assets. Our information technology
applications span the portfolio life-cycle including pre-trade
analysis, trade execution and capture, trade settlement and
financing, monitoring, management and financial accounting and
reporting.
Technology applications also support our control functions
including risk, compliance, and middle- and back-offices. We have
added breadth to our operating platform to accommodate diverse
asset classes and drive automation-based efficiencies. Our business
operations include a centralized collateral management function
that permits in-house settlement and self-clearing, thereby
creating greater control and management of our collateral. Through
technology, we have also incorporated exception based processing,
critical data assurance and paperless workflows. Our infrastructure
investment has driven operating efficiencies while expanding the
platform. Routine disaster recovery and penetration testing
enhances our systems resiliency, security and recovery of critical
systems throughout the computing estate.
Risk Management
Risk is a natural element of our business. Effective risk
management is of critical importance to our business strategy. The
objective of our risk management framework is to identify, measure,
monitor and control the key risks to which we are subject. Our
approach to risk management is comprehensive and has been designed
to foster a holistic view of risk. For a full discussion of our
risk management process and policies please refer to the section
titled “Risk Management” of Part II, Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Information about our Executive Officers
The following table sets forth certain information as of February
16, 2023 concerning our executive officers:
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Name |
Age |
Title |
David L. Finkelstein |
50 |
Chief Executive Officer and Chief Investment Officer |
Serena Wolfe |
43 |
Chief Financial Officer |
Steven F. Campbell |
50 |
President and Chief Operating Officer |
Anthony C. Green |
48 |
Chief Corporate Officer, Chief Legal Officer and
Secretary |
David L. Finkelstein has served as the Chief Executive Officer of
Annaly since March 2020 and Chief Investment Officer since November
2022. Mr. Finkelstein previously served as President of Annaly from
March 2020 until December 2022 and Annaly’s Chief Investment
Officer from November 2016 until December 2021. Prior to that, Mr.
Finkelstein served as Annaly’s Chief Investment Officer, Agency and
RMBS beginning in February 2015 and as Annaly’s Head of Agency
Trading beginning in August 2013. Prior to joining Annaly in
2013, Mr. Finkelstein served for four years as an Officer in the
Markets Group of the Federal Reserve Bank of New York where he was
the primary strategist and policy advisor for the MBS
purchase
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
program. Mr. Finkelstein has over 25 years of experience in fixed
income investments. Prior to the Federal Reserve Bank of New York,
Mr. Finkelstein held Agency MBS trading positions at Salomon Smith
Barney, Citigroup Inc. and Barclays PLC. Mr. Finkelstein is a
member of the Treasury Market Practices Group sponsored by the
Federal Reserve Bank of New York. Mr. Finkelstein received his B.A.
in Business Administration from the University of Washington and
his M.B.A. from the University of Chicago, Booth School of
Business. Mr. Finkelstein also holds the Chartered Financial
Analyst® designation.
Serena Wolfe has served as Chief Financial Officer of Annaly since
December 2019. Prior to joining Annaly in 2019, Ms. Wolfe served as
a Partner at Ernst & Young (“EY”) since 2011 and as its Central
Region Real Estate Hospitality & Construction (“RHC”) leader
from 2017 to November 2019, managing the go-to-market efforts and
client relationships across the sector. Ms. Wolfe was previously
also EY’s Global RHC Assurance Leader. Ms. Wolfe practiced with EY
for over 20 years, including six years with EY Australia and 16
years with the U.S. practice. Ms. Wolfe currently serves on the
boards of Berkshire Grey, Inc. and Doma Holdings, Inc. Ms. Wolfe
graduated from the University of Queensland with a Bachelor of
Commerce in Accounting. She is a Certified Public Accountant
in the states of New York, California, Illinois
and Pennsylvania.
Steven F. Campbell has served as President of Annaly since December
2022 and Chief Operating Officer of Annaly since June 2020. Prior
to these positions, Mr. Campbell served in a number of other senior
roles at Annaly, including as Head of Business Operations from
September 2019 to June 2020, Head of Credit Operations and
Enterprise Risk from February 2018 to September 2019, Chief
Operating Officer of Annaly Commercial Real Estate Group from
December 2016 to February 2018 and Head of Credit Strategy from
April 2015 to February 2018. Mr. Campbell has over 25 years of
experience in financial services. Prior to joining Annaly in 2015,
Mr. Campbell held various roles over six years at Fortress
Investment Group LLC, including serving as a Managing Director in
the Credit Funds business. Prior to that, Mr. Campbell held
positions at General Electric Capital Corporation and D.B. Zwirn
& Co., L.P. with a focus on credit and debt restructuring. Mr.
Campbell received a B.B.A. from the University of Notre Dame and a
M.B.A. from the University of Chicago, Booth School of
Business.
Anthony C. Green has served as Chief Corporate Officer of Annaly
since January 2019 and as Chief Legal Officer and Secretary of
Annaly since March 2017. Mr. Green previously served as Annaly’s
Deputy General Counsel from 2009 until February 2017. Prior to
joining Annaly, Mr. Green was a partner in the Corporate,
Securities, Mergers & Acquisitions Group at the law firm
K&L Gates LLP. Mr. Green has over 20 years of experience in
corporate and securities law. Mr. Green holds a B.A. in Economics
and Political Science from the University of Pennsylvania and a
J.D. and LL.M. in International and Comparative Law from Cornell
Law School.
Human Capital
Our Human Capital team oversees our company’s workforce management
to ensure its objectives are strategically integrated with the
firm’s goals and business plans. We proactively review human
capital management best practices on an ongoing basis to
continually enhance our employee experience. In addition, the
Management Development and Compensation (“MDC”) Committee of the
Board provides independent oversight of our policies and strategies
related to human capital management. Further, the Chair of the MDC
Committee liaises on certain human capital topics with the Chair of
the Corporate Responsibility Committee of the Board as
appropriate.
As of December 31, 2022, we had 161 employees.
Our People and Culture
Our employees are the driving force behind Annaly’s success, and we
are committed to promoting their well-being, engagement, and
development to help them reach their highest potential. Our culture
is focused on fostering a diverse, inclusive and rewarding work
environment for all employees, with ongoing opportunities for
career development, wellness support, and empowerment.
Our culture is built on five core values: ownership, humility,
accountability, collaboration, and diversity, equity and inclusion.
These values are embedded in our professional and personal conduct
and are crucial to how we operate our business. All employees are
responsible for upholding these values, which form the bedrock of
our culture and are vital to the continued success of our company.
Guided by these values, we are committed to attracting, developing
and retaining the best talent, with diverse experiences,
perspectives and backgrounds.
We utilize employee surveys, including an engagement survey, to
create open and honest feedback channels that foster our ability to
actively involve our employees in the design and evolution of our
culture, enhance our overall productivity, and mitigate risk. Our
leaders review and incorporate survey feedback to increase employee
engagement and drive positive changes throughout our company. We
remain committed to maintaining an environment of consistent
feedback as we strive for high employment satisfaction
levels.
Diversity, Equity & Inclusion
The diversity of our employees enables our company to cultivate
innovation, fresh perspectives and agility. Diversity, equity and
inclusion are essential tenets of our corporate culture. Our Human
Capital team, in coordination with an Inclusion
Support
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
Committee of Executive Sponsors, is responsible for overseeing and
continuing to improve our diversity, equity and inclusion
initiatives.
We are committed to promoting diversity, including gender and
racial/ethnic diversity, across all levels of our company. With 53%
of total employees in 2022 identifying as either female or
racially/ethnically diverse, we are driven by the belief that
having a diverse group of employees supports our continued
long-term growth. Our seven employee network groups, which include
the Women’s Interactive Network (“WIN”), the Asian American and
Pacific Islander Employee Network, the Black Employee Network, the
Latin American Employee Network, the Disabilities Within a Family
Network, the Veteran’s Employee Network and the Annaly Pride
Network, provide targeted development and networking opportunities,
knowledge exchanges, mentorship, coaching and volunteer efforts.
Further, we recognize and understand that education, training and
candid conversations are key to embedding and advancing diversity,
equity and inclusion within our organization and culture. To
further promote and foster such a foundation, our efforts also
include offering firm-wide training on topics such as unconscious
bias and allyship, hosting various forums for employees to openly
discuss their views and providing opportunities for employee
connection and networking, as well as actively seeking out feedback
through periodic employee surveys.
Compensation, Benefits and Wellness
Our employee compensation program includes base salary, annual
incentive bonuses and stock-based awards. Employee compensation
packages are designed to align employee and stockholder interests
and to provide incentives to attract, retain and motivate talented
employees.
In addition, we invest in a wide range of benefits and wellness
initiatives that support healthy lifestyles and choices for our
employees. We offer benefits including health and insurance
coverage, health savings and flexible spending accounts,
telemedicine benefits, 401(k) plans, paid time off and family care
resources. We also sponsor a wide range of initiatives that promote
employee wellness and mental well-being, including access to talk
therapy, health coaching and stress management support. Over the
last few years, we have enhanced our parental and family care
benefits to provide extended leave and fertility
assistance.
COVID-19 has challenged the way we work and operate. It has tested
our resiliency, nimbleness and flexibility of our people and
culture. At Annaly, we understand that we must continue to provide
an environment where our employees feel safe, motivated, empowered,
and prepared, regardless of whatever challenges arise in the
future. In addition to addressing physical health and safety
concerns, we recognize that people’s daily emotional lives and
mental health play a key role in their overall wellness. As such,
we continue to evaluate ways to promote and expand our mental
health offerings. Additionally, we recognize that part of meeting
employee needs includes institutionalizing broader and longer-term
flexibility where appropriate. Flexibility comes in many forms at
Annaly, including vacation and sick time, hybrid work options, and
location strategy. We remain committed to evaluating the evolving
definition of flexibility and promoting programs and practices that
foster inclusivity and well-being both personally and
professionally.
Learning and Development
We seek to invest in and promote talent to cultivate a
high-performance culture and build on the capabilities and full
potential of our employees.
We offer a number of learning and development programs tailored to
our employees’ needs and interests as well as our overall strategic
business objectives. We also have a tuition reimbursement plan that
provides financial support toward the cost of furthering employee
education in a field directly related to their job. In 2022, we
began offering individual style and culture sessions to new
employees to promote professional awareness and understanding of
our company’s culture initiatives. Additionally, we continue to
offer knowledge share sessions to all employees that focus on core
business strategies and initiatives in an effort to foster holistic
and inclusive learning.
Corporate and Employee Philanthropy and Volunteerism
Our corporate giving has been focused on high-impact programs that
seek to advance social issues we are committed to, including
combating homelessness and advancing the professional development
of women and underrepresented groups. Annaly and our employees
endeavor to meaningfully contribute to the communities where we
live, work, and invest by partnering with well-established
non-profit organizations and through Annaly’s corporate giving,
employee volunteerism and our employee charity match
program.
Regulatory Requirements
We have elected, organized and operated in a manner that qualifies
us to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended and regulations promulgated thereunder (the “Code”). So
long as we qualify for taxation as a REIT, we
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
generally will not be subject to U.S. federal income tax on our
taxable income that is distributed to our stockholders.
Furthermore, substantially all of our assets, other than our
taxable REIT subsidiaries (“TRSs”), consists of qualified REIT real
estate assets (of the type described in Section 856(c)(5) of the
Code).
We regularly monitor our investments and the income from these
investments and, to the extent we enter into hedging transactions,
we monitor income from our hedging transactions as well, so as to
ensure at all times that we maintain our qualification as a REIT
and our exemption from registration under the Investment Company
Act.
Arcola is a member of FINRA and is subject to regulations of the
securities business that include but are not limited to trade
practices, use and safekeeping of funds and securities, capital
structure, recordkeeping and conduct of directors, officers and
employees. As a self-clearing, registered broker dealer, Arcola is
required to maintain minimum net capital by FINRA. Arcola
consistently operates with capital in excess of its regulatory
capital requirements as defined by SEC Rule 15c3-1.
We have a subsidiary that is registered with the SEC as an
investment adviser under the Investment Advisers Act. As a result,
we are subject to the anti-fraud provisions of the Investment
Advisers Act and to fiduciary duties derived from these provisions
that apply to our relationships with that subsidiary’s clients.
These provisions and duties impose restrictions and obligations on
us with respect to our dealings with our subsidiary’s clients,
including, for example, restrictions on agency, cross and principal
transactions. Our registered investment adviser subsidiary is
subject to periodic SEC examinations and other requirements under
the Investment Advisers Act and related regulations primarily
intended to benefit advisory clients. These additional requirements
relate to, among other things, maintaining an effective and
comprehensive compliance program, recordkeeping and reporting
requirements and disclosure requirements.
We also have a subsidiary that operates as a licensed mortgage
aggregator and master servicer, which compels it to follow
individual state licensing laws and subjects it to supervision and
examination by federal authorities, including the CFPB, the U.S.
Department of Housing and Urban Development (“HUD”), the SEC as
well as various state licensing, supervisory and administrative
agencies. We and our subsidiaries must also comply with a large
number of federal, state and local consumer protection laws
including, among others, the Gramm-Leach-Bliley Act, the Fair Debt
Collection Practices Act, Real Estate Settlement Procedures Act,
the Truth in Lending Act, and the Fair Credit Reporting Act, as
well as state foreclosure laws and federal and local bankruptcy
rules. These laws and regulations, which are frequently amended and
adjusted, have, in recent years, led to an increase in both the
scope of the requirements and the intensity of the supervision to
which we are subject.
The financial services industry is subject to extensive regulation
and supervision in the U.S. The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (“Dodd-Frank Act”) and the rules
thereunder significantly altered the financial regulatory regime
within which financial institutions operate. Other reforms have
been adopted or are being considered by other regulators and policy
makers worldwide. We will continue to assess our business, risk
management and compliance practices to conform to developments in
the regulatory environment.
Competition
We operate in a highly competitive market for investment
opportunities. Competition may limit our ability to acquire
desirable investments in our target assets and could also affect
the pricing of these investments. In acquiring our target assets,
we will compete with financial institutions, institutional
investors, other lenders, government entities and certain other
REITs. For a full discussion of the risks associated with
competition see the “Risks Related to Our Investing, Portfolio
Management and Financing Activities” section in Item 1A. “Risk
Factors.”
Corporate Governance
We strive to conduct our business in accordance with the highest
ethical standards and in compliance with applicable governmental
laws, rules and regulations. Our notable governance practices and
policies include:
•Our
Board is composed of a majority of independent directors, and our
Audit, Management Development and Compensation, and
Nominating/Corporate Governance Committees are composed exclusively
of independent directors.
•We
have separated the roles of Chair of the Board and Chief Executive
Officer, and appointed an independent Chair of the
Board.
•All
directors are elected on an annual basis.
•We
have adopted an enhanced director refreshment policy, which
provides that an independent director may not stand for re-election
at the next annual meeting of stockholders taking place at the end
of his or her term following the earlier of his or her: (i) 15th
anniversary of service on our Board or (ii) 73rd
birthday.
•We
have adopted a Code of Business Conduct and Ethics, which sets
forth the basic principles and guidelines for resolving various
legal and ethical
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS
questions that may arise in the workplace and in the conduct of our
business. This code is applicable to our directors, officers and
employees.
•We
have adopted Corporate Governance Guidelines which, in conjunction
with the charters of our Board committees, provide the framework
for the governance of our company.
•We
have procedures by which any of our employees, officers or
directors may raise concerns confidentially about our company’s
conduct, accounting, internal controls or auditing matters with the
Chair of the Board, the independent directors, or the Chair of the
Audit Committee or through our whistleblower phone hotline or
e-mail inbox.
•We
have an Insider Trading Policy that prohibits our directors,
officers and employees, as well as those of our subsidiaries from
buying or selling our securities on the basis of material nonpublic
information and
prohibits communicating material nonpublic information about our
company to others. Our Insider Trading Policy prohibits our
directors, officers and employees, from (1) holding our stock in a
margin account as eligible collateral, or otherwise pledging our
stock as collateral for a loan, or (2) engaging in any hedging
transactions with respect to our equity securities held by
them.
•Our
executive officers are subject to a robust clawback policy, which
includes triggers for financial restatements and
misconduct.
•Our
executive officers are subject to stock ownership guidelines and
holding restrictions.
•In
February 2022, we amended our bylaws to allow stockholders holding
25% of our common stock to call a special meeting, reducing the
previous majority threshold.
Distributions
In accordance with the requirements for maintaining REIT status, we
intend to distribute to stockholders aggregate dividends equaling
at least 90% of our REIT taxable income (determined without regard
to the deduction of dividends paid and by excluding any net capital
gain) for each taxable year and will endeavor to distribute at
least 100% of our REIT taxable income so as not to be subject to
tax. Distributions of economic profits from our enterprise could be
classified as return of capital due to differences between book and
tax accounting rules. We may make additional returns of
capital when the potential risk-adjusted returns from new
investments fail to exceed our cost of capital. Subject to the
limitations of applicable securities and state corporation laws, we
can return capital by making purchases of our own capital stock or
through payment of dividends.
Available Information
Our website is
www.annaly.com.
We make available on this website under “Investors - SEC Filings,”
free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports as soon as reasonably practicable after
we electronically file or furnish such materials to the SEC
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the “Securities Exchange Act”). Our website and the
information contained therein are not incorporated into this annual
report on Form 10-K.
Also posted on our website, and available in print upon request of
any stockholder to our Investor Relations Department, are charters
for our Audit Committee, Management Development and Compensation
Committee, Nominating/Corporate Governance Committee, Risk
Committee and Corporate Responsibility Committee, our Corporate
Governance Guidelines and our Code of Business Conduct and Ethics.
Within the time period required by the SEC, we will post on our
website any amendment to the Code of Business Conduct and Ethics
and any waiver applicable to any executive officer, director or
senior financial officer.
Our Investor Relations Department can be contacted at:
Annaly Capital Management, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attn: Investor Relations
Telephone: 888-8ANNALY
E-mail:
investor@annaly.com
The SEC also maintains a website that contains reports, proxy and
information statements and other information we file with the SEC
at
www.sec.gov.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
An investment in our stock involves a number of risks. Before
making an investment decision, you should carefully consider all of
the risks described in this annual report on Form 10-K. If any of
the risks discussed in this annual report on Form 10-K actually
occur, our business, financial condition and results of operations
could be materially adversely affected. If this were to occur, the
trading price of our stock could decline significantly and you may
lose all or part of your investment. Readers should not consider
any descriptions of these factors to be a complete set of all
potential risks that could affect us.
INDEX TO ITEM 1A. RISK FACTORS
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Summary of Risk Factors
Risks Related to Our Liquidity and Funding
•Our
strategy involves the use of leverage, which increases the risk
that we may incur substantial losses.
•Our
use of leverage may result in margin calls and defaults and force
us to sell assets under adverse market conditions.
•We
may exceed our target leverage ratios.
•We
may not be able to achieve our optimal leverage.
•Failure
to procure or renew funding on favorable terms, or at all, would
adversely affect our results and financial condition.
•Failure
to effectively manage our liquidity would adversely affect our
results and financial condition.
•Volatile
market conditions for our assets can result in contraction in
liquidity for those assets and the related financing.
•An
increase in the interest payments on our borrowings relative to the
interest we earn on our interest earning assets may adversely
affect our profitability.
•Differences
in timing of interest rate adjustments on our interest earning
assets and our borrowings may adversely affect our
profitability.
•The
discontinuation of LIBOR may affect our results.
•It
may be uneconomical to “roll” our TBA dollar roll transactions or
we may be unable to meet margin calls on our TBA
contracts.
•Our
use of derivatives may expose us to counterparty and liquidity
risks.
•Securitizations
expose us to additional risks.
•Our
use of non-recourse securitizations may expose us to risks which
could result in losses to us.
•Counterparties
may require us to enter into covenants that restrict our investment
strategy.
•We
may be unable to profitably execute or participate in future
securitization transactions.
Risks of Ownership of Our Common Stock
•Our
charter does not permit ownership of over 9.8% in number of shares
or value of our common stock or any class of our preferred
stock.
•Provisions
contained in Maryland law may have anti-takeover effects,
potentially preventing investors from receiving a “control premium”
for their shares.
•We
have not established a minimum dividend payment level and cannot
assure stockholders of our ability to pay dividends in the
future.
•Our
reported GAAP financial results may not be an accurate indicator of
future taxable income and dividend distributions.
Compliance, Regulatory & Legal Risks
•Accounting
rules related to certain of our transactions are highly complex and
involve significant judgment and assumptions. Our application of
GAAP may produce financial results that fluctuate from one period
to another.
•New
laws may be passed affecting the relationship between Fannie Mae,
Freddie Mac and the federal government.
•We
may be subject to liability for potential violations of
truth-in-lending or other similar consumer protection laws and
regulations.
•We
may not be able to maintain compliance with laws and regulations
applicable to our Residential Credit and MSR businesses, including
through the manner in which we oversee the compliance obligations
of our third-party service providers.
•Changes
in laws or regulations governing our operations or our failure to
comply with those laws or regulations may adversely affect our
business.
•We
are subject to risks and liabilities in connection with sponsoring,
investing in and managing new funds and other investment accounts,
including potential regulatory risks.
•Loss
of our Investment Company Act exemption from registration would
adversely affect us.
Risks Related to Our Taxation as a REIT
•Our
failure to maintain our qualification as a REIT would have adverse
tax consequences.
•Our
distribution requirements could adversely affect our ability to
execute our business plan.
•Distributions
to tax-exempt investors may be classified as unrelated business
taxable income.
•We
may choose to pay dividends in our own stock.
•Our
TRSs cannot constitute more than 20% of our total
assets.
•TRSs
are subject to tax at the regular corporate rates, are not required
to distribute dividends, and the amount of dividends a TRS can pay
to its parent REIT may be limited by REIT gross income
tests.
•If
transactions between a REIT and a TRS are entered into on other
than arm’s-length terms, the REIT may be subject to a penalty
tax.
•Even
if we remain qualified as a REIT, we may face other tax liabilities
that reduce our cash flow.
•Complying
with REIT requirements may cause us to forgo otherwise attractive
opportunities and may force us to liquidate otherwise attractive
investments.
•Liquidation
of assets may jeopardize our REIT qualification or create
additional tax liability for us.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
•The
failure of assets subject to repurchase agreements to qualify as
real estate assets could adversely affect our ability to remain
qualified as a REIT.
•Complying
with REIT requirements may limit our ability to hedge effectively
and may cause us to incur tax liabilities.
•The
failure of a mezzanine loan or similar debt to qualify as a real
estate asset could adversely affect our ability to qualify as a
REIT.
•Qualifying
as a REIT involves highly technical and complex provisions of the
Code.
•The
tax on prohibited transactions limits our ability to engage in
certain transactions.
•Certain
financing activities may subject us to U.S. federal income tax and
could have negative tax consequences for our
stockholders.
•Uncertainty
exists with respect to the treatment of our TBAs for purposes of
the REIT asset and income tests.
•Dividends
payable by REITs generally receive different tax treatment than
dividend income from regular corporations.
•New
legislation or administrative or judicial action, in each instance
potentially with retroactive effect, could make it more difficult
or impossible for us to remain qualified as a REIT.
Counterparty Risks
•The
soundness of our counterparties and other financial institutions
could adversely affect us.
•We
are subject to counterparty risk and may be unable to seek
indemnity or require counterparties to repurchase residential whole
loans if they breach representations and warranties, which could
cause us to suffer losses.
Investment and Market Related Risks
•We
may experience declines in the market value of our
assets.
•Investments
in MSR may expose us to additional risks.
•A
prolonged economic slowdown or declining real estate values could
impair the assets we may own.
•An
increase in interest rates may adversely affect the market value of
our interest earning assets and, therefore, also our book
value.
•Actions
by the Federal Reserve may affect the price and returns of our
assets.
•We
invest in securities that are subject to mortgage credit
risk.
•Geographic
concentration exposes investors to greater risk of default and
loss.
•Inadequate
property insurance coverage could have an adverse impact on our
operating results.
•Our
assets may become non-performing or sub-performing assets in the
future.
•We
may be required to repurchase residential mortgage loans or
indemnify investors if we breach representations and
warranties.
•Our
and our third party service providers’ and servicers’ due diligence
of potential assets may not reveal all of the weaknesses in such
assets.
•When
we foreclose on an asset, we may come to own the property securing
the loan.
•Proposals
to acquire mortgage loans by eminent domain may adversely affect
the value of our assets.
•Subordinated
tranches of non-Agency mortgage-backed securities are subordinate
in right of payment to more senior securities.
•Our
hedging strategies may be costly, and may not hedge our risks as
intended.
•We
are subject to risks of loss from weather conditions, man-made or
natural disasters and climate change.
Operational and Cybersecurity Risks
•Inaccurate
models or the data used by models may expose us to
risk.
•We
are highly dependent on information systems that may expose us to
cybersecurity risks.
•We
depend on third-party service providers, including mortgage loan
servicers and sub-servicers, for a variety of services related to
our business.
•Our
investments in residential whole loans subject us to
servicing-related risks.
•The
performance of loans underlying our MSR related assets may be
adversely affected by the performance of the related mortgage
servicer.
•An
increase or decrease in prepayment rates may adversely affect our
profitability.
•We
are subject to reinvestment risk.
•Competition
may affect ability and pricing of our target assets.
•We
may enter into new lines of business, acquire other companies or
engage in other strategic initiatives.
•Some
of our investments, including those related to non-prime loans,
involve credit risk.
•We
face possible increased instances of business interruption
associated with the effects of climate change and severe
weather.
•If
we are unable to attract, motivate and retain qualified talent,
including our key personnel, it could materially and adversely
affect us.
Other Risks
•The
market price and trading volume of our shares of common stock may
be volatile.
•We
may change our policies without stockholder approval.
•COVID-19
has affected the U.S. economy and our business.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Risks Related to Our Liquidity and Funding
Our strategy involves the use of leverage, which increases the risk
that we may incur substantial losses.
We expect our leverage to vary with market conditions and our
assessment of risk/return on investments. We incur this leverage by
borrowing against a substantial portion of the market value of our
assets. Leverage, which is fundamental to our investment strategy,
creates significant risks. The risks associated with leverage are
more acute during periods of economic slowdown or
recession.
Because of our leverage, we may incur substantial losses if our
borrowing costs increase, and we may be unable to execute our
investment strategy if leverage is unavailable or is unavailable on
attractive terms. The reasons our borrowing costs may increase or
our ability to borrow may decline include, but are not limited to,
the following:
•short-term
interest rates increase;
•the
market value of our investments available to collateralize
borrowings decreases;
•the
“haircut” applied to our assets under the repurchase agreements or
other secured financing arrangements increases;
•interest
rate volatility increases;
•forced
sales, particularly under adverse market conditions, such as those
which occurred as a result of the COVID-19 pandemic;
•disruption
in the repo market generally or the infrastructure, including
technology infrastructure, that supports it; or
•the
availability of financing in the market decreases.
Our use of leverage may result in margin calls and defaults and
force us to sell assets under adverse market
conditions.
Because of our leverage, a decline in the value of our interest
earning assets may result in our lenders initiating margin calls. A
margin call means that the lender requires us to pledge additional
collateral to re-establish the ratio of the value of the collateral
to the amount of the borrowing. Borrowings secured by our
fixed-rate mortgage-backed securities generally are more
susceptible to margin calls as increases in interest rates tend to
more negatively affect the market value of fixed-rate securities.
Margin calls are most likely in market conditions in which the
unencumbered assets that we would use to meet the margin calls have
also decreased in value. The risks associated with margin calls are
more acute during periods of economic slowdown or recession. We
experienced margin calls much higher than historical norms during
the onset of COVID-19.
If we are unable to satisfy margin calls, our lenders may foreclose
on our collateral. This could force us to sell our interest earning
assets under adverse market conditions, or allow lenders to sell
those assets on our behalf at prices that could be below our
estimation of their value. Additionally, in the event of our
bankruptcy, our borrowings, which are generally made under
repurchase agreements, may qualify for special treatment under the
U.S. Bankruptcy Code. This special treatment would allow the
lenders under these agreements to avoid the automatic stay
provisions of the U.S. Bankruptcy Code and to liquidate the
collateral under these agreements without delay.
We may exceed our target leverage ratios.
We generally expect to maintain an economic leverage ratio of less
than 10:1. However, we are not required to stay below this economic
leverage ratio. We may exceed this ratio by incurring additional
debt without increasing the amount of equity we have. For example,
if we increase the amount of borrowings under our master repurchase
agreements with our existing or new counterparties or the market
value of our portfolio declines, our economic leverage ratio would
increase. If we increase our economic leverage ratio, the adverse
impact on our financial condition and results of operations from
the types of risks associated with the use of leverage would likely
be more severe. Our target economic leverage ratio is set for the
portfolio as a whole, rather than separately for each asset type.
The economic leverage ratio on Agency mortgage-backed securities
may exceed the target ratio for the portfolio as a whole. Because
credit assets are generally less levered than Agency
mortgage-backed securities, at a given economic leverage ratio an
increased allocation to credit assets generally means an increase
in economic leverage on Agency mortgage-backed securities. The
economic leverage on our Agency mortgage-backed securities is the
primary driver of the risk of being unable to meet margin calls
discussed above.
We may not be able to achieve our optimal leverage.
We use leverage as a strategy to increase the return to our
investors. However, we may not be able to achieve our desired
leverage if we determine that the leverage would expose us to
excessive risk; our lenders do not make funding available to us at
acceptable rates; or our lenders require that we provide additional
collateral to cover our borrowings.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Failure to procure or renew funding on favorable terms, or at all,
would adversely affect our results and financial
condition.
One or more of our lenders could be unwilling or unable to provide
us with financing. This could potentially increase our financing
costs and reduce our liquidity. Furthermore, if any of our
potential lenders or existing lenders is unwilling or unable to
provide us with financing or if we are not able to renew or replace
maturing borrowings, we could be forced to sell our assets at an
inopportune time when prices are depressed. Our business, results
of operations and financial condition may be materially adversely
affected by disruptions in the financial markets. We cannot assure
you that, under such extreme conditions, these markets will remain
an efficient source of financing for our assets. If our strategy is
not viable, we will have to find alternative forms of financing for
our assets, which may not be available. Further, as a REIT, we are
required to distribute annually at least 90% of our REIT taxable
income (subject to certain adjustments) to our stockholders and
are, therefore, not able to retain significant amounts of our
earnings for new investments. We cannot assure you that any, or
sufficient, funding or capital will be available to us in the
future on terms that are acceptable to us. If we cannot obtain
sufficient funding on acceptable terms, there may be a negative
impact on the market price of our common stock and our ability to
make distributions to our stockholders. Moreover, our ability to
grow will be dependent on our ability to procure additional
funding. To the extent we are not able to raise additional funds
through the issuance of additional equity or borrowings, our growth
will be constrained.
Failure to effectively manage our liquidity would adversely affect
our results and financial condition.
Our ability to meet cash needs depends on many factors, several of
which are beyond our control. Ineffective management of liquidity
levels could cause us to be unable to meet certain financial
obligations. Potential conditions that could impair our liquidity
include: unwillingness or inability of any of our potential lenders
to provide us with or renew financing, margin calls, additional
capital requirements applicable to our lenders, a disruption in the
financial markets or declining confidence in our creditworthiness
or in financial markets in general. These conditions could force us
to sell our assets at inopportune times or otherwise cause us to
potentially revise our strategic business initiatives.
Volatile market conditions for our assets can result in contraction
in liquidity for those assets and the related
financing.
Our results of operations are materially affected by conditions in
the markets for mortgages and mortgage-related assets, including
Agency mortgage-backed securities, as well as the broader financial
markets and the economy generally.
Significant adverse changes in financial market conditions can
result in a deleveraging of the global financial system and the
forced sale of large quantities of mortgage-related and other
financial assets. Concerns over economic recession, COVID-19 or
other pandemic diseases, geopolitical issues including events such
as the war in Ukraine, trade wars, unemployment, inflation, rising
interest rates, the availability and cost of financing, the
mortgage market, the repurchase agreement market and a declining
real estate market or prolonged government shutdown may contribute
to increased volatility and diminished expectations for the economy
and markets.
For example, as a result of the financial crises beginning in the
summer of 2007 and through the subsequent credit and housing
crisis, many traditional mortgage investors suffered severe losses
in their residential mortgage portfolios and several major market
participants failed or were impaired, resulting in a significant
contraction in market liquidity for mortgage-related assets. This
illiquidity negatively affected both the terms and availability of
financing for all mortgage-related assets.
Further increased volatility and deterioration in the markets for
mortgages and mortgage-related assets as well as the broader
financial markets may adversely affect the performance and market
value of our Agency mortgage-backed securities. If these conditions
exist, institutions from which we seek financing for our
investments may tighten their lending standards or become
insolvent, which could make it more difficult for us to obtain
financing on favorable terms or at all. Our profitability and
financial condition may be adversely affected if we are unable to
obtain cost-effective financing for our investments.
An increase in the interest payments on our borrowings relative to
the interest we earn on our interest earning assets may adversely
affect our profitability.
We generally earn money based upon the spread between the interest
payments we earn on our interest earning assets and the interest
payments we must make on our borrowings. If the interest payments
on our borrowings increase relative to the interest we earn on our
interest earning assets, our profitability may be adversely
affected. A significant portion of our assets are longer-term,
fixed-rate interest earning assets, and a significant portion of
our borrowings are shorter-term, floating-rate borrowings. Periods
of rising interest rates or a relatively flat or inverted yield
curve could decrease or eliminate the spread between the interest
payments we earn on our interest earning assets and the interest
payments we must make on our borrowings.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Differences in timing of interest rate adjustments on our interest
earning assets and our borrowings may adversely affect our
profitability.
We rely primarily on short-term borrowings to acquire interest
earning assets with long-term maturities. Some of the interest
earning assets we acquire are adjustable-rate interest earning
assets. This means that their interest rates may vary over time
based upon changes in an objective index, such as:
•LIBOR.
The rate banks charge each other for short-term Eurodollar
loans.
•Treasury
Rate. A monthly or weekly average yield of benchmark U.S.
Treasury securities, as published by the Federal Reserve
Board.
•Secured
Overnight Financing Rate. A measure of the cost of borrowing cash
overnight collateralized by U.S. Treasury securities, as published
by the Federal Reserve Bank of New York.
•Term
SOFR. A benchmark based on Secured Overnight Financing Rate
futures, administered by CME Group.
These indices generally reflect short-term interest rates. The
interest rates on our borrowings similarly reflect short-term
interest rates. Nevertheless, the interest rates on our borrowings
generally adjust more frequently than the interest rates on our
adjustable-rate interest earning assets, which are also typically
subject to periodic and lifetime interest rate caps. Accordingly,
in a period of rising interest rates, we could experience a
decrease in net income or a net loss because the interest rates on
our borrowings adjust faster than the interest rates on our
adjustable-rate interest earning assets.
The discontinuation of LIBOR may affect our results.
The United Kingdom Financial Conduct Authority, or FCA, which
regulates LIBOR, has announced that all LIBOR tenors relevant to us
will cease to be published or will no longer be representative
after June 30, 2023. The FCA's announcement coincided with the
March 5, 2021, announcement of LIBOR's administrator, the ICE
Benchmark Administration Limited, or IBA, indicating that, as a
result of not having access to input data necessary to calculate
LIBOR tenors relevant to us on a representative basis after June
30, 2023, IBA would have to cease publication of such LIBOR tenors
immediately after the last publication on June 30, 2023. These
announcements mean that any of our LIBOR-based borrowings and
assets that mature beyond June 30, 2023 need to be converted to
alternative interest rates. Many of our counterparties are now
subject to regulatory guidance not to enter new U.S. Dollar LIBOR
contracts except in limited circumstances.
The Alternative Reference Rates Committee, or ARRC, a committee of
private sector entities with ex-officio official sector members
convened by the Federal Reserve Board and the Federal Reserve Bank
of New York, has recommended the Secured Overnight Financing Rate
(“SOFR”), and in some cases, the forward-looking term rate based on
SOFR published by CME Group Benchmark Administration Ltd. (“CME
Term SOFR”) plus, in each case, a recommended spread adjustment as
the replacement for LIBOR. The Board of Governors of the Federal
Reserve has also named CME Term SOFR as the Board-selected
replacement rate for most cash products under the Adjustable
Interest Rate (LIBOR) Act of 2021 (the “LIBOR Act”), which governs
instruments for which there is no determining person to choose a
LIBOR replacement or which have no fallback provisions specifying
an alternate replacement rate. There are significant differences
between LIBOR and SOFR, such as LIBOR being an unsecured lending
rate while SOFR is a secured lending rate, and SOFR is an overnight
rate while LIBOR reflects term rates at different maturities. If
our LIBOR-based borrowings are converted to SOFR or CME Term SOFR,
the differences between LIBOR and SOFR, plus the recommended spread
adjustment, could result in interest costs that are higher than if
LIBOR remained available, which could have a material adverse
effect on our results. Although SOFR or CME Term SOFR are the
ARRC's recommended replacement rates, it is also possible that
lenders may instead choose alternative replacement rates that may
differ from LIBOR in ways similar to SOFR or in other ways that
would result in higher borrowing costs for us.
Many floating-rate instruments, including some transactions in
which we are issuer or sponsor, reference LIBOR. US regulators and
the ARRC have recommended that all LIBOR-based instruments include
robust fallback language dictating what rate will apply when LIBOR
ends. The fallbacks recommended by the ARRC are different for
various non-derivative instruments, and not all LIBOR-based
instruments will incorporate the recommended fallbacks. The
International Swaps and Derivatives Association (“ISDA”) has
implemented fallback language and a protocol that will ensure
LIBOR-based derivatives amongst protocol participants fall back to
compounded SOFR. We have opted into the ISDA 2020 IBOR Fallbacks
protocol. However, the variations in fallback language in different
financial instruments and the adoption of different replacement
rates or methodologies in such fallback language could result in
unexpected differences between our LIBOR-based assets and our
LIBOR-based interest rate hedges or borrowings. Certain instruments
may be affected by the LIBOR Act.
It is expected that switching existing financial instruments and
hedging transactions from LIBOR to SOFR or other replacement rates
will include a spread adjustment. ISDA has described the spread
calculation methodology that will apply to derivatives
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
that adopt the ISDA recommendations for derivatives, and the ARRC
has recommended the same methodology for all cash products, with a
one year transition period for consumer assets. These same spread
adjustments will be applied to contracts that transition to a
SOFR-based rate under the LIBOR Act. The adjustment calculation is
intended to minimize value transfer between counterparties,
borrowers, and lenders, but there is no assurance that the
calculated spread adjustment will be fair and accurate or that it
will not result in higher interest costs.
We and other market participants have less experience understanding
and modeling SOFR-based assets and liabilities than LIBOR-based
assets and liabilities, increasing the difficulty of investing,
hedging, and risk management. We use service providers to validate
the fair values of certain financial instruments. These service
providers take various approaches to modelling LIBOR
cessation.
The process of transition involves operational risks. References to
LIBOR may be embedded in computer code or models, and we may not
identify and correct all of those references.
Holders of our fixed-to-floating preferred shares should refer to
the relevant prospectus, the LIBOR Act, and related regulation to
understand the LIBOR-cessation provisions applicable to that class.
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. Each such
class that is currently outstanding becomes callable at the same
time it begins to pay a LIBOR-based rate.
It may be uneconomical to
“roll”
our TBA dollar roll transactions or we may be unable to meet margin
calls on our TBA contracts.
From time to time, we enter into TBAs as an alternate means of
investing in and financing Agency mortgage-backed securities. A TBA
contract is an agreement to purchase or sell, for future delivery,
an Agency mortgage-backed security with a specified issuer, term
and coupon. A TBA dollar roll represents a transaction where TBA
contracts with the same terms but different settlement dates are
simultaneously bought and sold. The TBA contract settling in the
later month typically prices at a discount to the earlier month
contract with the difference in price commonly referred to as the
“drop”. The drop is a reflection of the expected net interest
income from an investment in similar Agency mortgage-backed
securities, net of an implied financing cost, that would be
foregone as a result of settling the contract in the later month
rather than in the earlier month. The drop between the current
settlement month price and the forward settlement month price
occurs because in the TBA dollar roll market, the party providing
the implied financing is the party that would retain all principal
and interest payments accrued during the financing period.
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. Consequently, dollar roll transactions and such
forward purchases of Agency securities represent a form of
off-balance sheet financing and increase our “at risk”
leverage.
The economic return of a TBA dollar roll generally equates to
interest income on a generic TBA-eligible security less an implied
financing cost, and there may be situations in which the implied
financing cost exceeds the interest income, resulting in a negative
carry on the position. If we roll our TBA dollar roll positions
when they have a negative carry, the positions would decrease net
income and amounts available for distributions to
shareholders.
There may be situations in which we are unable or unwilling to roll
our TBA dollar roll positions. The TBA transaction could have a
negative carry or otherwise be uneconomical, we may be unable to
find counterparties with whom to trade in sufficient volume, or we
may be required to collateralize the TBA positions in a way that is
uneconomical. Because TBA dollar rolls represent implied financing,
an inability or
unwillingness to roll has effects similar to any other loss of
financing. If we do not roll our TBA positions prior to the
settlement date, we would have to take physical delivery of the
underlying securities and settle our obligations for cash. We may
not have sufficient funds or alternative financing sources
available to settle such obligations. Counterparties may also make
margin calls as the value of a generic TBA-eligible security (and
therefore the value of the TBA contract) declines. Margin calls on
TBA positions or failure to roll TBA positions could have the
effects described in the liquidity risks described
above.
Our use of derivatives may expose us to counterparty and liquidity
risks.
Most swaps that we enter into must be cleared by a Derivatives
Clearing Organization (“DCO”). DCOs are subject to regulatory
oversight, use extensive risk management processes, and might
receive “too big to fail” support from the government in the case
of insolvency. We access the DCO through several Futures Commission
Merchants (“FCMs”). For any cleared swap, we bear the credit risk
of both the DCO and the relevant FCM, in the form of potential late
or unrecoverable payments, potential difficulty or delay in
accessing collateral that we have posted, and potential loss of any
positive market value of the swap
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
position. In the event of a default by the DCO or FCM, we also bear
market risk, because the asset or liability being hedged is no
longer effectively hedged.
Most swaps must be or are traded on a Swap Execution Facility. We
bear additional fees for use of the DCO. We also bear fees for use
of the Swap Execution Facility. We continue to bear risk of trade
errors. Because the standardized swaps available on Swap Execution
Facilities and cleared through DCOs are not as customizable as the
swaps available before the implementation of Dodd-Frank Act, we may
bear additional basis risk from hedge positions that do not exactly
reflect the interest rate risk on the asset being
hedged.
Futures transactions are subject to risks analogous to those of
cleared swaps, except that for futures transactions we bear a
higher risk that collateral we have posted is unavailable to us if
the FCM defaults.
Some derivatives transactions, such as swaptions, are not currently
required to be cleared through a DCO. Therefore, we bear the credit
risk of the dealer with which we executed the swaption. TBA
contracts and swaps on CMBX indexes are also not cleared, and we
bear the credit risk of the dealer.
Derivative transactions are subject to margin requirements. The
relevant contract or clearinghouse rules dictate the method of
determining the required amount of margin, the types of collateral
accepted and the timing required to meet margin calls.
Additionally, for cleared swaps and futures, FCMs may have the
right to require more margin than the clearinghouse requires. The
requirement to meet margin calls can create liquidity risks, and we
bear the cost of funding the margin that we post. Also, as
discussed above, we bear credit risk if a dealer, FCM, or
clearinghouse is holding collateral we have posted.
Generally, we attempt to retain the ability to close out of a
hedging position or create an offsetting position. However, in some
cases we may not be able to do so at economically viable prices, or
we may be unable to do so without consent of the counterparty.
Therefore, in some situations a derivative position can be
illiquid, forcing us to hold it to its maturity or scheduled
termination date.
It is possible that new regulations could be issued governing the
derivatives market, or that additional types of derivatives switch
to being executed on Swap Execution Facilities or cleared on a DCO.
Ongoing regulatory change in this area could increase costs,
increase risks, and adversely affect our business and results of
operations.
Securitizations expose us to additional risks.
In a securitization structure, we convey a pool of assets to a
special purpose vehicle, the issuing entity, and in turn the
issuing entity issues one or more classes of non-recourse notes
pursuant to the terms of an indenture. The notes are secured by the
pool of assets. In exchange for the transfer of assets to the
issuing entity, we receive the cash proceeds of the sale of
non-recourse notes and a 100% interest in certain subordinate
interests of the issuing entity. The securitization of all or a
portion of our residential loan portfolio might magnify our
exposure to losses because any subordinate interest we retain in
the issuing entity would be subordinate to the notes issued to
investors and we would, therefore, absorb all of the losses
sustained with respect to a securitized pool of assets before the
owners of the notes experience any losses. Moreover, we cannot
assure you that we will be able to access the securitization market
or be able to do so at favorable rates. The inability to securitize
our portfolio could adversely affect our performance and our
ability to grow our business.
Our use of non-recourse securitizations may expose us to risks
which could result in losses to us.
We utilize non-recourse securitizations of our assets in mortgage
loans, especially loans that we originate, when they are available.
Prior to any such financing, we may seek to finance assets with
relatively short-term facilities until a sufficient portfolio is
accumulated. As a result, we would be subject to the risk that we
would not be able to acquire, during the period that any short-term
facilities are available, sufficient eligible assets to maximize
the efficiency of a securitization. We also would bear the risk
that we would not be able to obtain a new short-term facility or
would not be able to renew any short-term facilities after they
expire should we need more time to seek and acquire sufficient
eligible assets for a securitization. In addition, conditions in
the capital markets, including potential volatility and disruption
in the capital and credit markets, may not permit a non-recourse
securitization at any particular time or may make the issuance of
any such securitization less attractive to us even when we do have
sufficient eligible assets. While we would intend to retain the
non-investment grade tranches of securitizations and, therefore,
still have exposure to any assets included in such securitizations,
our inability to enter into such securitizations would increase our
overall exposure to risks associated with direct ownership of such
assets, including the risk of default. Our inability to refinance
any short-term facilities would also increase our risk because
borrowings thereunder would likely be recourse to us as an entity.
If we are unable to obtain and renew short-term facilities or to
consummate securitizations to finance our assets on a long-term
basis, we may be required to seek other forms of potentially less
attractive financing or to liquidate assets at an inopportune time
or price. To the extent that we are unable to
obtain
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
financing for our assets, to the extent that we retain such assets
in our portfolio, our returns on investment and earnings will be
negatively impacted.
Counterparties may require us to enter into covenants that restrict
our investment strategy.
If or when we obtain debt financing, lenders (especially in the
case of credit facilities) may impose restrictions on us that would
affect our ability to incur additional debt, make certain
allocations or acquisitions, reduce liquidity below certain levels,
make distributions to our stockholders, or redeem debt or equity
securities, and may impact our flexibility to determine our
operating policies and strategies. We may sell assets or reduce
leverage at an inopportune time to avoid breaching these
restrictions. If we fail to meet or satisfy any of these covenants,
we would be in default under these agreements, and our lenders
could elect to declare outstanding amounts due and payable,
terminate their commitments, require the posting of additional
collateral and enforce their interests against existing collateral.
We may also be subject to cross-default and acceleration rights
and, with respect to collateralized debt, the posting of additional
collateral and foreclosure rights upon default. A default and
resulting repayment acceleration could significantly reduce our
liquidity, which could require us to sell our assets to repay
amounts due and outstanding. This could also significantly harm our
business, financial condition, results of operations and ability to
make distributions, which could cause our share price to decline. A
default could also significantly limit our financing alternatives
such that we would be unable to pursue our leverage strategy, which
could adversely affect our returns.
We may be unable to profitably execute or participate in future
securitization transactions.
There are a number of factors that can have a significant impact on
whether we are able to execute or participate in a securitization
transaction, and whether such a transaction is profitable to us or
results in a loss. One of these factors is the price we pay for the
mortgage loans that we securitize, which, in the case of
residential mortgage loans, is impacted by the level of competition
in the marketplace for acquiring mortgage loans and the relative
desirability to originators of retaining mortgage loans as
investments or selling them to third parties such as us. As such,
we can provide no assurance that we will be able to identify and
make investments in residential mortgage loans at attractive levels
and pricing, which could adversely affect our ability to execute
future securitizations in this space. Another factor that impacts
the profitability of a securitization transaction is the cost to us
of the short-term warehouse financing facilities that we use to
finance our holdings of mortgage loans prior to securitization,
which cost is affected by a number of factors including the
availability of this type of financing to us, the interest rate on
this type of financing, the duration of the financing we incur, and
the percentage of our mortgage loans for which third parties are
willing to provide short-term financing. After we acquire mortgage
loans that we intend to securitize, we can also suffer losses if
the value of those loans declines prior to securitization. Declines
in the value of a mortgage loan, for example, can be due to, among
other things, changes in interest rates, changes in the credit
quality of the loan, and changes in the projected yields required
by investors to invest in securitization transactions. To the
extent we seek to hedge against a decline in loan value due to
changes in interest rates, there is a cost of hedging that also
affects whether a securitization is profitable. Other factors that
can significantly affect whether a securitization transaction is
profitable to us include the criteria and conditions that rating
agencies apply and require when they assign ratings to the
mortgage-backed securities issued in our securitization
transactions, including the percentage of mortgage-backed
securities issued in a securitization transaction that the rating
agencies will assign a triple-A rating to, which is also referred
to as a rating agency subordination level. Rating agency
subordination levels can be impacted by numerous factors,
including, without limitation, the credit quality of the loans
securitized, the geographic distribution of the loans to be
securitized, the structure of the securitization transaction and
other applicable rating agency criteria. All other factors being
equal, the greater the percentage of the mortgage-backed securities
issued in a securitization transaction that the rating agencies
will assign a triple-A rating to, the more profitable the
transaction will be to us.
The price that investors in mortgage-backed securities will pay for
securities issued in our securitization transactions also has a
significant impact on the profitability of the transactions to us,
and these prices are impacted by numerous market forces and
factors. In addition, the underwriter(s) or placement agent(s) we
select for securitization transactions, and the terms of their
engagement, can also impact the profitability of our securitization
transactions. Also, transaction costs incurred in executing
transactions impact the profitability of our securitization
transactions and any liability that we may incur, or may be
required to reserve for, in connection with executing a transaction
can cause a loss to us. To the extent that we are not able to
profitably execute future securitizations of residential mortgage
loans or other assets, including for the reasons described above or
for other reasons, it could have a material adverse impact on our
business and financial results.
Risks of Ownership of Our Common Stock
Our charter does not permit ownership of over 9.8% in number of
shares or value of our common stock or any class of our preferred
stock.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
To maintain our qualification as a REIT for U.S. federal income tax
purposes, not more than 50% in value of the outstanding shares of
our capital stock may be owned, directly or indirectly, by five or
fewer individuals (as defined in the federal tax laws to include
certain entities). For the purpose of preserving our REIT
qualification and for other reasons, our charter prohibits direct
or constructive ownership by any person of more than 9.8% of the
total number or value of any class of our outstanding common stock
or any class of our preferred stock. Our charter’s constructive
ownership rules are complex and may cause the outstanding stock
owned by a group of related individuals or entities to be deemed to
be constructively owned by one individual or entity. As a result,
the acquisition of less than 9.8% of the outstanding shares of any
class of common stock or any class of our preferred stock by an
individual or entity could cause that individual or entity to own
constructively in excess of 9.8% of the outstanding shares of such
class of stock and thus be subject to our charter’s ownership
limit. Any attempt to own or transfer shares of our common stock or
preferred stock in excess of the ownership limit without the
consent of the Board shall be void, or, alternatively, will result
in the shares being transferred by operation of law to a charitable
trust. Our Board, in its sole and absolute discretion, may waive or
modify the ownership limit with respect to one or more persons who
would not be treated as “individuals” if it is satisfied that
ownership in excess of this limit will not otherwise jeopardize our
status as a REIT for U.S. federal income tax purposes. The
ownership limit may have the effect of delaying, deferring or
preventing a change in control and, therefore, could adversely
affect our stockholders’ ability to realize a premium over the
then-prevailing market price for our stock in connection with a
change in control.
Provisions contained in Maryland law may have anti-takeover
effects, potentially preventing investors from receiving a “control
premium” for their shares.
Provisions contained in our charter and bylaws, as well as the
Maryland General Corporation Law (the “MGCL”), may have
anti-takeover effects that delay, defer or prevent a takeover
attempt, which may prevent stockholders from receiving a “control
premium” for their shares. For example, these provisions may defer
or prevent tender offers for our common stock or purchases of large
blocks of our common stock, thereby limiting the opportunities for
our stockholders to receive a premium for their common stock over
then-prevailing market prices. These provisions include the
following:
•Ownership
limit. The ownership limit in our charter limits related investors
including, among other things, any voting group, from acquiring
over 9.8% of any class our common stock or of our preferred stock,
in each case, in number of shares or value, without the consent of
our Board.
•Preferred
Stock. Our charter authorizes our Board to issue preferred stock in
one or more classes and to establish the preferences and rights of
any class of preferred stock issued. These actions can be taken
without soliciting stockholder approval.
•Maryland
Business Combination Act. The Maryland Business Combination
Act
provides that, subject to certain exceptions and limitations,
certain business combinations between a Maryland corporation and an
“interested stockholder” (defined generally as any person who
beneficially owns 10% or more of the voting power of our
outstanding voting stock or an affiliate or associate of ours who,
at any time within the two-year period immediately prior to the
date in question, was the beneficial owner of 10% or more of the
voting power of our then outstanding shares of stock) or an
affiliate of any interested stockholder are prohibited for five
years after the most recent date on which the stockholder becomes
an interested stockholder, and thereafter imposes two
super-majority stockholder voting requirements on these
combinations, unless, among other conditions, our common
stockholders receive a minimum price, as defined in the MGCL, for
their shares of stock and the consideration is received in cash or
in the same form as previously paid by the
interested stockholder for its shares of stock.
We have opted out of the Maryland Business Combination Act in our
charter.
However, if we amend our charter to opt back in to the statute,
subject to stockholder approval, the Maryland Business Combination
Act could have the effect of discouraging offers to acquire us and
of increasing the difficulty of consummating any such offers, even
if our acquisition would be in our stockholders’ best
interests.
•Maryland
Control Share Acquisition Act. The Maryland Control Share
Acquisition Act
provides that, subject to certain exceptions, holders of “control
shares” (defined as voting shares that, when aggregated with all
other shares controlled by the stockholder, entitle the stockholder
to exercise one of three increasing ranges of voting power in
electing directors) acquired in a “control share acquisition”
(defined as the direct or indirect acquisition of ownership or
control of issued and outstanding “control shares”) have no voting
rights except to the extent approved by our stockholders by the
affirmative vote of at least two-thirds of all the votes entitled
to be cast on the matter, excluding shares owned by the acquirer,
by our officers, or by our employees who are also directors of our
company.
We are currently subject to the Maryland Control Share Acquisition
Act.
•Title
3, Subtitle 8 of the MGCL: These provisions of the MGCL permit our
Board of Directors, without stockholder approval and regardless of
what is provided in our charter or bylaws, to
implement
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
certain takeover defenses, including adopting a classified board or
increasing the vote required to remove a director.
We have not established a minimum dividend payment level and cannot
assure stockholders of our ability to pay dividends in the
future.
We intend to pay quarterly dividends and to make distributions to
our stockholders in amounts such that all or substantially all of
our taxable income in each year (subject to certain adjustments) is
distributed. This enables 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 for the reasons described in this
section. 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.
Our reported GAAP financial results may not be an accurate
indicator of future taxable income and dividend
distributions.
Generally, the cumulative net income we report over the life of an
asset will be the same for GAAP and tax purposes, although the
timing of this income recognition over the life of the asset could
be materially different. Differences exist in the accounting
for GAAP net income and REIT taxable income that can lead to
significant variances in the amount and timing of when income and
losses are recognized under these two measures. Due to these
differences, our reported GAAP financial results could materially
differ from our determination of taxable income.
Compliance, Regulatory & Legal Risks
Accounting rules related to certain of our transactions are highly
complex and involve significant judgment and assumptions. Our
application of GAAP may produce financial results that fluctuate
from one period to another.
Accounting rules for valuations of investments, mortgage loan sales
and securitizations, investment consolidations, acquisitions of
real estate and other aspects of our operations are highly complex
and involve significant judgment and assumptions. These
complexities could lead to a delay in preparation of financial
information and the delivery of this information to our
stockholders. Changes in accounting interpretations or assumptions
could impact our financial statements and our ability to prepare
our financial statements in a timely fashion. Our inability to
prepare our financial statements in a timely fashion in the future
would likely adversely affect our share price significantly. The
fair value at which our assets may be recorded may not be an
indication of their realizable value. Ultimate realization of the
value of an asset depends to a great extent on economic and other
conditions. Further, fair value is only an estimate based on good
faith judgment of the price at which an investment can be sold
since market prices of investments can only be determined by
negotiation between a willing buyer and seller. If we were to
liquidate a particular asset, the realized value may be more than
or less than the amount at which such asset was recorded.
Accordingly, the value of our common shares could be adversely
affected by our determinations regarding the fair value of our
investments, whether in the applicable period or in the future.
Additionally, such valuations may fluctuate over short periods of
time.
We have made certain accounting elections which may result in
volatility in our periodic net income, as computed in accordance
with GAAP. For example, changes in fair value of certain
instruments are reflected in GAAP net income (loss) while others
are reflected in Other comprehensive income (loss).
New laws may be passed affecting the relationship between Fannie
Mae, Freddie Mac and the federal government.
The interest and principal payments we expect to receive on the
Agency mortgage-backed securities in which we invest are guaranteed
by Fannie Mae, Freddie Mac or Ginnie Mae. Principal and interest
payments on Ginnie Mae certificates are directly guaranteed by the
U.S. government. Principal and interest payments relating to the
securities issued by Fannie Mae and Freddie Mac are only guaranteed
by each respective Agency.
In September 2008, Fannie Mae and Freddie Mac were placed into the
conservatorship of the FHFA, their federal regulator, pursuant to
its powers under The Federal Housing Finance Regulatory Reform Act
of 2008, a part of the Housing and Economic Recovery Act of 2008.
In addition to FHFA becoming the conservator of Fannie Mae and
Freddie Mac, the U.S. Department of the Treasury entered into
Preferred Stock Purchase Agreements with the FHFA and have taken
various actions intended to provide Fannie Mae and Freddie Mac with
additional liquidity in an effort to ensure their financial
stability. In
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
September 2019, FHFA and the U.S. Treasury Department agreed to
modifications to the Preferred Stock Purchase Agreements that will
permit Fannie Mae and Freddie Mac to maintain capital reserves of
$25 billion and $20 billion, respectively.
Shortly after Fannie Mae and Freddie Mac were placed in federal
conservatorship, the Secretary of the U.S. Treasury suggested that
the guarantee payment structure of Fannie Mae and Freddie Mac in
the U.S. housing finance market should be re-examined. The future
roles of Fannie Mae and Freddie Mac could be significantly reduced
and the nature of their guarantees could be eliminated or
considerably limited relative to historical measurements. The U.S.
Treasury could also stop providing credit support to Fannie Mae and
Freddie Mac in the future. Any changes to the nature of the
guarantees provided by Fannie Mae and Freddie Mac could redefine
what constitutes an Agency mortgage-backed security and could have
broad adverse market implications. While the likelihood that major
mortgage finance system reform will be enacted in the short term
remains uncertain, it is possible that the adoption of any such
reforms could adversely affect the types of assets we can buy, the
costs of these assets and our business operations. A reduction in
the ability of mortgage loan originators to access Fannie Mae and
Freddie Mac to sell their mortgage loans may adversely affect the
mortgage markets generally and adversely affect the ability of
mortgagors to refinance their mortgage loans. In addition, any
decline in the value of securities issued by Fannie Mae and Freddie
Mac may affect the value of MBS in general. If Fannie Mae or
Freddie Mac was eliminated, or their structures were to change in a
material manner that is not compatible with our business model, we
would not be able to acquire Agency mortgage-backed securities from
these entities, which could adversely affect our business
operations.
We may be subject to liability for potential violations of
truth-in-lending or other similar consumer protection laws and
regulations.
Federal consumer protection laws and regulations regulate
residential mortgage loan underwriting and originators’ lending
processes, standards, and disclosures to borrowers. These laws and
regulations include, among others, the Consumer Financial
Protection Bureau’s (“CFPB”) “ability-to-repay” and “qualified
mortgage” regulations. In addition, there are various other
federal, state, and local laws and regulations that are intended to
discourage predatory lending practices by residential mortgage loan
originators. For example, the federal Home Ownership and Equity
Protection Act of 1994 (“HOEPA”) which was expanded under the Dodd
Frank Act, prohibits inclusion of certain provisions in residential
mortgage loans that have mortgage rates or origination costs in
excess of prescribed levels and requires that borrowers be given
certain disclosures prior to origination. The Dodd-Frank Act grants
enforcement authority and broad discretionary regulatory authority
to the CFPB to prohibit or condition terms, acts or practices
relating to residential mortgage loans that the CFPB finds abusive,
unfair, deceptive or predatory, as well as to take other actions
that the CFPB finds are necessary or proper to ensure responsible
affordable mortgage credit remains available to consumers. The
Dodd-Frank Act also affects the securitization of mortgages (and
other assets) with requirements for risk retention by securitizers
and requirements for regulating rating agencies.
Numerous regulations have been issued pursuant to the Dodd-Frank
Act, including regulations regarding mortgage loan servicing,
underwriting and loan originator compensation and others could be
issued in the future. These requirements can and do change as
statutes and regulations are enacted, promulgated, amended, and
interpreted, and the recent trends among federal and state
lawmakers and regulators have been toward increasing laws,
regulations, and investigative procedures concerning the mortgage
industry generally. As a result, we are unable to fully predict at
this time how the Dodd-Frank Act, as well as other laws or
regulations that may be adopted in the future, will affect our
business, results of operations and financial condition, or the
environment for repurchase financing and other forms of borrowing,
the investing environment for Agency MBS, non-Agency
mortgage-backed securities and/or residential mortgage and MSR. We
believe that the Dodd-Frank Act and the regulations promulgated
thereunder are likely to continue to increase the economic and
compliance costs for participants in the mortgage and
securitization industries, including us.
Some states have enacted, or may enact, similar laws or
regulations, which in some cases may impose restrictions and
requirements greater than those in place under federal laws and
regulations. In addition, under the anti-predatory lending laws of
some states, the origination of certain residential mortgage loans,
including loans that are classified as “high cost” loans under
applicable law, must satisfy a net tangible benefits test with
respect to the borrower. This test, as well as certain standards
set forth in the “ability-to-repay” and “qualified mortgage”
regulations, may be highly subjective and open to interpretation.
As a result, a court may determine that a residential mortgage loan
did not meet the applicable standard or test even if the originator
reasonably believed such standard or test had been satisfied.
Failure of residential mortgage loan originators or servicers to
comply with federal consumer protection laws and regulations could
subject us, as an assignee or purchaser of these loans (or as an
investor in securities backed by these loans), to monetary
penalties and defenses to foreclosure, including by recoupment or
setoff of damages and costs, which for some violations included the
sum of all finance charges and fees paid by the consumer, and could
result in rescission of the affected residential mortgage loans,
which could adversely impact our business and financial results. On
December 10, 2020, the Consumer Financial Protection Bureau adopted
a set of “bright-line” loan pricing thresholds to replace the
previous qualified mortgage 43% debt-to-income threshold calculated
in accordance with “Appendix Q”. The Consumer Financial Protection
Bureau also created a new category of a qualified mortgage,
referred to as a “Seasoned QM”, which consists of first-lien, fixed
rate loans that met certain performance requirements over a
seasoning period of at least
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
36 months, are held in portfolio until the end of the seasoning
period by the originating creditor or first purchaser, comply with
general restrictions on product features and points and fees, and
meet certain underwriting requirements. At this time, however,
there can be no assurance what impact the final rules will have on
the mortgage market and the “ability-to-repay” rules. Furthermore,
the temporary qualified mortgage provision applicable to certain
mortgage loans eligible for purchase or guarantee by the GSEs under
the ability-to-repay, commonly referred to as the “GSE patch”
expired on October 1, 2022. The impact of the expiration of the
patch on the mortgage market is still unclear.
Various regulatory measures enacted in response to the COVID-19
pandemic affect mortgage servicing and could have a material
adverse effect on our business and financial results. The Federal,
state, or local governments may pass additional stimulus bills,
foreclosure relief measures and may reinstate foreclosure and
eviction moratoriums that may continue to adversely impact the cash
flow on mortgage loans.
The CFPB Director has publicly stated that CFPB is carefully
monitoring conditions in the mortgage market and taking steps to
minimize avoidable foreclosures and address any compliance
failures, including by conducting prioritized assessments, or
targeted supervisory reviews, designed to obtain real-time
information from mortgage servicers due to the elevated risk of
consumer harm because of the COVID 19 pandemic. On June 28, 2021,
the CFPB finalized amendments to the federal mortgage servicing
regulations designed to support the housing market’s transition to
post-pandemic operation. The rules established temporary special
safeguards to help ensure that borrowers have time before
foreclosure to explore their options, including loan modifications
and selling their homes. The rules cover loans on principal
residences, generally exclude small servicers, and took effect on
August 31, 2021. On November 10, 2021, the Board of Governors of
the Federal Reserve, the CFPB, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, the Office
of the Comptroller of the Currency, and the state financial
regulators (collectively, agencies) announced that they were
discontinuing the more flexible supervisory approach announced in
April 2020, concluding that servicers have had sufficient time to
adjust their operations by, among other things, taking steps to
work with consumers affected by the COVID-19 pandemic and
developing more robust business continuity and remote work
capabilities. CFPB’s December 2021 Supervisory Highlights shows,
among other things, that CFPB is prioritizing compliance with
Regulation Z and Regulation X, as well as unfair and deceptive acts
or practices prohibited by the CFPA. The Fall 2022 Supervisory
Highlights report published by the CFPB illustrated enhanced
scrutiny continued throughout the first half of 2022 and, while
some COVID-related provisions sunset in October, its approach is
likely to continue to increase the economic and compliance costs
for participants in the mortgage and securitization industries,
including us, as its examinations remain focused on credit
reporting, mortgage servicing fees charged to consumers, and proper
handling of COVID-19 protections.
We may not be able to maintain compliance with laws and regulations
applicable to our Residential Credit or MSR businesses, including
through the manner in which we oversee the compliance obligations
of our third-party service providers.
While we are not required to obtain licenses to purchase
mortgage-backed securities, the purchase of residential mortgage
loans and certain business purpose mortgage loans in the secondary
market may, in some circumstances, require us to maintain various
state licenses. Acquiring the right to service residential mortgage
loans and certain business purpose mortgage loans may also, in some
circumstances, require us to maintain various state licenses even
though we currently do not expect to directly engage in loan
servicing ourselves. As a result, we could be delayed in conducting
certain business if we were first required to obtain a state
license. We cannot assure you that we will be able to obtain all of
the licenses we need or that we would not experience significant
delays in obtaining these licenses. Furthermore, once licenses are
issued we are required to comply with various information reporting
and other regulatory requirements to maintain those licenses, and
there is no assurance that we will be able to satisfy those
requirements or other regulatory requirements applicable to our
business of acquiring mortgage loans on an ongoing basis. Our
failure to obtain or maintain required licenses or our failure to
comply with regulatory requirements that are applicable to our
business of acquiring mortgage loans may restrict our residential
credit business and investment options and could harm our business
and expose us to penalties or other claims.
Although we utilize unaffiliated servicing companies to carry out
the actual servicing of MSR and the loans we purchase together with
the related MSR (including all direct interface with the
borrowers), we are ultimately responsible, vis-à-vis the borrowers
and state and federal regulators, for ensuring that the loans and
MSR are serviced in accordance with the terms of the related notes
and mortgages and applicable law and regulation. To manage this
risk, we have a robust oversight process that monitors the
activities of the third-party servicers. This oversight process is
also subject to regulatory requirements and expectations that we
are expected to meet.
Changes in laws or regulations governing our operations or our
failure to comply with those laws or regulations may adversely
affect our business.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
We are subject to regulation by laws at the local, state and
federal level, including securities and tax laws and financial
accounting and reporting standards. These laws and regulations, as
well as their interpretation, may be changed from time to time and
result in enhanced disclosure obligations, including with respect
to climate change or other environmental, social, or governance
(“ESG”) topics, increasing our regulatory burden. Moreover,
government efforts to address climate change may impact our
business.
Accordingly, any change in these laws or regulations or the failure
to comply with these laws or regulations could have a material
adverse impact on our business. Certain of these laws and
regulations pertain specifically to REITs.
We are subject to risks and liabilities in connection with
sponsoring, investing in and managing new funds and other
investment accounts, including potential regulatory
risks.
We have, and may in the future, sponsor, manage and serve as
general partner and/or manager of new funds or investment accounts.
Such sponsorship and management of, and investment in, such funds
and accounts may involve risks not otherwise present with a direct
investment in such funds’ and accounts’ target investments,
including, for example:
•the
possibility that investors in the funds/accounts might become
bankrupt or otherwise be unable to meet their capital commitment
obligations;
•that
operating and/or management agreements of a fund/account may
restrict our ability to transfer or liquidate our interest when we
desire or on advantageous terms;
•that
our relationships with the investors will be generally contractual
in nature and may be terminated or dissolved under the terms of the
agreements, or we may be removed as general partner and/or manager
(with or without cause), and
in such event, we may not continue to manage or invest in the
applicable fund/account;
•that
disputes between us and the investors may result in litigation or
arbitration that would increase our expenses and prevent our
officers and directors from focusing their time and effort on our
business and result in subjecting the investments owned by the
applicable fund/account to additional risk; and
•that
we may incur liability for obligations of a fund/account by reason
of being its general partner or manager.
We have a subsidiary that is registered with the SEC as an
investment adviser under the Investment Advisers Act. As a result,
we are subject to the anti-fraud provisions of the Investment
Advisers Act and to fiduciary duties derived from these provisions
that apply to our relationships with that subsidiary’s clients.
These provisions and duties impose restrictions and obligations on
us with respect to our dealings with our subsidiary’s clients,
including, for example, restrictions on agency, cross and principal
transactions. Our registered investment adviser subsidiary is
subject to periodic SEC examinations and other requirements under
the Investment Advisers Act and related regulations primarily
intended to benefit advisory clients. These additional requirements
relate to, among other things, maintaining an effective and
comprehensive compliance program, recordkeeping and reporting
requirements and disclosure requirements. The Investment Advisers
Act generally grants the SEC broad administrative powers, including
the power to limit or restrict an investment adviser from
conducting advisory activities in the event it fails to comply with
federal securities laws. Additional sanctions that may be imposed
for failure to comply with applicable requirements under the
Investment Advisers Act include the prohibition of individuals from
associating with an investment adviser, the revocation of
registrations and other censures and fines. We may in the future be
required to register one or more entities as a commodity pool
operator or commodity trading adviser, subjecting those entities to
the regulations and oversight of the Commodity Futures Trading
Commission and the National Futures Association. We may also become
subject to various international regulations on the asset
management industry.
Loss of our Investment Company Act exemption from registration
would adversely affect us.
We intend to conduct our business so as not to become regulated as
an investment company under the Investment Company Act. We
currently rely on the exemption from registration provided by
Section 3(c)(5)(C) of the Investment Company Act. Section
3(c)(5)(C), as interpreted by the staff of the SEC, requires us to
invest at least 55% of our assets in “mortgages and other liens on
and interest in real estate” (“Qualifying Real Estate Assets”) and
at least 80% of our assets in Qualifying Real Estate Assets plus
our interests in MSR and other real estate related
assets. The assets that we acquire, therefore, are
limited by this provision of the Investment Company Act and the
rules and regulations promulgated under the Investment Company
Act.
We rely on an SEC interpretation that “whole pool certificates”
that are issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie
Mae (“Agency Whole Pool Certificates”) are Qualifying Real Estate
Assets under Section 3(c)(5)(C). This interpretation was
promulgated by the SEC staff in a no-action letter in the 1980s,
was reaffirmed by the SEC in 1992 and has been commonly relied upon
by mortgage REITs.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
On August 31, 2011, the SEC issued a concept release titled
“Companies Engaged in the Business of Acquiring Mortgages and
Mortgage-Related Instruments” (SEC Release No.
IC-29778). In this concept release, the SEC announced it
was reviewing interpretive issues related to the Section 3(c)(5)(C)
exemption. Among other things, the SEC requested
comments on whether it should revisit whether Agency Whole Pool
Certificates may be treated as interests in real estate (and
presumably Qualifying Real Estate Assets) and whether companies,
such as us, whose primary business consists of investing in Agency
Whole Pool Certificates are the type of entities that Congress
intended to be encompassed by the exclusion provided by Section
3(c)(5)(C).
If the SEC changes its views regarding which securities are
Qualifying Real Estate Assets or real estate related assets, adopts
a contrary interpretation with respect to Agency Whole Pool
Certificates or otherwise believes we do not satisfy the exemption
under Section 3(c)(5)(C), we could be required to restructure our
activities or sell certain of our assets. The net effect of
these factors will be to lower our net interest income, which could
negatively affect the market price of shares of our capital stock
and our ability to distribute dividends. If we fail to qualify
for exemption from registration as an investment company, our
ability to use leverage would be substantially reduced, and we
would not be able to conduct our business as
described. Our business will be materially and adversely
affected if we fail to qualify for this exemption.
Risks Related to Our Taxation as a REIT
Our failure to maintain our qualification as a REIT would have
adverse tax consequences.
We believe that since 1997 we have qualified for taxation as a REIT
for U.S. federal income tax purposes under Sections 856 through 860
of the Code. We plan to continue to meet the requirements for
taxation as a REIT. The determination that we are a REIT
requires an analysis of various factual matters and circumstances
that may not be totally within our control. For example, to
maintain our qualification as a REIT, at least 75% of our gross
income must come from real estate sources and 95% of our gross
income must come from real estate sources and certain other sources
that are itemized in the REIT tax laws. Additionally, our
ability to satisfy the REIT asset tests depends upon our analysis
of the characterization and fair market values of our assets, some
of which are not susceptible to precise determination, and for
which we will not obtain independent appraisals. The proper
classification of an instrument as debt or equity for U.S. federal
income tax purposes may be uncertain in some circumstances, which
could affect the application of the REIT asset requirements. We are
also required to distribute to stockholders at least 90% of our
REIT taxable income (determined without regard to the deduction for
dividends paid and by excluding any net capital gain). Even a
technical or inadvertent mistake could jeopardize our REIT
status. Furthermore, Congress and the Internal Revenue
Service (“IRS”) might make changes to the tax laws and regulations,
and the courts might issue new rulings that make it more difficult
or impossible for us to remain qualified as a REIT.
We also indirectly own interests in entities that have elected to
be taxed as REITs under the U.S. federal income tax laws, or
“Subsidiary REITs.” Subsidiary REITs are subject to the various
REIT qualification requirements that are applicable to us. If any
Subsidiary REIT were to fail to qualify as a REIT, then (i) that
Subsidiary REIT would become subject to regular U.S. federal,
state, and local corporate income tax, (ii) our interest in such
Subsidiary REIT would cease to be a qualifying asset for purposes
of the REIT asset tests, and (iii) it is possible that we would
fail certain of the REIT asset tests, in which event we also would
fail to maintain our qualification as a REIT unless we could avail
ourselves of certain relief provisions. While we believe that the
Subsidiary REITs have qualified as REITs under the Code, we have
joined each Subsidiary REIT in filing “protective” TRS elections
under Section 856(l) of the Code. We cannot assure you that such
“protective” TRS elections would be effective to avoid adverse
consequences to us. Moreover, even if the “protective” elections
were to be effective, the Subsidiary REITs would be subject to
regular corporate income tax, and we cannot assure you that we
would not fail to satisfy the requirement that not more than 20% of
the value of our total assets may be represented by the securities
of one or more TRSs. If we fail to maintain our qualification as a
REIT, we would be subject to U.S. federal income tax at regular
corporate rates. Also, unless the IRS were to grant us relief
under certain statutory provisions, we would remain disqualified as
a REIT for four years following the year we first fail to
qualify. If we fail to maintain our qualification as a REIT,
we would have to pay significant income taxes and would therefore
have less money available for investments or for distributions to
our stockholders. This would likely have a significant
adverse effect on the value of our equity. In addition, the
tax law would no longer require us to make distributions to our
stockholders.
A REIT that fails the quarterly asset tests for one or more
quarters will not lose its REIT status as a result of such failure
if either (i) the failure is regarded as a de minimis failure under
standards set out in the Code, or (ii) the failure is greater than
a de minimis failure but is attributable to reasonable cause and
not willful neglect. In the case of a greater than de minimis
failure, however, the REIT must pay a tax and must remedy the
failure within six months of the close of the quarter in which the
failure was identified. In addition, the Code provides relief
for failures of other tests imposed as a condition of REIT
qualification, as long as the failures are attributable to
reasonable cause and not willful neglect. A REIT would be required
to pay a penalty of $50,000, however, in the case of each
failure.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Our distribution requirements could adversely affect our ability to
execute our business plan.
As a REIT, we must distribute at least 90% of our REIT taxable
income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain). The required
distribution limits the amount we have available for other business
purposes, including amounts to fund our growth. Also, it is
possible that because of the differences between the time we
actually receive revenue or pay expenses and the period we report
those items for distribution purposes, we may have to borrow funds
on a short-term basis to meet the 90% distribution
requirement.
To the extent that we satisfy this distribution requirement, but
distribute less than 100% of our taxable income, we will be subject
to U.S. federal corporate income tax on our undistributed taxable
income. In addition, we will be subject to a non-deductible 4%
excise tax if the actual amount that we pay out to our stockholders
in a calendar year is less than a minimum amount specified under
U.S. federal tax laws. We intend to make distributions to our
stockholders to comply with the REIT qualification requirements of
the Code.
From time to time, we may generate taxable income greater than our
income for financial reporting purposes prepared in accordance with
GAAP, or differences in timing between the recognition of taxable
income and the actual receipt of cash may occur. For example, if we
purchase Agency or non-Agency securities at a discount, we
generally are required to accrete the discount into taxable income
prior to receiving the cash proceeds of the accreted discount at
maturity, and in some cases, potentially recognize the discount in
taxable income once such amounts are reflected in our financial
statements. If we do not have other funds available in these
situations we could be required to (i) borrow funds on unfavorable
terms, (ii) sell investments at disadvantageous prices, (iii)
distribute our own stock, or (iv) distribute amounts that would
otherwise be invested in future acquisitions to make distributions
sufficient to enable us to pay out enough of our taxable income to
satisfy the REIT distribution requirement and to avoid the
corporate income tax and 4% excise tax in a particular year. Also,
we or our subsidiaries may hold debt investments that could require
subsequent modifications. If an amendment to an outstanding debt is
a “significant modification” for U.S. federal income tax purposes,
the modified debt may be deemed to have been reissued in a
debt-for-debt taxable exchange with the borrower. This deemed
reissuance could result in a portion of the modified debt not
qualifying as a good REIT asset if the underlying security has
declined in value, and would cause us to recognize income to the
extent the principal amount of the modified debt exceeds our
adjusted tax basis in the unmodified debt. These scenarios could
increase our costs or reduce our stockholders’ equity. Thus,
compliance with the REIT requirements may hinder our ability to
grow, which could adversely affect the value of our
stock.
Conversely, from time to time, we may generate taxable income less
than our income for financial reporting purposes due to GAAP and
tax accounting differences or, as mentioned above, the timing
between the recognition of taxable income and the actual receipt of
cash. In such circumstances we may make distributions
according to our business plan that are within our wherewithal from
an economic or cash management perspective, but that are labeled as
return of capital for tax reporting purposes, as they are in excess
of taxable income in that period.
Distributions to tax-exempt investors may be classified as
unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our
stock nor gain from the sale of our stock are anticipated to
constitute unrelated business taxable income to a tax-exempt
investor. However, there are certain exceptions to this rule. In
particular:
•part
of the income and gain recognized by certain qualified employee
pension trusts with respect to our stock may be treated as
unrelated business taxable income if shares of our stock are
predominantly held by qualified employee pension trusts, and we are
required to rely on a special look-through rule for purposes of
meeting one of the REIT ownership tests, and we are not operated in
a manner to avoid treatment of such income or gain as unrelated
business taxable income;
•part
of the income and gain recognized by a tax-exempt investor with
respect to our stock would constitute unrelated business taxable
income if the investor incurs debt in order to acquire the
stock;
•part
or all of the income or gain recognized with respect to our stock
by social clubs, voluntary employee benefit associations,
supplemental
unemployment benefit trusts and qualified group legal services
plans which are exempt from U.S. federal income taxation under the
Code may be treated as unrelated business taxable
income;
•to
the extent that we (or a part of us, or a disregarded subsidiary of
ours) are a “taxable mortgage pool,” or if we hold residual
interests in a real estate mortgage investment conduit or a
CLO;
•a
portion of the distributions paid to a tax-exempt stockholder that
is allocable to excess inclusion income may be treated as unrelated
business taxable income.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
We may choose to pay dividends in our own stock.
We may in the future distribute taxable dividends that are payable
in cash or shares of our stock at the election of each stockholder.
Taxable stockholders receiving such dividends will be required to
include the full amount of the dividend as ordinary income to the
extent of our current and accumulated earnings and profits for U.S.
federal income tax purposes. As a result, stockholders may be
required to pay income taxes with respect to such dividends in
excess of the cash dividends received. If a U.S. stockholder sells
the stock that it receives as a dividend in order to pay this tax,
the sales proceeds may be less than the amount included in income
with respect to the dividend, depending on the market price of our
stock at the time of the sale. Furthermore, with respect to certain
non-U.S. stockholders, we may be required to withhold U.S. tax with
respect to such dividends, including in respect to all or a portion
of such dividend that is payable in stock. In addition, if a
significant number of our stockholders determine to sell shares of
our stock in order to pay taxes owed on dividends, it may put
downward pressure on the trading price of our stock.
Our TRSs cannot constitute more than 20% of our total
assets.
A TRS is a corporation, other than a REIT or a qualified REIT
subsidiary, in which a REIT owns stock and with which the REIT
jointly elects TRS status. The term also includes a corporate
subsidiary in which the TRS owns more than a 35%
interest.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS
may earn income that would not be qualifying income if it was
earned directly by the parent REIT. Overall, at the close of
any calendar quarter, no more than 20% of
the value of a REIT’s assets may consist of stock or securities of
one or more TRSs.
The stock and securities of our TRSs are expected to represent less
than 20% of the value of our total assets. Furthermore, we
intend to monitor the value of our investments in the stock and
securities of our TRSs to ensure compliance with the
above-described limitation. We cannot assure you, however,
that we will always be able to comply with the limitation so as to
maintain REIT status.
TRSs are subject to tax at the regular corporate rates, are not
required to distribute dividends, and the amount of dividends a TRS
can pay to its parent REIT may be limited by REIT gross income
tests.
A TRS must pay income tax at regular corporate rates on any income
that it earns. In certain circumstances, the ability of our
TRSs to deduct interest expenses for U.S. federal income tax may be
limited. Such income, however, is not required to be distributed.
Our TRSs will pay corporate income tax on their taxable income, and
their after-tax net income will be available for distribution to
us.
Moreover, the annual gross income tests that must be satisfied to
maintain our REIT qualification may limit the amount of dividends
that we can receive from our TRSs. Generally, not more than
25% of our gross income can be derived from non-real estate related
sources, such as dividends from a TRS. If, for any taxable
year, the dividends we receive from our TRSs, when added to our
other items of non-real estate related income, were to represent
more than 25% of our total gross income for the year, we could be
denied REIT status, unless we were able to demonstrate, among other
things, that our failure of the gross income test was due to
reasonable cause and not willful neglect.
The limitations imposed by the REIT gross income tests may impede
our ability to distribute assets from our TRSs to us in the form of
dividends. Certain asset transfers may, therefore, have to be
structured as purchase and sale transactions upon which our TRSs
recognize a taxable gain.
If transactions between a REIT and a TRS are entered into on other
than arm’s-length terms, the REIT may be subject to a penalty
tax.
If interest accrues on an indebtedness owed by a TRS to its parent
REIT at a rate in excess of a commercially reasonable rate, then
the REIT would be subject to tax at a rate of 100% on the excess of
(i) interest payments made by a TRS to its parent REIT over (ii)
the amount of interest that would have been payable had interest
accrued on the indebtedness at a commercially reasonable
rate. A tax at a rate of 100% is also imposed on any
transaction between a TRS and its parent REIT to the extent the
transaction gives rise to deductions to the TRS that are in excess
of the deductions that would have been allowable had the
transaction been entered into on arm’s-length terms. While we
will scrutinize all of our transactions with our TRSs in an effort
to ensure that we do not become subject to these taxes, there is no
assurance that we will be successful. We may not be able to
avoid application of these taxes.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Even if we remain qualified as a REIT, we may face other tax
liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be
subject to certain federal, state and local taxes on our income and
assets, including taxes on any undistributed income, tax on income
from some activities conducted as a result of a foreclosure, excise
taxes, state or local income, property and transfer taxes, such as
mortgage recording taxes, and other taxes. In addition, in order to
meet the REIT qualification requirements, prevent the recognition
of certain types of non-cash income, or to avert the imposition of
a 100% tax that applies to certain gains derived by a REIT from
dealer property or inventory, we may hold some of our assets
through our TRSs or other subsidiary corporations that will be
subject to corporate level income tax at regular
rates.
Complying with REIT requirements may cause us to forgo otherwise
attractive opportunities and may force us to liquidate otherwise
attractive investments.
To remain qualified as a REIT for U.S. federal income tax purposes,
we must continually satisfy tests concerning, among other things,
the sources of our income, the nature and diversification of our
assets, the amounts that we distribute to our stockholders and the
ownership of our stock. Our ability to acquire and hold our
investments is subject to the applicable REIT qualification tests.
We must ensure that at the end of each calendar quarter, at least
75% of the value of our assets consists of cash, cash items, U.S.
Government securities and qualified real estate assets. The
remainder of our investment in securities (other than U.S.
Government securities, qualified real estate assets and securities
issued by a TRS) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of
the total value of the outstanding securities of any one issuer. In
addition, in general, no more than 5% of the value of our assets
(other than U.S. Government securities, qualified real estate
assets and securities issued by a TRS) can consist of the
securities of any one issuer, and no more than 20% of the value of
our total assets can be represented by securities of one or more
TRSs.
Changes in the values or other features of our assets could cause
inadvertent violations of the REIT requirements. If we fail to
comply with the REIT requirements at the end of any calendar
quarter, we must correct the failure within 30 days after the end
of the calendar quarter or qualify for certain statutory relief
provisions to avoid losing our REIT qualification and suffering
adverse tax consequences. Additionally, we may be required to make
distributions to stockholders at disadvantageous times or when we
do not have funds readily available for distribution.
Accordingly we may be unable to pursue investments that would be
otherwise advantageous to us or be required to liquidate from our
investment portfolio otherwise attractive investments if we feel it
is necessary to satisfy the source-of-income, asset-diversification
or distribution requirements for qualifying as a REIT. These
actions could have the effect of reducing our income and amounts
available for distribution to our stockholders.
Liquidation of assets may jeopardize our REIT qualification or
create additional tax liability for us.
To remain qualified as a REIT, we must comply with requirements
regarding the composition of our assets and our sources of income.
If we are compelled to liquidate our investments to repay
obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our qualification as a REIT,
or we may be subject to a 100% tax on any resultant gain if we sell
assets that are treated as dealer property or
inventory.
The failure of assets subject to repurchase agreements to qualify
as real estate assets could adversely affect our ability to remain
qualified as a REIT.
We enter into certain financing arrangements that are structured as
sale and repurchase agreements pursuant to which we nominally sell
certain of our assets to a counterparty and simultaneously enter
into an agreement to repurchase these assets at a later date in
exchange for a purchase price. Economically, these agreements are
financings that are secured by the assets sold pursuant thereto,
and we treat them as such for U.S. federal income tax purposes. We
believe that we would be treated for REIT asset and income test
purposes as the owner of the assets that are the subject of any
such sale and repurchase agreement notwithstanding that such
agreement may transfer record ownership of the assets to the
counterparty during the term of the agreement. It is possible,
however, that the IRS could assert that we did not own the assets
during the term of the sale and repurchase agreement, in which case
we could fail to remain qualified as a REIT.
Complying with REIT requirements may limit our ability to hedge
effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code could substantially limit our
ability to hedge our liabilities. Any income from a properly
designated hedging transaction we enter into to manage risk of
interest rate changes with respect to borrowings made or to
be
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
made, or ordinary obligations incurred or to be incurred, to
acquire or carry real estate assets generally does not constitute
“gross income” for purposes of the 75% or 95% gross income tests.
To the extent that we enter into other types of hedging
transactions, the income from those transactions is likely to be
treated as non-qualifying income for purposes of both of the gross
income tests. As a result of these rules, we may have to limit our
use of advantageous hedging techniques or implement those hedges
through our TRSs. This could increase the cost of our hedging
activities because our TRSs would be subject to tax on gains or
expose us to greater risks associated with changes in interest
rates than we would otherwise want to bear. In addition, losses in
our TRSs generally will not provide any tax benefit, except for
being carried forward potentially to offset taxable income in the
TRSs for future periods.
The failure of a mezzanine loan or similar debt to qualify as a
real estate asset could adversely affect our ability to qualify as
a REIT.
From time to time, we have invested and may in the future invest in
mezzanine loans and similar debt (including preferred equity
investments that we treat as mezzanine loans for U.S. federal
income tax purposes), for which the IRS has provided a safe harbor
but not rules of substantive law. Pursuant to the safe harbor, if a
mezzanine loan meets certain requirements, it will be treated by
the IRS as a real estate asset for purposes of the REIT asset
tests, and interest derived from the mezzanine loan will be treated
as qualifying mortgage interest for purposes of the REIT 75% income
test. The mezzanine loans or similar debt that we may acquire may
not have met all of the requirements of this safe harbor. In the
event we owned a mezzanine loan or similar debt that does not meet
the safe harbor, the IRS could challenge such loan’s treatment as a
real estate asset for purposes of the REIT asset and income tests
and, if such a challenge were sustained, we could fail to maintain
our qualification as a REIT.
Qualifying as a REIT involves highly technical and complex
provisions of the Code.
Qualification as a REIT involves the application of highly
technical and complex Code provisions for which only limited
judicial and administrative authorities exist. Even a technical or
inadvertent violation could jeopardize our REIT qualification. Our
continued qualification as a REIT depends on our satisfaction of
certain asset, income, organizational, distribution, stockholder
ownership and other requirements on a continuing basis. In
addition, our ability to satisfy the REIT qualification
requirements depends in part on the actions of third parties over
which we have no control or only limited influence, including in
cases where we own an equity interest in an entity that is
classified as a partnership for U.S. federal income tax
purposes.
The tax on prohibited transactions limits our ability to engage in
certain transactions.
The 100% tax on prohibited transactions will limit our ability to
engage in transactions, including certain methods of structuring
CMOs, which would be treated as prohibited transactions for U.S.
federal income tax purposes.
The term “prohibited transaction” generally includes a sale or
other disposition of property (including mortgage loans, but other
than foreclosure property, as discussed below) that is held
primarily for sale to customers in the ordinary course of a trade
or business by us or by a borrower that has issued a shared
appreciation mortgage or similar debt instrument to us. We could be
subject to this tax if we were to dispose of or structure CMOs in a
manner that was treated as a prohibited transaction for U.S.
federal income tax purposes.
We intend to conduct our operations at the REIT level so that no
asset that we own (or are treated as owning) will be treated as or
as having been, held for sale to customers, and that a sale of any
such asset will not be treated as having been in the ordinary
course of our business. As a result, we may choose not to engage in
certain transactions at the REIT level, and may limit the
structures we utilize for our CMO transactions, even though the
sales or structures might otherwise be beneficial to us. In
addition, whether property is held “primarily for sale to customers
in the ordinary course of a trade or business” depends on the
particular facts and circumstances. No assurance can be given that
any property that we sell will not be treated as property held for
sale to customers, or that we can comply with certain safe-harbor
provisions of the Code that would prevent such treatment. The 100%
tax does not apply to gains from the sale of property that is held
through a TRS or other taxable corporation, although such income
will be subject to tax in the hands of the corporation at regular
corporate rates. We intend to structure our activities to avoid the
prohibited transaction tax.
Certain financing activities may subject us to U.S. federal income
tax and could have negative tax consequences for our
stockholders.
We may enter into securitization transactions and other financing
transactions that could result in us, or a portion of our assets,
being treated as a taxable mortgage pool for U.S. federal income
tax purposes. If we enter into such a transaction in the
future,
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
we could be taxable at the highest corporate income tax rate on a
portion of the income arising from a taxable mortgage pool,
referred to as “excess inclusion income,” that is allocable to the
percentage of our shares held in record name by disqualified
organizations (generally tax-exempt entities that are exempt from
the tax on unrelated business taxable income, such as state pension
plans and charitable remainder trusts and government entities). In
that case, we could reduce distributions to such stockholders by
the amount of tax paid by us that is attributable to such
stockholder's ownership.
If we were to realize excess inclusion income, IRS guidance
indicates that the excess inclusion income would be allocated among
our stockholders in proportion to the dividends paid. Excess
inclusion income cannot be offset by losses of a stockholder. If
the stockholder is a tax-exempt entity and not a disqualified
organization, then this income would be fully taxable as unrelated
business taxable income under Section 512 of the Code. If the
stockholder is a foreign person, it would be subject to U.S.
federal income tax at the maximum tax rate and withholding will be
required on this income without reduction or exemption pursuant to
any otherwise applicable income tax treaty.
Uncertainty exists with respect to the treatment of our TBAs for
purposes of the REIT asset and income tests.
We purchase and sell Agency mortgage-backed securities through TBAs
and recognize income or gains from the disposition of those TBAs,
through dollar roll transactions or otherwise, and may continue to
do so in the future. While there is no direct authority with
respect to the qualification of TBAs as real estate assets or U.S.
Government securities for purposes of the 75% asset test or the
qualification of income or gains from dispositions of TBAs as gains
from the sale of real property (including interests in real
property and interests in mortgages on real property) or other
qualifying income for purposes of the 75% gross income test, we
treat our TBAs as qualifying assets for purposes of the REIT asset
tests, and we treat income and gains from our TBAs as qualifying
income for purposes of the 75% gross income test, based on an
opinion of counsel substantially to the effect that (i) for
purposes of the REIT asset tests, our ownership of a TBA should be
treated as ownership of real estate assets, and (ii) for purposes
of the 75% REIT gross income test, any gain recognized by us in
connection with the settlement of our TBAs should be treated as
gain from the sale or disposition of an interest in mortgages on
real property. Opinions of counsel are not binding on the IRS, and
no assurance can be given that the IRS will not successfully
challenge the conclusions set forth in such opinions. In addition,
it must be emphasized that the opinion of counsel is based on
various assumptions relating to our TBAs and is conditioned upon
fact-based representations and covenants made by our management
regarding our TBAs. No assurance can be given that the IRS would
not assert that such assets or income are not qualifying assets or
income. If the IRS were to successfully challenge the opinion of
counsel, we could be subject to a penalty tax or we could fail to
remain qualified as a REIT if a sufficient portion of our assets
consists of TBAs or a sufficient portion of our income consists of
income or gains from the disposition of TBAs.
Dividends payable by REITs generally receive different tax
treatment than dividend income from regular
corporations.
Qualified dividend income payable to U.S. stockholders that are
individuals, trusts and estates is subject to the reduced maximum
tax rate applicable to capital gains. Dividends payable by REITs,
however, generally are not eligible for the reduced qualified
dividend rates. Non-corporate taxpayers may deduct up to 20% of
certain pass-through business income, including “qualified REIT
dividends” (generally, dividends received by a REIT shareholder
that are not designated as capital gain dividends or qualified
dividend income), subject to certain limitations, resulting in an
effective maximum U.S. federal income tax rate of 29.6% on such
income. Although the reduced U.S. federal income tax rate
applicable to qualified dividend income does not adversely affect
the taxation of REITs or dividends payable by REITs, the more
favorable rates applicable to regular corporate qualified dividends
could cause investors who are individuals, trusts and estates to
perceive investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of
REITs, including our stock. Tax rates could be changed in future
legislation.
New legislation or administrative or judicial action, in each
instance potentially with retroactive effect, could make it more
difficult or impossible for us to remain qualified as a
REIT.
The present U.S. federal income tax treatment of REITs may be
modified, possibly with retroactive effect, by legislative,
judicial or administrative action at any time, which could affect
the U.S. federal income tax treatment of an investment in us. The
U.S. federal income tax rules dealing with REITs constantly are
under review by persons involved in the legislative process, the
IRS and the U.S. Treasury, which results in statutory changes as
well as frequent revisions to regulations and interpretations.
Future revisions in federal tax laws and interpretations thereof
could affect or cause us to change our investments and commitments
and affect the tax considerations of an investment in
us.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Counterparty Risks
The soundness of our counterparties and other financial
institutions could adversely affect us.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty, borrower, or other relationships.
We have exposure to many different counterparties, and routinely
execute transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, mortgage companies, and
other financial institutions. Many of these transactions expose us
to credit or counterparty risk in the event of default of our
counterparty or, in certain instances, our counterparty’s
customers. There is no assurance that any such losses would not
materially and adversely impact our revenues, financial condition
and earnings.
We are subject to counterparty risk and may be unable to seek
indemnity or require counterparties to repurchase residential whole
loans if they breach representations and warranties, which could
cause us to suffer losses.
When selling or securitizing mortgage loans, sellers typically make
customary representations and warranties about such loans.
Residential mortgage loan purchase agreements may entitle the
purchaser of the loans to seek indemnity or demand repurchase or
substitution of the loans in the event the seller of the loans
breaches a representation or warranty given to the purchaser. There
can be no assurance that a mortgage loan purchase agreement will
contain appropriate representations and warranties, that we or the
trust that purchases the mortgage loans would be able to enforce a
contractual right to repurchase or substitution, or that the seller
of the loans will remain solvent or otherwise be able to honor its
obligations under its mortgage loan purchase agreements. The
inability to obtain or enforce an indemnity or require repurchase
of a significant number of loans could adversely affect our results
of operations, financial condition and business.
Investment and Market Related Risks
We may experience declines in the market value of our
assets.
We may experience declines in the market value of our assets due to
interest rate changes, deterioration of the credit of the borrower
or counterparty, or other reasons described in other risk factors.
These declines can result in fair value adjustments, impairments,
decreases in reported asset and earnings, margin calls, liquidity
risks, and other adverse impacts.
Investments in MSR may expose us to additional risks.
We invest in MSR and financial instruments whose cash flows are
considered to be largely dependent on underlying MSR that either
directly or indirectly act as collateral for the investment. We
expect to increase our exposure to MSR-related investments in 2023.
Generally, we have the right to receive certain cash flows from the
owner of the MSR that are generated from the servicing fees and/or
excess servicing spread associated with the MSR. Our investments in
MSR-related assets expose us to risks associated with MSR,
including the following:
•Investments
in MSR are highly illiquid and subject to numerous restrictions on
transfer and, as a result, there is risk that we would be unable to
locate a willing buyer or get required approval to sell MSR in the
future should we desire to do so.
•Our
rights to the excess servicing spread are subordinate to the
interests of Fannie Mae, Freddie Mac and Ginnie Mae, and are
subject to extinguishment. Fannie Mae and Freddie Mac each require
approval of the sale of excess servicing spreads pertaining to
their respective MSR. We have entered into acknowledgment
agreements or subordination of interest agreements with them, which
acknowledge our subordinated rights.
•Changes
in minimum servicing compensation for agency loans could occur at
any time and could negatively impact the value of the income
derived from MSR.
•The
value of MSR is highly sensitive to changes in prepayment rates.
Decreasing market interest rates are generally associated with
increases in prepayment rates as borrowers are able to refinance
their loans at lower costs. Prepayments result in the partial or
complete loss of the cash flows from the related MSR. Accordingly,
an increase in prepayments can result in a reduction in the value
and income we may earn of our MSR related assets and negatively
affect our profitability.
•While
we have executed recapture agreements with our subservicers to
attempt to retain the MSR investment resulting from a refinance
transaction, the effectiveness of these efforts is impacted by
borrower, subservicer, and unaffiliated lender
behavior.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
•Servicers
are responsible for advancing the payment of principal, interest,
and escrow items on mortgage loans when those payments are not
timely made by the borrower (including during periods of
forbearance) and the timing and amount of recovery of those
advances is unpredictable.
•The
ongoing impact of COVID-19 on the exposure resulting from loans
that are delinquent, defaulted or in foreclosure. The federal CARES
Act as well as various state laws and foreclosure and eviction
moratoria have increased the cost and complexity of operational
controls, expanded the scope and duration of loss mitigation
options, and impacted the timing and process of foreclosure and
foreclosure alternatives. These limitations can cause delayed or
reduced collections and generally increase costs.
If we are not able to successfully manage these and other risks
related to investing in MSR, it may adversely affect the value of
our MSR-related assets.
A prolonged economic slowdown or declining real estate values could
impair the assets we may own.
Our non-Agency mortgage-backed securities, mortgage loans, and MSR
may be susceptible to economic slowdowns or recessions, which could
lead to financial losses in our assets and a decrease in revenues,
net income and asset values.
Owners of Agency mortgage-backed securities are protected from the
risk of default on the underlying mortgages by guarantees from
Fannie Mae, Freddie Mac or, in the case of the Ginnie Mae, the U.S.
Government. A default on those underlying mortgages exposes us to
prepayment risk described above, but not a credit loss. However, we
also acquire CRTs, non-Agency mortgage-backed securities and
residential loans, which are backed by residential real property
but, in contrast to Agency mortgage-backed securities, the
principal and interest payments are not guaranteed by GSEs or the
U.S. Government. Our CRT, non-Agency mortgage-backed securities and
residential loan investments are therefore particularly sensitive
to recessions and declining real estate values.
In the event of a default on one of the residential mortgage loans
that we hold in our portfolio or a mortgage loan underlying CRT or
non-Agency mortgage-backed securities in our portfolio, we bear the
risk of loss as a result of the potential deficiency between the
value of the collateral and the debt owed, as well as the costs and
delays of foreclosure or other remedies, and the costs of
maintaining and ultimately selling a property after foreclosure.
Delinquencies and defaults on mortgage loans for which we own the
servicing rights will adversely affect the amount of servicing fee
income we receive and may result in increased servicing costs and
operational risks due to the increased complexity of servicing
delinquent and defaulted mortgage loans.
An increase in interest rates may adversely affect the market value
of our interest earning assets and, therefore, also our book
value.
Increases in interest rates may negatively affect the market value
of our interest earning assets because in a period of rising
interest rates, the value of certain interest earning assets may
fall and reduce our book value. For example, our fixed-rate
interest earning assets are generally negatively affected by
increases in interest rates because in a period of rising rates,
the coupon we earn on our fixed-rate interest earning assets would
not change. Our book value would be reduced by the amount of a
decline in the market value of our interest earning
assets.
Actions by the Federal Reserve may affect the price and returns of
our assets.
The Federal Reserve (the “Fed”) owns approximately $2.6 trillion of
Agency mortgage-backed securities as of December 31, 2022. Certain
actions taken by the U.S. government, including the Fed, may have a
negative a impact on our results. For example, rising short-term
interest rates as the Fed lifts its monetary policy rate to slow
the currently elevated rate of inflation may have a negative impact
on our results. Meanwhile, any potential future reduction of the
Fed’s balance sheet might lead to higher interest rate volatility
and wider mortgage-backed security spreads that could negatively
impact Annaly’s portfolio.
We invest in securities that are subject to mortgage credit
risk.
We invest in securities in the credit risk transfer CRT
sector. The CRT sector is comprised of the risk sharing
transactions issued by Fannie Mae (“CAS”) and Freddie Mac
(“STACR”), and similarly structured transactions arranged by third
party market participants. The securities issued in the
CRT sector are designed to synthetically transfer mortgage credit
risk from Fannie Mae and Freddie Mac to private investors. The
holder of the securities in the CRT sector has the risk that the
borrowers may default on their obligations to make full and timely
payments of principal and interest. Investments in securities
in the CRT sector could cause us to incur losses of income from,
and/or losses in market value relating to, these assets if there
are
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
defaults of principal and/or interest on the pool of mortgages
referenced in the transaction. The holder of the CRT may also bear
the risk of the default of the issuer of the security.
Geographic concentration exposes investors to greater risk of
default and loss.
Repayments by borrowers and the market value of the related assets
could be affected by economic conditions generally or specific to
geographic areas or regions of the United States, and
concentrations of mortgaged residential properties in particular
geographic areas may increase the risk that adverse economic or
other developments or natural or man-made disasters affecting a
particular region of the country could increase the frequency and
severity of losses on mortgage loans or other real estate debt
secured by those properties. From time to time, regions of
the United States experience significant real estate downturns when
others do not. Regional economic declines or conditions in
regional real estate markets could adversely affect the income
from, and market value of, the mortgaged properties. In
addition, local or regional economies may be adversely affected to
a greater degree than other areas of the country by developments
affecting industries concentrated in such area. A decline in
the general economic condition in the region in which mortgaged
properties securing the related mortgage loans are located would
result in a decrease in consumer demand in the region, and the
income from and market value of the mortgaged properties may be
adversely affected.
Other regional factors – e.g., rising sea levels, earthquakes,
floods, forest fires, hurricanes or changes in governmental rules
(including rules related to the COVID-19 pandemic) or fiscal
policies – also may adversely affect the mortgaged
properties. Assets in certain regional areas may be more
susceptible to certain hazards (such as earthquakes, widespread
fires, floods or hurricanes) than properties in other parts of the
country and collateral properties located in coastal states may be
more susceptible to hurricanes than properties in other parts of
the country. As a result, areas affected by such events often
experience disruptions in travel, transportation and tourism, loss
of jobs and an overall decrease in consumer activity, and often a
decline in real estate-related investments. These types of
occurrences may increase over time or become more severe due to
changes in weather patterns and other climate changes. There can be
no assurance that the economies in such impacted areas will recover
sufficiently to support income producing real estate at pre-event
levels or that the costs of the related clean-up will not have a
material adverse effect on the local or national
economy.
Inadequate property insurance coverage could have an adverse impact
on our operating results.
Residential real estate assets may suffer casualty losses due to
risks (including acts of terrorism) that are not covered by
insurance or for which insurance coverage requirements have been
contractually limited by the related loan documents.
Moreover, if reconstruction or major repairs are required following
a casualty, changes in laws that have occurred since the time of
original construction may materially impair the borrower’s ability
to effect such reconstruction or major repairs or may materially
increase the cost thereof.
There is no assurance that borrowers have maintained or will
maintain the insurance required under the applicable loan documents
or that such insurance will be adequate. In addition, since
the residential mortgage loans generally do not require maintenance
of terrorism insurance, we cannot assure you that any property will
be covered by terrorism insurance. Therefore, damage to a
collateral property caused by acts of terror may not be covered by
insurance and may result in substantial losses to us.
Our assets may become non-performing or sub-performing assets in
the future.
Our assets may in the near or the long term become non-performing
or sub-performing assets, which are subject to increased risks
relative to performing assets. Residential mortgage loans may
become non-performing or sub-performing for a variety of reasons
that result in the borrower being unable to meet its debt service
and/or repayment obligations, such as the underlying property being
too highly leveraged or the financial distress of the borrower.
Such non-performing or sub-performing assets may require a
substantial amount of workout negotiations and/or restructuring,
which may involve substantial cost and divert the attention of our
management from other activities and may entail, among other
things, a substantial reduction in interest rate, the
capitalization of interest payments and/or a substantial write-down
of the principal of the loan. Even if a restructuring were
successfully accomplished, the borrower may not be able or willing
to maintain the restructured payments or refinance the restructured
loan upon maturity.
From time to time we may find it necessary or desirable to
foreclose the liens of loans we acquire or originate, and the
foreclosure process may be lengthy and expensive. Borrowers may
resist foreclosure actions by asserting numerous claims,
counterclaims and defenses to payment against us (such as lender
liability claims and defenses) even when such assertions may have
no basis in fact or law, in an effort to prolong the foreclosure
action and force the lender into a modification of the loan or a
favorable buy-out of the borrower’s position. In some states,
foreclosure actions can take several years or more to litigate.
At
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
any time prior to or during the foreclosure proceedings, the
borrower may file for bankruptcy, which would have the effect of
staying the foreclosure actions and further delaying the resolution
of our claims. Foreclosure may create a negative public perception
of the related property, resulting in a diminution of its value.
Even if we are successful in foreclosing on a loan, the liquidation
proceeds upon sale of the underlying real estate may not be
sufficient to recover our cost basis in the loan, resulting in a
loss to us. Furthermore, any costs or delays involved in the
foreclosure of a loan or a liquidation of the underlying property
will further reduce the proceeds and thus increase our loss. Any
such reductions could materially and adversely affect the value of
the residential mortgage loans in which we invest.
Whether or not we have participated in the negotiation of the terms
of a loan, there can be no assurance as to the adequacy of the
protection of the terms of the loan, including the validity or
enforceability of the loan and the maintenance of the anticipated
priority and perfection of the applicable security interests.
Furthermore, claims may be asserted that might interfere with
enforcement of our rights. In the event of a foreclosure, we may
assume direct ownership of the underlying real estate. The
liquidation proceeds upon sale of that real estate may not be
sufficient to recover our cost basis in the loan, resulting in a
loss to us. Any costs or delays involved in the effectuation of a
foreclosure of the loan or a liquidation of the underlying property
will further reduce the proceeds and increase our
loss.
Whole loan mortgages are also subject to “special hazard” risk
(property damage caused by hazards, such as earthquakes or
environmental hazards, not covered by standard property insurance
policies), and to bankruptcy risk (reduction in a borrower’s
mortgage debt by a bankruptcy court). In addition, claims may be
assessed against us on account of our position as mortgage holder
or property owner, as applicable, including responsibility for tax
payments, environmental hazards and other liabilities, which could
have a material adverse effect on our results of operations,
financial condition and our ability to make distributions to our
stockholders.
We may be required to repurchase residential mortgage loans or
indemnify investors if we breach representations and
warranties.
When we sell or securitize loans, we will be required to make
customary representations and warranties about such loans to the
loan purchaser. Our mortgage loan sale agreements will require us
to repurchase or substitute loans in the event we breach a
representation or warranty given to the loan purchaser. In
addition, we may be required to repurchase loans as a result of
borrower fraud or in the event of early payment default on a
mortgage loan. Likewise, we may be required to repurchase or
substitute loans if we breach a representation or warranty in
connection with our securitizations. The remedies available to a
purchaser of mortgage loans are generally broader than those
available to us against the originating broker or correspondent.
Further, if a purchaser enforces its remedies against us, we may
not be able to enforce the remedies we have against the sellers.
The repurchased loans typically can only be financed at a steep
discount to their repurchase price, if at all. They are also
typically sold at a significant discount to the unpaid principal
balance. Significant repurchase activity could adversely affect our
cash flow, results of operations, financial condition and business
prospects.
Our and our third party service providers’ and servicers’ due
diligence of potential assets may not reveal all weaknesses in such
assets.
Before acquiring a residential real estate debt asset, we will
assess the strengths and weaknesses of the borrower, originator or
issuer of the asset as well as other factors and characteristics
that are material to the performance of the asset. In making the
assessment and otherwise conducting customary due diligence, we
will rely on resources available to us, including our third party
service providers and servicers. This process is particularly
important with respect to newly formed originators or issuers
because there may be little or no information publicly available
about these entities and assets. There can be no assurance that our
due diligence process will uncover all relevant facts or that any
asset acquisition will be successful.
When we foreclose on an asset, we may come to own the property
securing the loan.
When we foreclose on a residential real estate asset, we may take
title to the property securing that asset, and if we do not or
cannot sell the property, we would then come to own and operate it
as “real estate owned.” Owning and operating real property involves
risks that are different (and in many ways more significant) than
the risks faced in owning a debt instrument secured by that
property. In addition, we may end up owning a property that we
would not otherwise have decided to acquire directly at the price
of our original investment or at all. If we foreclose on and come
to own property, our financial performance and returns to investors
could suffer.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
Proposals to acquire mortgage loans by eminent domain may adversely
affect the value of our assets.
Local governments have taken steps to consider how the power of
eminent domain could be used to acquire residential mortgage loans.
There can be no certainty whether any mortgage loans sought to be
purchased will be mortgage loans held in securitization trusts and
what purchase price would be paid for any such mortgage loans. Any
such actions could have a material adverse effect on the market
value of our mortgage-backed securities, mortgage loans and MSR.
There is also no certainty as to whether any such action without
the consent of investors would face legal challenge, and, if so,
the outcome of any such challenge.
Subordinated tranches of non-Agency mortgage-backed securities are
subordinate in right of payment to more senior
securities.
Our investments may include subordinated tranches of non-Agency
mortgage-backed securities, which are subordinated classes of
securities in a structure of securities collateralized by a pool of
mortgage loans and, accordingly, are the first or among the first
to bear the loss upon a restructuring or liquidation of the
underlying collateral and the last to receive payment of interest
and principal. Additionally, estimated fair values of these
subordinated interests tend to be more sensitive to changes in
economic conditions than more senior securities. As a result, such
subordinated interests generally are not actively traded and may
not be liquid investments.
Our hedging strategies may be costly, and may not hedge our risks
as intended.
Our policies permit us to enter into interest rate swaps, caps and
floors, interest rate swaptions, interest rate futures, and other
derivative transactions to help us mitigate our interest rate and
prepayment risks described above subject to maintaining our
qualification as a REIT and our Investment Company Act
exemption. We have used interest rate swaps and options to
enter into interest rate swaps (commonly referred to as interest
rate swaptions) to provide a level of protection against interest
rate risks. We may also purchase or sell TBAs on Agency
mortgage-backed securities, purchase or write put or call options
on TBAs and invest in other types of mortgage derivatives, such as
interest-only securities. No hedging strategy can protect us
completely. Interest rate hedging may fail to protect or could
adversely affect us because, among other things: interest rate
hedging can be expensive, particularly during periods of volatile
interest rates; available hedges may not correspond directly with
the risk for which protection is sought; and the duration of the
hedge may not match the duration of the related asset or liability.
The expected transition from LIBOR to alternative reference rates
adds additional complication to our hedging
strategies.
We are subject to risks of loss from weather conditions, man-made
or natural disasters and climate change.
To the extent that climate change impacts changes in weather
patterns, assets in which we hold a direct or indirect interest
could experience severe weather, including hurricanes, severe
winter storms, and flooding due to increases in storm intensity and
rising sea levels, among other effects that could impact house
prices and housing-related costs and/or disrupt borrowers’ ability
to pay their mortgage and or loan. Moreover, long term climate
change could trigger extreme weather conditions that result in
macroeconomic and demographic shifts. Over time, these conditions
could result in repricing of the assets (land, property,
securities) that we hold. There can be no assurance that climate
change and severe weather will not have a material adverse effect
on our financial performance.
Operational and Cybersecurity Risks
Inaccurate models or the data used by models may expose us to
risk.
Given our strategies and the complexity of the valuation of our
assets, we must rely heavily on analytical models (both proprietary
models developed by us and those supplied by third parties) and
information and data supplied by our third party vendors and
servicers. Models and data are used to value assets or potential
asset purchases and also in connection with hedging our assets.
When models and data prove to be incorrect, misleading or
incomplete, any decisions made in reliance thereon expose us to
potential risks. For example, by relying on models and data,
especially valuation models, we may be induced to buy certain
assets at prices that are too high, to sell certain other assets at
prices that are too low or to miss favorable opportunities
altogether. Similarly, any hedging based on faulty models and data
may prove to be unsuccessful. Furthermore, despite our valuation
validation processes our models may nevertheless prove to be
incorrect.
Some of the risks of relying on analytical models and third-party
data are particular to analyzing tranches from securitizations,
such as commercial or residential mortgage-backed securities. These
risks include, but are not limited to, the following: (i)
collateral cash flows and/or liability structures may be
incorrectly modeled in all or only certain scenarios, or may be
modeled
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
based on simplifying assumptions that lead to errors; (ii)
information about collateral may be incorrect, incomplete, or
misleading; (iii) collateral or bond historical performance (such
as historical prepayments, defaults, cash flows, etc.) may be
incorrectly reported, or subject to interpretation (e.g., different
issuers may report delinquency statistics based on different
definitions of what constitutes a delinquent loan); or (iv)
collateral or bond information may be outdated, in which case the
models may contain incorrect assumptions as to what has occurred
since the date information was last updated.
Some of the analytical models used by us, such as mortgage
prepayment models or mortgage default models, are predictive in
nature. The use of predictive models has inherent risks. For
example, such models may incorrectly forecast future behavior,
leading to potential losses on a cash flow and/or a mark-to-market
basis. In addition, the predictive models used by us may differ
substantially from those models used by other market participants,
with the result that valuations based on these predictive models
may be substantially higher or lower for certain assets than actual
market prices. Furthermore, since predictive models are usually
constructed based on historical data supplied by third parties, the
success of relying on such models may depend heavily on the
accuracy and reliability of the supplied historical data and the
ability of these historical models to accurately reflect future
periods. Additionally, such models may be more prone to
inaccuracies in light of the unprecedented conditions created by
the COVID-19 pandemic. In particular, the economic, financial and
related impacts of COVID-19 have been very difficult to model
(including as related to the housing and mortgage markets), as the
catalyst for these conditions (i.e., a global pandemic) is an event
that is unparalleled in modern history and therefore is subject to
wide variables, assumptions and inputs. Therefore, historical data
used in analytical models may be less reliable in predicting future
conditions. Further, the conditions created by COVID-19 increased
volatility across asset classes. Extreme volatility in any asset
class, including real estate and mortgage-related assets, increases
the likelihood of analytical models being inaccurate as market
participants attempt to value assets that have frequent,
significant swings in pricing.
Many of the models we use include LIBOR as an input. The expected
transition away from LIBOR may require changes to models, may
change the underlying economic relationships being modeled, and may
require the models to be run with less historical data than is
currently available for LIBOR.
All valuation models rely on correct market data inputs. If
incorrect market data is entered into even a well-founded valuation
model, the resulting valuations will be incorrect. However, even if
market data is inputted correctly, “model prices” will often differ
substantially from market prices, especially for securities with
complex characteristics, such as derivative instruments or
structured notes.
We are highly dependent on information systems that may expose us
to cybersecurity risks.
Our business is highly dependent on communications and information
systems. Any failure or interruption of our systems or
cyber-attacks or security breaches of our networks or systems could
cause delays or other problems in our securities trading
activities, including mortgage-backed securities trading
activities. A disruption or breach could also lead to unauthorized
access to and release, misuse, loss or destruction of our
confidential information or personal or confidential information of
our employees or third parties, which could lead to regulatory
fines, costs of remediating the breach, reputational harm,
financial losses, litigation and increased difficulty doing
business with third parties that rely on us to meet their own data
protection requirements. In addition, we also face the risk of
operational failure, termination or capacity constraints of any of
the third parties with which we do business or that facilitate our
business activities, including clearing agents or other financial
intermediaries we use to facilitate our securities transactions, if
their respective systems experience failure, interruption,
cyber-attacks, or security breaches. Certain third parties provide
information needed for our financial statements that we cannot
obtain or verify from other sources. If one of those third parties
experiences a system failure or cybersecurity incident, we may not
have access to that information or may not have confidence in its
accuracy. We may face increased costs as we continue to evolve our
cyber defenses in order to contend with changing risks, and
possible increased costs of complying with cyber laws and
regulations. These costs and losses associated with these risks are
difficult to predict and quantify, but could have a significant
adverse effect on our operating results. Additionally, the legal
and regulatory environment surrounding information privacy and
security in the U.S. and international jurisdictions is constantly
evolving. New business initiatives have increased, and may continue
to increase, the extent to which we are subject to such U.S. and
international information privacy and security
regulations.
Computer malware, viruses, computer hacking and phishing attacks
have become more prevalent in our industry and we are subject to
such attempted attacks. We rely heavily on our financial,
accounting and other data processing systems. Although we have not
detected a material cybersecurity breach to date, other financial
institutions have reported material breaches of their systems, some
of which have been significant. Even with all reasonable security
efforts, not every breach can be prevented or even detected. It is
possible that we have experienced an undetected breach. There is no
assurance that we, or the third parties that facilitate our
business activities, have not or will not experience a breach. We
may be held responsible if certain third parties that facilitate
our business activities experience a breach. It is difficult to
determine what, if any, negative impact may directly result from
any specific interruption or cyber-attacks or security breaches of
our networks or systems (or the networks
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
or systems of third parties that facilitate our business
activities) or any failure to maintain performance, reliability and
security of our technical infrastructure, but such computer
malware, viruses, and computer hacking and phishing attacks may
negatively affect our operations.
We depend on third-party service providers, including mortgage loan
servicers and sub-servicers, for a variety of services related to
our business.
We depend on a variety of services provided by third-party service
providers related to our investments in MSR as well as for general
operating purposes. For example, we rely on the mortgage servicers
who service the mortgage loans underlying our MSR to, among other
things, collect principal and interest payments on such mortgage
loans and perform loss mitigation services in accordance with
applicable laws and regulations. Mortgage servicers and other
service providers, such as trustees, bond insurance providers, due
diligence vendors and document custodians, may fail to perform or
otherwise not perform in a manner that promotes our
interests.
For example, any legislation or regulation intended to reduce or
prevent foreclosures through, among other things, loan
modifications may reduce the value of mortgage loans, including
those underlying our MSR. Mortgage servicers may be required or
otherwise incentivized by the Federal or state governments to
pursue actions designed to assist mortgagors, such as loan
modifications, forbearance plans and other actions intended to
prevent foreclosure even if such loan modifications and other
actions are not in the best interests of the beneficial owners of
the mortgage loans. Similarly, legislation delaying the initiation
or completion of foreclosure proceedings on specified types of
residential mortgage loans or otherwise limiting the ability of
mortgage servicers to take actions that may be essential to
preserve the value of the mortgage loans may also reduce the value
of mortgage loans underlying our MSR. Any such limitations are
likely to cause delayed or reduced collections from mortgagors and
generally increase servicing costs. As a consequence of the
foregoing matters, our business, financial condition and results of
operations may be adversely affected.
Our investments in residential whole loans subject us to
servicing-related risks.
In connection with the acquisition and securitization of
residential whole loans, we rely on unaffiliated servicing
companies to service and manage the mortgages underlying our
non-Agency mortgage-backed securities and our residential whole
loans. If a servicer is not vigilant in seeing that borrowers make
their required monthly payments, borrowers may be less likely to
make these payments, resulting in a higher frequency of default. If
a servicer takes longer to liquidate non-performing mortgages, our
losses related to those loans may be higher than originally
anticipated.
Any failure by servicers to service these mortgages and related
real estate owned (“REO”) properties could negatively impact the
value of these investments and our financial performance. In
addition, while we have contracted, and will continue to contract,
with unaffiliated servicing companies to carry out the actual
servicing of the loans we purchase together with the related MSR
(including all direct interface with the borrowers), we are
nevertheless ultimately responsible,
vis-à-vis the
borrowers and state and federal regulators, for ensuring that the
loans are serviced in accordance with the terms of the related
notes and mortgages and applicable law and regulation. In light of
the current regulatory environment, such exposure could be
significant even though we might have contractual claims against
our servicers for any failure to service the loans to the required
standard.
A default by the mortgage servicer in its capacity as servicer
and/or failure of the mortgage servicer to perform its obligations
related to any MSR could result in a loss of value of servicing
fees and/or excess servicing spread. Mortgage servicers are subject
to extensive federal, state and local laws, regulations and
administrative decisions and failure to comply with such
regulations can expose the servicer to fines, damages and losses.
In its capacity as servicer, mortgage servicers operate in a highly
litigious industry that subject it to potential lawsuits related to
billing and collections practices, modification protocols or
foreclosure practices.
When a residential whole loan we own is foreclosed upon, title to
the underlying property would be taken by one of our subsidiaries.
The foreclosure process, especially in judicial foreclosure states
such as New York, Florida and New Jersey can be lengthy and
expensive, and the delays and costs involved in completing a
foreclosure, and then liquidating the property through sale, may
materially increase any related loss. Finally, at such time as
title is taken to a foreclosed property, it may require more
extensive rehabilitation than we estimated at acquisition or a
previously unknown environmental liability may be discovered that
would require expensive and time-consuming
remediation.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
The performance of loans underlying our MSR related assets may be
adversely affected by the performance of the related mortgage
servicer.
The performance of the loans underlying our MSR related assets is
subject to risks associated with inadequate or untimely servicing.
If our mortgage servicers commit a material breach of their
obligations as a servicer, we may be subject to damages if the
breach is not cured within a specified period of time following
notice. In addition, poor performance by a mortgage servicer may
result in greater than expected delinquencies and foreclosures and
losses on the mortgage loans underlying our MSR related assets. A
substantial increase in our delinquency or foreclosure rate or the
inability to process claims could adversely affect our ability to
access the capital and secondary markets for our financing
needs.
Similarly to the way in which we service residential whole loans,
we have also contracted, and will continue to contract, with
unaffiliated servicing companies to carry out the actual servicing
activities (including all direct interface with the borrowers).
However, we are nevertheless ultimately responsible, vis-à-vis the
borrowers and state and federal regulators, for ensuring that these
activities are performed in accordance with the terms of the
related notes and mortgages and applicable laws and regulations. In
light of the current regulatory environment, such exposure could be
significant even though we might have contractual claims against
our servicers for any failure to service the loans to the required
standard.
A default by the mortgage servicer in its capacity as servicer
and/or failure of the mortgage servicer to perform its obligations
related to any MSR could result in a loss of value of servicing
fees and/or excess servicing spread. Mortgage servicers are subject
to extensive federal, state and local laws, regulations and
administrative decisions and failure to comply with such
regulations can expose the servicer to fines, damages and losses.
In its capacity as servicer, mortgage servicers operate in a highly
litigious industry that subject them to potential lawsuits related
to billing and collections practices, modification protocols or
foreclosure practices.
An increase or decrease in prepayment rates may adversely affect
our profitability.
The mortgage-backed securities we acquire are backed by pools of
mortgage loans. We receive payments, generally, from the payments
that are made on the underlying mortgage loans. We often purchase
mortgage-backed securities that have a higher coupon rate than the
prevailing market interest rates. In exchange for a higher coupon
rate, we typically pay a premium over par value to acquire these
mortgage-backed securities. In accordance with U.S. generally
accepted accounting principles (“GAAP”), we amortize the premiums
on our mortgage-backed securities over the expected life of the
related mortgage-backed securities. If the mortgage loans securing
these mortgage-backed securities prepay at a more rapid rate than
anticipated, we will have to amortize our premiums on an
accelerated basis that may adversely affect our
profitability.
Defaults on mortgage loans underlying Agency mortgage-backed
securities typically have the same effect as prepayments because of
the underlying Agency guarantee.
Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise, but changes in prepayment rates
are difficult to predict. Prepayment rates also may be affected by
conditions in the housing and financial markets, general economic
conditions and the relative interest rates on fixed-rate and
adjustable-rate mortgage loans. We may seek to minimize prepayment
risk to the extent practical, and in selecting investments we must
balance prepayment risk against other risks and the potential
returns of each investment. No strategy can completely insulate us
from prepayment risk. We may choose to bear increased prepayment
risk if we believe that the potential returns justify the
risk.
Conversely, a decline in prepayment rates on our investments will
reduce the amount of principal we receive and therefore reduce the
amount of cash we otherwise could have reinvested in higher
yielding assets at that time, which could negatively impact our
future operating results.
We are subject to reinvestment risk.
We are subject to reinvestment risk as a result of changes in
interest rates. Declines in interest rates are generally
accompanied by increased prepayments of mortgage loans, which in
turn results in a prepayment of the related mortgage-backed
securities. An increase in prepayments could result in the
reinvestment of the proceeds we receive from such prepayments into
lower yielding assets. Conversely, increases in interest rates are
generally accompanied by decreased prepayments of mortgage loans,
which could reduce our capital available to reinvest into
higher-yielding assets.
Competition may affect ability and pricing of our target
assets.
We operate in a highly competitive market for investment
opportunities. Our profitability depends, in large part, on our
ability to acquire our target assets at attractive prices. In
acquiring our target assets, we compete with a variety of
institutional investors, including other REITs, specialty finance
companies, public and private funds, government entities,
commercial and
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
investment banks, commercial finance and insurance companies and
other financial institutions. Many of our competitors are
substantially larger and have considerably greater financial,
technical, technological, marketing and other resources than we do.
Other REITs with investment objectives that overlap with ours may
elect to raise significant amounts of capital, which may create
additional competition for investment opportunities. Some
competitors may have a lower cost of funds and access to funding
sources that may not be available to us. Many of our competitors
are not subject to the operating constraints associated with REIT
compliance or maintenance of an exemption from the Investment
Company Act. In addition, some of our competitors may have higher
risk tolerances or different risk assessments, which could allow
them to consider a wider variety of investments and establish more
relationships than us. Furthermore, competition for investments in
our target assets may lead to the price of such assets increasing,
which may further limit our ability to generate desired returns. We
cannot provide assurance that the competitive pressures we face
will not have a material adverse effect on our business, financial
condition and results of operations. Also, as a result of this
competition, desirable investments in our target assets may be
limited in the future and we may not be able to take advantage of
attractive investment opportunities from time to time, as we can
provide no assurance that we will be able to identify and make
investments that are consistent with our investment
objectives.
We may enter into new lines of business, acquire other companies or
engage in other strategic initiatives, each of which may result in
additional risks and uncertainties in our businesses.
We may pursue growth through acquisitions of other companies or
other strategic initiatives. To the extent we pursue
strategic investments or acquisitions, undertake other strategic
initiatives or consider new lines of business, we will face
numerous risks and uncertainties, including risks associated
with:
•the
availability of suitable opportunities;
•the
level of competition from other companies that may have greater
financial resources;
•our
ability to assess the value, strengths, weaknesses, liabilities and
potential profitability of potential acquisition opportunities
accurately and negotiate acceptable terms for those
opportunities;
•the
required investment of capital and other resources;
•the
lack of availability of financing and, if available, the terms of
any financings;
•the
possibility that we have insufficient expertise to engage in such
activities profitably or without incurring inappropriate amounts of
risk;
•the
diversion of management’s attention from our core
businesses;
•the
potential loss of key personnel of an acquired
business;
•assumption
of liabilities in any acquired business;
•the
disruption of our ongoing businesses;
•the
increasing demands on or issues related to the combining or
integrating operational and management systems and
controls;
•compliance
with additional regulatory requirements;
•costs
associated with integrating and overseeing the operations of the
new businesses;
•failure
to realize the full benefits of an acquisition, including expected
synergies, cost savings, or growth opportunities, within the
anticipated timeframe or at all; and
•post-acquisition
deterioration in an acquired business that could result in lower or
negative earnings contribution and/or goodwill impairment
charges.
Entry into certain lines of business may subject us to new laws and
regulations with which we are not familiar, or from which we are
currently exempt, and may lead to increased litigation and
regulatory risk. The decision to increase or decrease investments
within a line of business may lead to additional risks and
uncertainties. In addition, if a new or acquired business generates
insufficient revenues or if we are unable to efficiently manage our
expanded operations, our results of operations will be adversely
affected. Our strategic initiatives may include joint ventures, in
which case we will be subject to additional risks and uncertainties
in that we may be dependent upon, and subject to liability for,
losses or reputational damage relating to systems, controls and
personnel that are not under our control.
Some of our investments, including those related to non-prime
loans, involve credit risk.
Our current investment strategy includes seeking growth in our
residential credit business. The holder of a mortgage or
mortgage-backed securities assumes the risk that the related
borrowers may default on their obligations to make full and timely
payments of principal and interest. Under our investment
policy, we have the ability to acquire non-Agency mortgage-backed
securities, residential whole loans, MSR and other investment
assets of lower credit quality. In general, non-Agency
mortgage-backed securities carry greater investment risk than
Agency mortgage-backed securities because they are not guaranteed
as to
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
principal or interest by the U.S. Government, any federal agency or
any federally chartered corporation. Non-investment grade,
non-Agency securities tend to be less liquid, may have a higher
risk of default and may be more difficult to value than investment
grade bonds. Higher-than-expected rates of default and/or
higher-than-expected loss severities on the mortgages underlying
our non-Agency mortgage-backed securities, MSR or on our
residential whole loan investments may adversely affect the value
of those assets. Accordingly, defaults in the payment of
principal and/or interest on our non-Agency mortgage-backed
securities, residential whole loan investments, MSR and other
investment assets of lower credit quality would likely result in
our incurring losses of income from, and/or losses in market value
relating to, these assets.
We have certain investments in non-Agency mortgage-backed
securities backed by collateral pools containing mortgage loans
that were originated under underwriting standards that were less
strict than those used in underwriting “prime mortgage
loans.” These lower standards permitted mortgage loans, often
with LTV ratios in excess of 80%, to be made to borrowers having
impaired credit histories, lower credit scores, higher
debt-to-income ratios and/or unverified income. Difficult
economic conditions, including increased interest rates and lower
home prices, can result in non-prime and subprime mortgage loans
having increased rates of delinquency, foreclosure, bankruptcy and
loss (including such as during the credit crisis of 2007-2008 and
the housing crisis that followed), and are likely to otherwise
experience delinquency, foreclosure, bankruptcy and loss rates that
are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional
manner. Thus, because of higher delinquency rates and losses
associated with non-prime and subprime mortgage loans, the
performance of our non-Agency mortgage-backed securities that are
backed by these types of loans could be correspondingly adversely
affected, which could materially adversely impact our results of
operations, financial condition and business.
We face possible increased instances of business interruption
associated with the effects of climate change and severe
weather.
The physical effects of climate change could have a material
adverse effect on our operations. To the extent that climate change
impacts changes in weather patterns, our operations could
experience disruptions. There can be no assurance that climate
change and severe weather will not have a material adverse effect
on our operations.
If we are unable to attract, motivate and retain qualified talent,
including our key personnel, it could materially and adversely
affect us.
Our success and our ability to manage anticipated future growth
depend, in large part, upon the efforts of our highly-skilled
employees, and particularly on our key personnel, including our
executive officers. Our executive officers have extensive
experience and strong reputations in the sectors in which we
operate and have been instrumental in setting our strategic
direction, operating our business, identifying, recruiting, and
training our other key personnel, and arranging necessary
financing. The departure of any of our executive officers or other
key personnel, or our inability to attract, motivate and retain
highly qualified employees at all levels of the firm in light of
the intense competition for talent, could adversely affect our
business, operating results or financial condition; diminish our
investment opportunities; or weaken our relationships with lenders,
business partners and industry personnel.
Other Risks
The market price and trading volume of our shares of common stock
may be volatile and issuances of large amounts of shares of our
common stock could cause the market price of our common stock to
decline.
If we issue a significant number of shares of common stock or
securities convertible into common stock in a short period of time,
there could be a dilution of the existing common stock and a
decrease in the market price of the common stock.
The market price of our shares of common stock may be highly
volatile and could be subject to wide fluctuations. In addition,
the trading volume in our shares of common stock may fluctuate and
cause significant price variations to occur. We cannot assure you
that the market price of our shares of common stock will not
fluctuate or decline significantly in the future. Some of the
factors that could negatively affect our share price or result in
fluctuations in the price or trading volume of our shares of common
stock include those set forth under “Special Note Regarding
Forward-Looking Statements” as well as:
•actual
or anticipated variations in our quarterly operating results or
business prospects;
•changes
in our earnings estimates or publication of research reports about
us or the real estate industry;
•an
inability to meet or exceed securities analysts’ estimates or
expectations;
•increases
in market interest rates;
•hedging
or arbitrage trading activity in our shares of common
stock;
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
•capital
commitments;
•changes
in market valuations of similar companies;
•adverse
market reaction to any increased indebtedness we incur in the
future;
•additions
or departures of management personnel;
•actions
by institutional stockholders or activist investors;
•speculation
in the press or investment community;
•changes
in our distribution policy;
•government
action or regulation;
•general
market and economic conditions;
•market
dislocations related to the COVID-19 pandemic; and
•future
sales of our shares of common stock or securities convertible into,
or exchangeable or exercisable for, our shares of common
stock.
Holders of our shares of common stock will be subject to the risk
of volatile market prices and wide fluctuations in the market price
of our shares of common stock. These factors may cause the
market price of our shares of common stock to decline, regardless
of our financial condition, results of operations, business or
prospects. It is impossible to assure you that the market prices of
our shares of common stock will not fall in the
future.
Under our charter, we have 3,000,000,000 authorized shares of
capital stock, par value of $0.01 per share. Sales of a
substantial number of shares of our common stock or other
equity-related securities in the public market, or any hedging or
arbitrage trading activity that may develop involving our common
stock, could depress the market price of our common stock and
impair our ability to raise capital through the sale of additional
equity securities.
We may change our policies without stockholder
approval.
Our Board has established very broad investment guidelines that may
be amended from time to time. Our Board and management determine
all of our significant policies, including our investment,
financing, capital and asset allocation and distribution policies.
They may amend or revise these policies at any time without a vote
of our stockholders, or otherwise initiate a change in asset
allocation. Policy changes could adversely affect our financial
condition, results of operations, the market price of our common
stock or our ability to pay dividends or
distributions.
COVID-19 has affected the U.S. economy and our
business.
General
COVID-19 has caused significant disruptions to the U.S. and global
economies and has contributed to volatility and negative pressure
in financial markets. The pace, timing and strength of any recovery
are still unknown and difficult to predict and, in general,
COVID-19 continues to cause a great deal of uncertainty in the
U.S.
Throughout the course of the COVID-19 pandemic, the U.S. federal
government, as well as many state and local governments, have
adopted a number of emergency measures and recommendations,
including moratoriums to stop evictions and foreclosures and
guidance to regulated servicers requiring them to formulate
policies to assist mortgagors in need as a result of the COVID-19
pandemic. A number of states have enacted laws which impose
significant limits on the default remedies of lenders secured by
real property. While some states have relaxed certain of these
measures, substantial restrictions on economic activity remain in
place or may be put in place. Although it cannot be predicted,
additional policy action at the federal, state and local level is
possible in the future. The COVID-19 pandemic (and any future
COVID-19 or other public health outbreaks) and resulting emergency
measures have led (and may continue to lead) to significant
disruptions in the global supply chain, global capital markets, the
economy of the United States and the economies of other nations.
Concern about the potential effects of the COVID-19 pandemic and
the effectiveness of measures being put in place by governmental
bodies and reserve banks at various levels as well as by private
enterprises to contain or mitigate its spread has adversely
affected economic conditions and capital markets globally, and have
led to significant volatility in global financial markets. There
can be no assurance that the vaccination efforts, containment
measures or other measures implemented from time to time will be
successful, including against new strains of COVID-19, and what
effect those measures will have on the economy. Disruption and
volatility in the credit markets and the reduction of economic
activity in severely affected sectors may occur in the United
States and/or globally.
Economic Conditions
The conditions related to COVID-19 discussed above have also
adversely affected our business and we expect these conditions to
continue to some extent during 2023. The significant decrease in
economic activity could have an adverse effect on the value of our
investments in mortgage real estate-related assets, particularly
residential real estate assets. In light of COVID-19’s impact on
the overall economy, such as a possible return to rising
unemployment levels or changes in consumer behavior
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1A. Risk Factors
related to loans as well as government policies and pronouncements,
borrowers may experience difficulties meeting their obligations or
seek to forbear payment on or refinance their mortgage loans to
avail themselves of lower rates. Elevated levels of delinquency or
default would have an adverse impact on the value of our mortgage
real estate related-assets. To the extent current conditions
persist or worsen, there may be a negative effect on our results of
operations, which may reduce earnings and, in turn, cash available
for distribution to our stockholders. COVID-19 or other public
health outbreaks could also negatively impact the availability of
key personnel necessary to conduct our business.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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None.
Our executive and administrative office is located at 1211 Avenue
of the Americas New York, New York 10036, telephone
212-696-0100. This office is leased under a non-cancelable
lease expiring September 30, 2025.
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ITEM 3. LEGAL PROCEEDINGS
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From time to time, we are involved in various claims and legal
actions arising in the ordinary course of business. As of
December 31, 2022, we were not party to any pending material legal
proceedings.
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ITEM 4. MINE SAFETY DISCLOSURES
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None.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters And Issuer Purchases Of Equity Securities
PART II
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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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, 2023, we had 493,615,144 shares of
common stock issued and outstanding which were held by
approximately
566,479
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, 2022, we have paid full cumulative
dividends on our preferred stock.
Share Performance Graph
The following graph and table set forth certain information
comparing the yearly percentage change in cumulative total return
on our common stock to the cumulative total return of the Standard
& Poor’s Composite 500 stock Index or S&P 500 Index, and
the Bloomberg Mortgage REIT Index, or BBG REIT index, an industry
index of mortgage REITs. The comparison is for the five-year
period ended December 31, 2022 and assumes the reinvestment of
dividends. The graph and table assume that $100 was invested
in our common stock and the two other indices on the last trading
day of the initial year shown in the graph. Upon written request we
will provide stockholders with a list of the REITs included in the
BBG REIT Index.
Five-Year Share Performance
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters And Issuer Purchases Of Equity Securities
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12/31/2017 |
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12/31/2018 |
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12/31/2019 |
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12/31/2020 |
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12/31/2021 |
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12/31/2022 |
Annaly Capital Management, Inc. |
100 |
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93 |
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99 |
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102 |
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104 |
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82 |
S&P 500 Index |
100 |
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96 |
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126 |
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149 |
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191 |
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157 |
BBG REIT Index |
100 |
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97 |
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120 |
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93 |
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110 |
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83 |
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 2022, we announced that our Board authorized the
repurchase of up to $1.5 billion of our outstanding common
shares through December 31, 2024. The new share repurchase program
replaces our previous $1.5 billion share repurchase program,
which expired on December 31, 2021. No shares were repurchased with
respect to this share 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
$1.5 billion.
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. AND SUBSIDIARIES
Item 6. Selected Financial Data
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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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 2022 and 2021 items and year-to-year
comparisons between 2022 and 2021. Discussions
of 2020 items and year-to-year comparisons
between 2021 and 2020 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, 2021.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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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.
For a full discussion of our business, refer to the section titled
“Business Overview” of Part I, Item 1. “Business.”
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. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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.
Economic Environment
U.S. 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. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
$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 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 significantly, ending the year
96 bps wider than December 2021.
The following table below presents interest rates and spreads at
each date presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2022 |
|
2021 |
|
2020 |
30-Year mortgage current coupon |
5.39% |
|
2.07% |
|
1.34% |
Mortgage basis |
152 bps |
|
56 bps |
|
43 bps |
10-Year U.S. Treasury rate |
3.87% |
|
1.51% |
|
0.91% |
LIBOR |
|
|
|
|
|
1-Month |
4.39% |
|
0.10% |
|
0.14% |
6-Month |
5.14% |
|
0.34% |
|
0.26% |
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. The FCA's announcement coincided with the
announcement of LIBOR's administrator, the ICE Benchmark
Administration Limited (“IBA”), indicating that, as a result of not
having access to input data necessary to calculate LIBOR tenors
relevant to us on a representative basis after June 30, 2023, IBA
would have to cease publication of such LIBOR tenors immediately
after the last publication on June 30, 2023. 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.
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 outline a communication strategy with
shareholders; regulators and other stakeholders. 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. The U.S. 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
Item 7. Management’s Discussion and Analysis
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 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. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Net Income (Loss) Summary
The following table presents financial information related to our
results of operations as of and for the years ended December 31,
2022, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31, |
|
|
|
2022 |
|
2021 |
|
2020 |
|
|
|
(dollars in thousands, except per share data) |
|
|
Interest income |
$ |
2,778,887 |
|
|
$ |
1,983,036 |
|
|
$ |
2,229,625 |
|
|
|
Interest expense |
1,309,735 |
|
|
249,243 |
|
|
899,112 |
|
|
|
Net interest income |
1,469,152 |
|
|
1,733,793 |
|
|
1,330,513 |
|
|
|
Servicing and related income |
246,926 |
|
|
69,018 |
|
|
94,190 |
|
|
|
Servicing and related expense |
25,145 |
|
|
12,202 |
|
|
26,437 |
|
|
|
Net servicing income |
221,781 |
|
|
56,816 |
|
|
67,753 |
|
|
|
Other income (loss) |
243,787 |
|
|
796,360 |
|
|
(2,094,266) |
|
|
|
Less: Total general and administrative expenses |
162,729 |
|
|
186,014 |
|
|
222,195 |
|
|
|
Income (loss) before income taxes |
1,771,991 |
|
|
2,400,955 |
|
|
(918,195) |
|
|
|
Income taxes |
45,571 |
|
|
4,675 |
|
|
(28,423) |
|
|
|
Net income (loss) |
1,726,420 |
|
|
2,396,280 |
|
|
(889,772) |
|
|
|
Less: Net income (loss) attributable to noncontrolling
interests |
1,095 |
|
|
6,384 |
|
|
1,391 |
|
|
|
Net income (loss) attributable to Annaly |
1,725,325 |
|
|
2,389,896 |
|
|
(891,163) |
|
|
|
Less: Dividends on preferred stock |
110,623 |
|
|
107,532 |
|
|
142,036 |
|
|
|
Net income (loss) available (related) to common
stockholders |
$ |
1,614,702 |
|
|
$ |
2,282,364 |
|
|
$ |
(1,033,199) |
|
|
|
Net income (loss) per share available (related) to common
stockholders |
|
|
|
|
|
|
|
Basic |
$ |
3.93 |
|
|
$ |
6.40 |
|
|
$ |
(2.92) |
|
|
|
Diluted |
$ |
3.92 |
|
|
$ |
6.39 |
|
|
$ |
(2.92) |
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
Basic |
411,348,484 |
|
|
356,856,520 |
|
|
353,664,860 |
|
|
|
Diluted |
411,621,758 |
|
|
357,142,251 |
|
|
353,664,860 |
|
|
|
Other information |
|
|
|
|
|
|
|
Investment portfolio at period-end |
$ |
78,469,860 |
|
|
$ |
74,792,041 |
|
|
$ |
86,403,446 |
|
|
|
Average total assets |
$ |
78,768,785 |
|
|
$ |
81,925,499 |
|
|
$ |
99,663,704 |
|
|
|
Average equity |
$ |
11,616,995 |
|
|
$ |
13,728,352 |
|
|
$ |
14,103,589 |
|
|
|
GAAP leverage at period-end
(1)
|
6.0:1 |
|
4.7:1 |
|
5.1:1 |
|
|
GAAP capital ratio at period-end
(2)
|
13.9 |
% |
|
17.2 |
% |
|
15.9 |
% |
|
|
Annualized return on average total assets |
2.19 |
% |
|
2.92 |
% |
|
(0.89) |
% |
|
|
Annualized return on average equity |
14.86 |
% |
|
17.45 |
% |
|
(6.31) |
% |
|
|
Net interest margin
(3)
|
1.92 |
% |
|
2.28 |
% |
|
1.46 |
% |
|
|
Average yield on interest earning assets
(4)
|
3.64 |
% |
|
2.61 |
% |
|
2.44 |
% |
|
|
Average GAAP cost of interest bearing liabilities
(5)
|
2.03 |
% |
|
0.37 |
% |
|
1.09 |
% |
|
|
Net interest spread |
1.61 |
% |
|
2.24 |
% |
|
1.35 |
% |
|
|
Weighted average experienced CPR for the period |
12.2 |
% |
|
23.7 |
% |
|
20.2 |
% |
|
|
Weighted average projected long-term CPR at period-end |
7.8 |
% |
|
12.7 |
% |
|
16.4 |
% |
|
|
Common stock book value per share |
$ |
20.79 |
|
|
$ |
31.88 |
|
|
$ |
35.68 |
|
|
|
Non-GAAP metrics * |
|
|
|
|
|
|
|
Interest income (excluding PAA) |
$ |
2,418,300 |
|
|
$ |
2,040,194 |
|
|
$ |
2,645,069 |
|
|
|
Economic interest expense
(5)
|
$ |
943,574 |
|
|
$ |
525,385 |
|
|
$ |
1,106,989 |
|
|
|
Economic net interest income (excluding PAA) |
$ |
1,474,726 |
|
|
$ |
1,514,809 |
|
|
$ |
1,538,080 |
|
|
|
Premium amortization adjustment cost (benefit) |
$ |
(360,587) |
|
|
$ |
57,158 |
|
|
$ |
415,444 |
|
|
|
Earnings available for distribution
(6)
|
$ |
1,850,138 |
|
|
$ |
1,768,391 |
|
|
$ |
1,696,167 |
|
|
|
Earnings available for distribution per average common
share |
$ |
4.23 |
|
|
$ |
4.65 |
|
|
$ |
4.39 |
|
|
|
Annualized EAD return on average equity (excluding PAA) |
16.02 |
% |
|
12.90 |
% |
|
12.03 |
% |
|
|
Economic leverage at period-end
(1)
|
6.3:1 |
|
5.7:1 |
|
6.2:1 |
|
|
Economic capital ratio at period-end
(2)
|
13.4 |
% |
|
14.4 |
% |
|
13.6 |
% |
|
|
Net interest margin (excluding PAA)
(3)
|
2.03 |
% |
|
2.02 |
% |
|
1.74 |
% |
|
|
Average yield on interest earning assets (excluding PAA)
(4)
|
3.16 |
% |
|
2.68 |
% |
|
2.90 |
% |
|
|
Average economic cost of interest bearing liabilities
(5)
|
1.46 |
% |
|
0.79 |
% |
|
1.34 |
% |
|
|
Net interest spread (excluding PAA) |
1.70 |
% |
|
1.89 |
% |
|
1.56 |
% |
|
|
*
Represents a non-GAAP financial measure. Refer to the “Non-GAAP
Financial Measures” section for additional
information.
(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 us 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. 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.
(4)
Average yield on interest earning assets represents annualized
interest income divided by average interest earning assets. Average
interest earning assets reflects the average amortized cost of our
investments during the period. Average yield on interest earning
assets (excluding PAA) is calculated using annualized interest
income (excluding PAA).
(5)
Average GAAP cost of interest bearing liabilities represents
annualized interest expense divided by average interest bearing
liabilities. Average interest bearing liabilities reflects the
average balances during the period. Average economic cost of
interest bearing liabilities represents annualized economic
interest expense divided by average interest bearing liabilities.
Economic interest expense is comprised of GAAP interest expense and
the net interest component of interest rate swaps.
(6)
Excludes dividends on preferred stock.
|
|
|
GAAP
Net income (loss) was $1.7 billion, which includes $1.1 million
attributable to noncontrolling interests, or $3.93 per average
basic common share, for the year ended December 31, 2022 compared
to $2.4 billion, which includes $6.4 million attributable to
noncontrolling interests, or $6.40 per average basic common share,
for the same period in 2021. We attribute the majority of the
change in net income (loss) to an unfavorable change in net gains
(losses) on investments and other and net interest income,
partially offset by favorable changes in net gains (losses) on
derivatives, lower business divestiture-related losses, and higher
net servicing income. Net gains (losses) on investments and other
for the year ended December 31, 2022 was ($4.6) billion compared to
$121.0 million for the same period in 2021. Part of this
unfavorable change is attributable to the change in fair value
flowing through the income statement on Agency pass-through,
collateralized mortgage obligation (“CMO”) and multifamily
securities purchased in the second half of 2022. Net interest
income for the year ended December 31, 2022 was $1.5 billion
compared to $1.7 billion for the same period in 2021. Net gains
(losses) on derivatives for the year ended December 31, 2022 was
$4.9 billion compared to $807.7 million for the same period in
2021. Business divestiture-related gains (losses) for the year
ended December 31, 2022 was ($40.3) million compared to ($278.6)
million for the same period in 2021. Net servicing income for the
year ended December 31, 2022 was $221.8 million compared to $56.8
million for the same period in 2021. Refer to the section titled
“Other income (loss)” located within this Item 7 for additional
information related to these changes.
Non-GAAP
Earnings available for distribution were $1.9 billion, or $4.23 per
average common share, for the year ended December 31, 2022,
compared to $1.8 billion, or $4.65 per average common share, for
the same period in 2021. The change in earnings available for
distribution for the year ended December 31, 2022 compared to the
same period in 2021 was primarily due to a favorable change in the
net interest component of interest rate swaps, lower premium
amortization expense, excluding PAA, resulting from lower
prepayment speed projections, higher net servicing income from an
increase in average MSR balances, and higher coupon income from an
increase in interest rates, partially offset by higher interest
expense from an increase in average borrowing rates.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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:
•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);
•economic
interest expense;
•economic
net interest income (excluding PAA);
•average
yield on interest earning assets (excluding PAA);
•average
economic cost of interest bearing liabilities;
•net
interest margin (excluding PAA); and
•net
interest spread (excluding PAA).
These measures should not be considered a substitute for, or
superior to, financial measures computed in accordance with GAAP.
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 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.
Changes to actual and estimated prepayments will impact the timing
and amount of premium amortization and, as such, both GAAP and
non-GAAP results.
These non-GAAP measures provide additional detail 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. 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.
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. 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) net servicing income less
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. In addition, EAD
serves as a useful indicator for investors in evaluating our
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. AND SUBSIDIARIES
Item 7. 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, |
|
2022 |
|
2021 |
|
2020 |
|
(dollars in thousands, except per share data) |
GAAP net income (loss) |
$ |
1,726,420 |
|
|
$ |
2,396,280 |
|
|
$ |
(889,772) |
|
Net income (loss) attributable to noncontrolling
interests |
1,095 |
|
|
6,384 |
|
|
1,391 |
|
Net income (loss) attributable to Annaly |
1,725,325 |
|
|
2,389,896 |
|
|
(891,163) |
|
Adjustments to exclude reported realized and unrealized (gains)
losses |
|
|
|
|
Net (gains) losses on investments and other |
4,602,456 |
|
|
(120,958) |
|
|
(358,489) |
|
Net (gains) losses on derivatives
(1)
|
(4,493,013) |
|
|
(1,083,872) |
|
|
2,065,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan loss provision (reversal)
(2)
|
(22,923) |
|
|
(148,632) |
|
|
151,188 |
|
Business divestiture-related (gains) losses |
40,258 |
|
|
278,559 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments |
|
|
|
|
Depreciation expense related to commercial real estate and
amortization of intangibles
(3)
|
3,948 |
|
|
15,225 |
|
|
39,108 |
|
Non-EAD (income) loss allocated to equity method investments
(4)
|
(15,499) |
|
|
(10,930) |
|
|
22,493 |
|
|
|
|
|
|
|
|
Transaction expenses and non-recurring items
(5)
|
7,620 |
|
|
5,579 |
|
|
11,293 |
|
Income tax effect of non-EAD income (loss) items |
46,070 |
|
|
13,325 |
|
|
(17,603) |
|
|
|
|
TBA dollar roll income and CMBX coupon income
(6)
|
431,475 |
|
|
445,768 |
|
|
355,547 |
|
MSR amortization
(7)
|
(114,992) |
|
|
(72,727) |
|
|
(97,506) |
|
|
|
|
|
|
|
Plus: |
|
|
|
|
|
Premium amortization adjustment cost (benefit) |
(360,587) |
|
|
57,158 |
|
|
415,444 |
|
Earnings available for distribution *
|
1,850,138 |
|
|
1,768,391 |
|
|
1,696,167 |
|
Dividends on preferred stock |
110,623 |
|
|
107,532 |
|
|
142,036 |
|
Earnings available for distribution attributable to common
stockholders *
|
$ |
1,739,515 |
|
|
$ |
1,660,859 |
|
|
$ |
1,554,131 |
|
GAAP net income (loss) per average common share |
$ |
3.93 |
|
|
$ |
6.40 |
|
|
$ |
(2.92) |
|
Earnings available for distribution per average common share
*
|
$ |
4.23 |
|
|
$ |
4.65 |
|
|
$ |
4.39 |
|
GAAP return (loss) on average equity |
14.86 |
% |
|
17.45 |
% |
|
(6.31) |
% |
EAD return on average equity (excluding PAA) * |
16.02 |
% |
|
12.90 |
% |
|
12.03 |
% |
* Represents a non-GAAP financial measure. Refer to the disclosure
within this section above for additional information on non-GAAP
financial measures.
(1)
The adjustment to add back Net (gains) losses on derivatives does
not include the net interest component of interest rate swaps which
is reflected in earnings available for distribution. The net
interest component of interest rate swaps totaled $366.2 million,
($276.1) million and ($207.9) million for the years ended December
31, 2022, 2021 and 2020, respectively.
(2)
Includes ($2.3) million, ($3.6) million, and $3.6 million of loss
provision (reversal) on unfunded loan commitments for the years
ended December 31, 2022, 2021, and 2020, respectively, which is
reported in Other, net in the Consolidated Statements of
Comprehensive Income (Loss).
(3)
Includes depreciation and amortization expense related to equity
method investments.
(4)
Represents unrealized (gains) losses allocated to equity interests
in a portfolio of MSR, which is a component of Other, net in the
Consolidated Statements of Comprehensive Income
(Loss).
(5)
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 management
internalization, the CEO search process and a securitization of
Agency mortgage-backed securities.
(6)
TBA dollar roll income and CMBX coupon income each represent a
component of Net gains (losses) on derivatives in the Consolidated
Statements of Comprehensive Income (Loss). CMBX coupon income
totaled $4.4 million, $5.2 million and $5.8 million for the years
ended December 31, 2022, 2021 and 2020, respectively.
(7)
MSR amortization utilizes purchase date cash flow assumptions and
actual unpaid principal balances and is calculated as the
difference between projected MSR yield income and net servicing
income for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From time to time, we enter into TBA forward contracts as an
alternate means of investing in and financing Agency MBS. A TBA
contract is an agreement to purchase or sell, for future delivery,
an Agency MBS with a specified issuer, term and coupon. A TBA
dollar roll represents a transaction where TBA contracts with the
same terms but different settlement dates are simultaneously bought
and sold. The TBA contract settling in the later month typically
prices at a discount to the earlier month contract with the
difference in price commonly referred to as the “drop”. The drop is
a reflection of the expected net interest income from an investment
in similar Agency MBS, net of an implied financing cost, that would
be foregone as a result of settling the contract in the later month
rather than in the earlier month. The drop between the current
settlement month price and the forward settlement month price
occurs because in the TBA dollar roll market, the party providing
the financing is the party that would retain all principal and
interest payments accrued during the financing period. Accordingly,
TBA dollar roll income generally represents the economic equivalent
of the net interest income earned on the underlying Agency MBS less
an implied financing cost.
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 MBS. 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
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
derivatives 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 MBS (interest income less an implied cost
of financing). TBA dollar roll income is reported as a component of
Net gains (losses) on derivatives 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. The CMBX index allows investors to take a long
position (referred to as selling protection) or short position
(referred to as purchasing protection) on the respective basket of
commercial mortgage-backed securities and is structured as a
“pay-as-you-go” contract whereby the protection seller receives and
the protection buyer pays a standardized running coupon on the
contracted notional amount. 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 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 earnings
available for distribution.
Premium Amortization Expense
In accordance with GAAP, we amortize or accrete premiums or
discounts into interest income for our Agency MBS, excluding
interest-only securities, multifamily and reverse mortgages, taking
into account estimates of future principal prepayments in the
calculation of the effective yield. We recalculate the effective
yield as differences between anticipated and actual prepayments
occur. Using third party model and market information to project
future cash flows and expected remaining lives of securities, the
effective interest rate determined for each security is applied as
if it had been in place from the date of the security’s
acquisition. The amortized cost of the security is then adjusted to
the amount that would have existed had the new effective yield been
applied since the acquisition date. The adjustment to amortized
cost is offset with a charge or credit to interest income. Changes
in interest rates and other market factors will impact prepayment
speed projections and the amount of premium amortization recognized
in any given period.
Our GAAP metrics include the unadjusted impact of amortization and
accretion associated with this method. Certain of our non-GAAP
metrics exclude the effect of the PAA, which quantifies the
component of premium amortization representing the cumulative
impact on prior periods, but not the current period, of
quarter-over-quarter changes in estimated long-term Constant
Prepayment Rate (“CPR”).
The following table illustrates the impact of the PAA on premium
amortization expense for our Residential Securities portfolio and
residential securities transferred or pledged to securitization
vehicles, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2022 |
|
2021 |
|
2020 |
|
(dollars in thousands) |
Premium amortization expense |
$ |
48,013 |
|
|
$ |
760,818 |
|
|
$ |
1,375,461 |
|
Less: PAA cost (benefit) |
(360,587) |
|
|
57,158 |
|
|
415,444 |
|
Premium amortization expense (excluding PAA) |
$ |
408,600 |
|
|
$ |
703,660 |
|
|
$ |
960,017 |
|
|
|
|
|
|
|
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.
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).
Certain credit facilities (included within other
secured
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
financing), debt issued by securitization vehicles, participations
issued, and mortgages payable are non-recourse to us and are
excluded from economic leverage.
The following table presents a reconciliation of GAAP debt to
economic debt for purposes of calculating our economic leverage
ratio for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
December 31, 2022
|
|
December 31, 2021
|
|
|
Economic leverage ratio reconciliation |
(dollars in thousands) |
|
|
Repurchase agreements
|
$ |
59,512,597 |
|
|
$ |
54,769,643 |
|
|
|
Other secured financing
|
250,000 |
|
|
903,255 |
|
|
|
Debt issued by securitization vehicles
|
7,744,160 |
|
|
5,155,633 |
|
|
|
Participations issued
|
800,849 |
|
|
1,049,066 |
|
|
|
|
|
|
|
|
|
Debt included in liabilities of disposal group held for
sale |
— |
|
|
112,144 |
|
|
|
Total GAAP debt
|
$ |
68,307,606 |
|
|
$ |
61,989,741 |
|
|
|
Less Non-Recourse Debt:
|
|
|
|
|
|
Credit facilities
(1)
|
— |
|
|
(903,255) |
|
|
|
Debt issued by securitization vehicles
|
(7,744,160) |
|
|
(5,155,633) |
|
|
|
Participations issued
|
(800,849) |
|
|
(1,049,066) |
|
|
|
|
|
|
|
|
|
Non-recourse debt included in liabilities of disposal group held
for sale |
— |
|
|
(112,144) |
|
|
|
Total recourse debt |
$ |
59,762,597 |
|
|
$ |
54,769,643 |
|
|
|
Plus / (Less):
|
|
|
|
|
|
Cost basis of TBA and CMBX derivatives
|
11,050,351 |
|
|
20,690,768 |
|
|
|
Payable for unsettled trades |
1,157,846 |
|
|
147,908 |
|
|
|
Receivable for unsettled trades |
(575,091) |
|
|
(2,656) |
|
|
|
Economic debt
*
|
$ |
71,395,703 |
|
|
$ |
75,605,663 |
|
|
|
Total equity
|
$ |
11,369,426 |
|
|
$ |
13,195,325 |
|
|
|
Economic leverage ratio
*
|
6.3:1 |
|
5.7:1 |
|
|
|
|
|
|
|
|
* Represents a non-GAAP financial measure. Refer to the disclosure
within this section above for additional information on non-GAAP
financial measures.
(1)
Included in Other secured financing in the Consolidated Statements
of Financial Condition.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
December 31, 2022 |
|
December 31, 2021 |
Economic capital ratio reconciliation |
(dollars in thousands) |
Total GAAP assets
|
$ |
81,850,712 |
|
|
$ |
76,764,064 |
|
Less:
|
|
|
|
Gross unrealized gains on TBA derivatives
(1)
|
(17,056) |
|
|
(52,693) |
|
Debt issued by securitization vehicles
|
(7,744,160) |
|
|
(5,155,633) |
|
Plus:
|
|
|
|
Implied market value of TBA derivatives
|
10,578,676 |
|
|
20,338,633 |
|
Total economic assets *
|
$ |
84,668,172 |
|
|
$ |
91,894,371 |
|
Total equity
|
$ |
11,369,426 |
|
|
$ |
13,195,325 |
|
Economic capital ratio
(2)*
|
13.4% |
|
14.4% |
|
|
|
|
* Represents a non-GAAP financial measure. Refer to the disclosure
within this section above for additional information on non-GAAP
financial measures.
(1)
Included in Derivative assets in the Consolidated Statements of
Financial Condition.
(2)
Economic capital ratio is computed as total equity divided by total
economic assets.
|
Interest Income (excluding PAA), Economic Interest Expense and
Economic Net Interest Income (excluding PAA)
Interest income (excluding PAA) represents interest income
excluding the effect of the premium amortization adjustment, and
serves as the basis for deriving average yield on interest earning
assets (excluding PAA), net interest spread (excluding PAA) and net
interest margin (excluding PAA), which are discussed below. We
believe this measure provides management and investors with
additional detail to enhance their understanding of our operating
results and trends by excluding the component
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
of premium amortization expense representing the cumulative effect
of quarter-over-quarter changes in estimated long-term prepayment
speeds related to our Agency MBS (other than interest-only
securities, multifamily and reverse mortgages), which can obscure
underlying trends in the performance of the portfolio.
Economic interest expense is comprised of GAAP interest expense and
the net interest component of interest rate swaps. We use interest
rate swaps to manage our exposure to changing interest rates on
repurchase agreements by economically hedging cash flows associated
with these borrowings. Accordingly, adding the net interest
component of interest rate swaps to interest expense, as computed
in accordance with GAAP, reflects the total contractual interest
expense and thus, provides investors with additional information
about the cost of our financing strategy. We may use market agreed
coupon (“MAC”) interest rate swaps in which we may receive or make
a payment at the time of entering into such interest rate swap to
compensate for the off-market nature of such interest rate swap. In
accordance with GAAP, upfront payments associated with MAC interest
rate swaps are not reflected in the net interest component of
interest rate swaps, which is presented in Net gains (losses) on
derivatives in the Consolidated Statements of Comprehensive Income
(Loss). We did not enter into any MAC interest rate swaps during
the years ended December 31, 2022 and December 31,
2021.
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 present a reconciliation of GAAP interest
income and GAAP 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Interest Income |
|
PAA Cost
(Benefit) |
|
Interest Income (excluding PAA) * |
For the years ended |
(dollars in thousands) |
December 31, 2022 |
$ |
2,778,887 |
|
|
$ |
(360,587) |
|
|
$ |
2,418,300 |
|
December 31, 2021 |
$ |
1,983,036 |
|
|
$ |
57,158 |
|
|
$ |
2,040,194 |
|
December 31, 2020 |
$ |
2,229,625 |
|
|
$ |
415,444 |
|
|
$ |
2,645,069 |
|
* Represents a non-GAAP financial measure. Refer to disclosures
within this section above for additional information on non-GAAP
financial measures.
|
Economic Interest Expense and Economic Net Interest Income
(excluding PAA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
Interest
Expense |
|
Add: Net Interest Component of Interest Rate Swaps |
|
Economic Interest
Expense
*
|
|
GAAP Net
Interest
Income |
|
Less: Net Interest Component
of Interest Rate Swaps |
|
Economic
Net Interest
Income * |
|
Add: PAA
Cost
(Benefit) |
|
Economic Net Interest Income (excluding PAA) * |
For the years ended |
(dollars in thousands) |
December 31, 2022 |
$ |
1,309,735 |
|
|
$ |
(366,161) |
|
|
$ |
943,574 |
|
|
$ |
1,469,152 |
|
|
$ |
(366,161) |
|
|
$ |
1,835,313 |
|
|
$ |
(360,587) |
|
|
$ |
1,474,726 |
|
December 31, 2021 |
|