Annaly Capital Management Inc. · NYSE:NLY
Annaly Capital Management — Investor Day (November 2017)
96 slides from Annaly Capital Management's investor day presentation, Nov 16, 2017
Slide 1: Investor Day
Investor Day November 16, 2017
Slide 2: Safe Harbor Notice
Safe Harbor Notice 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 referen
Slide 3: Agenda
Agenda Session 1 - Introduction Special Guest Speaker Tom Brokaw Kevin Keyes CEO Overview Chief Executive Officer and President Session 2 – Overview of Annaly Businesses David Finkelstein Chief Investment Officer Agency Ilker Ertas Head of Residential Mortgage-Backed Securities David Finkelstein Chi
Slide 4: CEO Overview
ANNALY ‘|| £0 Overview
Slide 5: CEO Overview
CEO Overview 1 The Yield-Less World 2 Three Major Questions Answered 3 Annaly Advantages 4 Performance & Relative Value 5 Annaly's Opportunity 3
Slide 6: The Yield-Less World
The Yield-Less World 1 Global Central Bank Accommodation 2 Excess Liquidity Yield in a in System Yield-Less World 5 3 Valuation Convergence: Muted Volatility Risk vs. Low Risk 4 Declining Yields 4
Slide 7: Global Central Bank Accommodation
1 Global Central Bank Accommodation Global central bank balance sheets expected to continue to grow $18,000 Central Bank Balance Sheet Growth Since 2010 Projection Bank Growth ($bn) % $16,000 Fed $2,214 99% European Central Bank $2,910 133% Central Bank Balance Sheets, ($bn) $14,000 Swiss National B
Slide 8: Excess Liquidity in System
2 Excess Liquidity in System Global debt has more than doubled since 2000 $80 $80 $76 $77 $76 $76 Cumulative Growth in Debt $75 $71 Outstanding ($tn) $68 $70 Since 2008 $15 24% $64 Outstanding Debt for Selected Countries, ($ tn) Since 2000 $49 160% $60 $60 $53 $50 $47 $48 $41 $40 $36 $31 $32 $30 $20
Slide 9: Muted Volatility
3 Muted Volatility A number of factors continue to drive volatility lower Large Central Bank Balance Improved Central Bank Passive Programmatic Mature Demographics and Sheets Transparency Investing Global Economies 130 40 120 35 3Mx10Y Implied Swaption Volatility, (bps) 110 30 100 VIX Index 25 90 20
Slide 10: Declining Yields
4 Declining Yields Amidst the backdrop of historic debt growth, global yields have fallen to the lowest levels ever (1) 35% 2.2% 2.3% 2.0% 30% 29% 2.0% Negative Yielding Bonds as Share of Universe, (%) Weighted Average Sovereign Bond Yield, (%) 25% 1.7% 1.8% 23% 1.6% 20% 1.5% 1.2% 15% 1.3% 13% 1.1%
Slide 11: Valuation Convergence: Risk vs. Low Risk
5 Valuation Convergence: Risk vs. Low Risk The incremental return for investing in higher risk assets has significantly fallen over the last five years 650 Change Since 2012 S&P 500 High Yield % Change (59%) (44%) bps Change (315 bps) (198 bps) 550 450 Spread, (bps) 350 250 150 2012 2013 2014 2015 2
Slide 12: CEO Overview
CEO Overview 1 The Yield-Less World 2 Three Major Questions Answered 3 Annaly Advantages 4 Performance & Relative Value 5 Annaly's Opportunity 10
Slide 13: Three Major Questions Answered
Three Major Questions Answered Against the current macroeconomic backdrop, there are three questions consistently raised by nearly all of our investors 1 How Will Annaly Be Impacted By Central Bank Policy? 2 What Happens In A Rising Rate Environment? 3 How Stable And Resilient Is The Annaly Model Ov
Slide 14: Increased Visibility of Central Bank Policy
1 Increased Visibility of Central Bank Policy Annaly has outperformed as market “paranoia” eases around central bank policy 1.2% 60% 50% 1.0% 40% Cumulative Total Return, (%) Mid Point of Target Rate, (%) 0.8% 30% 0.6% 20% 10% 0.4% 0% 0.2% -10% 0.0% -20% Dec-'15 Mar-'16 Jun-'16 Sep-'16 Dec-'16 Mar-'
Slide 15: Yield Performance in Rising Rate Environments
2 Yield Performance in Rising Rate Environments Across rising interest rate regimes(1), high dividend stocks(2) have delivered double digit returns, outperforming the broader market High Dividend Portfolio High Dividend Portfolio - # Months in Range Rate Increases per Month Total Return S&P 500 Tota
Slide 16: Impact of Rising Rates Muted by Relative Value Demand
2 Impact of Rising Rates Muted by Relative Value Demand The attractiveness of U.S. fixed income relative to the global environment should contain sustained higher yields U.S. Yields at Largest Premium vs. G6 Yields(1) U.S. = $15.4tn of Debt at ~6x International Yield(2) 200 U.S. International Debt O
Slide 17: Annaly Has Outperformed in Periods of Heightened Volatility
3 Annaly Has Outperformed in Periods of Heightened Volatility Financial Crisis 90 40% 80 20% 70 Cumulative Total Return, (%) 0% 60 50 -20% VIX Index 40 -40% 30 -60% 20 -80% 10 0 -100% Dec-'07 Mar-'08 Jun-'08 Sep-'08 Dec-'08 Mar-'09 Jun-'09 VIX Annaly mREITS MLPs Utilities Asset Managers Banks S&P 50
Slide 18: Annaly Has Outperformed: U.S. Credit Rating Downgrade
3 Annaly Has Outperformed in Periods of Heightened Volatility U.S. Credit Rating Downgrade 60 10% 5% 50 0% Cumulative Total Return, (%) 40 -5% -10% 30 VIX Index -15% 20 -20% -25% 10 -30% 0 -35% 7/1/2011 7/27/2011 8/22/2011 9/17/2011 10/13/2011 11/8/2011 12/4/2011 12/30/2011 VIX Annaly mREITS MLPs Ut
Slide 19: Annaly Has Outperformed: China Stock Market Turbulence
3 Annaly Has Outperformed in Periods of Heightened Volatility China Stock Market Turbulence 45 10% 40 5% 35 0% Cumulative Total Return, (%) 30 -5% 25 -10% VIX Index 20 -15% 15 -20% 10 -25% 5 -30% 0 -35% 6/1/2015 6/21/2015 7/11/2015 7/31/2015 8/20/2015 9/9/2015 9/29/2015 VIX Annaly mREITS MLPs Utilit
Slide 20: Annaly Has Outperformed: Oil Falls to $26
3 Annaly Has Outperformed in Periods of Heightened Volatility Oil Falls to $26 / Credit Selloff 30 20% 15% 25 10% Cumulative Total Return, (%) 5% 20 0% 15 -5% VIX Index -10% 10 -15% -20% 5 -25% 0 -30% Jan-'16 Feb-'16 Mar-'16 Apr-'16 VIX Annaly mREITS MLPs Utilities Asset Managers Banks S&P 500 U.S.
Slide 21: Annaly Has Outperformed: Brexit
3 Annaly Has Outperformed in Periods of Heightened Volatility Brexit 30 10% 5% Cumulative Total Return, (%) 20 0% VIX Index -5% 10 -10% 0 -15% 6/1/2016 6/8/2016 6/15/2016 6/22/2016 6/29/2016 VIX Annaly mREITS MLPs Utilities Asset Managers Banks S&P 500 U.S. Credit China Stock Market Oil Falls to $26
Slide 22: CEO Overview
CEO Overview 1 The Yield-Less World 2 Three Major Questions Answered 3 Annaly Advantages 4 Performance & Relative Value 5 Annaly's Opportunity 20
Slide 23: Annaly Advantages
Annaly Advantages Best in class management and stability have led to a 72% cumulative total return since 2014, outperforming yield sectors by at least 15%(1) 19x the size of the median mREIT(2) market cap and Size & Liquidity over $9 billion unencumbered assets(3) Current number of available investm
Slide 24: Annaly Advantages | Size
Annaly Advantages | Size Since Annaly announced the acquisition of Hatteras Financial Corp. (“Hatteras”), the number of mREITs has fallen by 15% and the industry market cap has grown by nearly $12.4bn $14,000 $12,000 Growth Consolidation Size $10,000 Since the Hatteras During the same time Anna
Slide 25: Annaly Advantages | Liquidity
Annaly Advantages | Liquidity Source: Bloomberg, SNL Financial, and Company filings as of September 30, 2017 or most recent quarter available. Market data as of November 7, 2017. Annaly’s superior liquidity position provides it with unique competitive advantages Note: Comparative sectors reflect an
Slide 26: Annaly Advantages | Diversification Through Internal Growth
Annaly Advantages| Diversification Through Internal Growth Annaly has increased the number of available investment options by 12x since inception 40 36 35 Number of Available Investment Options 30 29 26 25 20 16 15 13 10 8 7 6 5 5 4 3 0 1997 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 Resident
Slide 27: Annaly Advantages | Diversification Through Scalable Partnerships
Annaly Advantages | Diversification Through Scalable Partnerships Annaly’s expertise across investment platforms has enabled the Company to establish additive, long-term relationships with dedicated third party strategic partners Agency / MSR Joint Venture with Premier Sovereign Wealth Fund Resident
Slide 28: Annaly Advantages | Operating Efficiency
Annaly Advantages | Operating Efficiency Annaly currently benefits from diversification, operating 25% more efficiently than a peer composite(2) and at significantly lower costs than smaller, mono-line models 60% Annaly Dedicated Equity Allocation Agency 77% 51.9% Resi Credit 10% 50% Commercial Real
Slide 29: Annaly Advantages | Shared Capital
Annaly Advantages| Shared Capital Residential Commercial Real Middle Market Agency Credit Estate Lending Assets(1) | Capital(2) $107.3bn | $11.3bn $2.7bn | $1.4bn $2.0bn | $1.1bn $0.9bn | $0.7bn Sector Rank(3) #1/6 #6/18 #4/12 #14/41 The Annaly Commercial The Annaly Agency Group The Annaly Middle Th
Slide 30: Shared Capital = Book Value Protection
Annaly Advantages | Shared Capital = Book Value Protection As a result of its diversification strategy, Annaly has continued to deliver a stable book value Book Value Stability since Q4 2013(1) 0% (4%) (5%) (6%) (8%) (10%) (12%) (14%) (16%) Annaly Agency Hybrid Commercial mREITs mREITs mREITS Source
Slide 31: Shared Capital = Stability
Annaly Advantages | Shared Capital = Stability Despite heightened market volatility, Annaly has continued to offer stable Core Earnings(1) over the past three years, particularly when compared to other yield strategies Commercial Annaly Equity REITs Banks Agency mREITs Utilities Hybrid mREITs mREITs
Slide 32: Annaly Advantages | Intellectual Capital
Annaly Advantages | Intellectual Capital The intellectual capital created through the investment in Annaly’s business platforms has attracted top professionals and delivered best-in-class performance to shareholders Investment In Our People Investment By Our People 125+ $15 million New hires since 2
Slide 33: Management Ownership Culture Promotes Alignment with Shareholder Interests
Management Ownership Culture Promotes Alignment with Shareholder Interests Our executives have purchased over $24mm of NLY stock in the open market since 2011(1) Filing Date Holder Position Amount Purchased 11/7/2017 Kevin G. Keyes CEO and President; Director $3,336,000 8/7/2015 Kevin G. Keyes CEO a
Slide 34: CEO Overview
CEO Overview 1 The Yield-Less World 2 Three Major Questions Answered 3 Annaly Advantages 4 Performance & Relative Value 5 Annaly's Opportunity 32
Slide 35: Returns and Outperformance
Returns and Outperformance Annaly’s current investment team has outperformed other yield options since the end of 2013 Cumulative Current Price 90.0% Total Return Cumulative to Book Ratio Current Price Annaly Total Return 72.4% to Book 0.95xRatio Banks Annaly 54.6% 72.4% 1.34x 0.95x 75.0% S&P Banks
Slide 36: Attractive Valuation
Attractive Valuation Annaly’s valuation remains favorable to other yield manufacturers Annaly offers higher yield at a lower valuation 4.0x 3.5x S&P 500 3.0x Equity 2.5x REITs P/B Ratio Asset Utilities 2.0x Managers MLPs 1.5x Banks 1.0x Annaly 0.5x 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Dividend
Slide 37: Low Beta
Low Beta Annaly is more stable than other yield oriented industries 1.50 Beta Relative to the S&P 500 since 2014(1) 1.00 1.25 1.18 0.50 1.00 1.03 0.66 0.70 0.46 0.00 Annaly Utilities Equity REITs S&P 500 MLPs Banks Asset Managers Least Most Volatile Volatile Source: Bloomberg market data as of Novem
Slide 38: Risk-Adjusted Returns
Risk-Adjusted Returns Stability, low beta, and strong performance have resulted in superior risk-adjusted returns Performance vs. Standard Deviation of Returns Performance vs. Beta Sharpe Ratio(1) Treynor Measure(2) 1.00 30.0 25.0 0.80 20.0 0.60 15.0 0.88 28.4 0.40 0.76 0.74 0.63 10.0 0.49 0.20 14.8
Slide 39: Relative Value Comparison Highlights Valuation Discount
Relative Value Comparison Highlights Valuation Discount Annaly trades at a relative discount to other yield producing sectors despite outperforming across operating and performance metrics Equity Asset Annaly S&P 500 MLPs Utilities Banks REITs Managers Price to Book 0.95x 2.62x 3.20x 2.09x 1.66x 2.1
Slide 40: CEO Overview
CEO Overview 1 The Yield-Less World 2 Three Major Questions Answered 3 Annaly Advantages 4 Performance & Relative Value 5 Annaly's Opportunity 38
Slide 41: Annaly's Opportunity
Annaly’s Opportunity Market Environment Annaly vs. mREIT Industry Trends(1) Contained Growth/Gradual Removal of Central Bank Higher Risk “Monoline” Influence/Benign Inflation Broad and Diversified Platform vs. Strategy Fed $ Policy: Price = Interest Rates Supply = Balance Sheet Protecting Book Value
Slide 42: Uniquely Positioned for the Future
Uniquely Positioned for the Future The Annaly Advantages Size / Liquidity Stability Diversification Operating Efficiency Beta Shared Capital Performance Intellectual Capital The Annaly Advantages differentiate the Company from its peers and the broader market 40
Slide 43: Annaly's Outlook | 20/20 Vision
Annaly’s Outlook | 20/20 Vision Annaly Q3 2017(1) 2020(2) Significant Growth through Size $14bn Organic & External Opportunities Diversification Up to 25% Credit Increase Allocation to Credit Leverage 6x - 7x Decrease Leverage Return 10% Grow Returns Ownership ~60% Institutional Ownership Increase I
Slide 44: Executive Bios
Executive Bios Kevin G. Keyes serves as Chief Executive Officer and President of Annaly and is a member of the Board of Directors. On October 11, 2017, Kevin was appointed Chairman of the Board, effective January 1, 2018. Prior to joining Annaly in 2009, Mr. Keyes worked for 20 years in senior inves
Slide 45: Leadership Bios
Leadership Bios Ilker Ertas Ilker Ertas is Head of Residential Mortgage-Backed Securities at Annaly. Mr. Ertas has 20 years of experience in U.S. fixed income markets. Prior to joining Annaly in 2015, Mr. Ertas was at Citigroup Inc., where he was most recently a Managing Head of Residential Director
Slide 46: Leadership Bios
Leadership Bios Brooke E. Carillo Brooke E. Carillo is Head of Corporate Development and Strategy at Annaly. Ms. Carillo has 10 years of experience in Head of Corporate corporate strategy, investment and capital markets roles. Prior to joining Annaly in 2010, Ms. Carillo worked in Development and in
Slide 47: Overview of Annaly Businesses
Overview of Annaly Businesses
Slide 48: Overview of Annaly Businesses
Overview of Annaly Businesses 1 Agency 2 Residential Credit & Future of Housing Finance 3 Commercial Real Estate 4 Middle Market Lending 46
Slide 49: State of the Agency Market
State of the Agency Market Over the past year, the Agency MBS market has benefited from low volatility, relative attractiveness compared to credit, sound demand and readily available financing Range Bound Yields in 2017… …Have Kept MBS Prices Stable… …Reducing Interest Rate Volatility(1) 10-year Tre
Slide 50: Agency – Annaly Advantages and Highlights
Agency – Annaly Advantages and Highlights Annaly Agency Advantages Annaly Agency Highlights In-house proprietary analytics that identify emerging Analytical Expertise prepayment trends Hedging Diversity Diversified and comprehensive hedging strategy Traditional wholesale repo, proprietary broker- Op
Slide 51: Agency – Portfolio Composition
Agency – Portfolio Composition The Annaly Agency Group invests in Agency MBS collateralized by residential mortgages Capital(2) Assets(1) Levered Return(3) Strategy Book Value Impact (% of Total) $11.3bn Countercyclical / $107.3bn 9 - 11% Higher Impact (77%) Defensive Agency Portfolio Composition As
Slide 52: Agency Advantage – Hedging Diversity & Analytical Expertise
Agency Advantage – Hedging Diversity & Analytical Expertise Critical components to book value protection are methodical hedging and deep analysis of cash flows Proprietary analytics have allowed more Annaly employs a more diversified and accurate estimates of cash flows comprehensive hedging strateg
Slide 53: Agency Advantage – Scale and Returns
Agency Advantage – Scale and Returns Annaly’s focus on hedging and analytical expertise has directly contributed to positive economic returns relative to Agency peers(1) #1 Annaly’s unencumbered assets(3) are $12.0 larger than the market cap of next largest Agency Peer Market Cap ($bn) $10.0 $8.0 $6
Slide 54: Overview of Annaly Businesses
Overview of Annaly Businesses 1 Agency 2 Residential Credit & Future of Housing Finance 3 Commercial Real Estate 4 Middle Market Lending 52
Slide 55: Residential Credit – Portfolio Evolution
Residential Credit – Portfolio Evolution Annaly can pivot asset allocations as market dynamics change due to strategically avoiding operating businesses Internalization Initiation of Strategic of Chimera Investments in Annaly Acquires Hatteras Relationships with Annaly Reaches $1bn of Investment Leg
Slide 56: State of the Residential Credit Market
State of the Residential Credit Market Supportive housing fundamentals have contributed to strong performance of Annaly’s existing portfolio, while tight spreads have made it challenging to redeploy capital within securitized markets Underwriting Standards Remain Tight Post- Credit Availability Has
Slide 57: Residential Credit – Portfolio Composition
Residential Credit – Portfolio Composition The Annaly Residential Credit Group invests in Non-Agency Residential Mortgage Securities and Whole Loans Capital Assets Levered Return(1) Strategy Book Value Impact (% of Total) $1.4bn $2.7bn 9 - 11% Cyclical / Growth Higher Impact (10%) Residential Credit
Slide 58: Residential Credit – Annaly Advantages and Highlights
Residential Credit – Annaly Advantages and Highlights Annaly Residential Credit Advantages Annaly Residential Credit Highlights Strategic partnerships with multiple Top 10 mortgage Proprietary Partnerships originators and established Non-QM aggregators Exposure to over 10 separate investment product
Slide 59: Residential Credit Advantage – Strategic Asset and Funding Relationships
Residential Credit Advantage – Strategic Asset and Funding Relationships Strategic asset sourcing and financing advantages have led to substantial growth Strategic partnerships have allowed Annaly to scale FHLB financing provides significant funding whole loan portfolio(1) advantage over warehouse f
Slide 60: Residential Credit Advantage – Scale and Funding Comparison
Residential Credit Advantage – Scale and Funding Comparison Annaly Residential Credit’s funding advantage may allow for more attractive returns in the Residential Credit market as compared to select peers(1) $6.0 $5.0 Market Cap ($bn) $4.0 $3.0 #6 $2.0 $1.0 $0.0 NRZ CIM MFA TWO IVR NLY (2) RWT PMT M
Slide 61: Future of U.S. Housing Finance
Future of U.S. Housing Finance The introduction of CRT to move mezzanine residential credit risk to the private sector has been a success The CRT structure(1) has moved unexpected losses to the private sector GSEs have transferred Crisis-Scenario Collateral Loss Rate as % of Mortgage Balance(2) cr
Slide 62: Overview of Annaly Businesses
Overview of Annaly Businesses 1 Agency 2 Residential Credit & Future of Housing Finance 3 Commercial Real Estate 4 Middle Market Lending 60
Slide 63: State of the Commercial Real Estate Market
State of the Commercial Real Estate Market Mixed signals require a selective approach to new investments Positive Economic Backdrop CPPI vs. Cap Rates(1) Transaction Volumes(1) $bn 3.0% 10.0% 140 8.00% Down 16% $600 from 2015 8.0% $500 120 1.0% 7.00% 6.0% $400 100 $300 4.0% -1.0% 6.00% $200 80 2.0%
Slide 64: Commercial Real Estate – Portfolio Composition
Commercial Real Estate – Portfolio Composition ACREG originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments Capital Assets Levered Return(1) Strategy Book Value Impact (% of Total) $1.1bn $2.0bn 8 - 10% Cyclical / Growth Low Impa
Slide 65: Commercial Real Estate – Annaly Advantages and Highlights
Commercial Real Estate – Annaly Advantages and Highlights ACREG Advantages ACREG Highlights Cautious stance given mixed signals; Investing Discipline Premium on cash flow and downside protection Robust credit culture pervades entire deal process Strong In-House Capital Management from origination to
Slide 66: Commercial Real Estate Advantage – Multiple Investment Options
Commercial Real Estate Advantage – Multiple Investment Options ACREG’s multiple investment options provide flexibility across investment sizes, geographies and structures Investment Options and Recent Illustrative Examples Floating Rate First Mortgage CMBS Denver West Freddie Mac 2015 KLSF $112mm
Slide 67: Commercial Real Estate – Scale and Strategic Portfolio Positioning
Commercial Real Estate – Scale and Strategic Portfolio Positioning Credit management advantage provides informed view on commercial cycle $6.0 Among BBREMTG Commercial Real Estate $5.0 mREITs, ACREG ranks 4th in market cap(1) Market Cap ($bn) $4.0 With the addition of relevant Commercial Real $3.0 E
Slide 68: Overview of Annaly Businesses
Overview of Annaly Businesses 1 Agency 2 Residential Credit & Future of Housing Finance 3 Commercial Real Estate 4 Middle Market Lending 66
Slide 69: State of the Leveraged Loan Market
State of the Leveraged Loan Market Changing dynamics in the leveraged loan environment present a unique opportunity for AMML given flexibility to meaningfully allocate capital to select transactions in this market PE Fundraising Creates Demand for Debt Middle Market (“MM”) Yields Outperforming M&A F
Slide 70: Middle Market Lending – Portfolio Composition
Middle Market Lending – Portfolio Composition AMML provides financing to private equity backed middle market businesses across the capital structure Capital Assets Levered Return(1) Strategy Book Value Impact (% of Total) $0.7bn Countercyclical / $0.9bn 9 - 11% Low Impact (5%) Defensive AMML Portfol
Slide 71: Middle Market Lending – Annaly Advantages and Highlights
Middle Market Lending – Annaly Advantages and Highlights AMML Advantages AMML Highlights Partnerships and Long-Term Sponsor Funded 30+ private equity sponsors with Relationships 50% repeat deal flow Disciplined Underwriting and Lending 10.0% realized returns(1) while utilizing relatively low Criteri
Slide 72: Middle Market Lending Advantage – Partnerships and Long-Term Sponsor Relationships
Middle Market Lending Advantage – Partnerships and Long-Term Sponsor Relationships Paramount to AMML’s investment philosophy is a partnership approach to private equity sponsor relationships Deal Sourcing Platform Private Equity Sponsor Criterion Screening, Execution, & Monitoring Benefits of work
Slide 73: Middle Market Lending Advantage – Scale and Attractive Returns
Middle Market Lending Advantage – Scale and Attractive Returns AMML’s scale and tenured team enables investment in mispriced capital structures and ability to take on large single name allocations, which has resulted in attractive yields relative to the broader market $8.0 $7.0 Market Cap ($bn) $6.0
Slide 74: Capital Allocation & Financial Performance
Capital Allocation & Financial Performance
Slide 75: Capital Allocation and Financial Performance
Capital Allocation and Financial Performance 1 Capital Allocation 2 Financial Performance 73
Slide 76: Capital Allocation Framework
Capital Allocation Framework Based on the following criteria, the capital allocation team has developed a set of investment thresholds by asset class to risk-adjust returns across different products Description Agency Resi Credit ACREG MML • Diversification Benefit Correlation to Agency MBS • Correl
Slide 77: Spread Correlation & Volatility
Spread Correlation & Volatility As Annaly has expanded its diversification effort, we have examined the correlation of each asset to Agency MBS over time and the impact to spread volatility Spread Correlation to Agency Pools(1) Market Return on Equity Per Unit of Volatility(2) Expanded WL 1.06 Diver
Slide 78: Corporate Capital Allocation Timeline
Corporate Capital Allocation Timeline Over the last five years, Annaly has adapted to market conditions and opportunistically managed its capital through share buybacks, acquisitions, organic growth and equity offerings Bars Represent # of Available Investment Options Agency Residential Credit ACREG
Slide 79: Evolution of Annaly's Capital Allocation
Evolution of Annaly’s Capital Allocation Annaly grew its three credit businesses to scale as credit spreads widened from Q1 2015 through 1H 2016 and has since slowed growth and opportunistically deployed capital into credit given spread tightening Credit Growth Opportunistic Capital Allocation $4,50
Slide 80: Capital Allocation Trends – Growth in Underlying Products
Capital Allocation Trends – Growth in Underlying Products Annaly has continually shifted the composition of its capital allocation to position the portfolio for market trends Products(1) 2015 – 2016 Trends 2017 Trends (YoY) Pools − ARMs Agency Agency DUS N/A MSR / Derivatives − CRT − Legac
Slide 81: Annaly's Stability
Annaly’s Stability Diversification and prudent risk management have led to a lower beta for Annaly relative to peers across each of Annaly’s four business lines 1.40 % Change since Current Beta(1) 2010 1.30 Annaly 0.55 (50%) Agency Peers 0.73 (4%) 1.20 Resi Credit Peers 0.83 (15%) ACREG Peers 0.79 (
Slide 82: Capital Allocation = Effective Portfolio Management
Capital Allocation = Effective Portfolio Management Multiple tools – including proactive capital allocation shifts and dynamic hedging rebalances – have led to Annaly’s outperformance vs. static rate shocks in 8 of the last 10 quarters Passive (1) -75bps +75bps 75bps Reinvest Agency Runoff Annualize
Slide 83: Outlook
Outlook Annaly has numerous investment alternatives in its arsenal, facilitating capital allocation rotations based on relative value 0.80 6% Capital Allocation Drivers Recent equity offerings 5% were primarily invested into Agency MBS given 0.70 attractive relative valuation and market liquidity
Slide 84: Capital Allocation and Financial Performance
Capital Allocation and Financial Performance 1 Capital Allocation 2 Financial Performance 82
Slide 85: Scalable Operating Platform Drives Execution
Scalable Operating Platform Drives Execution Operational excellence has allowed Annaly to successfully and cost efficiently grow Self-clearing operations Sophisticated market risk capabilities Straight-through processing Business Deep credit skills Risk Operations Management Full service f
Slide 86: Operational Excellence Has Driven Efficient Diversification
Operational Excellence Has Driven Efficient Diversification Since the beginning of 2014, Annaly has increased its capital dedicated to credit assets from 11% to 23% at Q3 2017 and has further diversified its Agency exposure to floating rate assets… ($ in millions) $30.9bn of Gross Assets - Deployed
Slide 87: Diversified Investment Groups Operating at Scale
Diversified Investment Groups Operating at Scale Agency Residential Credit Commercial Real Estate Middle Market Lending Assets(1) | Capital(2) $107.3bn | $11.3bn $2.7bn | $1.4bn $2.0bn | $1.1bn $0.9bn | $0.7bn Operating Expenses to Core Earnings(3)(4) 60.0% 30% 21.3% 51.9% 20% 16.1% 50.0% 10% 38.8%
Slide 88: Annaly's Strong Balance Sheet and Liquidity
Annaly’s Strong Balance Sheet and Liquidity Annaly’s liability profile and large capital base provide unique competitive advantages Balance Sheet Summary Capital Structure Highlights Total Funding / Capital Base ~$88 billion Proprietary broker dealer, RCap, in place since 2008, provides beneficial
Slide 89: Case Study: Annaly's Acquisition of Hatteras Financial Corp.
Case Study: Annaly’s Acquisition of Hatteras Financial Corp. Annaly’s 2016 acquisition of Hatteras Financial Corp. demonstrated the Company’s ability to operationally onboard ~$11bn of assets and refinance ~$10bn of funding Assets increased materially… …while significantly decreasing operating costs
Slide 90: Operational Excellence Delivering Significant Benefits from Scale
Operational Excellence Delivering Significant Benefits from Scale 36 investment product alternatives drive Market / Industry Investment capital allocation optimization Leadership Advantage Ability to underwrite large loans and large securities positions 16 Consecutive Quarters of $0.30 Dividen
Slide 91: Closing Remarks
ANN ALY | Closing Remarks
Slide 92: Annaly Advantages
Annaly Advantages Best in class management and stability have led to a 72% cumulative total return since 2014, outperforming yield sectors by at least 15%(1) 19x the size of the median mREIT(2) market cap and Size & Liquidity over $9 billion unencumbered assets(3) Current number of available investm
Slide 93: Appendix
ANNALY || Appenaix
Slide 94: Non-GAAP Reconciliations
Non-GAAP Reconciliations Unaudited, dollars in thousands except per share amounts To supplement its consolidated financial statements, which are prepared and presented in accordance with GAAP, the Company provides non-GAAP financial measures. These measures should not be considered a substitute for,
Slide 95: Non-GAAP Reconciliations (Cont'd)
Non-GAAP Reconciliations (Cont’d) Unaudited, dollars in thousands except per share amounts To supplement its consolidated financial statements, which are prepared and presented in accordance with GAAP, the Company provides non-GAAP financial measures. These measures should not be considered a substi
Slide 96: Endnotes
Endnotes Endnote 1. The following spreads are displayed with their representatives: Agency Pools spreads - FN 30yr HLB 4.0% Libor OAS. ARMs spreads - 10/1 5/2/5 3.0% Libor OAS. Agency DUS - DUS 10/9.5 Spread to Swaps. SASB – AAA - rolling average of pricing spread to swaps on most recent 4
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