# DEAR FELLOW SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_NLY_2022/NYSE_NLY_2022.mmd` · pages 11-17_

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DEAR FELLOW SHAREHOLDERS,

2022 was a remarkably challenging year for financial markets, characterized by several unique events from which few participants were immune. Annually was no exception, vulnerable to the extreme volatility that persisted throughout the year notwithstanding our best efforts to defensively position the portfolio. While we ended the year on what appeared to be more solid footing, disruption continues as of the writing of this letter as the market grapples with the fallout from recent regional bank failures. Despite this environment, Annaly has demonstrated its constant resolve and I am confident that we will successfully emerge from this current period, as we have done throughout our history.

## 25 YEARS OF DELIVERING FOR OUR SHAREHOLDERS

This past year, we celebrated our 25 \( ^{th} \)  anniversary as a publicly traded company. In reflecting on Annaly's journey, I am struck by our strategic transformation from a pure play agency mortgage REIT into the diversified housing finance leader we are today. More importantly, we achieved a number of significant milestones while navigating volatile market episodes: the Russian Debt Crisis, the Great Financial Crisis, the Taper Tantrum and most recently the COVID-19 pandemic and ongoing inflation battle. Annaly's ability to adapt to any market environment is a testament to the durability of our strategy as well as our culture of innovation and forward-thinking.

One of the most important lessons from the past 25 years has been our ability to evolve ahead of the market.

During 2022, we completed our strategic evolution and became a dedicated housing finance REIT with the sale of our Middle Market Lending portfolio, which was announced in Q2 2022 and followed the disposition of our Commercial Real Estate platform in 2021.

Both transactions provided the opportunity to monetize non-core portfolios at attractive valuations and reinvest the proceeds into our Agency MBS, Residential Credit and Mortgage Servicing Rights strategies where we see greater operating synergies and enhanced risk-adjusted returns. We are tremendously proud of our expanded footprint in the residential mortgage market and are poised to take advantage of opportunities across our three businesses.

## PORTFOLIO PERFORMANCE & STRATEGY

We managed through a series of memorable market events in 2022, which I will revisit briefly. During the first half of the year, with a strong labor market and elevated inflation that was exacerbated by the Russian invasion of Ukraine, the Federal Reserve (the "Fed") was forced to remove monetary policy accommodation much faster than previously anticipated, leading to the worst half-year performance of the aggregate U.S. bond market index since 1980. Challenges continued into the second half of the year, beginning with Fed Chair Jerome Powell's speech in Jackson Hole at the end of August. With the Fed signaling its determination to tighten monetary policy until inflation returned to

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its target, the market experienced a further selloff in interest rates and increased volatility, which in turn reduced demand for fixed income products and contributed to a slowdown in housing market activity. Subsequently, the end of the third quarter saw the U.K. Gilt turmoil and Japan's Ministry of Finance currency intervention, resulting in continued instability that drove Agency MBS spreads to widen to levels previously not seen outside of a crisis. The market finally experienced a reprieve during the fourth quarter as inflation data improved, Fed rate hikes moderated and fund flows returned to fixed income.

All told, the Federal Funds Target Rate increased by 425 basis points between March and December 2022, representing the most pronounced tightening in monetary policy in more than 40 years. The U.S. bond market index experienced a negative 13% total return for the year, underperforming the second worst year in index history by more than four-fold. \( ^{(1)} \)  In light of the extremely turbulent year in financial markets, Annaly delivered an economic return of negative 23.7% for the full year. While 2022 was particularly challenging, we are nonetheless proud of a number of key strategic accomplishments throughout the year, including: the accretive disposition of our Middle Market Lending portfolio, the continued expansion of our Residential Credit and Mortgage Servicing Rights platforms and inclusion in the S&P Midcap 400 Index.

Following the $2.4 billion sale of our Middle Market Lending portfolio \( ^{(2)} \) , Annaly fully realized our rededication to investing in all aspects of the housing finance

market. The transaction afforded us the capacity and flexibility to expand our operational capabilities and leadership across residential credit and MSR. We have made great strides over the past year with respect to both strategies while maintaining an intentional focus on credit and risk management given the broader market volatility and disruptions to the mortgage finance sector.

In Residential Credit, our portfolio ended the year at \(5.0 billion in market value, representing 19% of the firm's capital. As the housing market decelerates, we have focused on investing in whole loans given our ability to control our credit strategy, who we partner with and pricing. We purchased \)4 billion in whole loans throughout 2022, bolstered by our correspondent channel that has acquired more

than $2.5 billion in loans since inception in April 2021. Our emphasis on preserving the credit quality of the portfolio remains paramount,
and we were diligent about tightening our already stringent credit standards throughout the year to protect against further deterioration in housing market fundamentals. Our underlying borrowers exhibit strong credit characteristics and have seen meaningful mark-to-market LTV improvements this past year. While our loan business is our preferred avenue for investing in residential credit in the current environment, our securities portfolio provides an additional lever for growth when returns are attractive.

Over the last year, Annaly garnered considerable market share in the MSR space as we fully scaled our platform since initiating the strategy in Q1 2021. In 2022, we increased our portfolio by nearly three times to $1.8 billion in market value and ended the year as the third largest buyer of bulk MSR. We added originator partners, put in place dedicated financing to support future growth and deepened relationships with subservicers. In recognition of the strength of our platform, we received a 2022 Bronze SHARP award from Freddie Mac for superior servicing portfolio performance. The portfolio, which is comprised of high credit quality, low loan rate MSR, continued to benefit from a lower

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prepayment environment, generating stable cash flows while providing a hedge to current dynamics in the housing market.

## FINANCING, CAPITAL & LIQUIDITY

Annaly's prudent management of our leverage and liquidity over the past year has been essential to navigating the unprecedented volatility in markets seen throughout 2022. We remained deliberate with respect to our leverage profile, increasing economic leverage \( ^{(3)} \)  to 6.3x at year-end from 5.7x at the end of 2021, which was still meaningfully below our historical levels prior to the onset of the pandemic. Considerate of the risks to the operating environment, we also positioned ourselves defensively by shoring up liquidity, ending 2022 with more than 6.3 billion in unencumbered assets, including 4.0 billion in cash and Agency MBS. Notably, we opportunistically raised 2.7 billion of common equity \( ^{(4)} \)  in 2022, which was accretive to both book and earnings, supported by strong investment returns across our strategies.

## $6.3 billion

in unencumbered assets

Additionally, we continued to utilize our deep and varied financing options as demonstrated by the strong production from our securitization program and added financing capacity. First, we had a record year of securitization issuance with Onslow Bay representing the largest non-bank issuer of prime jumbo and expanded prime MBS and the

third largest overall. \( ^{(5)} \)  Since the beginning of 2022, Onslow Bay has closed 19 securitizations totaling 7.3 billion in proceeds. \( ^{(6)} \)  Second, we added 825 million of credit facility capacity across our Residential Credit and Mortgage Servicing Rights businesses since the beginning of 2022.

## EXPANDING ON OUR ESG IMPACT

At Annaly, our commitment to corporate responsibility and sustainability is core to our culture and values. We were proud to issue our third annual Corporate Responsibility Report this past year, which details our continued focus on our ESG goals, disclosures and transparency. Some of the achievements highlighted in the report include integrating ESG oversight across the Board of Directors and its Committees and offsetting 100% of our Scope 1 and Scope 2 greenhouse gas. Moreover, our commitment to ESG best practices was further underscored by our recognition in the FTSE4Good and Bloomberg Gender-Equality Indices for the fourth and sixth consecutive years, respectively.

Finally, we are proud of our best-in-class corporate governance, which benefits the long-term interests of our stakeholders. We continue to enhance our governance practices, most notably by our management internalization and more recently by an enhancement to our stockholder rights framework that proactively lowered the threshold to call a special meeting.

## OUTLOOK & CONCLUSION

Looking ahead, we are constructive on the outlook for each of our businesses and excited by the three-pronged housing finance platform we have built. We believe our ability to invest across the Agency MBS, Residential Credit and MSR asset classes where relative returns are the strongest enhances the quality and stability of our long-term returns.

In the near term, with respect to our core Agency business, we continue to see historically attractive nominal and risk-adjusted spreads, a more predictable prepayment environment, an improving supply picture and stable financing conditions. Further, with recessionary risks increasing, Agency MBS has historically outperformed other fixed income sectors in times of economic hardship. In light of these factors, we expect to remain overweight Agency MBS in the near-to-medium term.

Within our Residential Credit business, we expect to maintain our market leadership as an aggregator and securitizer of residential whole

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loans given our capital and certainty of execution. With an exceptional credit profile and robust risk management, we believe our Residential Credit portfolio should be relatively well-insulated from the weakening economic picture. Within the MSR sector, we expect there to be significant supply in the market given sustained monetization efforts by originators. While we will be disciplined with respect to deploying additional capital, we have the flexibility to be opportunistic in adding MSR should returns become more attractive. Over the long term, we expect to continue increasing our footprint in both the Residential Credit and MSR sectors.

While our investment outlook is positive, we expect volatility to persist, with recent turbulence in the banking sector underscoring the need for vigilance. We are prepared for additional bouts of instability with a fortress balance sheet, conservatively hedged portfolio and robust risk management practices.
Our capital allocation also bolsters our positioning for the current environment, with approximately 90% of our assets in Agency MBS that carry little credit risk and are incredibly liquid. And with substantial liquidity and responsible leverage, we are poised to put capital to work as the landscape improves.

Before closing, I want to spend a moment acknowledging Annaly's co-founder Wellington Denahan as she retires from her positions on Annaly's Board following the conclusion of our 2023 Annual Meeting of Stockholders. Since Annaly's founding in 1996, Wellington has helped lead the Company through various market cycles, delivering an exemplary yield to shareholders and establishing a leading presence across all sectors of our business. Personally, I am incredibly grateful for her mentorship and support throughout the many years I have known her. On behalf of the Annaly management team, Board and employees, we thank Wellington for her visionary leadership and commitment to the Company and wish her well in her future endeavors.
In keeping with Wellington's founding ideals, we remain acutely focused on delivering value for our shareholders. We thank you for your continued support of Annaly and look forward to updating you on our performance throughout the year.

Sincerely,

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David Finkelstein
Chief Executive Officer & Chief Investment Officer

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