# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_NLY_2020/NYSE_NLY_2020.mmd` · pages 9-15_

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Dear Fellow Shareholders,

2020 was a year that tested our humanity as our world was transformed by a pandemic that affected all aspects of our lives. In reflecting on the year, I believe a bright spot amidst the darkness was our universal resilience. The strength and courage exhibited by our first responders, medical professionals and countless others who continue to lead our country through this difficult period are truly inspiring. On behalf of everyone at Annaly, we are grateful for the selflessness and sacrifices made by so many during this crisis and we are reminded of the responsibility to lead with purpose and impact during this time of rapid change.

Resilience is also a quality shared by the employees of Annaly whose tireless efforts helped us successfully navigate this past year to deliver a positive economic return for our shareholders. We delivered performance that we are proud of amidst the historic volatility experienced early in the year as the virus's devastating economic impacts unfolded.

Annaly successfully transitioned to a remote work environment ahead of government mandates and we prioritized staying engaged with our employees through new and innovative mediums. We've provided flexible work arrangements and our focus on technology has allowed for a seamless working experience throughout the year. This period has reinforced the importance of culture, our people and emergency planning and system resiliency, which has been a priority of ours for years. In that spirit, we expanded the mandate of the (formerly) Compensation Committee, which has been renamed as the Management Development and Compensation Committee, to include broad oversight of the Company's human capital management, including policies and strategies related to recruiting, retention, career development, management succession, corporate culture, diversity and employment.

## LEADING WITH PURPOSE & IMPACT

2020 was also a year marked by social unrest sparked by issues of injustice and inequality. At Annaly, we believe firmly in utilizing our voice to speak out in support of equality and we have a long-standing commitment to corporate responsibility and a culture that champions inclusivity. We have taken significant steps to improve our diversity efforts at Annaly including expanded unconscious bias training, naming our first Head of Inclusion and establishing an Inclusion Support Committee of Executive Sponsors.

Additionally, on the 23 \( ^{rd} \)  anniversary of our IPO, we published our inaugural corporate responsibility report, which details our significant corporate governance enhancements, responsible investments, corporate philanthropy and human capital initiatives. These practices are integral to our business at Annaly and our report includes related supplemental disclosures under various sustainability reporting frameworks and details how we integrate ESG within our investment processes and corporate strategy. We are continuously enhancing these practices and are acutely focused on ensuring our investments make a positive impact on the world around us.

Over the last few years, we have made significant enhancements to our corporate governance in order to drive value for shareholders. Notably, the completion of our management internalization in June 2020 underscores our commitment to further align the interests of management and shareholders and demonstrates our continued efforts towards enhanced governance practices that incorporate the views of long-term owners. Ultimately, the internalization, which has already resulted in

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increased transparency and disclosures to our shareholders, is expected to save operating costs over the long run. As a testament to the internalization's value, we have already reduced our operating expense ratio by over 20 basis points to 1.62% as of year-end, which was at the low end of the long-term target range we established at announcement of the internalization in February 2020 and well below the average of our mREIT Peers.

Most recently, we welcomed Eric A. Reeves to our Board of Directors. Eric's valuable insight and legal and private capital expertise will enrich Annaly and further strengthen our focus on corporate governance and business performance. We believe our Company benefits from a diverse group of voices on the Board and we have been committed to increasing the Board's breadth as indicated by the range of expertise in our Board skills and experiences matrix, which is set forth in the proxy statement for our 2021 annual meeting of stockholders.

## Portfolio Performance & Strategy

In the face of continued economic uncertainty, Annaly delivered strong results for 2020 that were driven by careful management of our well-positioned investment portfolio. Key to our performance during the crisis was the liquidity of our Agency MBS holdings and the ability to transact in volatile markets, as well as ample availability of financing. Of further benefit was our relatively low overall leverage profile and our differentiated approach to credit investing. Throughout the year, we shifted our capital allocation increasingly towards Agency MBS given the more favorable operating environment characterized by record low financing costs, low interest rate volatility and supportive supply and demand dynamics.
Our conservatively positioned credit businesses, which carry relatively low leverage and limited exposure to sectors most impacted by the pandemic, were able to weather the disruption experienced early in the year. To further illustrate this point, we were able to reverse CECL reserves over the course of the year, which declined by $20 million from the second quarter to year end. While capital allocation to credit was near the low end of our target range at 22% at year end, the relative value equation shifted back towards certain areas of credit as the economic recovery solidified and we began increasing the measured pace of activity in certain businesses. Residential Credit, which exhibited strong fundamental performance, and Middle Market Lending, which saw credit performance indicators improve year over year, represented the majority of the $2.4 billion in credit originations for the year.

We announced in March 2021 that we entered into a definitive agreement to sell our Commercial Real Estate business in a cash transaction valued at $2.3 billion. The Commercial Real Estate business has been an important pillar of Annaly's differentiated investment model since 2013. However, given structural changes in the operating environment, this transaction allows Annaly to successfully monetize the platform and provides additional capacity to further expand our leadership in the core of our strategy – residential mortgage finance. We are grateful to the team who supported and built the business over the years and we wish them well in their future endeavors.

## Financing, Capital & Liquidity

At the beginning of 2020, we took prudent steps to fortify our balance sheet that proved invaluable as

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the market disruption experienced in March and April took hold. We proactively reduced leverage starting in Q1 2020 and continued to do so in subsequent quarters, ending the year a full turn lower at 6.2x, which is the lowest economic leverage the Company has had in more than three years. Additionally, we significantly increased our liquidity with nearly $9 billion of unencumbered assets as of December 31, 2020, the strongest liquidity position for the Company in years. We believe that this combination of low leverage and robust liquidity allowed us to manage our capital more efficiently during a period of pronounced volatility, which differentiated us from other market participants this past year.

During 2020, we continued to utilize the breadth of our financing capabilities, diversifying financing through securitizations and increasing capacity under our credit facilities. Annaly Residential Credit Group completed five residential whole loan securitizations totaling \(2.1 billion since the beginning of 2020 and was the third largest non-bank issuer of new origination RMBS in 2020 \( ^{(1)} \) . Additionally, we secured \)1.125 billion of additional capacity across two new credit facilities for the Residential Credit business. We took advantage of the relative attractiveness of balance sheet and structural leverage compared to capital structure leverage, as evidenced by these transactions and the redemption of our $460 million 7.50% Series D Cumulative Redeemable Preferred Stock. Overall, the constructive financing environment was unlike anything we have witnessed in our Company's history. We achieved record-low financing costs with average economic cost of interest bearing liabilities \( ^{(2)} \)  declining 114 basis points to 0.87% over the course of the year.
Finally, we continued to use our stock buyback program as an effective tool to generate shareholder return. Annaly repurchased $209 million of common stock \( ^{(3)} \)  in 2020 when our evaluation deemed it the most attractive use of capital. We renewed our $1.5 billion common stock repurchase program authorization \( ^{(4)} \)  at year-end and will consider additional opportunistic repurchases in the future when appropriate to do so.

## STRATEGIC VISION

At Annaly, we see many synergies between our Agency and Residential Credit businesses and are focused on strategically expanding our leadership across all aspects of the housing market. We plan to grow our operational capabilities and products within our core competencies, diversifying and growing our opportunity set through residential loan acquisition channels, mortgage servicing rights ("MSR") and other asset types.

As demonstrated by the announced divestiture of the Commercial Real Estate business, we are laying the foundation to further diversify within residential housing finance. Within Agency, we are planning to begin investing in MSR on balance sheet and have also established a partnership with a highly reputable originator partner to further increase our exposure to the asset class. We have made several key hires to support this growth and recently opened an office in Dallas to broaden our sub-servicing oversight capabilities. Our Residential Credit business has continued to form strategic partnerships to secure loan production and further our securitization platform, where we have been a programmatic issuer since the beginning of 2018.

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One of the many differentiators of our platform will continue to be the optionality embedded in our alternative strategies, such as our Middle Market Lending platform. Through that business, which has been on balance sheet since 2010, we generate leading returns with cycle-agnostic investments. We also expect to maintain exposure in commercial real estate through opportunistic and efficient strategies within the realm of securities. More broadly, we are committed to continuing to deliver the highest quality returns for our shareholders, while maintaining a conservative leverage posture compared to peers.

## Conclusion

As I reflect on my first year as CEO of Annaly I am grateful for the support and dedication of our employees, our management team, our Board and all of Annaly's stakeholders. Last year, these relationships mattered more than ever. Throughout our nearly 25-year history, our external stakeholders have been key to our success and longevity and we deeply value these partnerships. 2020 will be marked as the most trying and exciting year of my career and the lessons learned from this crisis, like each before it, fuels our organizational growth and perspective.

Following the volatility last year, we are optimistic about the health of our financial position and we will remain nimble upon future dislocations to acquire assets at attractive valuations that will perpetuate our organic business objectives. Our attention to driving shareholder value and staying focused despite the severe turbulence surrounding us enabled us to achieve several strategic milestones during an otherwise challenging year. With real hope that the pandemic will end in the near future, we are energized about our prospects and look forward to continuing to update you on our progress on these exciting initiatives.

Sincerely,

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David Finkelstein
Chief Executive Officer & Chief Investment Officer

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David Finkelstein was named CEO and Director in March 2020. Mr. Finkelstein has been with Annaly since 2013 and has served as Chief Investment Officer since 2016. In this role, he has managed the Agency portfolio and platform and helped build and oversee Annaly's three credit businesses. Mr. Finkelstein first encountered Annaly in 2000 as a counterparty while trading fixed income investments at Salomon Smith Barney and continued his partnership with the Company in subsequent senior trading roles at Citigroup Inc. and Barclays PLC. Mr. Finkelstein joined Annaly from the Federal Reserve Bank of New York, where he served for four years as an Officer in the Markets Group and was the primary strategist and policy advisor for the MBS Purchase Program. Mr. Finkelstein received a B.A. in Business Administration from the University of Washington and a M.B.A. from the University of Chicago, Booth School of Business. Mr. Finkelstein also holds the Chartered Financial Analyst \( ^{®} \)  designation.