# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_NLY_2021/NYSE_NLY_2021.mmd` · pages 9-15_

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Dear Fellow Shareholders,

As I reflect on the last year, 2021 was transformational for Annaly with several key milestones, including the buildout of our Mortgage Servicing Rights ("MSR") platform and the expansion of our Residential Credit business. These achievements, coupled with the successful sale of our Commercial Real Estate business, have enhanced Annaly's ability to invest across all aspects of the housing finance market, fortified the durability of our returns and strengthened our position as the industry-leading mortgage REIT. While we have experienced challenging market conditions in recent months, we are excited about the combination of our Agency, MSR and Residential Credit investments within our portfolio and believe Annaly is well-positioned to be a leading source of private capital in the U.S. housing market for years to come.

## Portfolio Performance & Strategy

2021 was a year of strong growth coupled with a sharp increase in inflation as the U.S. economy recovered from the pandemic-related disruption. In this environment, mortgages underperformed as the Federal Reserve ("Fed") began to detail plans to unwind its accommodative monetary policy including halting mortgage purchases and ultimately reducing its balance sheet. In anticipation of wider spreads and higher interest rates, we thoughtfully reduced our Agency portfolio throughout the year to decrease leverage, increase liquidity and shift capital towards our credit businesses. While returns were impacted by swings in spreads and benchmark rates, our size, liquidity, strong risk culture and active portfolio management helped us to outperform our sensitivity models and maintain an attractive dividend.

At the time I became CEO in early 2020, we began to make preparations for strategic investments into new areas of housing finance. We see many synergies between our Agency and Residential Credit businesses and further sharpened our focus through the sale of our Commercial Real Estate business, which closed in the third quarter of 2021. \( ^{(1)} \)  The $2.3 billion transaction was a successful outcome for our shareholders that both unlocked the value of the platform and also allowed us to reallocate capital into our core residential mortgage finance expertise.

One area we have shifted capital towards is our MSR platform, which we expanded throughout 2021 through the hiring of key personnel, procurement of strategic partnerships and build-out of necessary operational infrastructure. MSR, which tends to perform well in a rising rate environment, is complementary to our Agency investments, offering attractive unlevered yields and providing a mechanism to hedge a portion of our mortgage basis risk. The business grew at a remarkable pace in its first year with Annaly ending 2021 as the fifth largest bulk buyer of MSR. \( ^{(2)} \)  This supported over $500 million in asset

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generation to end the year with a $645 million MSR portfolio. \( ^{(3)} \)  We have seen increased market activity in early 2022 given diminished originator profitability, which we expect to persist throughout the year and provide strong growth opportunities. Looking forward, we are excited about the combination of our MSR and Agency investments that we believe will enhance risk-adjusted returns and reduce our overall interest rate and spread volatility risk.

We have also increased our capital allocation to our Residential Credit Group, which posted a year of exceptional growth with assets nearly doubling. This performance was enabled by strong tailwinds in the U.S. housing market and new initiatives to support the development of our whole loan strategy, which serves to complement the Residential Credit Group's securitized products portfolio. We successfully launched a whole loan correspondent channel in April 2021, which expanded our sourcing capabilities through the addition of new partners and product offerings. Notably, the whole loan correspondent channel recently achieved over $1 billion in expanded credit loan aggregation within its first year of operation. Loan volume was also supported by new bulk partnerships outside of our correspondent channel. The combination of these initiatives drove the group's record $4.5 billion in whole loan purchases last year, which exceeded originations in 2019 and 2020 combined. With housing fundamentals expected to stay healthy, residential credit should be a key driver of our overall portfolio growth in the year ahead as we build on our momentum.

## Financing, Capital & Liquidity

Disciplined leverage and liquidity management has always been core to Annaly's DNA and we have augmented our defensive positioning over the last year given aforementioned market dynamics. We strategically decreased our economic leverage 0.5x in 2021 and 1.5x since the onset of the pandemic to 5.7x at year-end, our lowest year-end leverage since 2014. Our historically low leverage profile is further enhanced by our low capital structure leverage, with 88% of our equity in common stock, and minimal asset-level structural leverage, with highly liquid Agency MBS making up over 90% of our assets at year-end. We also maintained a sharp focus on liquidity, increasing unencumbered assets by $0.6 billion throughout the year to $9.3 billion.

Moreover, we continued to diversify our financing profile by expanding our securitization programs and increasing capacity with various credit facilities. Our Onslow Bay subsidiary remains an active issuer of securitizations, pricing 16 whole loan transactions totaling over $6.3 billion since the beginning of 2021. \( ^{(4)} \)  Notably, Onslow Bay finished the year as the fourth largest non-bank issuer of prime jumbo and expanded prime MBS over the past two years. \( ^{(5)} \)  We also added capacity at our credit facilities and warehouse

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lines including adding over $500 million of capacity within our credit businesses. Meanwhile, financing costs reached a record low during the year with the average economic cost of interest-bearing liabilities declining 55 basis points throughout 2021 to end the year at 0.79%. \( ^{(6)} \) 

## Delivering on Our ESG & Human Capital Commitments

Our core values are central to our culture and we strive to integrate our environmental, social and governance ("ESG") priorities into our overall strategy. We made significant progress on our ESG initiatives throughout 2021 and we are fully committed to generating a positive impact on the communities in which we live, work and operate.

We were proud to issue our second Corporate Responsibility Report, Leading with Purpose, which demonstrates Annaly's focus on ESG endeavors and provides an update on our related goals and commitments. Some of the achievements highlighted in the report include expanding our Sustainability Accounting Standards Board ("SASB") disclosures, offsetting 100% of our Scope 2 GHG Emissions and committing to evaluate disclosures under the Task Force on Climate-related Financial Disclosures ("TCFD"). Subsequent to the report and in line with our commitment to integrate ESG priorities into our broader strategy, we recently updated our corporate charters and guidelines to reflect integrated ESG oversight across the Board and its Committees and also published supplemental climate-related risk disclosures on our corporate website.

Our talented and diverse workforce is essential to driving Annaly's culture of innovation and success and we are acutely focused on supporting the development of all employees. In 2021, we successfully utilized a hybrid work approach that balanced the health and well-being of our employees with the benefits of in-office collaboration. This year, we are proud to have transitioned back into the office, while still providing flexibility for remote work, which we believe allows us to best cultivate our strong corporate culture. We have also made other enhancements to support our employees, including expanding our parental leave and fertility benefits. Further, we remain focused on nurturing an inclusive workplace. In line with this, we have improved our diversity, equity and inclusion ("DE&I") initiatives with the recent expansion to seven employee-sponsored affinity groups and have continued to host a series of training programs on allyship and cognitive biases, as well as other special DE&I-related events.

Best-in-class corporate governance also remains central to Annaly's mission. One recent enhancement we have made to our shareholder rights framework was amending our bylaws to lower the threshold for stockholders to call a special meeting. This is the latest in a series of enhancements we have made incorporating

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shareholder feedback and governance best practices. The benefit of our corporate governance enhancements to our shareholders is best exhibited by our management internalization in 2020, which along with last year's commercial real estate sale, drove a 20 basis point decrease in operating expenses to 1.35% at year-end 2021. \( ^{(7)} \)  Over the last two years, we have lowered our operating expense ratio by 42 basis points following our internalization.

## Outlook & Conclusion

Looking ahead, we expect market conditions to remain volatile in 2022 as the Fed tightens financial policy and reduces its Agency MBS footprint. We are prepared for a wider spread and higher interest rate environment with historically low leverage, substantial liquidity, a nearly fully hedged portfolio and well-diversified capital allocation. While wider Agency MBS spreads present near-term challenges, they also should present an improved Agency investment environment. With ample liquidity and low leverage, we are well-positioned to take a more offensive posture when the opportunity arrives. In line with our defensive positioning, we will be patient given uncertainty around the market and the Fed, but we stand ready to add fundamentally desirable assets should mortgage spreads widen and returns become more attractive. At Annaly, our number one priority is creating value for our shareholders. Ultimately, our investment, financing and liquidity, capital markets and ESG initiatives are all focused on generating a compelling return for our investors. On behalf of the entire Board and Executive Leadership team, we are grateful for your continued support.

Sincerely,

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David Finkelstein
Chief Executive Officer & President

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