# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_NLY_2018/NYSE_NLY_2018.mmd` · pages 3-9_

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Dear Fellow Shareholders,

2018 was a year of transformation for Annaly. We successfully delivered on many of the key corporate goals we communicated to you last year, and despite a difficult macro environment, reached a number of significant strategic milestones made possible by the institutionalization and diversification of Annaly over the past five years. The progress made in 2018 further establishes Annaly as a market leader and positions the Company to continue executing upon the most integral components of our platform and strategy, which are outlined in the themes below.

DIVERSIFIED
SHARED CAPITAL
MODEL

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The most important theme of 2018 was diversification. Annaly has transformed into a diversified operating company built to capitalize on numerous strategic opportunities across multiple complementary businesses. Since our diversification strategy began in 2014, Annaly has broadly invested in over \(10 billion of credit assets through continued development of our platform, expanded institutional partnerships and corporate acquisitions. \( ^{(1)} \)  As a result, today each of our three credit businesses would rank among the top ten industry leaders in their respective industry sectors by size on a standalone basis. As importantly, we have also continued to diversify within our core Agency strategies along the way and now maintain 37 investment options across our four businesses – 3x more alternatives than the Company had just a few years ago. A direct consequence of the breadth of our investment optionality is our ability to grow opportunistically and rotate investments based on relative value, while managing risk and our market share expansion in a sustainable way.

FINANCING,
CAPITAL &
LIQUIDITY

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Diversification in the ways we access capital and the broadening of our financing alternatives are equally important in driving our outperformance and capital efficiency. Since the beginning of 2016, we have increased our capital base by \(6.5 billion, more than half of which was sourced from avenues besides common equity offerings, further illustrating our leadership in the capital markets. \( ^{(2)} \)  In January 2018, Annaly's preferred equity offering priced at the lowest coupon ever for a non-rated U.S. preferred issue, allowing us to retire higher cost preferred equity and lower our overall cost of capital. Similarly, in January 2019, following one of the most volatile quarters in history, Annaly was the first U.S. company to access the equity market, raising accretive growth capital at highly attractive valuations. Many other market participants followed our lead over the past few months; however, most have raised restorative capital at dilutive levels after losing significant book value throughout 2018. The success of our capital markets offerings is illustrated by our largest institutional shareholders growing with us; more specifically, global, sovereign wealth and pension fund ownership of Annaly has increased by 40% since 2014. \( ^{(3)} \) 

We continue to enhance our capital efficiency through non-recourse, dedicated financing structures for each of our credit businesses – improving terms of existing arrangements, increasing financing capacity and establishing new counterparty relationships. Specifically, since the beginning of 2018, we added $2.4 billion of additional borrowing capacity across our three credit businesses and expanded our financing diversification by establishing Annaly as a repeat issuer in the residential and commercial securitization markets. \( ^{(4)} \)  Throughout, we have also remained measured and prudent in applying financing to Annaly's four businesses. As of year end 2018, our credit businesses were approximately 50% less levered than their respective sector peers \( ^{(5)} \) , and total firm leverage was nearly 20% lower than the Agency mREIT sector \( ^{(6)} \)  while we produced superior risk-adjusted returns. Our diversified, lower leveraged strategy results in greater liquidity – $7.7 billion in unencumbered assets – uniquely positioning us to take advantage of future market disruptions.

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Continuing to scale our differentiated operating platform has provided a foundation for growth, diversification and efficiency that is unmatched in the industry. Since 2014, we have made significant investments across our four businesses, adding expertise and depth to our investment teams and best-in-class infrastructure to support our strategies. Notably, we have grown our total number of IT professionals by over 40% during this time period. Our expanded in-house technology capabilities have led to the development of proprietary portfolio analytics, financial and capital allocation models, risk testing and accounting software, providing Annaly with distinct competitive advantages and cost savings. Anticipating the evolving needs of our businesses and recognizing the importance of differentiation and efficiency of scale has resulted in our diversified "Yield Machine" that is 30x more efficient than the average S&P 500 company, 20x more efficient than the average of other Yield Sectors in the equity market and 2x more efficient than the less diversified mREIT sector when comparing operating expense to equity ratios. \( ^{(7)} \) 

We have demonstrated, and the market has clearly validated, that size and scale drive performance. 2018 marked another successful year for Annaly and the execution of our long-term growth strategy. We capitalized on a number of opportunities that continue to solidify Annaly's brand as a market leader. Since 2016, amidst a market backdrop with the Fed raising rates eight times and the yield curve flattening by 86%, Annaly has grown its market capitalization 64%, while delivering an additional $4.2 billion in cumulative dividends to shareholders.

Organically, we have continued to grow each of our four business platforms by expanding our internal investment options and continuing to broaden our proprietary partnerships. Today, Annaly has established over 20 strategic relationships with industry leading, dedicated partners across our four businesses, which have resulted in improved efficiencies and increased origination capabilities. These partnerships reflect the growth of Annaly's footprint while also representing increased scalability through access to proprietary deal or asset flow without adding incremental cost to our shareholders. Our partnerships, coupled with our premier investment teams and access to our approximate $15 billion balance sheet \( ^{(8)} \) , enabled us to strategically grow our credit assets to 7.7 billion at year end, a 330% increase since our diversification strategy began. A significant driver of this growth is the 4.2 billion of investments across our three credit businesses in 2018, an increase of approximately 65% year-over-year. \( ^{(9)} \) 

In addition to our organic growth, expansion of partnerships and superior capital markets access, Annaly remains well-positioned to continue to gain market share through further consolidation. Within the mREIT and BDC sectors, we are prepared for opportunities created by the combination of factors in the "consolidation equation." The equation is essentially the direct correlation between market volatility, liquidity issues, resulting underperformance and subsequent M&A activity – demonstrated by our acquisition of Hatteras Financial Corp. in 2016 and most recently of MTGE Investment Corp. in 2018, each initiated in the two most volatile quarters of the past three years. As market conditions evolve, with challenging cycles and periods of volatility, inferior business models will come under pressure, creating an environment where Annaly will again emerge as an attractive partner.

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The diversification and size of Annaly's lower-levered capital base and investment businesses, along with our prudent risk management processes, continue to drive outperformance of Annaly's total return. Since 2014, our total shareholder return of 83% is 1.2x higher than mREITs, 1.3x higher than the S&P 500 and 2.3x higher than the Yield Sectors. \( ^{(10)} \)  In addition to our absolute returns, our proprietary model is producing higher cash flow margins than most any other financial services company – our pre-tax margins of approximately 60% are 3x higher than the average for corporations in the Yield Sectors. \( ^{(11)} \) 

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Annaly's stock has also displayed the stability of our model; over the past year, our beta has been 50% lower than both the S&P 500 and the Yield Sector average. Additionally, our stock trades with ~5x higher average daily trading volume than the median Yield Sector company and ~10x the median mREIT. \( ^{(12)} \)  Investors seeking attractive risk-adjusted returns appreciate Annaly's value as a safe, liquid, high margin, low beta vehicle that offers a premium yield in a market starved for income.

Our dedication to corporate responsibility and governance also sets us apart from the market – and undoubtedly is another contributor to Annaly's historical outperformance. We believe that continually evaluating the framework of our corporate responsibility and governance practices ensures alignment and transparency, resulting in increased value to our shareholders over the long term. In order to more specifically frame our efforts and illustrate our industry leading commitment to governance, we recently published a comprehensive narrative on our website detailing our commitment to ESG, which others are now, of course, beginning to emulate. Our disclosure emphasizes our concentrated efforts across six critical areas: Corporate Governance, Human Capital, Responsible Investments, Risk Management, Ethics and Integrity and the Environment.

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In 2018, we also announced two important governance enhancements: the decision to declassify our Board initiating annual election of all Directors, along with adopting an enhanced Board Refreshment Policy that contains both tenure and age limit provisions. Our commitment to Board refreshment is further demonstrated by the election of four new independent directors since the beginning of 2018, three of whom are women, which will bring the percentage of women on the Board to 45% following the 2019 Annual Meeting of Stockholders \( ^{(13)} \) , which is nearly 2x higher than the average for the S&P 500.

Behind the achievements and successes highlighted in this letter, and in everything we do, is the deep and varied expertise of our most important asset – our people. We have over 170 talented professionals, the largest number in the Company's history, who have supported our successful evolution from a mono-line Agency mortgage REIT to the Industry Innovator we are today. \( ^{[14]} \)  Annaly is One Firm, reflected in our strong corporate culture committed to ownership, inclusion and investment in our employees. We are very proud of how hard we work at the Company each day and how well we treat each other as partners, and in 2018 we recorded the highest level of employee satisfaction since we initiated our annual employee engagement survey in 2015. \( ^{[15]} \) 

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We continue to expand our initiatives focused on advancing diversity throughout the Firm, which remains a key business priority. Annaly's extensive ESG strategy has incorporated careful attention to racial and gender diversity, which is more relevant in today's market than ever. In 2018, 47% of new hires identified as racially diverse, increasing overall firm diversity to 32%, which is 60% higher than our industry based on Bureau of Labor Statistics data. \( ^{(16)} \)  Additionally, nearly 40% of new hires in 2018, 40% of Managing Director promotions and 50% of additions to Annaly's Operating Committee since 2015 have been women. In recognition of these efforts, Annaly was named to the 2019 Bloomberg Gender-Equality Index for the second consecutive year.

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Finally, our dedication to ESG principles, as well as our deep investment capabilities, uniquely positions us to support the vitality of local communities and the economy. This past year, we collaborated once again with Capital Impact Partners, a national mission-driven non-profit community development financial institution, to launch our second social impact joint venture, which is specifically aimed at supporting affordable housing and other community development projects in Washington, D.C. This investment not only advances our social impact investing strategy, but also further illustrates Annaly's overall goal of being a responsible steward of capital and commitment as an employer that contributes to our neighborhoods, schools and businesses across the country.

As we look ahead, we will continue our diversified and complementary growth strategies and reward our shareholders by taking advantage of opportunities in the market that are unique to Annaly. We are more prepared than ever to benefit from our size, liquidity, optionality and operational efficiency. I am grateful for the confidence of our Board, which has empowered us to be the industry leader we have become. I want to thank my fellow shareholders for the steadfast commitment, support and trust of this management team. And, to each Annaly employee, I sincerely appreciate all of the hard work and dedication, every day. We have so much opportunity in front of us.

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Chairman, Chief Executive Officer & President

April 9, 2019