 Celebrating 10 years on the NYSE |
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Annaly’s Strategy We invest in what we believe to be the premier asset-backed securities in the world - U.S. residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We enhance the return on our investment in these securities by using leverage. Similar to a bank, we seek to earn positive net interest income from the difference between the yield on our securities and the cost to finance them. Assets Mortgage-backed securities are ownership interests in mortgage loans made by financial institutions (savings and loans, commercial banks and mortgage bankers). When an institution has made enough loans it will “pool” or package them together and sell them to mortgage investors like Annaly. The institution will collect the principal and interest payments made by the homeowners and forward them to the mortgage investor. We structure our portfolio using the “Annaly MBS Barbell Strategy”. This strategy utilizes a combination of adjustable, floating and fixed-rate mortgage backed securities so that it can perform well throughout a wide range of interest rate environments. At one end of the barbell are adjustable-rate and floating-rate securities. These securities tend to outperform when interest rates rise because their yields will increase as interest rates rise due to the adjustable nature of their coupons. On the other end of the barbell are fixed-rate securities. These securities generally experience capital gains when interest rates are falling, which help to offset the lower yields associated with falling interest rates. 
We take pride in the transparency of our balance sheet and the “plain vanilla” strategy we deploy in our portfolio. All of our securities are classified as “available for sale.” Consequently, the entire portfolio is recorded at market value - determined by the average price provided by three independent sources - and announced quarterly. All of the securities in the portfolio are guaranteed by Fannie Mae, Ginnie Mae, or Freddie Mac, which carry actual or implied AAA ratings and therefore have virtually zero credit risk exposure. To date, we have not needed to introduce credit risk into our portfolio in order to achieve the favorable returns we have returned to our shareholders. All of our assets can be easily priced and traded in the largest fixed income market in the world, the mortgage-backed securities market. Because of this, our book value fairly approximates liquidation value. Financing We believe that managing the financing side of our strategy is just as important as the assets we choose. We use the repurchase markets to finance the acquisition of our investments. The repurchase market is an extremely liquid, efficient market used by most major financial institutions either for lending or borrowing money. We have over 50 years of combined experience in this area. Additionally we have developed proven strategies to manage the risks usually associated with leverage, including:
In the example used below, let’s say we are given $1 million to invest. We would purchase a portfolio of agency securities and use them as collateral to borrow $10 million (leverage 10x) which we would use to purchase additional securities. In total we would have purchased $11 million of securities paying us a rate of 6.01% and borrowed $10 million at a cost of 5.26%. (The interest rates used in this example are for illustration purposes only. They are not indicative of rates currently available.)
Without leverage we would have purchased $1million of securities and made a total of $60,100 ($1,000,000 x 6.01%) for the year. Using leverage in the above example we earned $135,100 ($1,000,000 X 13.51%) or $75,000 more than we would have earned with no leverage. |
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