Frequently Asked Questions:

Annaly - FIDAC

Who is Annaly Capital Management?

• Annaly Capital Management is a public company traded on the New York Stock Exchange under the ticker NLY.
• The Company is organized as a real estate investment trust (REIT). REITs receive special tax treatment from the IRS. They do not have to pay corporate taxes on the money paid out as dividends to shareholders. This avoids the "double taxation" issue associated with most dividend payouts.
• Our prime objective is to generate net income for distribution to investors from the spread between the interest income on our mortgage-backed securities and the cost of borrowing to finance their acquisition, and from the dividends we receive from FIDAC, which earns investment advisory fee income.

What is Annaly's relationship to FIDAC?

• FIDAC is the wholly owned subsidiary of Annaly Capital Management, Inc.  The team managing Annaly fulfills the same roles at FIDAC. The team is led by Chairman Michael A.J. Farrell and Chief Investment Officer Wellington Denahan-Norris. FIDAC's team of investment professionals, trained in-house and expert at all phases of the investment process, has built a successful long-term track record through some of the most challenging fixed income markets in memory. Annaly receives dividends from FIDAC, which earns investment advisory fee income.

What is the derivation of Annaly’s name and Crest?

• The Farrell clan was a leading family in Longford County, Ireland, where their ancestral home was called Annaly. Today, the Farrell Family crest—whose inscription figuratively means “Proceed without fear”—symbolizes the confidence we try to provide to our investors and is reinforced by years of reliable, consistent investment performance.

When and why did Annaly change its name from Annaly Mortgage Management to Annaly Capital Management?

• On August 2, 2006 Annaly Mortgage Management renamed the company Annaly Capital Management to better reflect the business objective of managing assets on behalf of institutional and individual investors worldwide through Annaly and through the funds managed by FIDAC.  For more information and a discussion of the name change please see our homepage.

What is Annaly’s Basic Strategy?

• NLY raises money in the public markets to invest in REIT-eligible assets, primarily mortgage-backed securities ("MBS").
• We use moderate leverage to increase returns to our shareholders.
• We strive to be a low-cost provider in order to increase shareholder value.

What are Mortgage-Backed Securities?

• 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. The institution will collect the principal and interest payments made by the homeowners and forward them to the mortgage investor.

What is the Difference Between Fixed Rate and Adjustable Rate MBS?

• Just like a homeowner has a choice of mortgages, the mortgage investor has a choice of mortgage securities to buy. Fixed-rate securities pay a fixed interest rate for the term of the security. Adjustable-rate mortgages (ARMs) securities have an interest rate that changes periodically based on short-term interest rates.

How has Wall Street Changed Mortgage Investing?

• Sometimes mortgage investors want to buy a bond with very specific characteristics, for instance a bond with an interest rate that changes every month. Wall Street bond traders can buy mortgage loans and allocate the principal and interest to meet the needs of different mortgage investors. These bonds are called Collateralized Mortgage Obligations or CMOs.

What is the Credit Quality of Annaly’s MBS?

• To date, all of the MBS owned by the company have been guaranteed by an agency of the U.S. government (Ginnie Mae) or by U.S. government sponsored enterprises (Fannie Mae and Freddie Mac). Mortgage-backed securities issued by these three are called "Agency" mortgage-backed securities. Owners of agency bonds are guaranteed the timely payment of principal and interest. This gives them the equivalent of an AAA credit rating, the highest rating available.

What Assets Does Annaly Own?

• Annaly owns mortgage-backed securities, not properties. Unlike other REITS, which invest in residential or commercial properties, Annaly invests in US Agency MBS.
• MBS are very liquid securities and allow the company to always know the true market value of its assets.
• Annaly’s assets have virtually zero credit risk because they carry actual or implied AAA ratings and are direct, in the case of Ginnie Mae MBS, obligations of the US government or indirect in the case of Fannie Mae and Freddie Mac MBS.

What Is Leverage?

• Leverage is another word for debt. Almost everyone in the United States uses leverage. When you take out a mortgage on your home or use your credit card, you are using leverage. You take on debt in order to buy something. Annaly takes out loans to buy mortgage-backed securities.
• We use leverage because it can help increase returns. If the asset earns more money than the interest payments on the debt, we can make more than we could if we did not borrow to buy the asset.
• 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.

What Are the Risks Involved With Using Leverage?

• Leverage is measured by a ratio called debt-to-equity. A leverage ratio of 10 to 1 means that for every dollar raised Annaly borrows 10 dollars. All other things being equal, a high leverage ratio implies a higher level of risk because there is a bigger chance that the borrower will not be able to repay its debt.
• Financial institutions typically employ more leverage than Annaly in the course of business: Commercial banks - 30:1; thrifts - 25:1; hedge funds - 20-30:1; Annaly - 8-12:1.

How Does NLY’s Cost Structure Help Shareholders?

• Management incentives are tied to book value and earnings.
• No performance fees for management keeps operating costs low and adds to shareholder return.
• Average G & A expenses are 0.15% of average assets since inception, among the lowest in the business.
• We have a solid earnings record since inception.

• We utilize what we call a "barbell strategy" in compiling a portfolio that performs well in a wide variety of interest rate environments. We use the "barbell" metaphor to describe the hedging process that occurs when, in general, a portion of our portfolio will outperform in times of rising rates, while a different portion will outperform in times of falling rates. The two portions of the portfolio- the ends of the barbell- thereby complement each other to maintain current income while minimizing NAV volatility as rates go up or down. What allows us to do this without using any derivatives is the unique characteristics of mortgage-backed securities.
• In our composition, at one end of the barbell we have ARMs 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 the coupons associated with them. On the other end of the barbell we have the fixed rate securities. These securities generally experience capital gains when interest rates are falling and these gains help to offset the lower yields associated with falling interest rates.

• For a more detailed discussion of the Barbell Strategy, please see “What happens when rates rise? We use our barbell” April 11, 2003, in our Commentary section.

What is the Series A Preferred Stock?

• Our Preferred Stock trades under the ticker symbol NLY PrA. During 2004, Annaly issued 7,412,500 shares of 7.875% Series A Cumulative Redeemable Preferred Stock in two offerings with a liquidation preference of $25.00 per share.

When do the dividends on the Series A Preferred Stock get paid?

• Dividends equal to $1.96875 per share per year are paid in arrears on a quarterly basis on or before: March 31, June 30, September 30 and December 31 of each year or, if not a business day, the next succeeding business day .

What is the 6% Series B Convertible Preferred Stock?

• The 6% Series B Convertible trades under the ticker symbol NLYBP.PK.  The original issue price was $25.00 per share.  It pays a 6% dividend of $1.50 per share per annum on a quarterly basis on or before: June 30, September 30, December 31 and March 31 of each year, if not a business day, the next succeeding business day.

What is the Convertible feature of the Series B Preferred Stock?

• The conversion feature allows the shareholder to convert all or part of their holding to Annaly common stock.  The initial conversion is 1.7730 shares of common stock for each convertible preferred share; this is equivalent to a common price of $14.10 (based on the initial offering price of $25.00 per share). There are adjustments made to the convertible feature based on certain business circumstances, see the prospectus for details.

How would Annaly be affected by a flat/steep yield curve?

• In general, our strategy will do better in a steep yield curve environment. However, our strategy of investing in a mix of fixed-rate and floating-rate securities makes it possible for us to generate competitive returns in a wide variety of interest rate environments. For example, in a falling rate environment our fixed-rate assets will outperform on a relative basis, while in a rising rate environment our floating rate assets--where the coupons reset on a periodic basis--will outperform on a relative basis. As you may know, Annaly has operated since 1997 in a wide variety of interest rate environments--flat curves, steep curves, inverted curves, falling rates, rising rates--and our strategy has managed to produce competitive returns. We encourage you to read A Case for a Steep Yield Curve (October 16, 2002) in our Commentary section.

When is the next ex-dividend/record/payable date for Annaly’s common stock?

• We do not pre-announce dates for dividend information. You will have the option of signing up for Email Alerts. These will notify you via email as soon as we declare the dividend dates and amount for any given quarter. These alerts are a very helpful way of obtaining up to date information on Annaly. Please go to the Dividend History section of the website.

What is going to happen to the dividend/earnings? Or are your dividend/earnings sustainable?

• We do not give dividend/earnings guidance. Earnings and dividends can fluctuate quarterly depending on market factors. Factors may include, but are not limited to, changes in interest rates, changes in yield curve, changes in prepayment rates, the availability of mortgage-backed securities for purchase, the availability of financing, and the terms of any financing. For a historical perspective please go to the dividend portion of the website.

I am thinking about reinvesting my dividend. At what price is my dividend reinvested?

• Additional shares purchased with dividends through the Administrator of our Dividend Reinvestment Plan will be purchased at the prevailing market price on the dividend reinvestment date. The prevailing market price for any dividend reinvestment date will be determined by taking the average of the daily high and low sales prices for that date as reported on the New York Stock Exchange (the “NYSE”). In the unlikely event that, due to unusual market conditions, the Administrator is unable to invest the funds within 30 days, the Administrator will remit the funds to you by check. No interest will be paid on funds held by the Administrator pending investment.

• FIDAC, which stands for Fixed Income Discount Advisory Company, is a wholly owned taxable REIT subsidiary of Annaly. FIDAC is a registered investment advisor which manages, assists in managing or supervises investment funds for a wide array of clients around the world on a discretionary basis. FIDAC is a fee-based asset management business with a global distribution reach.

What is the difference between Annaly and FIDAC?

• FIDAC is the taxable REIT subsidiary of Annaly. FIDAC earns fee income by managing funds and accounts on a global basis for institutional clients and high net worth individuals. Annaly raises money in the public market which it invests in mortgage-backed securities on a leveraged basis with the objective being to generate spread income for distribution to the shareholders in the form of a dividend.

What is FIDAC’s Basic Investment Strategy?

• The majority of FIDAC’s investment strategies are the same as Annaly’s - to generate current income by acquiring and managing a portfolio of mortgage-backed securities.

• FIDAC manages off-shore and on-shore private and public investment funds distributed globally as well as separate accounts for high net worth individuals, municipal funds and school endowments.

Who can purchase FIDAC Funds?

• FIDAC funds are typically designed to meet the needs of investors outside the U.S.

What is a CDO?

• A Collateralized Debt Obligation is a structured debt security backed by a portfolio consisting of the following:
  • Secured or unsecured senior or junior bonds issued by a variety of corporate or sovereign obligors.
  • Secured or unsecured loans made to a variety of corporate commercial and industrial loan customers of one or more lending banks.

What is FIDAC's CDO?

• In June 2006, FIDAC launched Harp High Grade CDO I, Ltd. ("Harp"). Harp is a $1 billion multi-tranche collateralized debt obligation that invests in a high-grade portfolio of primarily residential mortgage-backed securities.