STRATEGY
About the Company
Annaly Capital Management, Inc. commenced operations on February 18, 1997, as a
self-managed self-advised company. We have elected to be treated as a real estate
investment trust (REIT) under the Internal Revenue Code. We own and manage a portfolio
of mortgage-backed securities. Our principal business objective is to generate income
for distribution to our stockholders from the spread between the interest income
on our mortgage-backed securities and costs of borrowing to finance our acquisition
of mortgage-backed securities, and from dividends we receive from our subsidiaries.
We trade on the New York Stock Exchange under the symbol NLY.
All of the investment securities we own are issued and guaranteed by U.S. Government
Agencies and carry an actual or implied AAA rating. We structure our portfolio using
the Annaly MBS Barbell StrategySM, according to which a combination of adjustable-,
floating-, and fixed-rate mortgage-backed securities is designed to perform through
a wide range of interest rate environments. We employ leverage to enhance our returns.
Please see below to learn more.
In addition to managing a portfolio of high-quality mortgage-backed securities we
earn dividend income from our subsidiaries. As the graphic below illustrates we
currently have three wholly-owned subsidiaries, RCap Securities, Inc.(RCap), Fixed Income
Discount Advisory Company (FIDAC), and Merganser Capital Management, Inc. (Merganser).
RCap (member: FINRA) is a self-clearing broker dealer. FIDAC specializes in managing
residential and commercial loans and securities, CDO management, and other advisory
services. Merganser extends our subsidiaries’ asset management platform into
traditional fixed income strategies for institutional clients. To learn more about
the Annaly Family of Companies, click here.
Investing in Your Best Interest
Annaly Portfolio Strategy
At Annaly 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. We seek to earn positive net interest income
from the difference between the yield on our mortgage-backed securities and the
cost to finance them.
Annaly's Portfolio Strategy: Assets
Mortgage-backed securities (“MBS”) 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 StrategySM®.” This strategy utilizes a combination of adjustable-,
floating-, and fixed-rate mortgage-backed securities so that it can perform throughout
a wide range of interest rate environments. At one end of the barbell are adjustable-rate
and floating-rate securities or swaps. 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 and faster prepayments associated
with falling interest rates.
Annaly MBS Barbell Strategy sm
We take pride in the transparency of our balance sheet. All of our investment 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. The securities in the portfolio
are primarily Agency MBS, which, although not rated, carry an implied “AAA”
rating. Agency MBS are mortgage-backed securities for which a government agency
or federally chartered corporation, such as Freddie Mac, Fannie Mae, or Ginnie Mae,
guarantees payments of principal or interest on the securities, and therefore the
securities have virtually zero credit risk exposure. To date, we have not needed
to introduce credit risk into our Agency portfolio in order to achieve the favorable
returns we have achieved for 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.
Annaly’s Portfolio Strategy: Financing
We believe that managing the financing side of our strategy is just as important
as the assets we choose. We primarily use the repurchase markets to finance the
acquisition of our investment securities. The repurchase market is an extremely
liquid, efficient market used by most major financial institutions either for lending
or borrowing money. Additionally we have developed proven strategies to manage the
risks usually associated with leverage, including:
- Leveraging only liquid assets that are easily priced and have well-defined active
markets.
- Utilizing self imposed limits on the amount borrowed from any one lender.
- Diversifying counterparty risk by maintaining credit relationships and open financing
lines with many high quality lenders.
- Maintaining optimal levels of leverage to manage margin calls.
Putting the Pieces Together
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 $8
million (leverage 8:1) which we would use to purchase additional securities. In
total we would have purchased $9 million of securities paying us a rate of 6.00%
and borrowed $8 million at a cost of 5.00%. (The interest rates and amounts of leverage
used in this example are for illustration purposes only. They are not indicative
of rates or amounts of leverage currently available or desirable.)
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Investment Model
|
|
Yield on Portfolio
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6.00%
|
|
Cost of Borrowing
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-5.00%
|
|
Net Interest Rate Spread
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1.00%
|
|
Debt to Equity Ratio
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8 Times
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Yield on Unleveraged Portion of the Portfolio
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6.00%
|
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Net Interest Rate Spread x Leverage (8x)
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8.00%
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Gross ROE
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14.00%
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Without leverage we would have purchased $1 million of securities and made a
total of $60,000 ($1,000,000 x 6.00%) for the year. Using leverage in the above
example we earned $140,000 ($1,000,000 X 14.00%) or $80,000 more than we would have
earned with no leverage.
Systems: XBasis
XBasis is Annaly’s in-house, proprietary, .NET portfolio management system, and is specifically designed to handle the complexities of agency and non-agency mortgage backed securities, in terms of their pricings, cash flows, and financings.