Annaly Full Risk Report

I. Financial Risks

A. Interest Rate Risk

Annaly Capital Management, Inc. (NLY) is significantly exposed to interest rate risks. As a mortgage real estate investment trust (REIT), fluctuations in interest rates can affect the company’s borrowing costs and the value of its mortgage-backed securities.

B. Credit Risk

Annaly faces credit risk as it primarily invests in mortgage-backed securities. The creditworthiness of the mortgage issuers and the performance of the underlying mortgages can impact the returns and the risk profile of the investments.

C. Market Risk

Market risk including changes in market perception and liquidity conditions can influence the market value of Annaly’s securities holdings. Turbulent financial markets or decreased investor confidence can lead to larger than expected losses.

II. Operational Risks

A. Regulatory Compliance

Being a REIT, Annaly must comply with complex regulatory requirements, including maintaining its status which necessitates distributing at least 90% of taxable income to shareholders. Failure to meet these requirements can have significant financial implications.

B. Cybersecurity Threats

Annaly operates in a sector where large volumes of sensitive financial data are managed, making it susceptible to cybersecurity threats. A serious cyber-attack could compromise investor and company data and materially impact operations.

C. Business Continuity

As a financial institution, it is critical for Annaly to maintain a robust business continuity plan. Disruptions in operations, whether from natural disasters or technology failures, could affect the company’s ability to function efficiently.

III. Strategic Risks

A. Competition in the Mortgage REIT Industry

The mortgage REIT industry is highly competitive. Annaly competes with other REITs, investment funds, and financial institutions for investments in mortgage-backed securities and funding, which may affect profitability and market share.

B. Changes in Economic Conditions

Economic downturns or an unfavorable economic environment, such as rising unemployment or declining property values, can negatively affect the performance of the securities Annaly invests in, thereby impacting its profitability.

C. Investment Risks in Mortgage-Backed Securities

Investments in mortgage-backed securities come with inherent risks such as prepayment risks and changes in payment patterns, which can affect the yields and the overall returns from these securities.

IV. Reputational Risks

A. Public Perception and Trust

As a public entity, maintaining investor confidence and trust is crucial for Annaly. Negative perceptions or loss of trust can impact its stock price and ability to raise funds.

B. ESG Concerns

Environmental, Social, and Governance (ESG) practices are increasingly important to investors. Failure to adhere to ESG standards can lead to a loss of investor confidence and potential divestments.

C. Litigation and Compliance Issues

Legal risks including litigation and compliance issues can lead to significant financial liabilities and affect the public perception of Annaly. Staying compliant with applicable laws and regulatory requirements is crucial to mitigate these risks.

V. Mitigation Strategies

A. Diversification of Investment Portfolio

Annaly actively diversifies its investment portfolio to mitigate risks associated with any single type of investment, aiming to stabilize returns across various economic climates.

B. Regular Risk Assessments and Stress Testing

Annaly conducts regular risk assessments and stress testing to understand potential impacts of adverse conditions, which helps in preparing and mitigating those effects in a timely manner.

C. Compliance Monitoring and Training

Continuous monitoring and regular training sessions for compliance are implemented to ensure adherence to legal and regulatory standards, thereby reducing legal and reputational risks.

D. Enhanced Cybersecurity Measures

To combat cybersecurity threats, Annaly has invested in state-of-the-art security technologies and protocols to protect sensitive data and maintain trust with partners and investors.

E. Continuous Monitoring of Market and Economic Trends

Annaly remains vigilant in monitoring market and economic trends, enabling quick adjustments to its investment strategies in response to changing economic indicators.