Annaly Capital Management, Inc.

Wellington J. Denahan – Chairman and Chief Executive Officer

Jason Arnold – RBC Capital Markets, Llc. Steve DeLaney – JMP Securities Joel Houck – Wells Fargo Securities, Llc Daniel Furtado – Jefferies Mark C.

DeVries – Barclays Capital

Thank you, Emily. Good morning and welcome to the Annaly Capital Management earnings call for the first quarter of 2013.

Joining me on the call today is Kathryn Fagan our CFO. We will review our quarterly results and our earnings supplement today, but before I want to begin by discussing the recent attention that has been paid to the mortgage REIT sector.

To do so, I want to share the following story, and I will call it, ‘The Summer of the Shark’. On July 6, 2001 an eight year boy had his arm bitten off by a shark while wading offshore near Santa Rosa, Florida.

Shortly afterwards a New Yorker vacationing in the Bahamas has had his legs severed in a shark attack. And on July 15, there was a third attack, this time on a surfer who was at the spot near where the first attack happened on the small boy, a media frenzy ensued culminating in a Time Magazine cover on July 30, titled ‘Summer of the Shark’.

The story was huge and provided an interesting diversion to what was an otherwise slow news summer, but it was misleading, the media attention did not put the risk of shark attack into proper context. As it turns out, there wasn’t any surge in shark attacks in 2001, it was just an average year.

The number of attacks in 2001 76 was down from the previous year of 85. The number of shark attack fatalities dropped to 5 from 12 the previous year.

And in Florida, which leads the nation in shark attacks in over the last half centuries you would have been 50 times more likely to die from lighting strikes as from a shark attack. I tell this little story not to minimize the risk of shark attacks, but to remind everyone that there is always a risk of shark attack.

As a matter of fact I am definitely afraid of sharks and yet I still swim in the ocean. The lesson of the summer of 2001 The Summer of Sharks is that fears rose with the level of media attention, even though there had been no actual change in the risks of shark attacks.

Mortgage REITs are going through their own summer of the sharks. There have been a number of speeches and news articles that have featured the mortgage REIT sector.

I’d like to address the storylines with some factual perspective. In terms of our market’s history, Annaly and some other mortgage REITs have operated through a range of risks, whether it was the refi wave of 2003, the two years of tightening from 2004 to 2006, the financial crisis of 2008 and 2009, and the challenges of today, a period when rates are very low, dollar prices are very high and the Fed is using agency mortgage-backed as a tool of monetary policy.

The recent spotlight on this sector doesn’t change the risks that mortgage REITs manage or have managed in the past. The attention this sector attracts today is primarily the result of its growth.

The growth of the mortgage REITs has only been made possible by the sector’s relative performance and ability to attract and protect private capital. For some more effects, since 2007, mortgage REITs have raised approximately $65 billion of permanent equity capital.

Over the same time period, the aggregate debt-to-equity ratios for agency REIT has declined from 10.1 to 6.5 on average. This represents a core capital ratio of 13.3% for the mortgage REIT sector, which compares favorably to the banking system’s current core capital ratio of 9.3, according to the FDIC.

Because of the nature of our assets mortgage REITs capitalization is clearly superior on a risk weighted basis. And even at the sectors larger size, the combined assets of mortgage REITs are less than two days of average trading volume of agency MBS, which is a deep and liquid market.

Finally, I do not believe that the mortgage REIT sector poses a threat to the financial stability of the United States; rather the facts behind the storylines remain. Annaly has managed its conservative posture in order to be part of the solution to the future of real estate finance in our country.

We are focused on working with all market participants to improve the housing finance system, to quote the FSOC 2012 Annual Report “as the GSEs have reduced their investment portfolios REITs have been a rapidly growing source of investment capital for agency mortgage backed securities.” Annaly will continue to revolve and grow in order to enable our shareholders to benefit from these market opportunities.

Before I open the call up for questions, I want to make a few comments on the release and then discuss some of our recent strategic activities. During the quarter, we disposed of approximately $17 billion in assets that resulted in about a $183 million in gains.

The book yields associated with those assets were around a 127 basis points, which was included in the spread calculation for the quarter and contributed to a reduction in reported spreads quarter-over-quarter.

For the quarter, our overall dividend yield and yield on core earnings remains at historically high levels relative to virtually all other asset classes. For example, our dividend yield of 11.3 is 967 basis points greater than the 10 year treasury.

Our historical yield spread since inception versus the benchmark has been around 730 basis points. Our current yield on core earnings of approximately 7% remains higher than even the corporate high yield index which now stands at about 5.3.

Now I’ll turn to a brief discussion on some strategic developments. First, an update on the CreXus tender offer.

As previously announced, on April 17, 2013 Annaly accepted for purchase 55.1 million shares of CreXus bringing our direct and indirect ownership of CreXus to 84.3%. Using our top-up option we will acquire enough shares to enable us to complete the acquisition in a short form merger which should be completed on May 23 of 2013.

The CreXus’s acquisition is accretive to the Annaly dividend and represents a meaningful step in the evolution of Annaly’s capital allocation strategy, one that will enable us to take advantage of a broader spectrum of investments. Since the announcement of this acquisition in November, we have continued to build out our commercial expertise and we remain confident that CreXus’ capabilities and growth may be significantly enhanced when coupled with Annaly’s broader capital base.

Finally, our externalization Proposal is another strategic initiative that I’d like to highlight. The Proposal assures our shareholders of significant costs savings and cap expenses as we invest in additional resources to diversify and grow our investment capabilities, the proposed fixed management fee of 105 basis points is the lowest in the industry by far and 30% below our peer group on average.

Pro forma cost savings for 2012 amount to 48 million and senior management’s incentives are further aligned with our shareholders, as they are required to own $38 million worth of Annaly’s stock. It should also be noted that the Proposal proactively addresses the competitive changes within our industry and the external managements structures are generally viewed favorably by shareholder advisory services.

With that, I will turn the call over to the moderator for questions.

Hi, good morning. First, I would just like to say Mike would have enjoyed the shark analogy, very well done.

But in terms of questions, with CreXus coming into the portfolio here near-term I was just wondering if you could talk about the CRE opportunities that you see are out there in terms of loan types, yields et cetera. And then kind of what we might be able to expect from an asset mix perspective here for going forward as well?

Jason as we have put out in releases, when we initially set off on this broader initiative we will be limiting ourselves to 25% of our capital allocated away from the agency mortgage position. With respect to activity in the commercial space and pipeline and specifics, I really want to reserve comments until the close of the merger which is on May, projected to be on May 23.

We will give you a full update at that time.

Okay, fair enough. And then I guess just one follow up on the prepay end of the equation, assuming the 10 year kind of remains near or above current levels it seems to me that refi activity will kind of slowly burn out here, just curious what your thoughts are on that end of the equation here?

The only thing concerns me really is that a person like Mel Watt has been put up as a potential replacement for DeMarco. In the portfolio itself we have obviously seen speeds come down and just to put it into perspective the securities we did sell during the period had an associated speed of around 34 CPR with them, which dragged down the yield on that overall position.

Since quarter end you have had rates come down a bit. And so you have to expect that speeds will remain elevated and that policy meddling May get in the way at some point.

But overall, your general feel that you should start to get into a burn out position is correct, if everything else wasn’t happening around it.

Okay, it makes sense. Thanks very much for the color.

You’re welcome. Thank you.

Good morning, Steve.

I think, we’ll all keep an eye out for those land sharks in Washington and…

They’re big.

…hopefully avoid getting our leg bitten off.

Yeah.

I was just curious, since we’re talking about Washington. If you guys are spending any time talking to FHFA about this pilot program, the $30 billion pilot program for credit bonds, if you think that’s viable for the Annaly complex.

And not that it really matters, but if you look at that product, does it fit with Annaly or is that something that you would rather hold in Chimera?

The intersecting thing because when they do come out with their ultimate products, $30 billion is obviously we would allocate however according to capital needs, but it is something that Annaly could look at and it is also something that Chimera would look at. And we have been in ongoing conversations with the both agencies as they try and roll out what the new products going forward is going to look like and also what they’re going to do with existing portfolio.

Do you have a sense, Wellington, as to when we might see that first proposed deal and structure because I’ve been trying to find out what are the - I keep hearing things like credit linked notes and maybe they’re not really cash bonds. I was curious if you have any views of what the actual instrument that you would be investing in might look like?

Well, there have been a number of things that that have been proposed. I do think and - they’re still querying participants on where the demand will lie.

Again, for us and for Chimera in particular, there is the potential that credit linked note might work fine. The problem is it is not a good REIT asset…

Yeah.

…and so you have to keep that in mind on how much and we are conveying this to them, so they do understand the limitations of the REIT market’s participation in a structure like that. But I do think they’re getting serious and they probably will have some thing to market by Q3.

Wow, okay. And in these discussions are they also trying to address whether the seniors that come out of this will be similar - accreted as whole pools [before 40 Act] [ph] compliance, because that seems - that’s another important issue?

No, and that is an issue that we raised when we initially went in on the SEC concept release. And it has not obviously it has not been resolved and that comment letter there has been no movement on it.

But I do think that all the parties understand the need for either a resolution of that outstanding issue or there has to be a way to have private capital participate and the large part of it coming from the REIT community. It is an issue that does need to be resolved.

But they understand it, they understand it exists and they’re not the only one to understand it.

Well, that’s good to hear. Well, thank you so much for the comment.

Sure

Thank you and good morning. I did enjoy the shark analogy and I think most of the people understand that the mortgage REITs are part of the longer-term solution to obviously, it take up a lot of the absorbed, lot of the GSE run off for liquidation, but can you - Wellington can you talk about industry REPO capacity because on the another side, we are hearing a lot of the U.S.

REPO providers are perhaps, not I don’t want to say constrained, but perhaps looking at this with the sharper pencil; on the other hand we are hearing favorable things out of Canada and Asia in terms of new entrance coming into the market. So maybe your perspective in terms of what Annaly is seeing with respect to REPO capacity would be helpful?

Yeah, no, I mean there is no questions that the capacity is there for good quality collateral and you have also seen an increased demand from lenders who are AAA non-agency collateral as well. The over arching issue I think that is evolving in the market is tri-party reform and how that is going to impact the ability to leverage your assets as much as you used to in the past.

As far as the capacity, I have to say that it’s very robust from our perspective and you’ve always had participants and you’ve always had Asia coming in out of the market, we are actually seeing the European lenders to be rather aggressive in their search for collateral, so from our perspective it is a fairly robust market; we keep in mind that there is reform going on and it will create drag and friction and slow the velocity of things, but the availability is robust.

Okay, good. And the second question related to the spread, I mean it was 121 basis point in the quarter, do you have a pro forma spread to taking your account that the fact that as you say a lot of this were lower yielding stuff that you sold and like if we were to look at the spread at the end of the quarter ex the stuff you sold what would it look like, roughly?

Well, the spread at the end of the quarter, if you just take the assets that we had in portfolio and if I just looked at them the ones we did not sell, you are around 260 type of yield and when you add that into the stuff that you did sell at a 127 basis points, with prepayments kind of stabilizing they were fast early in the quarter and started to taper off and so new money spreads around if you look at it conservatively, around 240 basis points, there is no question that this market is not my favorite market, I think I have not been shy about that, but nonetheless in the framework that we’re operating in and where I think the fed is in the long-term I think it will be more difficult for them to exit this market than they think, yet I really look forward to it. But we may, going forward, we may present a increased disclosure on the actual better spread profile disclosure for you guys so you get a better sense because the spread is generated on all interest earning assets and some times if you have cash, large cash positions that is a drag, it’s not necessarily totally representative of your mortgage position.

Right, I mean you guys are bringing in cash at the end of March - I think a lot of that’s reflected in the…

Yeah, and we did have $4.9 billion in reverse as I mentioned. We had REPOs out there that we didn’t necessarily want to force people to break.

So we would reverse collateral in to satisfy those transactions and that activity would drag down your overall spread.

Okay, thank you very much Wellington.

You’re welcome.

Thank you for the opportunity; most of my question have been asked and answered. I just had one, Wellington, and that’s just kind of, but you wouldn’t kind of taking this into your thought process in terms of how you see Annaly say five years out from now and really the highlight that the big difference is that you expect to see in the organization between today and say that five year period.

Thank you.

You’re welcome. Thanks Daniel.

We made this statement that we will more actively allocate capital away from just a pure agency trade. And I see with housing reform and GSE reform, I see tremendous opportunities for us as the private solution to be able to take advantage of that.

And I want us to be in a position where we have all of the necessary disciplines in-house as risk retention rules and all of the things that are impacting the banking sector kind of the fog clears and these things become clearer on what the implications are going to be. I want to make sure that us, we as a company are positioned to deal with those changes and also capitalize on them in a way that is, we have somewhat of an advantage over the historical participants in those markets.

The other thing I want to make sure that five years from now, we are still a highly liquid company involved in whatever the future of and I do think there will be a government guarantee in some form, whatever the future of the government’s participation in the mortgage market is. And so, I think, the company is making very good strides in that direction to be one of the preeminent participants in those markets.

Great, thank you for the thought process. I appreciate it.

Thanks Daniel.

Hi, Mark.

Hey, how are you? I just wanted to follow up on your comment about being harder for the fed to exit than they think?

Could you talk a little bit about kind of when you think they’ll look to exit and how they’ll do it, and if their risks of disruptions from that process and how you kind of positioned your portfolio for that?

Yeah, I mean, one thing I do say to them, whenever we have a change to have conversations with them is that don’t worry so much about disruption, the private sector will be there, we would - everybody hasn’t noticed, we haven’t gone out and raised equity because the opportunity set in that market in particular is not as good as it will be, when said the fed ultimately starts to exit. Now, our advice to them and I think they kind of understand it themselves is that to allow the portfolio just to amortize down I think they get around 250 billion based on today’s prepay levels, somewhere around that in pay downs each year and the market could absorb that.

It wouldn’t be at these prices obviously, but the market will absorb it. The reason I say that they may have difficulty exiting is they are in a game of pulling demand forward.

And when you keep pulling demand forward, you leave a hole in the future. And once you get to that hole, you realize or I need to do it again.

And so as much as they may think that the economy is going to be able to exist without their participation and we all see it, we see the liquidity sloshing around. We see what it’s doing to investment decisions and business decisions.

I just think - they did put their targets out there and I hope they stick to them, and we will look continue to monitor the unemployment rate and future inflation rate. Given their activities thus far, I think we put - you probably hit unemployment around 6.4% in 2014, 2015 and I hope they keep their words at that time.

Okay and just one follow-up on that. I think you mentioned the ability of the private sector to be there to absorb that.

Any thoughts on - it seems like it’s a lot easier for the industry to raise capital when bonds are rich and harder when they are cheap, about kind of the ability to step up and really grow the balance sheet in the event that you see some really significant spread widening and then more attractive opportunity.

No, I have to say that one of the - really the year that we really grew tremendously in size was the year in which the Fed was tightening, they had gone through a tightening cycle 2004 to 2005 when Bernanke was handed over from Greenspan and he continued to tighten and mortgages were getting hit, I think it’s just a matter of investors understanding the opportunity set, at that period of time cash flows were cheaper than they had been in the long period of time. And I think investors are sophisticated enough to understand the difference between various markets.

I do think the amount of capital raised at these levels is indicative of the limited choices that everybody have and that’s why I put it into context, even our core yield surpasses almost by 200 basis points the corporate high yields index. So that tells you what is going on and that’s part of the problem we are all facing with the amount of liquidity that’s in the market and the fed will have some level of volatility when they try and exit, although I hope they are not, I hope they don’t get too concerned about that, I think the markets need to be markets.

Okay, great, that’s helpful. Thanks.

Okay.

Thank you all for participating in the call and we look forward to speaking to you after the second quarter. Take care.