COMPANY UPDATE | COMMENT

MAY 10, 2011

Annaly Capital Management (NYSE: NLY)

Updating Estimates on 1Q11 Results: Strong

Performance Expected to Persist

Top Pick

Average Risk

Price: 17.95

Shares O/S (MM): 804.4

Dividend: 2.61

BVPS: 15.76

Float (MM): 800.0

Institutional Ownership: 44%

Price Target: 21.00

Implied All-In Return: 32%

Market Cap (MM): 14,439

Yield: 14.5%

P/BVPS: 1.1x

Tr. 12 ROE: NM

Avg. Daily Volume (MM): 14.87

3-Yr. Est. EPS Growth: NM

Represents forward 12-month dividend estimate

Priced at market close on May 10, 2011 ET

NLY Reported Core Diluted 1Q11 EPS of
.61;

Anticipating Additional EPS Upside Ahead

Investment Opinion

Earnings Summary: 1Q11 core diluted EPS of
.61,
.02 above consensus

despite missing our estimate due to share count impact from recent capital

raises. GAAP diluted EPS was
.88, which includes swap mark-to-market,

gains on the sale of MBS, and trading gains. Core earnings strength was driven

by higher MBS portfolio holdings and wider portfolio spreads. We continue to

believe that fundamentals support performance for the year ahead, given our

outlook for a relatively steep yield curve to persist, along with continued

decline in average borrowing costs from maturities of older-dated swaps.

Spread Expansion: Portfolio spread increased 0.31% sequentially to 2.17%,

compared to 1.85% in the previous quarter and in line with our expectation.

Spread expansion was driven by a 0.18% drop in borrowing costs and a 0.14%

increase in asset yields. We continue to expect spread expansion ahead as

higher interest rate swaps continue to roll off, leading to lower average

borrowing costs ahead. This key support remains a less well-understood

component of the NLY story given consensus estimates, in our view.

Portfolio Update: MBS/agency debt investments rose to $94.1B from $79.5B

in 4Q10; portfolio growth was supported by $2.9B in equity raised in 1Q11.

During the quarter, NLY sold $4.2B in MBS for gains of $27.2M

(approximately
.03 p/s). Leverage fell to 6.3x, from 6.7x in 4Q10. Book

value increased 2.7% sequentially to $15.76 p/s, compared to $15.34 in 4Q10 -

the increase was primarily driven by accretion from recent capital raises along

with positive swap portfolio marks (an estimated
.21 p/s).

Estimate Revisions: Lowering our core 2011 estimate modestly, to $2.69 from

$2.71, and raising our 2012 EPS estimate to $2.64 from $2.52. Our estimate

revisions reflect minor adjustments to spread and leverage assumptions.

Return Outlook Remains Strong: NLY remains one of our favorite

risk/return stories for 2011. Shares are attractively valued at 1.1x current book

value, relative to what we expect to be a forward dividend yield of roughly

15% in the year ahead.