Today James Kieffer, Managing Director and Portfolio Manager of the Artisan Partners U.S. Value Team, delivered the following letter to the Annaly Capital Management, Inc. Board of Directors. The letter below was delivered to the Board in addition to an earlier letter delivered to Wellington Denahan, CEO of Annaly Capital Management.

Michael Haylon   E. Wayne Nordberg
Donnell A. Segalas Jonathan D. Green
Kevin G. Keyes John H. Schaefer
Kevin P. Brady Francine J. Bovich
c/o Wilhelmina Sheridan, Investor Relations
Annaly Capital Management, Inc.
1211 Avenue of the Americas
New York, NY 10036

Ladies and Gentlemen:

Earlier today I shared with you a letter written to Annaly’s CEO, Wellington Denahan. That letter addressed the case for share repurchase. This letter addresses corporate governance, an issue of vital importance to you as an Annaly director.

On the first quarter conference call, when Ms. Denahan spoke out against share repurchase, she made an oblique reference to Annaly’s market-beating returns since the inception date of the company. While this is true and impressive, it is also a bit disingenuous. What Ms. Denahan conveniently ignored is that Annaly has conducted numerous secondary offerings and raised an enormous amount of capital. For instance, from January 2008 to July 2011, Annaly raised $8.8 billion. How have the shareholders who provided that capital fared? The total return of all $8.8 billion has materially trailed the S&P500. Even more disturbing, $5.4 billion of the $8.8 billion has barely generated a positive return. Considering that the market capitalization of Annaly is $9.7 billion and shareholder’s equity is $12.4 billion, I think it is fair to say that the majority of shareholders have experienced an outcome entirely different from what Ms. Denahan promotes.

Let’s keep in mind that Annaly management is well compensated for its efforts. How has management fared since the surge in capital raises? According to the 10-K, Annaly shareholders have paid management fees in excess of $1 billion since 2008. That is quite a sum. Granted, the fee is contractual. But, it is the contractual nature of the fee that creates a conflict of interest regarding share repurchase. Since the fee is calculated by multiplying shareholder’s equity by 1.05%, management’s fee would decline as a consequence of share repurchase. You are well aware of this conflict, so I merely mention it to remind you to stay on guard against potential abuse.

I mentioned in my earlier letter that I was perplexed by Ms. Denahan’s conference call commentary regarding the merits of share repurchase. Consequently, I placed myself in the queue to ask a follow-up question. Unfortunately, management chose to end the call before taking my question. This reflects quite a change from past practices whereby not only did management take questions from the sell-side and the buy-side, but also from individual shareholders. I am sure you will agree with me that it is important for shareholder issues to be addressed in a public forum, all the more so in the case of Annaly since, in my view, it lacks a broad constituency of institutional shareholders to speak up on shareholder issues.

As an Annaly director, you are tasked with ensuring that shareholder interests are served. Part of your job is to add value to the management conversation regarding the direction of the company. You contribute varying perspectives; you challenge management’s thought processes and decisions. Given Ms. Denahan’s hardline stance against share repurchase, I can’t help but wonder how thoroughly this issue has been vetted. Because Ms. Denahan has audaciously equated an Annaly share repurchase to Apple selling off a factory, I can’t help but think the issue has not been well-vetted or that it may be misunderstood at the board level.

As an Annaly director, you have a unique position in the corporate hierarchy. It is your duty to ensure that shareholder interests are being served. I very strongly believe that the absence of a share repurchase program indicates that this is not the case at Annaly. Opportunities to genuinely build economic value through share repurchase do not come along every day. I urge you to address this issue with Annaly management as soon as practical and to do the right thing: implement a very aggressive share repurchase program.

I am available for further discussion should you disagree with my viewpoint. Because I feel strongly about this matter, I intend to make the contents of this letter public promptly after delivering it to you.

Respectfully submitted,

James C. Kieffer
Managing Director, Portfolio Manager
Artisan Partners Limited Partnership

cc: Wellington J. Denahan