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ANNALY CAPITAL MANAGEMENT INC

5. INVESTMENT IN AFFILIATE, EQUITY METHOD

During the quarter ended September 30, 2009, the Company acquired 4,527,778 shares of CreXus Investment Corp. (“CreXus”) common stock at a price of $15.00 per share. The Company owns 25% of CreXus and accounts for its investment using the equity method. CreXus is externally managed by FIDAC pursuant to a management agreement. The quoted market value of the Company's investment in CreXus was $64.2 million at September 30, 2009.

Caterpillar Inc.

6.	Investments in Unconsolidated Affiliated Companies

Our investments in affiliated companies accounted for by the equity method have historically consisted primarily of a 50 percent interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. On August 1, 2008, SCM redeemed half of Mitsubishi Heavy Industries Ltd.'s (MHI's) shares in SCM. As a result, Caterpillar now owns 67 percent of the renamed entity, Caterpillar Japan Ltd. (Cat Japan) and consolidates its financial statements. See Note 16 for additional information. In February 2008, we sold our 23 percent equity investment in A.S.V. Inc. (ASV) resulting in a $60 million pretax gain. Accordingly, the September 30, 2009 and December 31, 2008 financial position and equity investment amounts noted below do not include ASV or Cat Japan.

Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a lag of three months or less) was as follows:

Results of Operations of unconsolidated affiliated companies:
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Millions of dollars)	2009			2008		2009			2008
Sales	$	133		$	1,285	$	400		$	3,455
Cost of sales		99			1,063		299			2,863
Gross profit	$	34		$	222	$	101		$	592

Profit (loss)	$	(1	)	$	16	$	(9	)	$	53

Prior to consolidation of Cat Japan, sales from SCM to Caterpillar for the three months ended September 30, 2008 of $437 million and for the nine months ended September 30, 2008 of $1,669 million are included in the affiliated company sales. In addition, SCM purchases of Caterpillar products were $95 million for the three months ended September 30, 2008 and $353 million for the nine months ended September 30, 2008.

Financial Position of unconsolidated affiliated companies:		September 30,		December 31,
(Millions of dollars)		2009		2008
Assets:
	Current assets	$	227	$	209
	Property, plant and equipment – net		222		227
	Other assets		9		26
			458		462
Liabilities:
	Current liabilities		250		173
	Long-term debt due after one year		44		110
	Other liabilities		16		35
			310		318
Equity		$	148	$	144

Caterpillar's investments in unconsolidated affiliated companies:
(Millions of dollars)
	Investments in equity method companies	$	74	$	66
	Plus: Investments in cost method companies		27		28
	Total investments in unconsolidated affiliated companies	$	101	$	94

NRG ENERGY, INC.

Note 5 — Investments Accounted for by the Equity Method

MIBRAG — On June 10, 2009, NRG completed the sale of its 50% ownership interest in Mibrag B.V. to a consortium of Severoćeské doly Chomutov, a member of the CEZ Group, and J&T Group. Mibrag B.V.’s principal holding is MIBRAG, which is jointly owned by NRG and URS Corporation. As part of the transaction, URS Corporation also entered into an agreement to sell its 50% stake in MIBRAG.

For its share, NRG received EUR 203 million ($284 million at an exchange rate of 1.40 U.S.$/EUR), net of transaction costs. During the nine months ended September 30, 2009, NRG recognized an after-tax gain of $128 million. Prior to completion of the sale, NRG continued to record its share of MIBRAG’s operations to “Equity in earnings of unconsolidated affiliates.”

In connection with the transaction, NRG entered into a foreign currency forward contract to hedge the impact of exchange rate fluctuations on the sale proceeds. The foreign currency forward contract had a fixed exchange rate of 1.277 and required NRG to deliver EUR 200 million in exchange for $255 million on June 15, 2009. For the nine months ended September 30, 2009, NRG recorded an exchange loss of $24 million on the contract within “Other income/(loss), net.”

NRG provided certain indemnities in connection with its share of the transaction. See Note 18, Guarantees, to this Form 10-Q for further discussion.

Public Storage

5. Investments in Real Estate Entities

The following table sets forth our investments in the real estate entities at September 30, 2009 and December 31, 2008, and our equity in earnings of real estate entities for the three and nine months ended September 30, 2009 and 2008 (amounts in thousands):

	Investments in Real Estate Entities at
	September 30, 2009		December 31, 2008
PSB	$	327,155	$	265,650
Shurgard Europe		272,668		264,145
Other Investments		13,977		14,803
Total	$	613,800	$	544,598

	Equity in Earnings of Real Estate Entities for the Three Months Ended September 30,				Equity in Earnings of Real Estate Entities for the Nine Months Ended September 30,
	2009		2008		2009		2008
PSB	$	4,684	$	3,320	$	30,351	$	8,512
Shurgard Europe		3,631		2,260		7,239		3,717
Other Investments		509		738		1,443		1,450
Total	$	8,824	$	6,318	$	39,033	$	13,679

During the nine months ended September 30, 2009 and 2008, respectively, we received cash distributions from the Real Estate Entities totaling $36,140,000 and $31,741,000, respectively. Included in earnings recognized for the nine months ended September 30, 2009 is $16,284,000, representing our share of the earnings allocated from PSB’s preferred shareholders, as a result of PSB’s repurchases of preferred stock and preferred units for amounts that were less than the related book value, during the period.

During the nine months ended September 30, 2009, in addition to the impact of earnings recognized and cash distributions received, our investments in real estate entities increased by $18,191,000 due to foreign currency translation adjustments and $17,825,000 due to our acquisition of an additional 383,333 shares of PSB common stock. During the three months ended September 30, 2009, we recorded a gain of $30,293,000 in connection with PSB’s sale of common stock in a public offering, and this gain was included in “gains on disposition of real estate investments, net” on our condensed consolidated statements of income. Our investment in real estate entities increased by $30,293,000 as a result of this gain. See “Investment in PSB” below for further information on this gain.

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange, which controls an operating partnership (collectively, the REIT and the operating partnership are referred to as “PSB”). At September 30, 2009, PSB owned and operated approximately 19.6 million net rentable square feet of commercial space and manages certain of our commercial space.

During the quarter ended September 30, 2009, PSB sold 3,450,000 shares of its common stock in a public offering for net proceeds of $153.6 million during the three months ended September 30, 2009. In accordance with EITF 08-6 “Equity Method Investment Considerations”, we recognized a gain totaling $30,293,000 on the share issuance by PSB, as if we had sold a proportionate share of our investment in PSB.

Concurrent with the public offering, we purchased an additional 383,333 shares of PSB common stock from PSB at the same price per share as the public offering for a total cost of $17.8 million.

We have a 41.4% common equity interest in PSB as of September 30, 2009 (46% as of December 31, 2008), comprised of our ownership of 5,801,606 shares of PSB’s common stock and 7,305,355 limited partnership units in the operating partnership (5,418,273 shares of PSB’s common stock and 7,305,355 limited partnership units at December 31, 2008). The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. Based upon the closing price at September 30, 2009 ($51.32 per share of PSB common stock), the shares and units had a market value of approximately $672.6 million as compared to a book value of $327.2 million.

The following table sets forth selected financial information of PSB; the amounts represent 100% of PSB’s balances and not our pro-rata share.

	2009			2008
	(Amounts in thousands)
For the nine months ended September 30,
Total revenue	$	205,791		$	212,571
Costs of operations and general and administrative expense		(70,781	)		(73,101	)
Depreciation and amortization		(63,631	)		(75,270	)
Other items		(817	)		(1,957	)
Net income	$	70,562		$	62,243

	At September 30, 2009		At December 31, 2008
	(Amounts in thousands)

Total assets (primarily real estate)	$	1,571,321	$	1,469,323
Debt and other liabilities		103,923		105,736
Equity		1,467,398		1,363,587

Investment in Shurgard Europe

At September 30, 2009 we had a 49% equity investment in Shurgard Europe. As a result of our disposition of an interest in Shurgard Europe, we deconsolidated Shurgard Europe effective March 31, 2008 (see Note 3).

For the three and nine months ended September 30, 2009, we recorded an aggregate of $3,631,000 and $7,239,000, respectively, in equity in earnings of Shurgard Europe. For the three and nine months ended September 30, 2008, we recorded an aggregate of $2,260,000 and $3,717,000, respectively, in equity in earnings of Shurgard Europe. During the nine months ended September 30, 2009 and 2008, our investment in Shurgard Europe increased by approximately $18,191,000 and decreased by $31,410,000, respectively, due to the impact of changes in foreign currency exchange rates, primarily between the Euro and the U.S. Dollar.

The following table sets forth selected financial information of Shurgard Europe. These amounts are based upon 100% of Shurgard Europe’s balances, rather than our pro rata share, and are based upon Public Storage’s historical acquired book basis.

Amounts for all periods are presented, notwithstanding that Shurgard Europe was deconsolidated effective March 31, 2008. Accordingly, only the amounts (net of intercompany eliminations) prior to April 1, 2008 are included in our consolidated financial statements.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2008			2009			2008
	(Amounts in thousands)

Self-storage and ancillary revenues	$	59,457		$	62,605		$	164,114		$	185,626
Interest and other income (expense)		178			217			371			573
Self-storage and ancillary cost of operations		(25,546	)		(25,721	)		(74,929	)		(79,284	)
Trademark license fee payable to Public Storage		(423	)		(450	)		(1,169	)		(1,510	)
Depreciation and amortization		(18,922	)		(23,200	)		(53,734	)		(70,675	)
General and administrative		(1,475	)		(2,690	)		(6,557	)		(9,724	)
Interest expense on third party debt		(3,905	)		(6,719	)		(12,328	)		(20,846	)
Interest expense on loan payable to Public Storage		(11,839	)		(12,063	)		(33,356	)		(34,861	)
Income (expenses) from foreign currency exchange		466			(2,006	)		851			(1,351	)
Discontinued operations		-			(6	)		8			(26	)
Net loss (a)	$	(2,009	)	$	(10,033	)	$	(16,729	)	$	(32,078	)

(a)

Approximately $2,841,000 in net income and $2,133,000 in net loss was allocated to permanent noncontrolling equity interests in subsidiaries for the three months ended September 30, 2009 and 2008, respectively, of which $2,994,000 and $3,287,000, respectively, represented depreciation and amortization expense. During the nine months ended September 30, 2009 and 2008, approximately $3,019,000 in net income and $5,911,000 in net loss, respectively, was allocated to permanent noncontrolling equity interests in subsidiaries, of which $8,591,000 and $9,919,000, respectively, represented depreciation and amortization expense.

	At September 30, 2009		At December 31, 2008
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	1,667,710	$	1,615,370
Total debt to third parties		343,018		362,352
Total debt to Public Storage		571,783		552,361
Other liabilities		82,409		82,247
Equity		670,500		618,410

Our equity in earnings of Shurgard Europe for the three and nine months ended September 30, 2009 totaling $3,631,000 and $7,239,000, respectively, and $2,260,000 and $3,717,000 for the three and nine months ended September 30, 2008, respectively, are comprised of (i) losses of $2,377,000 and $9,677,000 for the respective 2009 periods and $3,871,000 and $8,690,000 for the respective 2008 periods, representing our 49% pro-rata share of Shurgard Europe’s net loss for the respective periods and (ii) income of $6,008,000 and $16,916,000 for the respective 2009 periods and $6,131,000 and $12,407,000 for the respective 2008 periods, representing our 49% pro-rata share of the interest income and trademark license fees received from Shurgard Europe for the respective periods (such amounts are presented as equity in earnings of real estate entities rather than interest and other income).

Other Investments

At September 30, 2009, the “other investments” include an aggregate common equity ownership of approximately 24% in entities that collectively own 19 self-storage facilities.

The following table sets forth certain condensed financial information (representing 100% of these entities’ balances and not our pro-rata share) with respect to the 19 facilities that we have an interest in at September 30, 2009:

	2009			2008
	(Amounts in thousands)
For the nine months ended September 30,
Total revenue	$	12,512		$	12,910
Cost of operations and other expenses		(4,776	)		(4,840	)
Depreciation and amortization		(1,515	)		(1,578	)
Net income	$	6,221		$	6,492

	At September 30, 2009		At December 31, 2008
	(Amounts in thousands)

Total assets (primarily self- storage facilities)	$	37,624	$	40,168
Total accrued and other liabilities		1,075		888
Total Partners’ equity		36,549		39,280

Weatherford International Ltd./Switzerland

3. Equity Investment Acquisition

The Company acquired a 33% ownership interest in Premier Business Solutions (“PBS”) in June 2007 for approximately $330 million. PBS is the world’s largest electric submersible pump manufacturer by volume. In January 2008, the Company sold its electrical submersible pumps (“ESP”) product line to PBS and received a combination of cash and an additional equity investment in PBS in consideration of the sale. This transaction increased the Company’s ownership percentage to approximately 40%. In September 2009, the Company converted a $38 million note plus accrued interest due from PBS for an additional equity investment. The Company’s ownership percentage was unchanged as the other joint venture partner also converted its notes receivable for an additional equity investment. The Company’s investment in PBS is included in Equity Investments in the accompanying Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008.