Is Annaly's Management More Concerned About Its Compensation Than The Spread?

| About: Annaly Capital (NLY)

Shift of Management

Bloomberg reported that Annaly Capital Management (NLY) is advocating the appointment of an external manager to replace its current management structure. The proposed external manager is to employ Annaly Capital's current executives. On the May 23rd meeting Annaly's shareholders would be asked to approve this proposal which would have saved $48 million in expenses last year alone. However, this immediate financial benefit is not the exact motivation behind this proposal. The shift of management to an external manager would no longer require Annaly Capital to disclose its top executives' compensations, which have been a source of anxiety for its shareholders. Shares of Annaly Capital fell 1% on the announcement of proposal.

Annaly Capital Management's CEO is drawing record compensations. Last year, Bloomberg reported the company's then-CEO earning $35 million in 2011. The company's current CEO and Chairman earned $25.8 million in 2012. This is compared to $23 million for Dimon, the CEO of American largest bank by assets, JPMorgan Chase.

If the proposal is approved, Annaly Capital get a management structure similar to American Capital Agency (AGNC), Invesco Mortgage Capital (IVR) and Two Harbors (TWO). Annaly's external manager would be paid a base fee 1.05% of the equity.


Annaly Capital has faced hard times, thanks to the efforts of the Fed. The company reported a consistent decrease in its net interest rate spread. Its spread quarterly decreased from 1.71% at the end of the first quarter of 2012 to 0.95% at the end of the last quarter of the same year. This is a decrease of 76 bps. Similarly, the company's annual net interest rate spread plunged 80 bps year over year to 1.29% at the end of 2012. The prepayment speed of 19% for Annaly Capital's investment portfolio remained stable, however, elevated.

Compared to this, the 2012 year end net interest rate spread for American Capital Agency plunged 48 bps over the prior year. Invesco Mortgage Capital reported a 71 bps year over year decline, while Two Harbors' net interest rate spread took at 90 bps dive over the prior year. However, the prepayments at Annaly Capital's peers remained low. Two Harbors reported a weighted CPR of 6.6% at the end of 2012 up from 5.6% at the end of the first quarter of 2012. Invesco reports prepayment speeds of 14.6%, while the prepayments for American Capital Agency stood at 11%.

Company description

With a market cap of $14.7 billion, Annaly Capital Management stands to be the largest mortgage REIT in the US. The company invests exclusively in Agency mortgage backed securities backed by single-family and multi-family mortgage loans. However, the company's capital investment policy allows it to hold assets other than Agency MBS comprising not more than 25% of its total assets. Annaly started operations in 1997 and to date it is self-managed and self-advised.


Annaly Capital is one of the Agency mortgage REITs that faced tremendous downward pressure due to the Fed's QE3. This also caused the company to cut its dividend distribution twice during the prior year. However, the company's latest move to appoint an external manager, which employs its current executives, shows it is least bothered about the decreasing net interest rate spread. Therefore, I rate Annaly Capital hold at best.

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