Annaly Capital Management: More Than One Way To Milk a Cash Cow

Annaly Capital Management, Inc (NLY) does not believe in providing its executives with excessive perquisites and other fringe benefits. Consistent with its pay-for-performance mandate, the m-REIT provides few executive fringe benefits, save for health and welfare benefits, such as group medical, group life and long-term disability coverage.

As stated in the company’s annual proxy:

We believe that our executives should be able to provide for their retirement needs from the total annual compensation they earn based on our performance. Accordingly, other than an employer matching contribution, which is the same that we provide all of our employees, we do not offer our executives any nonqualified pension plans, supplemental executive retirement plans, deferred compensation plans or other forms of compensation for retirement.

In fiscal 2007, Chairman and Chief Executive Michael A. J. Farrell received just $160 in "all other compensation."

Nonetheless, there is more than one way to milk the cash cow.

Pursuant to their employment agreement, the bonus compensation of all Named Executive Officers is linked to percentage gains (Y/Y) in book value.

Farrell received $12.35 million in total compensation in 2007, including a salary of $2.43 million and a cash bonus of $9.62 million, according to the Company's proxy statement filed Monday with the Securities and Exchange Commission.

Book value for the year-ended December 31, 2007, increased 13.4% to $13.04 a share.

The 10Q Detective believes the Company used opportunistic capital raising to deliver sequential book value gains in the current challenging credit environment. Net proceeds from a preferred stock offering (and follow-ons) delivered $2.48 billion, or $6.38 a share, to additional-paid in capital in FY '07.

Yes, we are cognizant of the fact that net income increased 200 percent (Y/Y) to $1.32 a share. Mark Twain was right, however, when he said: "Get your facts first, and then you can distort them as much as you please."

Net income of $414.4 million pales in comparison to proceeds of $2.48 billion!

Author David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Comments

[Lisa:]

Good catch.

2008 Apr 02 05:50 AM

[Ralph F:]

I'd be interested to hear what the company has to say about this.

2008 Apr 02 05:51 AM

[Patrick Harden:]

Annaly has long had a standard of basing executive compensation on book value. It's sort of a Catch-22 in that the Company needs to constantly raise capital in order to feed its business model, yet the accretive offerings also line management's pockets.

2008 Apr 02 09:37 AM

[User 171712:]

The key question is really this: With the current drop in stock price, and related drop in asset value, do the executive bonuses go to zero? If so, I would have no problem with paying bonuses in years where asset rise.

2008 Apr 02 11:32 AM

[flwpower:]

This baby is ready to pop, as soon as it gets over the $17 mark it will be back to $20 bucks by the end of May!

2008 Apr 02 11:59 AM

[Socialism c...:]

flwpower...totally agree! it has been inching its way back, testing resistance...falling back a little, but then regaining. once it pushes through (when the irrational fear and guilt-by-association subsides?) this baby is def gonna pop! however...i dont think we have to wait till end of May...NLY will be reporting at the beginning of the month. ;)

Disclosure - I am long NLY! :)

2008 Apr 02 05:24 PM

[Income Freak:]

Is any stockholder out there not glad they raised all of that "opportunistic" capital? Good job NLY. They'll weather the storm nicely and will line my pocket with a very adequate dividend check. Thanks.

2008 Apr 03 08:00 PM

[Q98:]

User 171712 asked: "The key question is really this: With the current drop in stock price, and related drop in asset value, do the executive bonuses go to zero? If so, I would have no problem with paying bonuses in years where asset rise."

From the 10K exhibit 10.4:
" Book Values of the company shall be equal to the aggregate amounts reported as Stockholders Equity on the Company's balance sheet as of the end of each fiscal year determined in accordance with GAAP, but without taking into account any valuation reserves (i.e. changes in the value of the Company's portfolio of investments as a result of mark to market valuation changes, referred to in the Financial Statements as "Accumulated Other Comprehensive Gain or Loss".

2008 Apr 04 01:16 PM

[jjason:]

The executives at NLY are overpaid. Check out the last 5 years of dividends to shareholders and the share prices. You will see when NLY cut the dividend. I was a shareholder and I did not see Farrell cut compensation when he cut the dividend...or when NLY took losses. I will not invest in NLY. But I have to give NLY credit for explaining the subprime mortgage mess.

2008 Apr 07 09:08 AM

[WindyCityBl...:]

Huge short interest against NLY....it will fall before it goes up

2008 Apr 17 09:10 AM

[Socialism c...:]

WindyCityBlogger - huge short interest does not necessarily mean it will fall. It's expiration week...we may see a squeeze.

2008 Apr 17 12:04 PM

[Socialism c...:]

Uh...shorts? I see 3.5%. Not terribly huge, given the mortgage biz lately. Testing resistance today - if it breaks through the low 17 range...I think we're looking at a gap up back into the 18s - don't forget, there was an issue at $18.25 not long ago.

2008 Apr 18 11:45 AM

[WTF?!:]

~8% ROE on year end Stockholder's Equity, opportune capital raises, reasonable leverage relative to industry, investment in safe assets, and a compensation package minuscule compared to capital destroyers such as Stan O'Neal, Chuck "where's my chair" Prince, and Jimmy "sorry, got a bridge game" Cayne received in years past and you are complaining about NLY's compensation packages. Where's your head at?! I am glad to compensate Farrell at 2007 levels if he continues his clairvoyant traversing of the financial minefield that exists.

Bigger and better battles to take to make your mark.

Long NLY

2008 Apr 26 09:53 PM

[Jonathan Ch...:]

You can make money in Annaly in four ways:

1. High Dividends,
2. Capital gains during the up cycle
3. Shorting the stock during the down cycle.
4. Buy and hold the Warren Buffet way.

I do 1, 2, and 3 in untaxed (IRA) accounts and 4 in taxed accounts.

20% per year is doable with this stock.

2008 May 01 11:29 AM