An additional problem with this bonus structure is that it’s unsustainable. It should be self-evident that Annaly, or any company for that matter, can only issue so many new shares of stock before the market has had its fill. This wasn’t a problem before the financial crisis, when Annaly Capital Management, Inc. (NYSE:NLY) was one of the only mortgage REITs in town. Since then, however, there’s been a veritable stampede into the space, with a multitude of new funds setting up shop over the last few years and competing for capital in the public markets. As I discussed here, for instance, the second and third largest mortgage REITs, American Capital Agency Corp. (NASDAQ:AGNC) and ARMOUR Residential REIT, Inc. (NYSE:ARR) , weren’t founded until 2008.
When you consider Annaly’s management proposal in this context, its timing doesn’t appear to be coincidental. Nor does it appear to be driven by an altruistic desire among a handful of overpaid executives to save shareholders some scratch. Consider this: At the end of last year, Annaly repurchased stock for essentially the first time in its history — the only other time they had done so was in 1999 when they bought back a negligible $900,000 worth. They did so last year because Annaly was trading for less than tangible book value, which makes it difficult to justify issuing new shares given the dilutive effect on existing shareholders.
I trust you see where I’m going with this. If Annaly can’t issue new shares, how will it grow book value? And if it can’t grow book value, how will its executives get their exorbitant bonuses? Obviously, they won’t. That is, unless they can concoct a new compensation structure outside the purview of its shareholders’ prying eyes. And that’s precisely what the management proposal allows it to do. As I discussed here and Bloomberg reporter Jody Shenn covered here, by externalizing management to the very same people that are internally running it now, Annaly will no longer have to disclose how, or how much, each of its top executives are getting paid.
So, when Annaly Capital Management, Inc. (NYSE:NLY) says that its management proposal is being offered to save money, I would encourage its shareholders to consider the possibility that they’re actually doing it to pad their own pockets. And it’s for this reason I’d urge anybody who holds this stock to think long and hard about how they plan to vote at the upcoming shareholder meeting.
The article Annaly Has a Credibility Problem originally appeared on Fool.com and is written by John Maxfield.
John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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