American Capital Agency Corp. (AGNC), Annaly Capital Management, Inc. (NLY), ARMOUR Residential REIT, Inc. (ARR): Should You Be Worried About Your mREIT’s Compensation Structure?

The top management at ARMOUR and American Capital Agency Corp. (NASDAQ:AGNC) is paid a management fee based on the REIT’s equity. The more money these executives raise, the more equity they accumulate and the more they get paid in annual compensation. Typically, American Capital Agency’s managers are paid 1.25% of the equity of the company, while ARMOUR Residential REIT, Inc. (NYSE:ARR)’s top executive is paid 1.5% annually on the company’s equity. Annaly Capital Management, Inc. (NYSE:NLY) has just swicthed to an external management structure. Its management gets paid 1.5% of the company’s equity. So, the compensation is clearly not linked to the company’s fundamentals, or stock price, at all three companies.

Given the volatility in interest rates, analysts believe that this was the absolute wrong time to raise money. So, the bad timing of the capital raises by American Capital Agency Corp. (NASDAQ:AGNC) and ARMOUR Residential raises many questions about the exact purpose behind them. I believe the intentions were clear. It was to further increase the compensation of the top executives of American Capital Agency and ARMOUR Residential.

The current compensation structure creates a conflict of interest, where shareholders’ money is put into bonds that perform worse under the rising interest rate environment, like ARMOUR Residential REIT, Inc. (NYSE:ARR) did.

Conclusion

The entire mortgage REIT sector has nosedived since the speculations about the Fed’s exit first erupted. Agency mREITs were hit the worst, and among them were American Capital Agency Corp. (NASDAQ:AGNC) and ARMOUR Residential REIT, Inc. (NYSE:ARR). However, it seems that the managers of both of these companies are more concerned about their annual compensation than about the stock price and earnings potential. I believe the external management structure, where executive compensation is attached to the assets under management, is flawed, and it needs to be more aligned to company performance. The current compensation structure creates a conflict of interest.

The article Should You Be Worried About Your mREIT’s Compensation Structure? originally appeared on Fool.com and is written by Adnan Khan.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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