Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Another Story of Compressed Spreads and Book Value, But the Outlook is Brighter

External management

By the end of this month, the issue of external management will be up for a proxy vote. This would be similar to the one being adopted by American Capital Agency Corp. (NASDAQ:AGNC), and its cousin American Capital Mortgage Investment Crp (NASDAQ:MTGE). Apparently, the company is reverting to external management to reduce expenses borne by shareholders. However, I believe the motives are different.

I think the external management structure would allow the company’s management to hide top management’s elevated compensation plans. Bloomberg reported that last year alone, Annaly Capital Management, Inc. (NYSE:NLY)’s CEO was paid more than double the average compensation of the six largest US banks. So, I believe this is the kind of disclosures that management is looking to hide.

Besides, I believe the external management will increase expenses instead of decreasing them. This will particularly be the case in the long-term as operating leverage is diminished. Therefore, the May 23, 2013 shareholder meeting holds a key answer to the company’s future strategy.

Prepayments

It seems that Annaly was able to take some advantage from the slowdown in refinance activity during the first quarter of the current year, reporting a modest decline in prepayment speeds. The reported CPR came down from 19% to 18% over the prior quarter.

This is still above the prepayment speeds for American Capital Agency Corp. (NASDAQ:AGNC)’s investment portfolio. American Capital Agency Corp. (NASDAQ:AGNC)’s investment portfolio is considered to have high prepayment protection attributes, which is why it reported a CPR of 10%, one of the lowest in the sector. American Capital Mortgage Investment Crp (NASDAQ:MTGE) reported a CPR of 6.3%, down from the prior quarter’s 6.5%.

Conclusion

Annaly Capital Management’s second quarter performance is highly reliant on how much the company is able to decrease its cost of funds, and the increase in the average asset yield due to the Crexus Investment Corp (NYSE:CXS) acquisition. While the future looks brighter for Annaly, investors should keep an eye on the May 23 shareholder meeting and any further extension in the maturities of the interest bearing liabilities.

The article Another Story of Compressed Spreads and Book Value, But the Outlook is Brighter originally appeared on Fool.com is written by Adnan Khan.

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