How Annaly Capital Management, Inc. (NLY)’s Executives Fleece Shareholders

It also isn’t true that Annaly’s executives are somehow industry sages who know how to position the company better than the leadership teams at other mortgage REITs. This was the opinion offered recently by a colleague of mine to justify the $25 million payout to Annaly’s CEO last year. Unfortunately, the data doesn’t support this. In fact, the opposite appears to be the case. The metric proving this is the constant prepayment rate — that is, the proportion of principal in a loan portfolio that’s paid off prematurely over a designated time period. In a low interest rate environment, a high CPR decreases a mortgage REIT’s earnings, and vice versa. Well, it turns out that at the end of last year, Annaly’s CPR was 19%, while American Capital Agency Corp. (NASDAQ:AGNC)‘s was 11% and ARMOUR Residential REIT, Inc. (NYSE:ARR)‘s was 12%. Thus, if anything, Annaly appears to be the worst positioned of the major players in its industry.

Look, at the end of the day, the issue isn’t technically about how much Annaly’s executives are paying themselves. While that is certainly relevant, the broader point concerns the way in which they’ve portrayed these payouts to shareholders. They claim their outrageous compensation packages are conditioned upon performance when that’s only true in the most tangential sense. And they fuel the misplaced impression of their brilliance through quarterly pontifications on their conference calls in lieu of serious analysis. It’s almost as if they’re trying to hide something. Which, of course, they are.

If there’s any doubt about this, Annaly’s management externalization proposal, which is on the ballot for the upcoming shareholders’ meeting in May, should smother any remaining questions. By proposing to outsource the management of Annaly Capital Management, Inc. (NYSE:NLY) to a private company owned by Annaly Capital Management, Inc. (NYSE:NLY) ‘s executives, these individuals will no longer have to even create the illusion that they’re being paid for performance, as any disclosure requirements will no longer plague their obviously compromised consciences.

The article How Annaly’s Executives Fleece Shareholders originally appeared on Fool.com.

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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