Mortgage REIT Annaly Seeks to Shift Management to New Firm

Annaly Capital Management Inc., the largest real-estate investment trust that buys mortgage debt, is proposing that it be managed by a separate firm that would employ its current executives.

The firm’s board is asking shareholders to approve at its annual meeting on May 23 a shift in which investing would be overseen by a new company called Annaly Management Co. owned by its management, according to a regulatory filing yesterday with the Securities and Exchange Commission.

The move would leave Annaly, which ended 2012 with $133.5 billion of assets, with a management structure similar to rivals including American Capital Agency Corp., Invesco Mortgage Capital Inc. and Two Harbors Investment Corp.

While there would be an “immediate financial benefit” for Annaly, the motivation for the change was probably that it means the pay of individual executives will no longer be disclosed, according to Steven DeLaney, an analyst in Atlanta at JMP Securities LLC. Bloomberg News reported last year that the company’s then-chief executive officer made $35 million in 2011, dwarfing the CEOs of the six largest U.S. banks.

“While such figures would cause little reaction if attributed to a hedge fund manager, they can be a source of comment and consternation when earned by an officer of a publicly-held financial services company in this post financial crisis environment,” DeLaney wrote today in a report.

Jay Diamond, a spokesman for New York-based Annaly, didn’t immediately return a telephone message seeking comment on the proposed change.

Base Fee

Annaly’s management company would be paid a base fee totaling 1.05 percent of stockholders’ equity under the board’s proposal, the firm said in the filing. The structure would have saved $48 million in expenses last year, Annaly said.

“During the past several years, a number of changes have occurred in our business and in the market that the independent members of our board of directors believe makes it desirable for us to externalize our management functions,” the firm said.

Current Chairman and CEO Wellington Denahan was paid $25.8 million last year, compared with targeted compensation of $39.1 million, according to the filing. The firm additionally paid $29.5 million to the estate of Michael A.J. Farrell, its former head who died in October at 61 years old after being diagnosed with cancer. The reported 2011 compensation of both was $35 million.


While external management structures for mortgage REITs tend to bring conflicts of interest, the version proposed by Annaly is as “shareholder-friendly as they come,” JMP’s DeLaney said today in a telephone interview. The management firm’s executives will be required to own Annaly stock, the entity won’t oversee other money and Annaly’s shareholders would benefit from any sale of the manager, he said.

While the proposed management-fee percentage is lower than peers, it may be more difficult to cut the rate under the new management structure as Annaly’s assets grow, instead of slowing increases in executive pay, he said.

Annaly shares fell 1 percent to $15.55 as of 1:31 p.m. in New York. The stock returned 10.4 percent over the 12 months through yesterday assuming reinvested dividends.

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