Lays out nine reasons investors should avoid Annaly Capital Management.
9 Reasons Id Never Invest In ANNALY CAPITAL MANAGEMENT
Its hiding something from you
Annalys executives have long been the subjects of well- deserved criticism for unjustly enriching themselves at the expense of shareholders. At the 2013 annual meeting only 28% of shareholders supported the compensation of its named executives. In order to hide their pay, in turn, the company has reorganized its corporate structure in such a way that it must no longer disclose the details of its executives compensation.
After founding a publically traded portfolio company called Chimera Investments, Annaly installed the son of a board member to be Chimeras CEO and the sister of Annalys now-CEO to be its CFO. What became of Chimera? For the past two years, its been embroiled in an accounting fiasco that involved overstating earnings between 2008 and 2011 by 66%.
It disregards shareholder votes
At Annalys 2011 annual meeting, shareholders voted overwhelming (1) in favor of holding say-on-pay votes every year and (2) against the reelection of Jonathon Green to Annalys board of directors. What do you suppose Annaly did? It ignored both, choosing at the time to hold say-on-pay votes every three years and reelecting Green to the board despite the shareholder discontent.
Nothing screams bad investment more than an accounting fiasco. And thats exactly what took place at Chimera Investments, one of Annalys publicly traded portfolio companies, which, its critical to appreciate, is managed by the very same people who run Annaly. Between 2009 and 2011, Chimera reported net income of $1.06 billion. In reality, the figure was only $367 million.
In 1994, the year Annalys managing entity was founded, its co-founder and former-CEO Michael Farrell was censured by the NASD, fined $150,000, suspended "30 days from associating with any member of the NASD," and had his securities license revoked. The charges? Among other things, "filing inaccurate [regulatory] reports," "filing [an] incomplete and inaccurate annual audit," and keeping "inaccurate books and records."
Its getting riskier
For virtually all of Annalys existence, its focused exclusively on agency mortgage-backed securities. As a result, Annalys shareholders have never been exposed to credit risk. But those days are over. Starting last year, Annaly began to diversify its portfolio into assets related to commercial real estate that arent similarly covered. In my opinion, its an egregious mistake and one that shareholders are likely to pay for in years to come.
Theres no incentive to outperform
As a result of Annalys previously mentioned corporate reorganization, its executive compensation package is now completely detached from the companys performance. Regardless of profitability, they now get a set percentage of shareholder equity every year.
The Federal Reserve
Its said that one should never fight the Fed. But thats exactly what Annaly must do. In an effort to boost the economy, the central bank has kept short-term interest rates near zero for much of the past five years. But this is bound to end. And when it does, Annalys cost of funds will increase, which is likely to have the concomitant effect of decreasing its earnings.
Annalys book value is inversely correlated to mortgage rates. As mortgage rates increase, the value of Annalys portfolio of mortgage-backed securities decreases. Thus, since theres essentially only one direction for mortgage rates to go from here (up), theres also only one direction for Annalys book value to go (down).