A recent filing with the Securities and Exchange Commission reveals some interesting plans for the Annaly Capital shareholders’ meeting. It seems that the well-established mortgage REIT wants to significantly change its management structure — and it will ask its shareholders at the company’s annual meeting this May to approve this modification.

A drastic change
Since going public in 1997, Annaly has been internally managed by its board of directors, which oversees its management team — most of whom are also on the board. A note on Annaly’s website from the late Michael Farrell, former CEO, states that the trust’s governance is geared toward transparency, which accounts for the company’s excellent performance.

Now, the mREIT wants to become externally managed, using a company called, quite appropriately, Annaly Management Company LLC. All managers and officers would become employees of the Manager, and the new regime would begin on July 1 of this year.

A management contract beneficial to Annaly
Annaly says that the decision to move to an external management system is in the best interests of both the company and the stockholders. The company lays out several ways that its new paradigm would be superior to other external management agreements, after researching the subject thoroughly with the help of advisors from Credit Suisse.

For instance, Annaly will pay an annual management fee of 1.05% of stockholder equity, less than the industry average of 1.50%. Also, if the Manager is sold, Annaly would receive the proceeds, not the Manager’s owners. The Manager would oversee Annaly only, avoiding conflicts of interest. Annaly would also require the officers who own the Manager to purchase stock at a rate of 6 times their base salary — thus cementing their loyalty to the company. Interestingly, the five owners of the Manager all sit on Annaly’s board.

Not an unusual setup
Annaly is familiar with outside management contracts. Its wholly owned subsidiary, FIDUC, manages both Chimera Investment , a hybrid mREIT, and CreXus Investment , the purchaser of commercial mortgage-backed securities that Annaly is in the process of acquiring.

Chimera’s recent 10-K report notes that there is a risk of conflict when an outside Manager is in charge of more than one entity, something Annaly is seeking to avoid. Chimera has also paid higher management fees than average — the most recent being 1.87%, including expenses, for the last quarter of 2011 As I’ve recently noted, there are close familial relationships between Chimera’s and Annaly’s boards.

Why the change?
As Annaly notes, many other mREITsuse outside management, such as American Capital Agency and Two Harbors. The reasons for the desired change seem to be mostly financial, and tied to the way the company pays its executives. Annaly estimates that the savings will be in the neighborhood of $210.9 million over the next five years, if the proposal is ratified. One way Annaly would realize these savings, assumedly, is because the company would be able to deduct expenses tied to “certain payments made …read more
Source: FULL ARTICLE at DailyFinance