Are Changes in Store for This Top mREIT With a New CEO?

It's unfortunate that America's glass ceiling is still very low. The ranks of female executives who've made it to the top of the corporate food chain remain thin, and capable, accomplished women are still making far less than their male counterparts. A notable exception to both of the above is Wellington J. Denahan-Norris, co-CEO of top mortgage REIT Annaly Capital (NYSE: NLY  ) , who's now almost certain to occupy the position exclusively. She's filling some mighty big shoes, though; the company's former top dog was one of the most widely admired in the industry.

Death of a co-founder
Denahan-Norris' ascendancy at Annaly is a bittersweet success story. The man she's set to replace, Michael Farrell, retreated into a co-CEO role with her early in October in order to fight the cancer that ended up taking his life mere weeks later.

Farrell was a larger-than-life figure, a high profile CEO whose supporters praised him for his management acumen; under his watch, the company became world's largest mREIT. His detractors, though, complained about his rich pay package -- he was far and away the best-compensated CEO in the real estate world.

Whether you loved or loathed him, he's a hard guy to replace. He was undoubtedly successful, not only in creating the beast that is Annaly but in nimbly guiding it through the trauma of the financial crisis several years ago.

A glimpse into the black box
It's always hard to gauge how well an executive suite transition will work out. Even those who've effectively climbed through the ranks and performed well on every rung of the ladder can rock and slip when the reach the top.

Denahan-Norris is certainly capable, and she's got a good track record not only in the company but as an exec in the wider jungle of the financial sector. She was a vice president at Citadel Funding Corporation and did time in the trenches, slinging mortgage-backed securities as a trader at a 1990s iteration of London's venerable Schroders trading house.

Perhaps more critically, although she kept a lower profile than the flamboyant Farrell, she was still deeply involved in Annaly's operations and had been a top manager since the beginning. Even now, following her big promotion, she holds the CIO title. It's reasonable to assume that, as a co-founder of FIDAC -- the company behind not only Annaly but its peers Chimera (NYSE: CIM  ) and CreXus -- and a top Annaly manager from inception, Denahan-Norris was at least partially responsible for crafting the company's strategy.

She was and is well paid for doing so. At around $35 million for 2011,her compensation matches that of the late Farrell. What's good about that is, she probably won't be sniffing around for a richer payday (who could afford it, and why would she abandon a firm she co-founded anyway?). In fact, according to CNNMoney, Denahan-Norris was the second highest-paid woman in corporate America last year.

She was in good company. No. 1 on the list was Safra Catz, president and CFO of global software powerhouse Oracle (Nasdaq: ORCL  ) , a firm with a long streak of profitable years behind it and plenty of money to reward its executives. Trailing behind Denahan-Norris were such notable female execs as Facebook (Nasdaq: FB  ) COO Sheryl Sandberg and Hewlett-Packard (NYSE: HPQ  ) CEO Meg Whitman, both of whom preside over big firms just as well-known to Main Street as they are to Wall Street.

What's bad about Denahan-Norris' pay package is that, like Farrell, she's bound to be a lightning rod for critics of CEO pay seen as excessive. Her seemingly low-key approach might not be the best one in the face of such attacks; it could be interpreted as arrogance or indifference.

Rising with the boss
As with many successions, Denahan-Norris is lifting some company bigwigs along with her. Two senior executives who've put in at least a few years at the company, Kevin Keyes and James Fortescue, have advanced to fill the positions of president (Keyes) and COO (Fortescue). So it seems the new top management team will start their new jobs as a unified group; we can assume that they're all reasonably comfortable and satisfied working with each other. Such an orderly succession of insiders will almost certainly be good for company harmony.

As far as shareholders are concerned, though, a peaceful executive cabal doing business as usual might not be ideal for their investment. Dividend payouts remain rich in terms of yield, but they've been dropping in absolute terms. Annaly's common stock will disburse $0.50 per share for the firm's most recent quarter, down $0.05 from the previous three-month period, and a full $0.10 off that of one year ago.

It's not entirely the company's fault. Low interest rates are putting the squeeze on interest rate spreads, as they ever do, and the government's qualitative easing activities mean fewer good mortgage-backed securities to invest in. Anything connected with MBSes these days is struggling with these conditions, and Annaly is and always has been tightly welded to that asset class.

So your feelings about the company's managerial succession depend on your outlook for the industry as a whole. Those who believe it can get past the current roadblocks will likely be comfortable with the shift in the executive team. It was orderly and smooth, which is welcome in a market that in recent times has been anything but.

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Eric Volkman owns shares of Facebook. The Motley Fool owns shares of Facebook, Annaly Capital Management, and Oracle and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On October 30, 2012, at 6:12 AM, bmc007 wrote:

    "So your feelings about the company's managerial succession depend on your outlook for the industry as a whole."

    Quite true. IMO, left to their own devices, the Co./sector should be able to handle any transitions that are necessary - but then again you always get the people who panic and that always rocks the boat a bit.

  • Report this Comment On October 30, 2012, at 3:22 PM, TMFVolkman wrote:

    bmc007, my feeling is Annaly will do just fine with the new(ish) regime, but your point is well taken -- we don't know how good the actors will be until the curtain rises and the play begins. Let's watch and see.

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