Categorized | Featured, Long Ideas

Chimera Investment Corp – Discipline Yields Success

Chimera Investment Corp (CIM)It’s been a rough last 24 months for Chimera Investment Corp (CIM).  The company is in the business of investing in Residential Mortgage Backed Securities (RMBS) – deemed “toxic assets” by many in the industry.  After coming public at $15 in late 2007, the stock briefly rallied to give investors a temporary gain of 32%.  But then the financial crisis hit and shareholders saw the value of home loans as well as the share price plummet.

In the darkest days of November 2008, the stock briefly traded below $2.00 per share and many believed that the company would not survive the credit crisis.  Chimera had borrowed huge amounts of capital and used the funds to invest in risky Adjustable Rate Mortgages (ARMs) which had often been issued to borrowers without the means to repay the loans.  The underwriters continued to write these admittedly irresponsible loans because they assumed that home values would rise and when the higher mortgage rates set in, borrowers could simply refinance based on the higher home value and net equity in the home.

As it turned out, trees don’t grow to the sky and home prices don’t rise forever.  Chimera’s 4.6:1 leverage rate meant that for every dollar of company equity, an additional $4.60 had been borrowed to invest in these assets.  As the value of the assets fell and the liabilities remained stable, Chimera was in hot water.

ZachStocks Free NewsletterBut rather than fold, management went to work improving their balance sheet and making wise strategic decisions.  The strategy was to lower exposure to these risky ARM investments and reduce the amount of leverage the company utilized.  Within four quarters, the company had paired down its leverage to a level of 0.9:1 – quite an impressive feat considering the environment.  In April and again in late May, the company issued additional shares to the public raising capital and investing these funds at much more attractive prices.

Today, the company looks much more healthy and the stock price just shy of $4.00 appears to be an attractive value.  The most recent quarter saw the company reporting adjusted earnings of $0.13 per share.  This is down a bit from the 16 cents reported in the third quarter of 2008, but the prior three quarters had earnings of 7 cents, 9 cents and 10 cents in the June quarter.  So it appears momentum has turned and is favoring this much more conservative approach.

After fully investing the proceeds of our capital raises earlier in the year, our team executed two re-securitizations that should enhance our return potential going forward. We continue to monitor evolving market conditions and prepare for a wide range of possible outcomes. ~Matthew J. Lambiase, CEO

Chimera briefly stopped paying a dividend at the height of the crisis, but the firm only missed one quarter and has been increasing its payout ever since.  Looking at the last year, the company has paid out 44 cents per share in dividends and that includes the one quarter when the company did not make a payment.  At this rate, the stock is offering investors a dividend yield of 11.3%.  If you assume that the company will be able to continue to pay 17 cents per share each quarter (which it announced for the fourth quarter) then the yield increases to 17.5%

Currently Chimera is realizing an annualized yield on its assets at 7.71% and has been able to lower its borrowing costs to 1.67%.  The interest rate spread of 6.04% is quite impressive and while that may narrow in a rising interest rate environment, the company should still be able to command a healthy margin.  The current loan portfolio is now made up of 59% fixed rate mortgages which are more stable and likely much less risky than the ARM component.

Other Articles of Interest
Banking in 2010 – At Risk If You Do, More Risk If You Don’t
First Cash Financial Breaking to New Recovery High
WSJ: Life Insurers Need $8.75 Billion RMBS Backstop
Ritholtz: Fed Doesn’t Know How to Get Rid of Liquidity

As far as the Adjustable Rate Mortgages, the company has already written a large portion of these loans down to a fair market value of 52.4 cents on the dollar.  So this means that if three quarters of these mortgages turn out to perform well, the company will recognize a large gain on this investment.  Looking at the entire book, only 0.6% of the loans are delinquent 60 days or more, and 1.37% are in foreclosure.  So the metrics are not particularly bad despite a difficult employment and economic picture.

I wouldn’t be surprised if Chimera were to sell additional stock in the near future to raise capital for more purchases.  If another wave of ARM resets sends mortgage prices lower, Chimara will be in great shape to pick up assets at discounted prices.  But for now, the company seems content to use low levels of leverage and enjoy its attractive interest spread.

Chimera Investment Corp (CIM)

FD: Author has long positions in Sound Counsel portfolios

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Chimera Investment Corp – Discipline Yields Success

17 Comments For This Post

  1. ocean express Says:

    good analysis.

    current yield, if annualized, is very high… not sure this is sustainable or not. residential real estate is still in recovery; i see opportunity in 2010 to pick up more shares at a lower price (<$4).

  2. sliman Says:

    I thought the mortgages they are now buying are Fannie and Freddie backed to avoid losses?

  3. Deathrider96 Says:

    Bought my first bundle @3.25. The next one @3.50. I will buy more on the next pull back, after a little more fact gathering. Some big players are in on the same bet. Remember real estate is not dead, its onsale.

  4. jake gittes Says:

    I believe NLY formed Chimera to invest in non-agency
    rmbs..which was dirt cheap. Chimera purchased, a few months
    ago,one billion rmbs from the European banks desperatly dumping
    as they recapatilized. They paid from 16 to 40 cents on the dollar.

  5. finance Says:

    it’s like most of the company that are being affected by the crisis. But it’s just a good thing to come back more. And as for me it’s good to buy stock nowadays its’ “cheaper”.

  6. Mesa Guy Says:

    Well I can see by the volume of comments that people are fairly concerned. Running a blog is difficult because people don’t always agree, but that’s what makes it so much fun.

  7. JohnMathew Says:

    Great post. Simple but more interesting one.

  8. Bassett Says:

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  9. nonetheless Says:

    There are some interesting time limits on this article however I don’t know if I see all of them middle to heart. There’s some validity but I will take hold opinion until I look into it further. Good article , thanks and we wish more! Added to FeedBurner as well

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  11. Bitstudio Says:

    Interesting and informative article, It’s now Sept 2011 and I see CIM is holding at 3.00 and still paying an incredible div all this time. I’m in based on what the management did in such a harsh enviroment.

  12. Bitstudio Says:

    Interesting and informative article, It’s now Sept 2011 and I see CIM is holding at 3.00 and still paying an incredible div all this time. I’m in based on what the management did in such a harsh environment.

  13. Bitstudio Says:

    It’s now Sept 2011 and I see CIM is holding at 3.00 and still paying an incredible div all this time. I’m in based on what the management did in such a harsh environment.

  14. April Tiogangco Says:

    Hello there! This is my 1st comment here so I just wanted to give a quick shout out and say I really enjoy reading your posts. Can you suggest any other blogs/websites/forums that go over the same subjects? Thanks a lot!

  15. pc repair miami Says:

    Nice post!

  16. fred fedor Says:

    Good info, thanks. I just purchased 300 shares at 2.43. I’m reviewing my portfolio and you helped me to decide to keep and hold. Thanks again….

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