Why High-Yielding Chimera Could Be A Sensible Buyout Target For Annaly

| About: Chimera Investment (CIM)

Annaly Capital Management, Inc. (NYSE:NLY) recently announced a deal to buy Crexus Investment Corp. (NYSE:CXS), which was valued at $840 million. Crexus is also a real estate investment trust and it already had ties to Annaly Capital. Crexus Investment is managed by Annaly's wholly owned subsidiary, Fixed Income Discount Advisory Co or "FIDAC." Annaly Capital also owned about 12% of Crexus before it offered to buy the entire company.

Annaly Capital has ready access to the capital markets which makes raising funds for acquisitions relatively easy. If it was going to pursue another deal in the future, it seems that Chimera Investment (NYSE:CIM) would be an ideal buyout target for at least a couple of reasons. For example, just like Crexus, Chimera is also managed by Annaly's Fixed Income Discount Advisory Co. As its manager, it already has detailed knowledge on Chimera's assets, operations and investment portfolio. That is a big advantage and it means plenty of due diligence is already in place.

Another big plus is that Chimera has significant exposure to non-agency mortgage securities. With the roll-out of the Federal Reserve's QE3 program, interest rates have dropped and that has caused a wave of refinancing in the mortgage market. However, as one top investor points out, non-agency mortgages are at lower risk of pre-payment which means stronger profit margins could continue for this subsector of the mortgage market. That is another reason why Chimera could be an attractive takeover target. Furthermore, Chimera has a book value of over $3 per share and yet the stock trades for just about $2.60. By contrast, Crexus has a book value of around $11.93 per share and trades above that level due to the Annaly buyout offer. Buying a company like Chimera that trades below book value could be accretive for Annaly shareholders.

Whether or not a deal is ever made for Chimera Investment, there is a strong case for investing in the stock at current levels. The mortgage REIT stocks have been volatile recently, but over time this sector has provided significant returns and investor interest in these stocks remains strong. In fact, there is a new investment that offers two times leverage in mortgage REIT stocks that provides a yield of about 25% and it also holds a position in Chimera. As noted above, Chimera stock currently trades at about a 20% discount to book value. It also has a yield of about 13.7% which is higher than what Crexus and Annaly offer. Finally, since Chimera has strong exposure to non-agency mortgage securities, it could be well-positioned to continue with solid earnings and paying out those profits to shareholders.

Here are some key points for NLY:
Current share price: $14.74
The 52 week range is $13.72 to $17.75
Earnings estimates for 2012: $1.80 per share
Earnings estimates for 2013: $1.71 per share
Annual dividend: $2 per share which yields 13.5%

Here are some key points for CXS:
Current share price: $12.40
The 52 week range is $9.48 to $12.67
Earnings estimates for 2012: n/a on Yahoo Finance
Earnings estimates for 2013: n/a on Yahoo Finance
Annual dividend: $1.28 per share which yields 10.3%

Here are some key points for CIM:
Current share price: $2.59
The 52 week range is $1.81 to $3.16
Earnings estimates for 2012: 47 cents per share
Earnings estimates for 2013: 45 cents per share
Annual dividend: 36 cents per share which yields 13.7%

Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.