Seeking Alpha
Newsletter provider, dividend investing, master limited partnerships, REITs
Profile| Send Message|
( followers)  

It came as a surprise to get notification after the market close on Friday that Chimera Investment Corp. (NYSE:CIM) had finally filed its long-delayed 2011 10-K annual report. The last notice from Chimera had stated that the company had received a final deadline of March 15 to get the report filed. I am not sure what it means that the company waited until late on a Friday to release the information.

The press release and 10-K made it clear that the results are for the period ending on December 31, 2011 and included restatement of some results for 2009 and 2010. There remains very little information about results for any period of 2012.

10-K Notes

I almost called this section Highlights, but in reality, the following are just notes and some impressions of my reading/scanning through the almost 200 page 10-K. I was impressed by the over 50 pages of risk factors, which brings up the question of why anyone would invest in a company this complicated with so many factors at the mercy of outside forces. While most of the risk factors are of the could, maybe and possibly types, Chimera did manage to put a couple of actually occurring factors in the section:

Difficult conditions in the financial markets and the economy generally have caused us and may continue to cause us market value losses related to our holdings.

Our investment focus is different from those of other entities that are or have been managed by our Manager.

We have experienced declines in the market value of our assets resulting in us recording impairments, which have had an adverse effect on our results of operations and financial condition.

Our investments in subordinated RMBS are generally in the "first loss" position and our investments in the mezzanine RMBS are generally in the "second loss" position and therefore subject to losses.

In the 10-K Chimera published a graph with the company's total return over its 4 years of existence through the end of 2011 compared to the S&P 500 and the BBG REIT index. Over that time frame, investors in Chimera Investment suffered a 68% loss while the S&P 500 was down 6% and the REIT index was off 10%.

For 2011 Chimera reported net interest income of $570 million and other-than-temporary impairment losses of $419 million - Ouch!. OTTI for 2010 and 2009 was $295 million and $290 million, respectively. These losses may go a long way to explaining the total return results discussed just above.

"We paid FIDAC a management fee of $52.0 million, $40.9 million and $25.7 million for the years ended December 31, 2011, 2010 and 2009, respectively." FIDAC was paid a management fee of 1.5% of stockholder equity and the fee continued to grow on the back of equity offerings even as performance suffered. With the troubles of last year, the fee percentage was finally cut in half in November of 2012.

This chart really caught my eye. Notice the losses column, sucking up over half of the economic net interest in 2011. Also, the last, ROE column with the overall results of 15.8%, 8.56% and 4.08% for 2009, 2010 and 2011, respectively. ROE dropped by 74% over the three years. FIDAC really earned the $115 million in management fees.

(click to enlarge)2011 10-K ROE

Conclusions

The Chimera Investment results for 2009 through 2011 show a complicated investment strategy badly executed. Whether the terrible returns were due to market conditions or management decisions is an unanswered question. Annaly Capital (NYSE:NLY), the owner of FIDAC, outperformed Chimera by about 25% in total return over the three-year period.

Now the wait is for Chimera's 2012 results. The company says it will release the 2012 Q1 results within 60 days. I do not see any reason why the three 10-Qs and the annual 10-K cannot all be released at the same time. The company should have its financial situation figured out by now. Since the start of 2012, the CIM share price has been on a roller coaster ride and the current share value is 10% above the 2011 year-end price. Investors have also collected 38 cents in dividends, adding an additional 15% return on the $2.50 share price at the end of 2011.

I have been of the opinion that a company that needs over a year to get its financial act together is in bigger trouble than the market is discounting. Now that we can see the actual results. Chimera also had a terrible 2011. However, the share price action over the last year or so indicates that investors believe there is value in Chimera Investment and that value can still produce investment gains.

CIM Chart

CIM data by YCharts

Source: Chimera Investment Beats Delisting Deadline; 2011 10-K Highlights