Chimera Investment Corporation (NYSE:CIM) is a high-yielding mortgage real estate investment trust or "mREIT" that specializes in buying residential mortgage-backed securities, residential mortgage loans, and other real estate-related assets.
A few months ago, some investors had concerns about the mREIT sector as to whether or not the yields in this industry were sustainable. The concern was that QE3 was lowering interest rates. When interest rates drop, homeowners often refinance existing mortgages at lower rates and this can reduce profit margins for certain companies. However, mREITs that have exposure to mortgage loans which are not back by government agencies are better positioned and Chimera is one of these companies. This is because sub-prime loans that are not traditionally agency-backed, generally offer higher rates and have borrowers with lower credit quality. As these borrowers do not usually qualify for traditional financing, they are not as likely to take part in refinancing, and this means Chimera could continue reaping strong profits from these loans. But few investors are concerned about refinancing now.
More recently, investors are concerned that the end or tapering of QE3 is going to raise interest rates and impact the value of mortgage bonds and related assets. This is certainly the case, as bonds yields have surged in the past couple of weeks and values have dropped. Chimera and other companies in this sector often use hedges to mitigate the risks of interest rate volatility. Even with hedges potentially minimizing the impact of the recent interest rate increase, investors seem to have had a sell now and questions later approach.
In the past few days, Chimera shares have dropped about 7% from just over $3 to a recent $2.80. It seems like a buying opportunity might be here now, or is close at hand, so it seems reasonable to start buying in stages. There is no way to know when the selling wave will end, or if more panic will set in, so it makes sense to average in over time. However, it does appear that Chimera can still reward investors with a longer term time horizon as the dividend yield can smooth over these occasional patches of volatility. Furthermore, there are some smart money investors in this stock which should help to reassure shareholders that this is a viable investment when bought at the right time.
Billionaire Leon Cooperman who made a fortune in the stock market, has purchased a significant stake in Chimera Investment Corporation for his investment fund. According to a recent article on Marketwatch.com, his fund owns about 49 million shares and other highly successful investors have also bought Chimera shares, including Dan Loeb, Daniel Arbess, and David Tepper (also a billionaire).
Chimera is externally managed by Fixed Income Discount Advisory Company or "FIDAC", which is a subsidiary of Annaly Capital Management, Inc. (NYSE:NLY). As such, Chimera is managed by a leader in the mortgage REIT industry. Annaly Capital is another major mREIT company to consider and it offers a similar yield of roughly 12.7%. Chimera pays a quarterly dividend of 9 cents per share which provides a yield of about 12%. After a drop to $2.80 per share, this stock looks undervalued and it now even trades below GAAP book value, which is around $3.42 per share.
A large, additional move in interest rates or a major change in policy from the Federal Reserve could be significant risk factors for investors to consider, however, the economy just does not appear to have enough strength to sustain a significant rise in rates so this risk seems overblown. If rates stabilize, Chimera shares could rebound a bit and still offer above-average yields of roughly 12%.
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CIM, NLY over 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.