Chimera Investment Corp (NYSE:CIM) is one of the contrarian's options amongst mortgage REIT equities, with characteristics and holdings that the market disfavored in 2011. These characteristics include its long-term holding of non-agency, private-label residential mortgage-backed securities (RMBSs), which many consider too risky to hold, given the potential for continued defaulting homeowners over the coming years.
Mortgage REITs (mREITs) buy mortgage paper as an investment, or in order to re-securitize RMBSs and sell them. Agency mREITs, such as Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp (NASDAQ:AGNC), Capstead Mortgage Corp (NYSE:CMO) and Hatteras Financial Corp (NYSE:HTS), exclusively buy and hold mortgage paper that is backed by federal agencies. Hybrid and/or non-agency mREITs, such Chimera, MFA Financial (NYSE:MFA) and Invesco Mortgage Capital (NYSE:IVR) also hold mortgage paper that has no government agency backing.
Annaly is the largest mREIT, with a market capitalization of over $16 billion, well over double the size of AGNC, the next largest mREIT, at about $6.5 billion. Chimera was founded in late 2007 and is externally managed by the Fixed Income Discount Advisory Company (FIDAC), a wholly owned subsidiary of Annaly. FIDAC also now manages CreXus Investment Corp (NYSE:CXS), which is a subsequently created commercial mREIT.
On December 19, 2011, both Annaly Capital Management and Chimera Investment Corporation announced their quarterly dividends. Annaly declared a Q4 2011 common stock cash dividend of $0.57 per common share, payable January 26, 2012, to shareholders of record on December 29, 2011, with an ex-dividend date is December 27, 2011. Chimera declared a Q4 dividend of $0.11 per share, with the same relevant dates. Both represented a dividend reduction.
Last quarter, Annaly paid a $0.60 quarterly dividend, and in Q4 2010 Annaly paid a $0.64 dividend. This represents a 5% drop from the Q3 2011 dividend and a 10.93% drop from Q4 last year. Chimera paid a $0.13 dividend last quarter and a $0.17 cent dividend in Q4 2010. This represents a 15.38% drop from the Q3 2011 dividend and a 35.11% drop from Q4 last year. The changes in dividend policy roughly equaled the equity performance for the REITs.
A noteworthy issue is that these mREITs become highly volatile around dividend performance dates, and are particularly at their peaks going into both ex-dividend and pay dates. For example, Chimera's prior dividend had an ex-dividend date of September 29, 2011, and a pay date of October 27, 2011. In advance of the ex-dividend date, Chimera peaked, only to then drop. Then, in advance of the 9/29 pay date, Chimera again appreciated, only to subsequently again fall to its post ex-dividend lows.
See Chimera's equity performance chart between September 15 and November 15, 2011, indicating these price fluctuations:
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As the chart above shows, Chimera approached and passed the $3 mark in advance of that prior ex-dividend date, subsequently fell below $2.60, and then again approached $3 by the pay date. Nonetheless, Chimera did fall back below $2.60 after the pay date.
Chimera did not approach the $3 mark on its last ex-dividend date, 12/27, but it is once again moving towards $3 as we now approach the upcoming pay date of January 26, or this coming Thursday. See the recent performance chart, below:
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The second chart also shows that Chimera appreciated from 12/19, when it announced its dividend, until its ex-dividend date, but subsequently sold off (falling, again, below $2.60). Then, starting in 2012, Chimera began to appreciate.
Most hybrid mREITs have performed well so far in 2012, but Chimera has fared far better than the average. Of course, it did also perform below average in 2011, losing about one-third of its equity value. So far in 2012, Chimera has appreciated over 15 percent, but it is still down by about one-third from its 52-week high.
Some of Chimera's recent appreciation appears tied to positive news out of U.S. homebuilders and mortgage-lenders, which may be mitigating fears that foreclosure rates will spike in 2012. Moreover, continued European sovereign debt risks have helped strengthen U.S. dollars and further lower the so called risk-free rate of return provided by U.S. Treasuries and agency-backed RMBSs.
Nonetheless, and given CIM's prior appreciation in advance of its dividend pay date, it appears that a significant portion of the present increase is occurring in advance of expected purchasing associated with coming the dividend payout. More specifically, many holders of mREITs, as well as several other high yielding investments, opt to reinvest their dividends through reinvestment programs or DRiPs, and this reinvestment works out as a predictable demand spike.
Given Chimera's significant annual yield and quarterly payout, if even only one-third of its holders were to opt to DRiP their dividends, that equates to the acquisition of over one percent of Chimera's current market valuation, this coming week. Such significant investments are rarely telegraphed to the market, but this one is.
This also highlights an issue that can exist with reinvestment programs. Instead of choosing at which price you would purchase additional shares, one is subject to often capricious and sometimes manipulated pricing on pre-determined dates. Last time, if an investor wanted to reinvest, but waited two weeks from the pay date rather than doing so through the automatic plan, they could have purchased shares at around $2.60, over 12 percent below the $2.95 at which a timely reinvestment plan would have purchased those additional shares.
Chimera's relative strength versus its peers indicates that there could be a short-term demand peak coming this week. Once the payout and reinvestment occurs, there will likely be a short-term reduction in demand for the equity, while investors wait for Chimera to report during early to mid-February. This does not mean that the equity will definitely plateau or decline following this coming payout, but new demand will have to come from a source that is willing to bet on a positive forthcoming report rather than waiting to decide based upon the fundamentals being reported.
Disclosure: I am long CIM, NLY.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.