Chimera Investment Corp.: A View From The Perspective Of A Preferred Investor

| About: Chimera Investment (CIM)


From a preferred perspective Chimera has performed rather well over these past five years.

I state this because due ti its large size and past performance, this preferred investor deems it recent preferred offering a reasonably safe bet.

At its present price CIM-A of a nice yield, especially during this time of, what I consider, irrational preferred market exuberance.

For those of you unfamiliar with my preferred Investment philosophy, "The Basics: Underlying Investments Viewed Through the Eyes Of A Preferred Investor" will explain how and why I became a preferred investor. More important, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.

When considering the acquisition of Chimera Investment Corporations' (NYSE:CIM) preferred shares, CIM-A, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.

Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to CIM. Below is a snapshot of a slice of that page:

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A quick review informs us that Chimera, is a leveraged REIT that primarily invests in all forms of investment and non-investment grade residential mortgaged-backed securities: some of which are backed by government agencies, Ginnie Mae, Fannie Mae, and Freddie Mac.

Let's click "Find Related Securities: to examine any preferreds this company has to offer:

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Here we learn that CIM offers one preferred, (CIM-A), which is offered at the interest rate of 8.00%.

Now let's click on CIM-A itself. Below is the screenshot:

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  • I like that this preferred is cumulative, meaning that in an event that payments are suspended, they accumulate and are owed to the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more restrictions* placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, and consequently, I don't buy them.
  • These shares are callable at the company's option in 10/30/21 at $25.00 plus any accrued interest owed.
  • They pay a dividend of $2.00 per share per year, or 0.50 per quarter, paid 3/30, 6/30, 9/30, & 12/30 of each year.
  • At the time of this recent IPO, these shares were unrated by Moody's or S&P, which really doesn't concern me, but might concern a more conservative investor.
  • These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
  • Dividends are NOT eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
  • As usual, upon liquidation, preferreds rank senior to commons and junior to debt, both secured and unsecured.

The following paragraphs are taken from the linked CIM-A Prospectus:

* Except as noted below, unless full cumulative dividends on the Series A Preferred Stock have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment for all past dividend periods, no dividends (other than in shares of our common stock or other Junior Stock we may issue) may be declared or paid or set apart for payment upon our common stock or other Junior Stock or Parity Stock we may issue and no other distribution may be declared or made upon our common stock or other Junior Stock or Parity Stock we may issue. In addition, our common stock and other Junior Stock or Parity Stock we may issue may not be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such securities) by us (except by conversion into or exchange for shares of, or options, warrants or rights to purchase or subscribe for, our common stock or other Junior Stock we may issue or pursuant to an exchange offer made on the same terms to all holders of Series A Preferred Stock and all Parity Stock we may issue). The foregoing will not, however, prevent the redemption, purchase or acquisition by us of shares of any class or series of stock for the purpose of enforcing restrictions on transfer and ownership of our stock contained in our charter, or the redemption, purchase or acquisition by us of shares of our common stock for purposes of and in compliance with any incentive or benefit plan of ours.

When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series A Preferred Stock and any Parity Stock we may issue, all dividends declared upon the Series A Preferred Stock and such Parity Stock must be declared pro rata so that the amount of dividends declared per share of Series A Preferred Stock and such Parity Stock will in all cases bear to each other the same ratio that accumulated dividends per share on the Series A Preferred Stock and such Parity Stock (which will not include any accrual in respect of unpaid dividends for prior dividend periods if such Parity Stock do not have a cumulative dividend) bear to each other. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment or payments on the Series A Preferred Stock which may be in arrears.

However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or to fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally understand a company's financial statements and conference calls.

Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interests in mind, rather than those of the preferred shareholder - which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.

Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two websites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of CIM.

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Above is a screenshot of CIM's 5-year chart, which, as far as I'm concerned, is the picture of a company that did pretty well until 2015 when their share price plummeted, only to rebound since January. Furthermore, it has increased its common quarterly dividend in January of 2015 from 0.45 to 0.48, which it has maintained since then.

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Above is a screenshot taken from a Finviz view of CIM's present financial highlights. The company's current market value is $2.90 billion. It earned an income of $224.30 million, on sales of $836.10 million. Over the past year its share price has increased by 28.13%. I also find its short-term debt/equity is a moderate 4.66 and LT D/E 2.69.

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According to the Yahoo chart above, CIM placed at the top of its peer group, all which underperformed the S&P. In fact, as a sector, these mREIT's have underperformed the S&P dramatically. The peer comparisons charted above are: Altisource Residential (NYSE:RESI), Silver Bay Realty Trust (NYSE:SBY), Apollo Residential Mortgage (NYSE:AMTG), Armour Residential REIT (NYSE:ARR), and Capstead Mortgage (NYSE:CMO), and New York Mortgage Trust (NASDAQ:NYMT).

I chose this preferred to review because it is a brand new issue currently trading at $24.95, which means at this price its effective yield is 8.02%; a nice yield at this time of irrational exuberance in the preferred market, and a relatively safe one considering the size and recent performance of Chimera. However, I feel it is my duty to caution investors who don't intend to hold this preferred until it's called, which could be considerably more than the five years until it's callable. Interest rates will eventually increase and this preferred's prices could fall. But it should not matter to you if you are prepared to hold it for the continued dividend payments that will remain fixed and constant for as long as your shares remain uncalled.

Disclosure: I am/we are long NYMTO, ARR-A, ARR-B.

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.