On June 19, after the markets closed, Chimera Investment Corporation (CIM) announced that the company would pay a second quarter 2012 dividend of $0.09 per common share. The Q2 dividend is payable July 26, to shareholders of record on June 29, with an ex-dividend date of June 27. This is a quarterly dividend cut of two cents, with Chimera distributing $0.11 per quarter for each of the last two quarters, and $0.13 for Q2 of 2011.
See a 1 year performance chart for CIM, indicating dividends paid:
Chimera also included in the dividend announcement an estimated GAAP book value of $3.03 per share and an estimated economic book value of $2.76 per share, as of the end of Q1. Chimera has had a series of accounting issues over the last several quarters. The last substantive information out of Chimera, excluding switching accountants, came on March 1, 2012, when Chimera announced that it would delay the filing of its quarterly report for the fourth quarter of 2011. At that point in time, the mREIT reported its GAAP book value was $2.97 per share and its economic book value was $2.82 per share.
The company stated it expected to file its 2011 Form 10-K as soon as practicable. It was the second consecutive quarter that Chimera had to delay the filing of a 10-K. In late 2011, Chimera changed the way it accounted for certain of its assets, explained here. That report was eventually filed, but then Chimera again announced it was reviewing the way it treated and accounted for its non-agency assets.
Since then, Chimera has only announced that it appointed Ernst & Young as its accounting firm beginning with the quarter ending March 31, and that the services provided by Deloitte & Touche will conclude after the completion of Deloitte's audit services for the fiscal year ending December 31, 2011. I have previously contacted Chimera requesting any additional information they may be able to provide, including which accounting firm is handling Q1 and whether the OTTI changes it made last year are being maintained, but received no response.
Chimera is a hybrid non-agency mortgage REIT. Mortgage REITs ("mREITs") buy mortgage paper as an investment, or in order to re-securitize them and sell them to another mREIT or some other entity that is investing in real estate loans. Non-agency and/or hybrid mREITs like Chimera, MFA Financial (MFA) and Invesco Mortgage Capital (IVR) hold mortgage paper without government agency backing. Chimera is related to Annaly Capital Management, Inc. (NLY), the largest agency mortgage, and is managed by FIDAC, a wholly owned subsidiary of Annaly.
According to Chimera's prior comments on these accounting changes, they should only result in a non-cash change to the GAAP accounting results, and should not affect the company's book value, cash flows, dividends and/or taxable income. This is why Chimera has consistently updated their GAAP book value, stated as $3.03 per share as of the end of Q1, and estimated economic book value, at $2.76 per share at end of Q1.
Chimera previously determined that at least some of its investments in securities rated less than AA, non-rated non-agency securities and other subordinate securities should be evaluated for impairment under ASC 325- Investments-Other - Beneficial Interest in Securitized Transactions. This was an issue that involves non-agency RMBSs. This issue should not matter to agency mREITs like Annaly or American Capital Agency (AGNC), but it is interesting that no other non-agency mREITs have had a similar issue.
Beneficial interest model impairment recognition is similar to the investment security model, except credit loss is determined based on discounting cash flows expected to be collected through the yield currently used to accrete the beneficial interest rather than using the original effective interest rate. If this was the problem, the accounting would likely be revised to use newer information about a security that has substantially changed.
Another option for Chimera could be to account for the securities under ASC 310-30 Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, which is another potential option. Again, it is still unclear whether the prior basis for a delayed filing is the present cause of this current delay, and some of these accounting treatments are interchangeable, making it hard to guess what could possibly be the problem and who caused the problem, let alone which option would be preferable.
All of this is discouraging to confidence regarding a business that is based upon investors having faith in management's presumed competency. Here, it appears the issue may actually be the fault of Chimera's former and/or leaving auditors at Deloitte & Touche, but it is difficult to assign any particularized causation or fault with the limited information provided by Chimera for the last three quarters.
A company can continue to pound the table and state that their accounting issues are not material, but neither analysts nor retail investors enjoy reporting delays, let alone multiple consecutive ones. Chimera better get its act together and file its delayed reportings soon, or at least provide some greater clarity regarding the nature and scope of the changes, because pretty soon no one will be left waiting to read them.
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.