Chimera (CIM) is currently trading at around $2.55 and yielding a whopping 16.10%. If you just landed on the planet earth, you would think that this looks like a great, high yield security. Without looking into it, you would see that like most mortgage REITs, American Capital Management (AGNC), Annaly (NLY) and MFA Financial (MFA), it is providing solid double digit dividends and will likely remain doing so as long as the current interest rate environment does not change. For those of us that have been watching this stock, we know better. In contrast to its peers, Chimera offers very little to recommend it as an investment.
Chimera announced a cut in its quarterly dividend from $0.11 to $0.09 payable in July. It also announced the estimated book value per share under GAAP was $3.03 and the economic book value was $2.76 per share. The economic book value is the value of the securities Chimera is able to dispose of or use as leverage for debt. The difference between GAAP and economic book value is based on the type of securities used in certain leverage or as Chimera calls it "re-securitization" situations compared to the nature of the underlying securities - the actual mortgages or bonds - used in these transactions.
The news release goes on to say that the company still has not been able to get its act together to deliver a 10K from last year and its March 31 10Q. Chimera is still "reviewing" its non-Agency paper to figure out the treatment under GAAP. The announcement includes the standard covering statement that the review may result in material non-cash changes that won't have any effect on any prior or future dividend distributions. Which is all very well and good except the dividend was lowered in this quarter. The dividend is based on an estimate, not an audited or even reviewed amount.
This is the fifth time in two years that this REIT has reduced its dividend. There may be some truth in Chimera being able to achieve higher yields from the non-Agency portion of its portfolio. Chimera's non-Agency portfolio represents about 40% of its total holdings. Currently analysts' earnings estimates show an average of $0.46 per share and low estimates $0.39 per share for the 2012 year. It is very possible that Chimera will hit the low estimate and then some, meaning more dividend cuts, meaning more investors will be going over the side.
An article by Stockhouse outlines the U.S. Economic and Housing Market for 2012 shows that rental demand has increased 4% for the year ended March 2012. The article further outlines that rents adjusted for inflation remain below where they had been in the decade before the recession. The value of multifamily properties is up almost 25% over the past two years but still 14% below pre-recession values. Building starts of apartments with five or more dwellings have risen 48% to June of 2012 from the same period in 2011. Home ownership is being delayed until the economy picks ups and enough savings can be accumulated to qualify for a mortgage. Apartment dwellings will continue to show vacancy declines, rental income gains and improved property values for the duration of 2012.
This article highlights that regardless of incentives to buy, such as 30 year rates being 3.7%, home sales have dropped 1.5% in May from April. Homeownership rates dropped from 66% to 65% during the first quarter of 2012, the lowest rate in 15 years. In addition, homeowners who are unable to sell their homes have been renting out single family properties. One third of all rentals are now single family homes. As the number of single family home rentals grows, rents will rise.
Nationally, rents are up 2% from the same period in the previous year and are expected to be up 4% in 2012. Renters pay $500 to $1,000 less per month for renting as opposed to owning. Communities in Washington, California, New Jersey and Hawaii are identified as markets where it is far less expensive to rent than to own. Less people buying less real estate, means less paper out there for mortgage REITs to trade in. There are REITs that own actual rental properties, not the mortgage paper behind them and they are worth a look in response to these statistics. Mid-America Apartment Communities (MAA) and Home Properties (HME) are apartment REITs that own several thousand multifamily properties across the United States.
I translate Chimera's latest news release as lighting the aisle to the exit door and showing investors outside. I feel that this has come a little too late. If Chimera can't or won't provide audited financials, I don't think it's worth waiting around. Companies have an obligation to keep investors apprised in a timely manner of any changes in existing facts that may affect the performance of the stock. There is a happy medium between overabundance of frothy news and no material news. But not releasing any information on financial performance for three quarters and not being able to provide solid numbers for that period of time is beyond understanding. In the case of Chimera, the silence is deafening and it cannot be anything good.
I can speculate that the buying is from people who have knowledge of the actual value of the company's stock and are setting a down limit somewhere near today's price. I can speculate that any movement in non-Agency paper will have higher yields and current buyers are betting on better yield performance from the non-Agency portion of Chimera's holdings. I can speculate that this is the bottom. I recommend holding off on Chimera for now.