Is Chimera One Of The Better Plays In The REIT Sector?

 |  About: Chimera Investment Corporation (CIM), Includes: AGNC, EFC, NLY
by: Matt Schilling

After doing some statistical research I wanted to compare four REITs, two of which are preparing to announce their quarterly earnings on August 6th and 7th, and see how well Chimera Investment Group (CIM) fared amongst Annaly Capital Management (NLY), American Capital Agency Corp. (AGNC), and Ellington Financial (EFC). The four statistical comparisons I used for this screen were Return on Equity (ROE), Return on Assets (ROA), Profit Margin (P/M), and Yield. I chose chimera as a focal point for two reasons, its price and dividend yield, which in my opinion are two very attractive qualities for the individual investor who is driven by income.

Based the statistics provided by Yahoo! Finance I'd like to first re-create the table I used during my research. The table is as follows (Please Note: Price Are As Of Friday 8/3/2012):




































Click to enlarge

Chimera Investment Group - trades in a 52-week range of $1.81 (52-week low) and $3.30 (52-week high), and closed trading at $2.16/share on Friday as the company prepares to announce its quarterly EPS numbers on August 7th. CIM is expected to earn $0.11/share on revenue of $162.28 million dollars. The key catalyst for CIM is going to be FFO and if that number surpasses estimates we could see upside in the range of 5% - 8%. CIM leads the bunch in all but two categories, where AGNC has performed slightly better in both ROE and P/M better over the last 12 months. Based on the statistics CIM has demonstrated an ROA of 6.55% which is nearly 3.02 times that of AGNC and 22.58 times that of NLY, making it the clear leader in the group, which is great considering the uncertainty that lies in both the mortgage and housing markets.

Annaly Capital Management - trades in a 52-week range of $14.65 (52-week low) and $18.45 (52-week high), and closed trading at $17.25/share on Friday as the company received a downgrade from Wunderlich, even though the company raised its price target to $18/share. The most attractive variable for NLY is clearly the company's yield of 12.70%. Even though the numbers are very good, NLY is the laggard of the four featured companies in terms of ROE, ROE, P/M and Yield. Is the company a solid REIT? Sure. Does the company have good numbers? Yes. Is there much upside to NLY? Aside from the company's yield, there really isn't much room to grow. Although the company demonstrated a very promising quarter, they'd need to put several more positive quarters together before potential investors should establish larger positions.

Ellington Financial LLC - trades in a 52-week range of $15.76 (52-week low) and $23.24 (52-week high), and closed trading at $23.10/share on Friday as the company prepares to release its quarterly earnings on August 6th. I think EFC is a very good REIT play demonstrating very good fundamentals over the last 12 months. With an ROE of 7.93% and an ROA of 1.36%, they've performed much better than group laggard NLY who has demonstrated a disappointing ROE of 2.21% and an ROA of 0.29% over the same period. Analysts are expecting EFC to earn $0.72/share on $14.30 million dollars in revenue, and if the company can continue to sustain the momentum they were able to generate during the March quarter when they surpassed estimates by 179.40%, as well as post an above average FFO number we could see EFC trade much higher than their current 52-week high.

American Capital Investment Corp - trades in a 52-week range of $22.84 (52-week low) and $35.58 (52-week high), and closed trading at $34.83/share on Friday as the company had its price target raised from $34.00 to $35.00 at Wunderlich. Of the four companies screened AGNC demonstrated a profit margin of 92.80% and ROE of 21.18% over the last 12 months, which are two positive catalysts to consider when establishing a position. The company also has the 2nd highest yield among the group, even though the company recent reduced its dividend by $0.15/share during the March quarter.

Final Analysis

Based on the statistical analysis provided in this article, I believe CIM is one of the better REIT plays currently in the marketplace. That doesn't mean that the remaining companies are not worth considering a position in, nor does it mean CIM will demonstrate the same performance as it has over the last 12 months. On the other hand, there are several things that potential investors should consider before establishing a position. One of the negative catalysts potent shareholders should consider, and as dually noted by my SA colleague Tim Plaehn, is the fact CIM recently hired a new accounting firm and has delayed the announcement of several previous earnings reports, not to mention they've begun to shave their dividend. "At the rate of decline experienced in the Chimera' dividend for the first two quarters of 2012, the company will not be able to pay a dividend by the second quarter of 2013. This is unlikely, but a complete de-leveraging of the portfolio and high prepayment rates or credit losses could drive the profits and dividends to a couple of cents per quarter fairly quickly".

Disclosure: I am long CIM, EFC, AGNC, NLY.