As Chimera Receives Its Final NYSE Extension, A Filing Or Buyout Better Come Soon

| About: Chimera Investment (CIM)

Last week, Chimera Investment Corporation (NYSE:CIM) announced that the New York Stock Exchange (NYSE) has given the company a final 30-day extension for continued listing and trading of the company's stock on the exchange. This final extension provides the company until March 15, 2013, to file its 2011 annual report with the Securities and Exchange Commission. This is the third recent extension that Chimera has received. In September of 2012, the company obtained a four-month extension, until January 15, 2013, and a subsequent one-month extension to February 15, 2013.

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 hold mortgage paper without government agency backing, but Chimera also holds agency-backed paper. Chimera is related to Annaly Capital Management (NYSE:NLY), the largest agency-only mREIT, and is managed by FIDAC, a wholly owned subsidiary of Annaly.

Chimera has not filed its 2011 annual report or any subsequent reports due to the reconsideration of how to appropriately treat its junk-rated non-agency residential mortgage-backed securities portfolio under accounting standards. The company first indicated that it needed to adjust its accounting practices in late 2011, and has subsequently only expanded the scope of its self-proclaimed needed revisions.

On August 7, 2012, the company reported that it needed to restate all of its financial statements included in its previously filed annual and quarterly reports for the period between September 30, 2008, and September 30, 2011, and that the former filings can no longer be relied upon. The company simultaneously declared a plan to initiate a regular quarterly dividend of $0.09 per share for both the third and fourth quarter of 2012. Though nine cents was half the quarterly dividend CIM paid out two years earlier, for Q3 2010, it would mean a hiatus to the serial dividend reductions that subsequently occurred and were likely expected. Nonetheless, even though Chimera set a temporary fixed payout rate, the company noted that portions of the quarterly payout might be a return of capital, which could lower an investor's cost basis.

With each filing extension, the company commented that its accounting problems are related to the application of generally accepted accounting principles (GAAP) to its non-agency residential mortgage-backed securities portfolio. Chimera has also indicated that the issues relate to accounting of other than temporary impairment (OTTI) of non-agency residential mortgage-backed securities that are rated as junk. Much of this accounting problem likely comes from the fact that a large percentage of junk-rated non-agency RMBS paper that existed before 2008 initially traded with exceptionally high credit ratings. Chimera complicated the matter by repackaging and selling portions of securities.

Since the onset of this matter, Chimera has consistently claimed that it does not expect its restatements to affect previously reported GAAP or economic book values, actual cash flows, past dividends, or taxable income. Be that as it may, Chimera did last report that it estimates for the total period at issue its interest income will decrease by approximately $411 million, from $1.88 billion to $1.46 billion (a 21.8% decrease), and that net income is expected to decrease by approximately $695 million, from $1.06 billion to $367 million (a 65.5% decrease). Chimera also reported that it expects OTTI losses for the total term to increase by approximately $293 million from $190 million to $484 million. Additionally, realized losses on sales are expected to decrease by approximately $9 million, from $29 million to $20 million.

Chimera's problematic accounting issues have made legitimate fundamental analysis of Chimera not possible. Nonetheless, the shares have recently become fortified due to increased non-agency debt valuations and growing expectations that Chimera may become an acquisition target. Annaly Capital Management Inc. recently agreed to purchase the shares of Crexus Investment Corp. (NYSE:CXS) it doesn't already own for about $872 million. Annaly owns 12.4 percent of Crexus and the commercial mREIT is managed by FIDAC, a wholly owned subsidiary of Annaly. Chimera is similarly managed by FIDAC and Annaly has a similar ownership interest in it.

Moreover, Annaly's CFO and Treasurer, Kathryn Fagan, commented on its relationship with Crexus and Chimera during the company's last conference call, noting that:

"Annaly's participation has been as an equity owner in those companies, and part of the reason for the Crexus transaction is that we do need to remove some of the conflicts I guess, of being able to expand those positions on our own balance sheet while we have these public companies out there that we manage."

Fagan's statement indicates that if Annaly would want to accumulate non-agency RMBSs, much like it should accumulate CMBSs through the Crexus acquisition, it should likely have a similar conflict that may potentially obligate Annaly to first acquire Chimera, or otherwise modify its relationship with CIM. The terms of the agreement allow Crexus to pursue alternatives to the deal though March 16, and Crexus has indicated that a special committee and independent advisers will "actively solicit" other options. This date falls but one day after Chimera is obligated to file its still truant 2011 annual report under this final extension. Hopefully, for shareholders, some resolution will soon be in sight.

Disclosure: I am long NLY, CIM. 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.

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