Chimera Investment: 8% With A Twist

| About: Chimera Investment (CIM)

Summary

Chimera has issued a new series of preferred stock which offers investors a third way to invest in the company.

This is the second series of preferred stock issued by the company, but it has an important difference.

Of the two series, I prefer one.

Chimera Investment Corp. (NYSE:CIM) tapped the preferred market for the second time in under six months, raising nearly $300 million.

Chimera Investment is a publicly traded REIT that invests in residential mortgage loans, residential mortgage-backed securities, or RMBS, Agency commercial mortgage-backed securities, or Agency CMBS, commercial mortgage loans, real estate-related securities and various other asset classes.

The details of the offering are:

The prospectus is here, and the term sheet here.

The following are Chimera's outstanding preferred stock:

Ok, I promised you a twist. The Series A is a traditional fixed-rate perpetual preferred stock. The Series B, however, is a fixed-to-float preferred:

From and including the original issue date to, but excluding, March 30, 2024, at a fixed rate equal to 8.00% per annum of the $25.00 liquidation preference ($2.00 per annum per share), and from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.791% per annum.

The fixed-to-float feature, like many financial firms have, shortens the duration of the preferred, as the rate will reset if not redeemed after the 3/30/24 optional redemption date.

The following is the pricing on the two series:

Note that the new issue has a higher yield, a longer period until the optional redemption date and a fixed-to-float coupon structure. The choice between the two seems (and is) straightforward and simple - the Series B.

Of course, there are more than just two preferred stocks from which to choose. The following table compares CIM's new issue to preferred stocks from the following hybrid mortgage REITs:

  • New York Mortgage Trust (NASDAQ:NYMT);
  • Annaly Capital Management (NYSE:NLY);
  • MTGE Investment Corp. (NASDAQ:MTGE); and
  • AG Mortgage Investment Trust (NYSE:MITT).

The comparison table:

As the table above and the graphs below show, the Chimera preferreds have yields second only to New York Mortgage Trust (which I reviewed here).

And yield:

My weekly mREIT preferred readers will recognize the following table - and, of course, chart - of the cost of stability. The cost of stability is the equity dividend yield less the preferred yield, with the premise that preferred stock is less volatile than the common equity.

And presented graphically:

An investor pays less for the stability of the Chimera preferred stock than any other mREIT, with the exception of MTGE Investment. This is yet another plus.

It might be helpful to look at Chimera versus a similar REIT, New York Mortgage Trust. For this, the Series A will be used, as it has history, albeit limited.

The spread between the two has been narrowing, despite the following chart:

CIM Chart

CIM data by YCharts

If you like the light that chart paints Chimera in, get a load of this chart:

CIM Chart

CIM data by YCharts

Chimera has an equity that has outperformed the majority of its peers and a preferred that out-yields the majority of its peers. Usually, it's more of a challenge than this. I find the new Chimera Investment Corp. Series B preferred attractive and worthy of consideration for inclusion in an income portfolio.

Still curious? Try the following:

  • Achilles Research wrote on CIM here.
  • Quad 7 Capital wrote on CIM here.
  • Norman Roberts wrote on the CIM preferred here.

Disclosure: I am/we are long NLY, MTGE, NYMT, MITT.

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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