Chimera: Time To Look For An Exit Strategy

| About: Chimera Investment (CIM)

When I wrote this article in early December, about Chimera Corporation (NYSE:CIM), I was conflicted on the issue of whether it is time to exit my little investment in this mortgage-based REIT.

The management has delayed the company's quarterly and annual reports, which caused a negative reaction when it was announced on Wednesday:

(Click chart to enlarge)

With the little information that was given in the press release, it is becoming more clear that it is time to look for an exit strategy.

To summarize, this REIT was an underachiever in my REIT portfolio last year, having cut its dividends, and having a 35% reduction in stock price since I entered last spring. The reason the price dropped was that a significant restatement of book value took place last summer as it tried to clear some of the 2009 and 2010 non-performing assets off of the books. It set up a "resecuritization trust" for this purpose and at this point it is just the note holders.

Since I wrote that article in early December, the stock has done a little better. I said at the time that it should probably be trading near $3, which proved to be right on the money:

Here are some of the numbers from the most recent 10Q, along with some of the numbers from the previous 10Q covering the quarter ending September 30:

Chimera Investment Corp. 3Q2011 4Q2011
Stock Price (Dec1/Current) 2.66 2.95
Taxable Income 0.13 0.11
Economic Value 3.01 2.82
GAAP EPS 0.06 ?
GAAP Book Value 3.27 2.97
Dividend 0.11 0.11
Div Yield 16.5% 14.9%
Average Yield on Portfolio 7.21% ?
Average Interest Expense 2.33% ?
Spread 4.88% ?

We know that the "economic value" of the company has continued to go down in the last quarter, as have the pre-tax earnings, at the rate of roughly 10%. The company earnings are going to be down a couple of cents per share compared with the third quarter as well; how much of this will reach the bottom line is one of the unknowns. The company has managed to preserve the 11 cent per share dividend, which means that it was reasonably close in estimating the sustainable dividend for the stock, since it paid out more than 100% of the third-quarter EPS to the shareholders.

What bothers me the most at this point is the lack of growth. Long-term mortgage rates are continuing to go down, or at least staying flat:


Since the source of the high dividends among companies in this industry is the spread between the interest collected and the interest paid out, low rates equals lower income, which eventually equals lower dividends. The only way to avoid this is to grow the top line.

I would feel a lot better if I had the three additional data points in the table above, Chimera's interest rate spread. If I knew that even though the company is contracting, its portfolio was efficiently spinning off money to me, I would be a little more forgiving.

But, since the management is turning in its homework late, it is not a good sign, and it is probably correct that the market punished the stock last week.

So, now the exit strategy:

The dividend announcement came at the same time as the announcement for the filing delay. The Ex-Dividend date will be March 28. So, I could sell it now, or wait a month and collect one last round of dividends.

But, I know that when the Ex-dividend date passes, the stock price will drop, and even though I would collect the 11 cents per share I might be worse off.

Here is a table of what happened to Chimera's stock price at or near its last 3 dividends:

Ex Dividend Date Price Before Price After Price Drop
28-Jun 3.53 3.47 -1.7%
29-Sep 3.02 2.57 -17.5%
27-Dec 2.74 2.51 -9.2%

Note that the September dividend was the last dividend before it was cut from 13 to 11 cents. We know that the stock should have declined about 4% right after the dividend, but the last two quarters what obviously happened was that a lot of people decided to exit the stock after they collected that nice dividend, and the stock price went down a lot more than it should have.

So, with the usual caveat that past performance does not necessarily equal future results, it stands to reason that when the ex-dividend date happens this time, something similar will happen, and I would be better off selling it now before the dividend and not worrying about it. There is a possible strategy of buying the stock back right after the dividend issue: I have discussed this at length in this article, and it is worth consideration in this case.

What would talk me out of it? If the 10K announcement was in my inbox tomorrow morning, and it said that even though the company was smaller the interest spread was bigger, I might be inclined to stick with the stock a little longer since that would imply more dividend safety. Another consideration might be if the management issued some more stock. Even though it would dilute my shares, it would imply that the management is trying to grow the company rather than masterfully manage its contraction and shrink into greatness.

I also might be inclined to keep the stock around if I thought that housing was picking up, or that long-term mortgage rates might go up. The slight increase in mortgage rates in the last few days might be seasonal, and it might be due to a little stability in Europe, but I might also be better off looking for some more stability in one of the other high-yielding companies in this industry.

The world is full of chaos, and there are no guarantees on anything.

Disclosure: I am long CIM, TWO, AGNC, CYS, IVR. I still have an open order below the market to go long on ARR on a pullback.

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