Preferred Series C from Chimera Investment Corp. (CIM.PC) has an attractive 9.31% yield at current prices, but Chimera Investment Corp. (CIM) has been hit hard by the pandemic, more so than most other REITs. Because of the company’s poor performance, weak financials and uncertain prospects for REITs, I would advise caution when considering investing in this company.
REITs, like companies in the shipping industry, have been hit hard by current market conditions, and Chimera Investment Corp. is no exception. The key is to find those companies that have the resources to survive the downturn and not go bankrupt while benefiting from the increased dividend yields resulting from the lower prices.
Bear in mind that I am not a speculative investor looking to buy low and sell high. Rather, I am interested in lower prices because of the impact on the dividend yields and receiving those for as long as possible. An added benefit of acquiring preferred shares at below the par value is that, in the event that they pass the callable date and the company buys them back, I will profit by whatever the difference is between what I purchased them for and the par value, usually $25. For this reason I never buy preferreds priced above the call price.
In my previous analysis Tsakos Energy Navigation For The Savvy Preferred Investor I looked at Tsakos Energy Navigation (TNP), an oil and petroleum shipping company, and its related preferreds. Today I have chosen Chimera Investment Corp. (NYSE:CIM), a publicly traded real estate investment trust, or REIT.
Once I’ve picked a company with preferreds to investigate I look to see how the common stock has performed over the past five years. This gives me an insight into the track record of the company and its health and long term prospects. I have found that looking at the history of the common stock and the company’s financial highlights is an excellent indicator for future expectations.
(Source: Yahoo Finance)
Up until the sudden drop in price there is an upward trend for the five year period selected. Let’s see how CIM did in comparison with four other large cap REITs, AGNC Investment Corp (AGNC), Blackstone Mortgage Trust, Inc.(BXMT), New Residential Investment Corp. (NRZ) and Starwood Property Trust, Inc. (STWD).
As can be seen from the above chart, they all experience a dramatic decline in unison. My two takeaways here here are that 1) external market forces have played a significant role in this price decline and 2) proceed with caution with CIM as it has experienced the biggest loss. With that in mind I proceed in my investigation to see if the preferreds offered by CIM prove to be an investment worthy of consideration.
In the above chart from we can see that Debt/Equity is a hefty 4.32. While high, this is consistent with other companies in this sector so it does not necessarily disqualify CIM as a company worthy of consideration. Red flags in this chart include the abysmal EPS Q/Q of -272% so my next step is to compare CIM with the other four mid-cap mortgage REITS shown here after applying the appropriate filter on finviz.
It appears that CIM is indeed performing worse than the others as can be seen from the following table comparing the ratio of debt to equity, earnings per share this quarter vs. the same quarter last year and year-to-date performance.
|Company||Debt/Eq||EPS Q/Q||Perf YTD|
At this point I’ll need some convincing evidence that all is not as bad as indicated by my investigation up to this point. Coincidentally, as I was preparing this article an excellent analysis of CIM was published on August 18, 2020 by Michael A. Gayed that I recommend reading, “Chimera Investment Corporation: A Narrow Range”. The following quote from that analysis is of particular interest when evaluating the preferreds as my primary concern is survival of the company and that it continue to make the dividend payments.
As of Q2 2020, 75% of CIM’s credit borrowings are long term and more than 54% of its non-agency RMBS borrowings have no or limited mark-to-market exposure. By reducing its mark-to-market exposure, the company has tried to counter any volatility that may hit its loan book in the near term. However, despite having adequate liquidity to take advantage of opportunities, the company is not yet out of the woods.
(Source: Chimera Investment Corporation: A Narrow Range)
In addition to the above mentioned liquidity and reduced mark-to-market exposure, CIM beat analyst estimates for Q2 2020 as summed up here –
-Earnings: -$73.39 million in Q2 vs. $40.32 million in the same period last year. -EPS: -$0.37 in Q2 vs. $0.21 in the same period last year. -Excluding items, Chimera Investment Corp. reported adjusted earnings of $76.02 million or $0.32 per share for the period. -Analysts projected $0.31 per share
(Source: Nasdaq RTT News)
Before taking a look at the specifics of the preferreds let me take a minute to discuss a very important distinction between a company’s common stock and its preferreds. When faced with financial distress one of the first things a company will do is cut or eliminate the dividend payments on the commons. Contrast that with the cumulative preferreds which can be suspended but must be repaid in full, i.e. all missed payments, when and if payments are resumed. There are two takeaways for me here. The first is that the dividend paid on the commons provides an extra layer of security for those owning the preferreds as it is almost always the case that the dividend on the commons will be reduced or eliminated before the dividends paid on the preferreds are suspended. The second is that the owners of preferreds benefit from the advance notice provided by a reduction of the dividends on the commons, giving them an opportunity to sell off some or all of their preferreds before the dividend is suspended. Think of a cut in the dividend paid on the commons as the canary in the coal mine.
Without further ado, let’s take a look at the preferred offerings from Chimera Investment Corp. For this I turn to Quantum Online.
(Source: Quantum Online)
Here we see a brief profile of Chimera Investment Corp. indicating that it is a REIT with a diversified portfolio of mortgage assets, including residential Mortgage loans, Non-Agency RMBS, Agency CMBS and Agency RMBS along with other real estate related securities and that it is a large cap stock with a market value of $3.5 billion.
Click on the “Find All Related Securities for CIM” and you will be presented with the following.
There are four related securities, all of them cumulative redeemable preferreds. I like the fact that they are all cumulative as this means that in the event that the dividend payments are suspended, the payments accumulate and are owed to the shareholder and will be repaid in full if and when the payments are resumed. Another advantage of preferreds is that the dividends must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Note that all four are cumulative so that will not be a factor in determining which of the preferreds is the best investment.
Now let’s see which of the four preferreds gives the best yield. All prices are at the time of market close, August 18, 2020.
(Data: Yahoo Finance and Quantum Online)
Despite the .14% higher yield provided by CIM.PD I have chosen CIM.PC because of the fact that its callable date provides an additional year and a half of safety from being called which more than compensates for the slight difference in price. Additionally, CIM.PD can be purchased for $.33 less per share than CIM.PC so you’re putting less money at risk.
With unknowns like the federal aid, the possibility that the US will experience a second wave of the pandemic this fall concurrent with flu season and the strong possibility of a second lockdown there is a strong possibility that Wall Street will be forced to align itself more closely with the reality of main street and there will be a gut wrenching drop across the boards. The REITs have been hit pretty hard as a result of the ongoing pandemic and while I am of the opinion that CIM has a fighting chance of surviving the pandemic in anything short of a worst case scenario there is far too much unpredictability here for me to want to take a chance on CIM.PC despite the attractive 9.31% yield and below par price. As ever, I welcome input from my fellow Seeking Alpha readers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.