What: Back in September of 2011, Chimera Investment Company (NYSE: CIM ) received the first of many "Non-timely filing notices" from the SEC.
Stemming from an accounting blunder in which the company incorrectly accounted for the amount of deterioration on its non-agency securities (its largest asset class at the time), Chimera was forced to restate all of its filings since its inception in 2007.
According to Chimera CEO Matt Lambiase, the accounting adjustments were all non-cash changes and had no real effect on the company's book value, cash flows, dividend, or taxable income. However, that isn't to say falling behind on filings hasn't come without consequences.
For instance, it limits Chimera's access to public markets and therefore its ability to raise capital, the company reduced its borrowing by roughly $1 billion because lenders are more likely to make margin calls (force pay-back on loans early) on companies behind on filings, and certain licenses are necessary to buy mortgage loans, however, without up-to-date filings, Chimera was forced to withdraw some of these licenses which altered its investing strategy toward less cost-effective channels.
Not to mention the possibility of a lawsuit. Because whether or not the accounting inaccuracies on the non-agency securities made a significant difference in the company's operations, it lead to an overstating of net income from 2007 to 2011 by roughly $700 million (from approximately $1.06 billion to $370 million) and certainly had the potential to mislead investors.
So what: The good news is at least some of this looks like it's coming to an end. Last week, Chimera officially filed its 2013 annual report, which should be followed by its 2014 first quarter and second quarter results in July and August, respectively.
At the company's current pace, fillings could be up-to-date by the end of 2014. This is a good sign things are getting back to normal and the focus will make its way back onto the business itself, which, all things considered, has performed fairly well.
In fact, since 2011, Chimera's total return (dividends plus price appreciation) is just over 45% -- this is compared to the S&P 500's return of 61% in the same time.
Now what: Ultimately, I think the future is looking brighter for Chimera. Not only is the company well on its way to filing on time, but recent disclosures show some nice improvements. As of May 2014, the company added $4 billion to its agency residential mortgage-backed securities portfolio, which slightly boosted the company's year-over-year book value. Chimera also locked in its $0.09 dividend for the rest of the year -- which at current per share prices creates an 11% yield.
With that said, considering the likelihood of legal troubles mixed with the current lack of transparency, you might expect the stock to be at least a little beaten-down. However, despite Chimera carrying more baggage, it's trading at roughly 1 times book value, the same valuation as fellow non-agency REIT Two Harbors -- who, unlike Chimera, outperformed the S&P 500 over the last three years.
Therefore, I don't' see any real incentive for investors to rush out and buy Chimera today, but rather wait for the dust to clear and allow management to prove they can finish the job.
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