Mortgage REITs are popular with many investors right now for the high dividend yields they currently provide. Sporting a dividend yield of nearly 15%, Chimera (NYSE: CIM ) is certainly no exception.
Mortgage REITs issue shares to investors to raise capital, which they use to buy mortgage-backed securities. They also use short-term financing to boost their returns. They repay lenders out of the mortgage payments they collect, and most of the rest is returned to shareholders in dividends.
Here's a helpful visualization:
Let's take a quick look at four things investors in Chimera need to know. After that, we'll find out how the company stacks up next to its competitors.
1. Interest rate spread
A REIT's interest rate spread is the difference between its financing costs and its interest income. This provides a decent measure of investing profitability -- and portfolio risk.
2. Debt-to-equity ratio
Since interest rate spreads tend to be pretty narrow, REITs like to leverage those returns to generate bigger returns. Companies with safer portfolios can afford to take on more leverage risk than those with riskier investments.
3. Share growth
Since REITs have to pay out the vast majority of their earnings in dividends, the only way to grow their business is to take on more leverage or issue new shares. If a company issues a lot of shares, we want to make sure it does so at attractive prices so investors aren't diluted.
4. Dividend yield
The main reason to buy mortgage REITs is for their dividend. The forward yield tells us what dividends we'll get paid over the next year if earnings hold constant.
Let's see how Chimera stacks up next to its peers in these four crucial areas:
Interest Rate Spread*
2-Year Annual Share Count Growth
|Invesco (NYSE: IVR )||2.39%||653%||260%||16.7%|
|Annaly (NYSE: NLY )||1.71%||557%||32%||13.8%|
|American Capital Agency (Nasdaq: AGNC )||1.90%||797%||204%||16.6%|
Source: S&P Capital IQ. *Most recently reported quarter.
Annaly-managed Chimera was founded in 2007. That's quite recent, but it's not unusual in an industry that has seen so many new players pop up in recent years. Its rapid share growth over the last two years is also normal for the industry, which has lately been raising tons of new capital to scale up operations. The bulk of those shares were issued in the second and fourth quarters of 2010, when the stock traded at an average valuation of some 1.2 times book value. That's impressive timing on Chimera's part, as shares have traded for 0.8 to 1.3 times book value over the past couple of years.
To a greater extent than even CMBS-dabbler Invesco, Chimera is one of a small number of REITs that don't stick almost exclusively to federal agency-guaranteed mortgages. That extra portfolio risk they take allows them to generate higher interest rate spreads than agency-only peers like Annaly and American Capital Agency, which use greater leverage on smaller spreads.
Chimera manages that extra risk in part by utilizing less leverage and using only its agency securities as collateral. But ultimately, more so than for any other REIT, how well Chimera fares in 2012 will depend on how well its management team is able to take advantage of new investment opportunities and manage risk. The re-emerging jumbo market and the trouble brewing in European financial markets could present some attractive bargains for this opportunistic REIT.
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