Should You Trust Chimera's Executives?

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There are few stocks in the market that offer the level of opportunity and risk that mortgage REIT Chimera Investment  (NYSE: CIM  ) does. On one hand, it pays an absolutely monster dividend yield of 14% and trades for a nearly 20% discount to book value. But on the other hand, the company has failed to file its 2011 annual report, as well as a slew of quarterly updates.

While this isn't necessarily fatal, it's pretty ominous and adds a significant amount of uncertainty to any valuation of the company. It also means the leadership at Chimera is that much more important: Are they making the right decisions, and as an investor, can you trust them? To help answer those questions, and many others, the Fool has published an in-depth report on Chimera, detailing the strengths and weaknesses of the company as well as the key things you should watch if you're an investor in the stock (or thinking about becoming one). This article is an excerpt from the report, which you can download here.

At its core, an mREIT could be seen as a lightly regulated hedge fund that specializes in real estate. As such, and unlike a Coca-Cola  (NYSE: KO  ) or an ExxonMobile  (NYSE: XOM  ) , which can seamlessly transition from one group of executives to the next, much of an mREIT's success and critical access to capital markets depends on the reputation of the executive(s) in charge.

In Chimera's case, it's managed by FIDAC, a wholly owned subsidiary of Annaly Capital Management  (NYSE: NLY  ) . For many years, FIDAC and Annaly were run by Michael A.J. Farrell, their founder and chief executive officer whom many considered to be a trailblazer in the mREIT space. But in October of 2012, Farrell died, leaving Wellington Jamie Denahan-Norris, the company's former chief operating officer, in charge.

Putting aside the accounting errors at Chimera, there are four critical red flags that investors should be aware of when it comes to how Chimera and Annaly are run. In the first case, executive bonuses at Annaly are tied to book value and not a more relevant performance metric. This incentivizes them to do one thing above all others: issue new shares.

In the second case, here at The Motley Fool, we like to see executives with significant skin in the game. In Ms. Denahan-Norris's case, she owns $14.6 million of shares in Annaly. While this is nothing to shake a stick at, to be sure, it nevertheless pales in comparison to the $35 million compensation package she received in 2011.

In the third case, at least three of Chimera's top executives, including its CEO and CFO, are close relatives of either executives or board members of Annaly, raising the concern that familial ties may have trumped merit in the hiring process. I shouldn't go without noting the possibility that Chimera's CFO was potentially chosen for the position because she's the sister of Annaly's current CEO, which certainly adds another angle to Chimera's ongoing accounting problems.

And finally, immediately prior to founding Annaly, Farrell was censured and had his securities license suspended by the NASD, the predecessor to FINRA, for failing to "maintain [...] minimum required net capital," filing "incomplete and inaccurate annual audit reports," and failing to "maintain accurate books and records." I point this out, and particularly the latter two charges, only in light of the problems now plaguing Chimera. 

All of this doesn't exactly give me a warm and fuzzy feeling about the leadership at Chimera, but there are other factors to consider when weighing an investment. To help you figure out whether the stock is a buy right now, click here now to claim your copy of this must-have investor's resource.

Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2013, at 3:43 PM, MiserblOF wrote:

    It's not out of trust for their executives so much as I just like the odds. I'm on board with this risk. With the threat of spending cuts plunging the economy back into depression (intentionally, I might add) the chance of short term interest rates going up any time soon is nil. That's one of the risks, and now there are others to take its place.

    I am also long MFA, but that one, at present is flying very high, and I think there is more to lose,,

  • Report this Comment On January 09, 2013, at 10:45 AM, bmc007 wrote:

    Hey - "worry, you die - don't worry, you die". If/when something happens I deal with it.

  • Report this Comment On January 09, 2013, at 2:18 PM, gogojuice1 wrote:

    John-Thank you for continuing to report pertinent facts about CIM that cannot be found anywhere else in the financial news. I got out in Feb. to wait for restatements, but with all the additional information you have uncovered there is no way I will ever get back in. The huge dividend payments have a way of building blind confidence and for a while I too wanted to ignore the red flags and excuse the lack of information but finally pulled the plug.

    Thanks again and keep up the good work.

  • Report this Comment On January 10, 2013, at 8:48 AM, jonkai3 wrote:


    In the first case, executive bonuses at Annaly are tied to book value and not a more relevant performance metric. This incentivizes them to do one thing above all others: issue new shares.


    I about blew milk out reading that, I suggest you figure out how Mreits work before writing such non sense.

    Issuing new shares at say the price of book value does not in itself raise book value.

    to make this simple so one may understand how ridiculous that statement is.

    if a company's book value is at $15, and they have 1000 shares, (company is worth $15,000)

    and this company issues 1000 more shares at $15, and take in another $15,000..

    the "book value" is $30,000 / 2000 shares, or $15 a a share.... this does not increase the executives bonus... PERIOD..... what does increase it is results so people would even buy a secondary... PERIOD....

    the reason an Mreit raises more shares is so they can invest it and leverage it at 7 times, and create more profits, there by increasing book value...

    what is good for book value is good for ALL INVESTORS...

    tying the book value to incentives aligns all shareholders to what is important, how much those shares are worth...

    so you better hope the employes DOUBLE their bonuses, because the only way they can do this is if shareholders have DOUBLED in price the value of their shares. and the only way to do this is to actually make enough profits to do it.... any bells and whistles going off there????

    that is how ridiculous this bog's statement is.

  • Report this Comment On January 11, 2013, at 1:29 PM, gogojuice1 wrote:

    According to an article written by Aaron Elstein at Crain's:

    "The fundraising is important because it's what drives Mr. Farrell's pay to the stratosphere. While most Wall Street executives are paid based on some combination of earnings growth and stock appreciation, Mr. Farrell's bonus is tied entirely to how much cash his firm raises from investors. Specifically, he gets 0.25% of any growth in the firm's capital levels."

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