Is Chimera Too Risky an Investment?

Let's face it: Some stocks are simply not for the faint of heart. Mortgage REIT Chimera Investment  (NYSE: CIM  ) , offering a unique combination of opportunity and risk, is certainly one of them. On one hand, the company 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 extremely ominous and adds a significant amount of uncertainty to any valuation of the company. It follows that investing in Chimera isn't for the faint of heart and should only be undertaken by those comfortable with the heightened degree of risk. Two of the primary risks Chimera faces right now are uncertainty and profitability.

Uncertainty
With those missing financial statements in mind, it should come as no surprise that the biggest risk towering over Chimera involves the uncertainty about its financial health. It's now been over a year since investors have seen anything but a cursory financial update from Chimera. The last time it filed its mandatory disclosures was in August of 2011. In the meantime, it's failed to file four quarterly statements and its 2011 annual statement, prompting the New York Stock Exchange to threaten to delist it this coming January.

To make matters worse, Chimera informed investors that due to a "material weakness in internal controls," it must restate all of its financial statements going back to the third quarter of 2008. This includes effectively every financial statement that it's filed as a publicly traded company, as it didn't go public until the end of 2007. To put it in Chimera's own words, any quarterly or annual report filed over the last four years "should no longer be relied upon."

For investors, this leaves a giant black hole of uncertainty on two different levels. First, there's the question of whether Chimera will file its financial documents in time to avoid being delisted by the NYSE -- this is assuming, of course, that the NYSE doesn't extend the deadline, as it has in the past. According to a report filed by Chimera at the beginning of September, the company has until January 15, 2013 to submit the necessary paperwork subject to the NYSE's "reassessment on an ongoing basis." Later in the same report, however, Chimera claims that while it's "working diligently" to meet this timeline, "no assurances can be given" that it will succeed at doing so.

The second level of uncertainty relates to its current financial condition. While some of the concern was arguably alleviated when Chimera recently announced that its GAAP book value is $3.08 per share, or only 8% less than it was when it last reported in 2011, the ultimate proof is in the pudding. In other words, investors won't truly know how well Chimera is faring until it releases its full array of financial documents.

Profitability and dividends
If and when the company ultimately files its financial statements, the most important aspect beyond the company's estimate of book value is its profitability. Make no mistake about it, Chimera is a dividend stock, and in the absence of profits, it can't fund its generous dividend payout.

While the interest rate environment has been particularly conducive to mREITs since the financial crisis -- at one point, industry leader Annaly Capital Management's (NYSE: NLY  ) interest rate spread had quadrupled from pre-crisis levels -- this gap has since begun to contract, squeezing bottom lines across the industry. In the last 12 months, for instance, Annaly has seen its interest rate spread sliced in half, leading it to cut its dividend by nearly 23% since the second quarter of 2011.

In Chimera's case, we know very little about how it's faring in the current environment, to say nothing of the past year. When it last reported in the middle of 2011, its interest rate spread was 4.88%, or more than twice that of Annaly's. Since then, however, it's really anyone's guess. The most we can say is that it's decreased its dividend from $0.13 at the time of its last full financial disclosure to $0.09 today -- this equates to a 31% decrease compared to Annaly's 17%. Consequently, while it seems safe to say that Chimera's profitability has decreased substantially, it's currently impossible to say by how much.

With so many unknowns, Chimera is a risky investment indeed. There's a chance it might be just the right amount of risk for you, though, so to help you figure out whether the stock is a buy (or a sell) right now, The Motley Fool has just released a new premium research report on Chimera. Click here now to claim your copy of this must-have investor's resource.


Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On January 10, 2013, at 11:31 AM, pondee619 wrote:

    " trades for a nearly 20% discount to book value"

    How do we know this?

    " To put it in Chimera's own words, any quarterly or annual report filed over the last four years "should no longer be relied upon""

    " it must restate all of its financial statements going back to the third quarter of 2008. This includes effectively every financial statement that it's filed as a publicly traded company"

    "the company has failed to file its 2011 annual report as well as a slew of quarterly updates"

    From where do you get the "20% of book Value" metric?

  • Report this Comment On January 10, 2013, at 1:13 PM, StopPrintinMoney wrote:

    pondee, there is a metric called book value per share. just because you dont know about it, it doesn't make it non-existent. see here in the lowest left corner http://finance.yahoo.com/q/ks?s=CIM+Key+Statistics

  • Report this Comment On January 10, 2013, at 2:13 PM, pondee619 wrote:

    Without trustworthy reporting by the company since it went public, how do you know that the "metric called book value per share" is accurate? Did Yahoo finance make this number up? Did someone pull it out of the air? Did Yahoo get it from the company's reports that must be restated or haven't been filed since 2011?

    I am fully aware of the metric of book value. My question is where this number came from in regard to this company. There hasn't been a trustworthy filing since it came public!

    So. I'll repeat, how did the author arrive at the 20% discount to book value? Perhaps the author could answer the question since he published the metric.

  • Report this Comment On January 10, 2013, at 2:52 PM, JohnMaxfield37 wrote:

    pondee619 -

    The book value figure came from S&P's Capital IQ.

    That said, your point is well taken. Nobody really knows what CIM's portfolio (and thus book value) is really worth right now -- that is, presumably, except CIM/NLY's execs and accountants. CIM does intermittently release estimates of its book value, but until investors can see the underlying financial statements, I agree with you that it's a bit of a mystery.

    John

  • Report this Comment On January 10, 2013, at 6:24 PM, DavidAkre wrote:

    John - You seem determined to talk this stock down but fail to make a good argument, and have incorrect facts. Their book value/share at Sept 30 was $3.31 per a company filing in Dec. Considering their asset type they should be trading at a premium to book. The negative is they're behind on filings after a fight with Deloitte that may get them delisted from the NYSE. That wouldn't be good. They attempted to keep that from happening by filing necessary governance info on Dec 31. This will play out in the next week or so but I'm very sure this is going higher (I'm long). If they get delisted, sell and wait for a new bottom.

    Keep it fair John. Bashing for a cloaked reason is usually pretty obvious.

  • Report this Comment On January 10, 2013, at 7:16 PM, promommyfool wrote:

    This REIT gets bashed regularly by all. Granted, a good part of the reason for that is obvious, no updates on those filings they say need to be restated. But, eventually, one would think that writers would get tired of saying the same thing and realize they are piling on the easiest target for a quick article. CIM is still paying out good dividends and yielding over 10% every quarter. The share price has been within a 20 cent window since September. I remember the December filing too DavidAkre. I'm long too and watching.

  • Report this Comment On January 11, 2013, at 9:15 AM, pondee619 wrote:

    DavidAkre:

    Do the company's statements that;

    any quarterly or annual report filed over the last four years "should no longer be relied upon.";

    Chimera informed investors that due to a "material weakness in internal controls," it must restate all of its financial statements going back to the third quarter of 2008;

    have any impact on you when you cite a company filing in making your argument?

    Per a company filing in Dec book value in Sept was 3.31. This filing is subject to restatement and per the company "SHOULD NO LONGER BE RELIED UPON". Why are you relying on it?

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