Most well-liked Collection C from Chimera Funding Corp. (CIM.PC) has a gorgeous 9.31% yield at present costs, however Chimera Funding Corp. (CIM) has been hit exhausting by the pandemic, extra so than most different REITs. Due to the corporate’s poor efficiency, weak financials and unsure prospects for REITs, I’d advise warning when contemplating investing on this firm.
REITs, like corporations within the delivery business, have been hit exhausting by present market situations, and Chimera Funding Corp. isn’t any exception. The secret is to search out these corporations which have the assets to outlive the downturn and never go bankrupt whereas benefiting from the elevated dividend yields ensuing from the decrease costs.
Keep in mind that I’m not a speculative investor trying to purchase low and promote excessive. Somewhat, I’m focused on decrease costs due to the impression on the dividend yields and receiving these for so long as potential. An added good thing about buying most popular shares at beneath the par worth is that, within the occasion that they cross the callable date and the corporate buys them again, I’ll revenue by regardless of the distinction is between what I bought them for and the par worth, normally $25. Because of this I by no means purchase preferreds priced above the decision value.
In my earlier evaluation Tsakos Energy Navigation For The Savvy Preferred Investor I checked out Tsakos Power Navigation (TNP), an oil and petroleum delivery firm, and its associated preferreds. At this time I’ve chosen Chimera Funding Corp. (NYSE:CIM), a publicly traded actual property funding belief, or REIT.
As soon as I’ve picked an organization with preferreds to analyze I look to see how the frequent inventory has carried out over the previous 5 years. This offers me an perception into the observe report of the corporate and its well being and long run prospects. I’ve discovered that wanting on the historical past of the frequent inventory and the corporate’s monetary highlights is a superb indicator for future expectations.
(Supply: Yahoo Finance)
Up till the sudden drop in value there’s an upward development for the 5 yr interval chosen. Let’s examine how CIM did as compared with 4 different massive cap REITs, AGNC Funding Corp (AGNC), Blackstone Mortgage Belief, Inc.(BXMT), New Residential Funding Corp. (NRZ) and Starwood Property Belief, Inc. (STWD).
As may be seen from the above chart, all of them expertise a dramatic decline in unison. My two takeaways right here listed below are that 1) exterior market forces have performed a major function on this value decline and a couple of) proceed with warning with CIM because it has skilled the most important loss. With that in thoughts I proceed in my investigation to see if the preferreds provided by CIM show to be an funding worthy of consideration.
Within the above chart from we will see that Debt/Fairness is a hefty 4.32. Whereas excessive, that is in keeping with different corporations on this sector so it doesn’t essentially disqualify CIM as an organization worthy of consideration. Crimson flags on this chart embody the abysmal EPS Q/Q of -272% so my subsequent step is to check CIM with the opposite 4 mid-cap mortgage REITS proven right here after making use of the suitable filter on finviz.
It seems that CIM is certainly performing worse than the others as may be seen from the next desk evaluating the ratio of debt to fairness, earnings per share this quarter vs. the identical quarter final yr and year-to-date efficiency.
|Firm||Debt/Eq||EPS Q/Q||Perf YTD|
At this level I will want some convincing proof that every one isn’t as unhealthy as indicated by my investigation up so far. Coincidentally, as I used to be getting ready this text a superb evaluation of CIM was revealed on August 18, 2020 by Michael A. Gayed that I like to recommend studying, “Chimera Investment Corporation: A Narrow Range”. The next quote from that evaluation is of specific curiosity when evaluating the preferreds as my major concern is survival of the corporate and that it proceed to make the dividend funds.
As of Q2 2020, 75% of CIM’s credit score borrowings are long run and greater than 54% of its non-agency RMBS borrowings haven’t any or restricted mark-to-market publicity. By decreasing its mark-to-market publicity, the corporate has tried to counter any volatility that will hit its mortgage ebook within the close to time period. Nonetheless, regardless of having sufficient liquidity to reap the benefits of alternatives, the corporate isn’t but out of the woods.
(Supply: Chimera Funding Company: A Slender Vary)
Along with the above talked about liquidity and diminished mark-to-market publicity, CIM beat analyst estimates for Q2 2020 as summed up right here –
-Earnings: -$73.39 million in Q2 vs. $40.32 million in the identical interval final yr. -EPS: -$0.37 in Q2 vs. $0.21 in the identical interval final yr. -Excluding gadgets, Chimera Funding Corp. reported adjusted earnings of $76.02 million or $0.32 per share for the interval. -Analysts projected $0.31 per share
(Supply: Nasdaq RTT News)
Earlier than having a look on the specifics of the preferreds let me take a minute to debate an important distinction between an organization’s frequent inventory and its preferreds. When confronted with monetary misery one of many first issues an organization will do is minimize or eradicate the dividend funds on the commons. Distinction that with the cumulative preferreds which may be suspended however have to be repaid in full, i.e. all missed funds, when and if funds are resumed. There are two takeaways for me right here. The primary is that the dividend paid on the commons gives an additional layer of safety for these proudly owning the preferreds as it’s nearly at all times the case that the dividend on the commons shall be diminished or eradicated earlier than the dividends paid on the preferreds are suspended. The second is that the house owners of preferreds profit from the advance discover supplied by a discount of the dividends on the commons, giving them a chance to dump some or all of their preferreds earlier than the dividend is suspended. Consider a minimize within the dividend paid on the commons because the canary within the coal mine.
With out additional ado, let’s check out the popular choices from Chimera Funding Corp. For this I flip to Quantum On-line.
(Supply: Quantum On-line)
Right here we see a quick profile of Chimera Funding Corp. indicating that it’s a REIT with a diversified portfolio of mortgage property, together with residential Mortgage loans, Non-Company RMBS, Company CMBS and Company RMBS together with different actual property associated securities and that it’s a massive cap inventory with a market worth of $3.5 billion.
Click on on the “Discover All Associated Securities for CIM” and you’ll be offered with the next.
There are 4 associated securities, all of them cumulative redeemable preferreds. I like the truth that they’re all cumulative as which means that within the occasion that the dividend funds are suspended, the funds accumulate and are owed to the shareholder and shall be repaid in full if and when the funds are resumed. One other benefit of preferreds is that the dividends have to be fully repaid earlier than the frequent shareholder shall be allowed to obtain any additional dividend funds. Notice that every one 4 are cumulative so that won’t be a consider figuring out which of the preferreds is the perfect funding.
Now let’s have a look at which of the 4 preferreds provides the perfect yield. All costs are on the time of market shut, August 18, 2020.
(Knowledge: Yahoo Finance and Quantum On-line)
Regardless of the .14% greater yield supplied by CIM.PD I’ve chosen CIM.PC due to the truth that its callable date gives a further yr and a half of security from being referred to as which greater than compensates for the slight distinction in value. Moreover, CIM.PD may be bought for $.33 much less per share than CIM.PC so that you’re placing much less cash in danger.
With unknowns just like the federal support, the chance that the US will expertise a second wave of the pandemic this fall concurrent with flu season and the sturdy risk of a second lockdown there’s a sturdy risk that Wall Avenue shall be compelled to align itself extra carefully with the truth of predominant road and there shall be a intestine wrenching drop throughout the boards. The REITs have been hit fairly exhausting on account of the continued pandemic and whereas I’m of the opinion that CIM has a combating probability of surviving the pandemic in something wanting a worst case state of affairs there’s far an excessive amount of unpredictability right here for me to need to take an opportunity on CIM.PC regardless of the engaging 9.31% yield and beneath par value. As ever, I welcome enter from my fellow Looking for Alpha readers.
Disclosure: I/we’ve got no positions in any shares talked about, and no plans to provoke any positions throughout the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.