This mREIT Has Red Flags You Can't Ignore
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It is always a red flag when a company delays the publication of its financial statements. Chimera Investment (NYSE: CIM) has not reported its results for all of 2012, and now faces a final deadline from the NYSE, or it risks delisting. This article focuses on the consequences for the company and its investors.
Final extension from the NYSE
Chimera announced that it has obtained a final 30-day extension for listing and trading of the company’s stock to continue on the New York Stock Exchange. The extension granted by the NYSE is subject to ongoing review by the NYSE. The company has until March 15, 2013, to file its 2011 Annual Report on Form 10-K with the SEC. During this period of extension, trading of the shares on the NYSE will remain unaffected. The company had previously received a four month listing extension until Jan. 15, 2013, and a subsequent extension to Feb. 15, 2013.
Chimera previously announced that it would delay filing of its Form 10-K for the year ended Dec. 31, 2011 (“2011 10-K”), and its Form 10-Q for the quarters ended March 31, June 30, and Sept. 30, 2012. On Aug.7, 2012, the company announced that its consolidated financial statements included in its previously filed Annual Reports on Form 10-K for the years 2010, 2009 and 2008, and its quarterly reports on Form 10-Q beginning with the quarter ended Sept.30, 2008, and for all subsequent quarters up to the third quarter of 2011 need to be restated, and were therefore no longer reliable. The restatement is not expected to affect the company’s previously reported GAAP or economic book values, actual cash flows, dividends and taxable income for any previous period.
Implications for the company and the investor
It now appears that troubled Chimera is getting close to the point when it must reveal its true financial condition to investors. After months of evasion and extensions, the NYSE has now given the company a final deadline to produce its 2011 financials or face delisting from the exchange. A company that does not provide financial statements for a full year means that investors do not have up-to-date information from which to assess the potential of the investment. I also believe that the continued delay in publishing financial statements, combined with the continued payment of a high dividend, should engender suspicion that the company has more problems than it wishes to admit.
Worse still, the failure to produce financial statements on time means that we have no way of knowing what has happened to the company for the whole of 2012. Each quarter, Chimera has provided a book value per share figure that has increased from $2.97 in March 2012 to $3.31 in Dec. 2012. However, this figure cannot be cross checked in the absence of the supporting financial statements.
Invesco Mortgage Capital (NYSE: IVR) offers an attractive quarterly dividend of $0.65 per share. Because of the pressure on net interest margins, the company has had to reduce quarterly dividends from the previous $1 per share. However, Invesco has been able to sustain dividends over the previous six quarters, and in 2012 the company paid $2.60 in dividends, making for a dividend yield of around 12.7%. During the same period, its stock price has grown by nearly 25%. In response to the quantitative easing by the Fed, the company has moved its investment strategy from agency RMBS to non-agency RMBS and commercial mortgage-backed securities (CBMS). At the end of the fourth quarter, the agency RMBS portfolio declined by $604 million, while the non-agency RMBS and CBMS portfolios grew by $534 million and $297 million, respectively. The stock is trading at a price to book ratio of around 1 and is a good choice for income investors.
American Capital Agency (NASDAQ: AGNC) is an mReit that has an investment portfolio consisting exclusively of single-family residential mortgage pass-through securities, and collateralized mortgage obligations acquired with leverage. It has recently announced a quarterly dividend of $1.25 per share, which is the same as the past four quarters and, over the year, the company has paid a hefty annual dividend of $5 per share. Recently, the company announced comprehensive income of $126 million, or $0.36 per common share, for the fourth quarter and, at the end of the quarter, net book value per common share was $31.64.
Regardless of the quantitative easing measures, the company's investment strategy and asset selection remained the same, enabling it to sustain an economic return of over 30% in the last four consecutive quarters. The CPR is 1% lower compared to the past quarter's CPR of 10%, and investors should note that CPR influences the stability and sustainability of earnings, and is also a hallmark of effective risk management. Furthermore, at the end of the fourth quarter, interest spread rates increased to 1.63% compared to 1.42% in the preceding quarter when they were falling for much of the competition. I believe American Capital Agency is a must-own for investors seeking solid income.
Chimera is a highly avoidable investment at this point in time, despite its large dividend yield. I believe investors should consider selling any shares of the stock that they currently hold. Until we have had a chance to examine the financials, there is a good chance that the dividend is not only an income distribution but a return of capital as well. You can always take a new position in the stock after the financial statements have been published.
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