Key Highlights

  • Chimera Investment (NYSE:CIM) appears on the aggressive small cap screen with a one-year EPS change of 722.66% and a Market Value of about USD 539 million, at USD 6.44 in the November 13 snapshot, down 2.94% on the session.
  • Third quarter GAAP net loss available to common stockholders was USD 194 million, or USD 2.31 per share, driven by USD 391 million of unrealised losses on financial instruments.
  • Book value per share fell to USD 14.82 from USD 17.75 in June, a drop of about 16.5%, and the economic return for the quarter was negative 13.98%.
  • Earnings available for distribution were USD 0.38 per share, below the USD 0.45 quarterly dividend, and the shares fell 8.76% on the day of the results.

A Sharp Hit to Book Value

Chimera, a Mortgage real estate investment trust that invests in residential mortgage loans and securities and owns the Loan originator HomeXpress, reported on November 5. The quarter was dominated by mark to market losses. As long-term interest rates rose and Credit spreads widened, the value of Chimera's loan and securities portfolio fell, producing USD 391 million of unrealised losses. The GAAP net loss available to common stockholders was USD 194 million, or USD 2.31 per share, against a loss of USD 0.27 a year earlier. Book Value per share fell to USD 14.82 at September 30 from USD 17.75 at June 30, about 16.5% lower, and the economic return, which combines the book value change and dividends, was negative 13.98%. For a mortgage REIT, book value is the main anchor for the share price, so a decline of this size explains the 8.76% fall in the stock on the day of the release.

Earnings Versus the Dividend

Earnings available for distribution, a non-GAAP measure that excludes mark to market swings, were USD 32 million, or USD 0.38 per share, compared with USD 0.37 a year earlier and USD 0.46 in the second quarter. Net interest income rose to about USD 71.2 million from USD 65.0 million. The common Dividend of USD 0.45 per quarter, or USD 1.80 a year, was paid on October 30, and management has said it expects to maintain that level through 2026. However, the third quarter dividend was not covered by distributable earnings, which raises the question of whether the payout will be reset in 2027. At the screen price of USD 6.44, the stock trades at roughly 43% of book value and the annual dividend implies a Yield near 28%, figures that show the market expects either further book value losses or a dividend cut. The screen's one-year EPS change of 722.66% is not meaningful against a large GAAP loss.

HomeXpress and Balance Sheet

The bright spot is origination. HomeXpress, which makes non-qualified residential mortgage loans, originated USD 1.1 billion in the third quarter, up 27% on a standalone basis, although the segment posted a small net loss. On October 30, Chimera launched a HomeXpress securitisation programme with a USD 291 million deal whose senior class received top ratings, which gives the company a way to fund loans it originates and retain the economics. Total Assets were about USD 16.7 billion at September 30, cash was USD 357.2 million, and GAAP Leverage was about 6.5 times. The company also declared fourth quarter dividends on its four series of preferred stock, payable December 30. Key risks are further increases in long-term yields, wider credit spreads on non-agency mortgages and higher funding costs. A stabilisation in rates would help book value recover, while further declines would put the common dividend under pressure.

Where Things Stand

Chimera (NYSE:CIM) lost about 16.5% of its book value in the third quarter as rates and spreads moved against it, and distributable Earnings of USD 0.38 did not cover the USD 0.45 dividend. The stock trades at about 43% of book, so investors are pricing in further risk despite growth at HomeXpress.