Chimera Investment: Discount To Book Value Is Attractive

Investment Thesis - Pessimism surrounding Chimera Investment has led to a stock price of around $12 per share, a 5-year low, but the discount to book value is considered excessive, indicating potential for recovery [1] - Future dividend cuts are deemed unlikely as book values and dividends have stabilized, suggesting that the stock price may support from this point onward [1] Company Overview - Chimera Investment primarily invests in a diversified portfolio of mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency RMBS, Agency CMBS, and other real estate-related assets [2] Investment Strategy - The company has shifted its strategy to focus primarily on residential loans, indicating a more conservative approach in the current market environment [4] - Management plans to continue acquiring and securitizing mortgage loans, which is a major strategic emphasis for the company [8] Loan Portfolio Characteristics - Chimera's loan portfolio is seasoned, with 80% of loans originated prior to 2008, which are expected to perform reliably [5][6] - As of Q1 2024, the total current unpaid principal balance is $11.6 billion, with a weighted average coupon of 5.99% and a weighted average loan age of 186 months [6] Financial Performance - Q1 2024 earnings showed a GAAP net income of $0.45 per diluted common share and a GAAP book value of $7.11 per common share [11] - Total shareholder's equity increased from $2.56 billion to $2.65 billion quarter over quarter, indicating resilience in book value [7] Market Conditions - The housing market is experiencing mixed results, with existing home sales declining while new home sales are rising, which may affect mREITs [14][15] - Despite macroeconomic headwinds, Chimera is viewed as resilient, with the potential for book value to increase if the Federal Reserve cuts rates [12][13] Valuation - The stock is considered significantly undervalued, with an adjusted book value of $32 per share, leading to a fair value estimate of $15 per share after applying a 50% discount for potential risks [16] - The stock trades at 10x forward earnings non-GAAP, close to the sector median, with dividends well covered by earnings [17] Risk Management - The company is managing liabilities effectively, reducing higher-cost repo borrowings, which is expected to benefit net interest income [18] - Current hedges are positioned to deal with an uncertain rate environment, providing some protection against interest rate movements [13] Conclusion - The significant discount to book value is expected to close as the company performs well under challenging conditions, with a focus on securitization allowing for flexible financing and high returns on equity [22]