Mortgage REIT Chimera Investment (CIM) has announced the pricing of a new baby bond with a coupon of 9%.
CIM has a few preferreds outstanding which can be seen here.
The pricing term sheet can be read here.
Thanks to Hugo for bringing this one up – my apologies if others did the same and I missed it.
CIMN trading today. Picked up a small position for 24.70 w Vanguard
Hi Maine – you are very correct and no doubt that their portfolio is very well seasoned the average loan is 17 years old and LTVs are low. Yes these loans are not going anywhere in terms of default and there would appear to be low prepayment risk given the age and average coupon on the loans. However, this remains an mREIT which focuses in on reperforming loans and non qualified loans. They do have agencies to balance out the risk, and they also have subordinated debt. They do continue to produce securitizations so at some point they will grow out of their legacy portfolio.
What would you compare CIM to interms of an mREIT?
If the choice is between MFA, MITT pref/BB or ABR preferred or RWT pref/BB and CIM BB I could see picking CIM BB at the right price.
What would you compare CIM to interms of businesses outside of the mREIT space?
Could CIM BB compare to a BDC BB – sure I would make that comparison and pick CIM BB at the right price.
Would I rather own a CIM BB than a regional bank BB or pref issue? Probably. The Feds are not going to come in and zero out the CIM BB out an any given Sunday.
But I just don’t see CIM as a starter mREIT. NLY or AGNC are more of a starter mREITs IMO.
Hey August. Always good chatting.
August: If the choice is between MFA, MITT pref/BB or ABR preferred or RWT pref/BB and CIM BB I could see picking CIM BB at the right price.
My thoughts: Price/value aside, I think MFA management is the most trustworthy and their portfolio is “good enough” from a pref investor perspective. MITT and RWT are re-building trust while CIM needs to go through a reset period, but the prefs should be fine. This is unlikely, but there is always the risk of a mREIT getting bought by a weak operator. I call this the “Terra” risk. Terra signed a deal (later voided) to purchase/take over WMC, and the stock immediately sold off as it was apparent Terra was a much worse credit.
When factoring in price, I think the market is still waking up on MITT and MITT/B is v cheap. MITT common needs to heal so that management can eventually issue shares again. Management is taking all the right steps, and it is likely they will be added to the R2000 shortly. I have also been buying ABR-F in the low 19’s. I think they have some issues they need to get sorted but they will survive, and the issue will eventually get called as the float spread of 612 is too high to keep outstanding for a financially strong mREIT. Also, the short squeeze on the common has allowed mgmt to sell shares above book.
August: Could CIM BB compare to a BDC BB – sure I would make that comparison and pick CIM BB at the right price.
My Thoughts: Good question. My mind can’t fathom a comparison given the ’40 act leverage limits on BDCs, plus BDCs tend to be much more diversified. I only dabble in BDC debt when there is fear for the sector or an individual issue trades cheap temporarily. Thinking about it from a common share perspective, I believe BDCs are better long term investments but mREIT common currently offer better value given their discount to NAV and the attractiveness of their sector. Agency MBS spreads are very attractive compared to other IG sectors, only a matter of time before those spreads compress….and generally speaking, some of the CRE related mREITs trade cheap, esp FBRT and RC -more fear is priced in than warranted.
August: Would I rather own a CIM BB than a regional bank BB or pref issue? Probably. The Feds are not going to come in and zero out the CIM BB out an any given Sunday.
My Thoughts: Yes, I think mREIT prefs offer much higher yield than comparable risk regional banks…but the technical bid for banks is just stronger. mREITs are a small niche sector…whereas many retail investors have heard of their local bank… like recent M&T and CFG issues. I think these will both trade above par (market shock aside), plus the divs are qualified.
August: But I just don’t see CIM as a starter mREIT. NLY or AGNC are more of a starter mREITs IMO.
Thoughts: Yes, agree 100%. I think DX-C or AGNCL represent the best value within the lower risk prefs. DX is one of the top managers and only has 1 pref outstanding. AGNCL provides an OK coupon and some price appreciation potential before it resets.
Hey Maine – thanks for the detailed discussion! One quibble – yes MBS spreads are high. The question is “will they return to previous levels”?
I think the buyer of Agency MBS has fundamentally changed and that banks may not play in this space to anywhere near the same level moving forward. This will impact agency spreads to the upside some degree.
I will say that I have purchased a decent allotment of 5.5% and 6.0% coupon agency MBS bonds and currently high spreads are the reason for that.
Also, and FWIW, the way I think of the underlying credit risk on debt assets right now is as follows. This is why I trade off between BDC vs mREIT.
1)Leveraged Bank Loans – like these the most therefore I like securitizations based on these the best and CEF based on such securitizations the best.
2)Residential Mortgages – like these second most. Non agency mREITS, therefore, second best.
3)Small/Med size business debt – like these third best. BDCs, therefore 3rd best.
Regional banks – to me these are not worth the event/headline risk at all.
Hey August. What are your favorite CEFs? I used to spend a lot of time on CEFs years ago but the space has become more efficient. There was a great Morningstar Discuss forum. My screen name was “outzonein.” Anyways, I like TSI now. It is trading ta a 9% discount which is -2 Z-Score compared to it’s 52 week average. TSI is one of the few CEFs that don’t use leverage always, and they also tend to have a large MBS/Non-agency allocation.
https://www.cefconnect.com/fund/TSI
Hi Maine – thanks for the lead on TSI. Looks like it trades at a nice discount!
On the topic of CEFs – I like leveraged bank loans so I am using CEF as a vehicle to access this asset class. Much discussed on this site, Eagle Point Credit and Oxford Lane Capital are CEF which invest in CLO equity where the CLOs are based on bank loans.
If one thinks of a CLO as a virtual bank, then CLO equity is like a common stock in the virtual bank. So a CEF containing a portfolio of CLO equities is like a bank stock CEF. I like the fixed coupon term preferred on these CEFs.
While the underlying assets float with SOFR, the preferreds are fixed coupon.
As you’ll know they both have fixed coupon term preferreds which trade at a nice discount to par. I have these because I think that in a world of tight corporate spreads these offer a good value, have minimal call risk and offer attractive YTM. I keep these in conjunction with PRFRX which is a bank loan open ended fund. Together these are about 8% of my 40% FI allocation.
Just my 2 cents as I continue to have a large exposure to the mREIT sector. I doubt this will change anyone’s opinion. I am fortunate to have some experience in this space. With that said… caution is always warranted given the leverage and the fact that fundamentals can change quickly (e.g. CRE) or financing could be pulled.
the commonality across MREITS are mortgage investments and leverage.. but after that.. they can be completely different animals. One needs to understand the fundamentals of their portfolio, and their financing structure. Many variations existing within MREIT land: agency, msr, non-agency resi, fix and flip business loans, hard $ lending, and then the whole spectrum of CRE lending. And then you have names like RITM, which are more complex and have idiosyncratic risks.
Why aren’t they issuing perpetual prefs? mREITs are issuing baby bonds because the market isn’t really open now for perpetual prefs, although that may change soon.Yes, they are expensive but they provide the managers some optionality, paying them back in 2-5 years, at their discretion.
Questions about the creditworthiness of CIM
Older residential mortgage debt is some of the safest paper out there, lots of home price appreciation significantly reduces loss probability. Managers like PIMCO and doubleline have been a large buyer in this space for a while. the CIM portfolio is actually pretty good from a Credit perspective. IIRC, their updated LTV is below 50% when factoring in updated house values. Their main issue is high financing costs, and opex. I am not worried about their assets, so any risk/losses is likely to be a slow bleed, but you never know.. It is possible to nationwide home price losses of 30%+.
How can these companies survive with such high interest payments?
I am not defending this strategy….. but managers can get a low teens return (via leverage) so the math can work. Of course, this assumes minimal loss severity, which has certainly been the trend for residential.
And most importantly.. yes, high borrowing costs can impact the managers EAD, but as a bond/pref holder… we can more about survival than thriving..and these companies are notorious of doing whatever it takes to survive.. to keep the fees flowing. MREIT managers are known to be serial issuers of common stock, which is good for pref holders. Of course, this strategy doesn’t work if they can’t issue new shares. This is where the nuances matter. When managers become too small.. and can’t issue new shares.. they either sell, get very expensive rescue financing, or go bust. It is very important to know what they hold in these instances. Names like ANH and AAIC were able to be bought out because they held relatively good assets.. on the other hand, nobody would buy out a name like GPMT now because everyone knows the NAV is significantly inflated, and many of their loans are troubled.
Maine and August, your long and detailed conversations are enlightening. I have been avoiding the MREIT sector completely. I would now consider dipping a toe in one or two of the BB’s in one of the stronger MREIT’s
Thanks Charles! I like your posts as well!
Divv lower compared to what their other issues are offering. You do get a redemption date, and higher up on the capital stack for whatever that’s worth
Gotta wonder why these mREITs are issuing term preferreds instead of perpetuals. 3+% underwriting costs for just a few years is costly. In exchange they get investors paying for a lower rate. How is that a good deal for anybody but the underwriters? Unless somebody is clued in to what interest rates are going to do in the future.
I simply do not have enough knowledge to purchase this recent non-IG stuff with confidence. The BBs I have been buying are the IG ones (barely it seems) and they definitely do not pay 9%. MFAN/ATLCZ were the only two I took a 100 share shot on otherwise it has been stuff like ATHS, FGN, NMFCZ, and CSWCZ type stuff if more than 100 shares.
I wish I knew enough to capture these high yields with confidence but I do not. Is anyone going heavy with these non-IG high yielding baby bonds? If so why?
High credit risk mortgage portfolio dating back to the mortgage crisis and barely earns its common dividend. Trades well below book value.
Seriel stock issuer and reverse stock splitter with an upcoming 3 for 1 reverse split on May 21st.
Captial structure is kind of funky as well common equity is about $1.7B while preferred equity is about $1B. Seems like a very expensive capital structure so this bond issue is not a major shocker.
Could there be value here? Potentially, but it is not exactly a starter mREIT. Certainly would not pay par for it. I am getting 10% on my NLY floating rate prefs. No way in heck that I would sell those for a 9% fixed coupon from Chimera.
If somebody asked me what has a better chance of going to $0 over the next 5 years Bitcoin or CIM common… I would easily pick CIM common.
Not sure if that helps… but FWIW.
I’m heavy into REIT preferreds it’s my largest sector by far. Perpetuals not these baby bonds. High yield plus trading opps to boost the return. They’ve had a low default rate, my few defaults have been other sectors. Though they could default in waves because of their leverage if the economy or housing market does unexpected things.
Agreed, Martin. mREIT prefs still trade relatively cheap because of issues from the past, or misconceptions.
>Some see the damage from the COVID period and have sworn off the sector.
> Leverage misconception – While, it’s true that many MREITS borrow short and lend long, it’s not necessarily true that inverted curves are always bad for mREITs. Within the agency sector, the MBS spread matters the most as they employ swaps to hedge out rates across the curve… so they are not borrowing at the short term rate from an economic perspective. And most of the hybrid names either have matched financing or their investments float.
>CRE – the market is in a “prove it” mode for anything related to commercial real estate. So even though companies like RC or FBRT predict low levels of losses from their multi portfolio, the stock will trade cheap until the multifamily stress narrative subsides.
A couple of useful links:
Feb 2024 – Thoughts on Agency MBS market from AGNC
https://investors.agnc.com/events/event-details/agnc-investment-corp-ubs-financial-services-conference
March 2024 – Overview of RWT and the origination sector
https://www.redwoodtrust.com/investor-relations/investor-day