Billionaire Leon Cooperman Finds Yield in Chimera

Omega Advisors, a hedge fund managed by billionaire Leon Cooperman, has reported a position of over 55 million shares in Chimera Investment Corporation (NYSE:CIM) in a 13G filed with the SEC. Omega now owns 5.4% of the outstanding shares of the $3.1 billion market cap company, which invests in mortgage backed securities (including residential MBSs) and other mortgage loans and is organized as a real estate investment trust. REITs receive favorable tax treatment as long as they distribute 90% of taxable income to shareholders, which often results in high dividend yields. Chimera has paid dividends of 9 cents per share in each of the last three quarters; 36 cents per share in annual dividends makes for a yield of almost 12%.

Omega had owned just under 1 million shares at the end of September (see Cooperman’s stock picks). We track hedge fund filings because they can sometimes be useful for finding unfamiliar stocks or developing investment strategies (for example, the most popular small cap stocks among hedge funds as listed in our August 2012 newsletter outperformed the S&P 500 by 17 percentage points between September and January).

Chimera is currently on notice from the New York Stock Exchange for failure to file its financial statements in a timely fashion; the company is expected to release its 10-K for the 2011 fiscal year this week, and its 10-Q for Q1 2012 within 60 days. While of course investors should be concerned by the apparent poor management that has resulted in this situation, it’s possible that the market has driven the share price down in response and left an attractive investment opportunity. Cooperman and his team seem to be staking their capital on some amount of stability going forward, or at least enough to make collecting the high yield worthwhile. Chimera Investment Corporation has also publicly estimated its book value at about $3.30 per share as of September 2012, so the current price of about $3 may represent a discount. This book value is up from an estimate of $3.08 per share as of the end of June. We would note that the dividend payment has at times been reduced- Chimera paid dividends of 51 cents per share in 2011, for example- and so it is possible that if the company’s fortunes decline it would reduce its payments further.

Which other billionaires like Chimera?

Billionaire David Tepper’s Appaloosa Management had been buying shares of Chimera Investment Corporation during the third quarter of 2012, and owned over 10 million shares according to its 13F filing (find Tepper’s favorite stocks). D.E. Shaw, a large hedge fund managed by billionaire David Shaw, reported a position of a little under 16 million shares at the time (check out more stocks D.E. Shaw owned).

Other real estate investment trusts with high yields include Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), Capstead Mortgage Corporation (NYSE:CMO), and MFA Financial, Inc. (NYSE:MFA). All four of these companies invest a significant share of their capital in mortgage backed and other real estate related securities. They are also up to date as far as their financial disclosures, and in fact their P/B multiples are much in line with Chimera’s generally in the 0.9 to 1.0 range. Annaly and American Capital Agency also offer dividend yields of more than 10% going by recent dividend payments and the current stock price. The other two peers offer high dividend yields as well: Capstead’s is just shy of 10% while MFA’s yield is about 9%. Of course, as investors in subprime mortgages they are likely exposed to the same macro factors as Chimera.

We’re not sure that Chimera is a particularly good opportunity compared to its peers. It’s hard to see its filing problems as anything other than a signal of poor management and governance, and the stock doesn’t seem cheap compared to similar companies on a book basis. While the dividend yield is high, so is that of other companies such as Annaly and American Capital Agency. While Cooperman’s interest is notable we would recommend that investors research at least those other two companies before making a buy decision.

Disclosure: I own no shares of any stocks mentioned in this article.