CIM-B: Higher for Longer

As the market continues to price in higher interest rates for longer, there is opportunity in owning floating rate securities. CIM-B is a preferred stock issued by Chimera Investment Corporation with a fixed rate coupon of 8.0%. CIM-B trades at a 15% discount to par leading to a current rate of 9.4%.

On 3/30/24, 9 months from now, CIM-B switches to a floating rate security of 5.79% + 3m SOFR + 0.26%. The 3m SOFR is the replacement for LIBOR and is currently at 5.26%. That puts the floating rate coupon at 11.3%. At the current price of $21.34, the yield would be 13.2%.

My investment thesis is that CIM-B moves to its par value of $25 over the next 9 months. I think there will be $1.50 in dividends and $3.66 in capital gains in those 9 months resulting in a 24% total return. I think $25 is a fair price because that puts the yield at 130 bps higher than the fixed rate CIM-A, more than enough additional yield to compensate for the potential for rate decreases. However, $25 is roughly the maximum share price as CIM can redeem the shares at $25 at anytime after 3/30/24. I wouldn’t be surprised if CIM does redeem the shares, a win for investors.

CIM-B is far from risk free, but I think the potential for a quick 9 month profit is worth the risk. CIM owns residential mortgages. Not the type guaranteed by Freddie or Fannie. If you remember the Big Short’s quote of dog shit wrapped in cat shit. CIM owns the dog shit. It’s not as bad as 2007. The mortgages have low loan to value (LTV) as mortgage standards are tighter and the housing market has had considerable appreciation since the mortgages were written. The job market for subprime mortgage customers is strong. CIM has minimal leverage allowing it to handle delinquencies.

It’s not a risk free 24% 9 month return, but I’m comfortable with it.

Here’s the CIM investor presentation

I encourage you to look up the details of CIM-B at QuantumOnline.com. Benefits of CIM-B include cumulative dividends (if CIM can’t pay preferred dividends, they accrue and must be fully paid before their common stock can pay a dividend.). CIM is an mREIT that must pay out 90% of profits to maintain its tax status, meaning the preferred stock dividends must be paid. Not a tax advisor, but every mREIT dividend I’ve seen qualifies as a 199A tax break effectively leading to dividends taxed at only 80% of your marginal tax rate.

If you want more ideas like CIM-B, here’s my previous posts. RITM-D

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