Chimera (CIM) is loosely related to the largest mortgage REIT, Annaly Capital (NLY). A subsidiary of Annaly acts as investment advisor for Chimera. Investors might view the two as similar, with both in the mortgage REIT business – one large and one small. However, the two companies work with distinctly different business models, and the current state of the mortgage backed security – MBS – business may push the investment results of the two stocks in different directions.
Over the last year, Annaly has outperformed Chimera, although both share values have declined. The Annaly share price is off 10 percent, and the value of Chimera shares is down 28 percent. Using the most recent dividend payments, Annaly yields 13.5% and the Chimera yield is a few basis points under 15%.
The results from Annaly going forward from here will be primarily driven by interest rates. The Annaly MBS portfolio is almost entirely composed of agency – Fannie Mae, Freddie Mac and Ginnie Mae – backed securities. There is little chance of losses from mortgage defaults. The risk lies in a shrinking yield spread between what the company can earn on its mortgage portfolio and the rate the company pays to borrow money to leverage the rate earned on the portfolio. If the interest rate spread tightens, Annaly will be forced to cut the dividend and the share price will probably decline. If the spread widens, positive things will happen for shareholders. The spread has tightened in each of the three previous quarters, compared to the preceding quarter. To continue reading, click here.