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Omega Advisors further reduces its stake in Chimera Investment

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Omega Advisors’ 13G filings since October

Omega Advisors added to its position in Atlas Energy LP (ATLS) and Altisource Portfolio Solutions (ASPS). It disclosed stakes in Aspen Group (ASPU), Resource America, Inc. (REXI), and Arbor Realty Trust, Inc. (ABR). It trimmed positions in Chimera Investment Corporation (CIM), SandRidge Energy, Inc. (SD), and Harbinger Group (HRG).

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Omega Advisors and Chimera Investment

Omega Advisors further lowered its position in Chimera Investment (CIM) during the current quarter. It said it holds 64,362,201 shares via an amended 13G filing this month. This amounts to a 6.27% stake in Chimera.

Overview of Chimera Investment Corporation

Chimera Investment Corporation (CIM) invests in residential mortgage loans, residential mortgage–backed securities (or RMBS), real estate–related securities, and various other asset classes.

The company is a Maryland corporation that has elected to be taxed as a real estate investment trust (or REIT). Chimera is managed externally by Fixed Income Discount Advisory Company (or FIDAC), a wholly owned subsidiary of Annaly Capital Management (NLY).

Chimera Investment aims to provide attractive risk-adjusted returns to its investors over the long term, mainly through dividends and secondarily through capital appreciation.

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This can be achieved by investing in a diversified investment portfolio of RMBS, residential mortgage loans, real estate–related securities, and various other asset classes. The company’s principal business objective is to generate income from the spread between yields on its investments and its cost of borrowing and hedging activities.

On September 30, 2014, based on the amortized cost balance of interest-earning assets, approximately 50% of Chimera’s investment portfolio was agency RMBS, 16% was non-agency RMBS, and 34% was securitized residential mortgage loans.

Factors impacting Chimera’s results

Chimera noted in its 10Q filing that its results are impacted by economic trends, macro as well as those directly affecting the residential housing market, and the supply and demand of RMBS. Its net interest income varies due to changes in interest rates, borrowing costs, credit impairment losses, and prepayment speeds.

An article in Market Realist earlier this month noted that a rise in prepayment speeds could negatively affect REITs, especially those with a large exposure to fixed-rate, government-guaranteed mortgages such as American Capital Agency Corp. (AGNC) and Annaly Capital Management (NLY).

The article added that investors who want to protect themselves from prepayment risk should focus on REITs that invest primarily in adjustable rate securities and include names such as Hatteras Financial (HTS) and MFA Financial (MFA). Investors can also look at the VanEck Vectors Mortgage REIT ETF (MORT).

The next part of this series will be a brief overview of Chimera Investment’s (CIM) results.

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