Factors Influencing Chimera's (CIM) Fate this Earnings Season
Chimera Investment Corporation CIM is scheduled to report second-quarter 2020 results on Aug 5, before the opening bell. The company’s quarterly earnings per share (EPS) and net interest income (NII) are expected to have declined year over year.
In the last reported quarter, this mortgage real estate investment trust (mREIT) posted core earnings of 57 cents per share, surpassing the Zacks Consensus Estimate of 32 cents. During the first quarter, it sold its Agency residential mortgage-backed securities (RMBS) portfolio to boost liquidity and reduce leverage.
Over the trailing four quarters, the company missed the Zacks Consensus Estimate in two occasions and surpassed in the other two. It delivered a surprise of 24.05%, on average, during this period. The graph below depicts this surprise history:
Chimera Investment Corporation Price and EPS Surprise
Chimera Investment Corporation price-eps-surprise | Chimera Investment Corporation Quote
Let’s see how things have shaped up prior to this announcement.
Factors at Play
Rebounding from the steep sell-off in March, which resulted in mREITs witnessing a drastic decline in share prices and book values, the mortgage market stabilized during the second quarter. This was supported by the Federal Reserve’s continuous purchase of Agency mortgage-backed securities, a decline in benchmark interest rates to near zero and an improvement in housing data.
Also, given that the mortgage rate recorded several new lows during the quarter, refinancing and origination activities have gone up. Specifically, the 30-year mortgage rates declined from 3.33% in the week ended Apr 2, 2020, to 3.07% in the week ended Jul 2, 2020.
Amid this, while other mREITs are likely to have struggled with higher prepayment speeds during the quarter, Chimera’s Agency commercial MBS (CMBS) portfolio is likely to have provided the company with a competitive edge and decent spread income.
Specifically, the portfolio (representing 14% of the investment portfolio) primarily consists of Ginnie Mae construction loan and Ginnie Mae permanent loan certificates. The borrowers of the underlying mortgage loan have to pay a prepayment penalty if the loan is prepaid in the initial 10 years of the loan. This offers prepayment protection to the company.
Hence, the company’s $2.8-billion Agency CMBS portfolio (as of the first-quarter end) is expected to have enjoyed superior convexity profile and better navigate interest rate risk compared to Agency RMBS.
Moreover, with a decline in the Fed fund rate, a reduction in repurchase agreements collateralized by Agency MBS liability and lower borrowing costs; the company is expected to have witnessed lower interest expenses in the second quarter.
However, Chimera sold its Agency RMBS investment portfolio in the first quarter. The loss of interest income earned on such investments is expected to have dampened interest income growth in the second quarter. Reduced interest income is expected to have weighed on NII. Notably, the Zacks Consensus Estimate for second-quarter NII of $110.1 million indicates a decline of 22.4% year over year.
Additionally, the company’s non-Agency RMBS investments are expected to have witnessed higher prepayment speed amid the low-rate environment. This is anticipated to have impacted its NII and asset yield since net purchase premium balance needs to be amortized over a shorter period. In addition, it is anticipated to have increased the allowance for credit losses in the second quarter.
Moreover, the company slashed its second-quarter dividends by around 40% to 30 cents in June.
Lastly, prior to the second-quarter earnings release, the Zacks Consensus Estimate for the company’s EPShas been unchanged at 29 cents over the past month. It also suggests a decline of 44% from the year-ago reported figure.
Here is what our quantitative model predicts:
Chimera does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Chimera is 0.00%.
Zacks Rank: Chimera carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks That Warrant a Look
Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:
Healthcare Trust of America, Inc. HTA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and carries a Zacks Rank of 3.
Public Storage PSA, slated to release results on Aug 5, has an Earnings ESP of +0.41% and a Zacks Rank of 3 at present.
National Storage Affiliates Trust NSA, scheduled to announce earnings figures on Aug 6, currently has an Earnings ESP of +0.44% and a Zacks Rank of 3.
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