INVESCO MORTGAGE CAPITAL INC.
As
filed with the Securities and Exchange Commission on June 2, 2009
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Registration Statement No. 333-151665 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment
No. 6
to
FORM S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF CERTAIN REAL ESTATE COMPANIES
Invesco Mortgage Capital Inc.
(Exact name of registrant as specified in its governing instruments)
1555 Peachtree Street, NE
Atlanta, Georgia 30309
(404) 892-0896
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrants Principal Executive Offices)
Jeffrey H. Kupor
c/o Invesco Institutional (N.A.), Inc.
1555 Peachtree Street, NE
Atlanta, Georgia 30309
(404) 892-0896
(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)
Copies to:
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Jay L. Bernstein, Esq.
Andrew S. Epstein, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
Tel (212) 878-8000
Fax (212) 878-8375
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David J. Goldschmidt, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Tel (212) 735-3574
Fax (917) 777-3574 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after
the effective date of this registration statement.
If any of the Securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the following box: o
If this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following
box. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check One):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer þ
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Amount of |
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Title of |
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Aggregate |
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Registration |
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Securities to be Registered |
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Offering Price(1) |
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Fee(2) |
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Common Stock, par value $0.01
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$460,000,000
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$21,543 |
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(1) |
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Estimated solely for the purpose of determining the registration fee in accordance
with Rule 457(o) of the Securities Act of 1933, as amended. |
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(2) |
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Calculated in accordance with Rule 457(o) under the Securities Act of 1933, as
amended. |
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$9,825 previously paid on June 13, 2008 for an initial maximum aggregate offering
price of $250,000,000. $11,718 paid herewith for a total proposed maximum aggregate
offering price of $460,000,000. |
The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration
Statement shall become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission
is effective. This preliminary prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2009
Shares
Invesco
Mortgage Capital Inc.
Common Stock
Invesco Mortgage Capital Inc. is a newly organized Maryland corporation focused on
investing in, financing and managing residential and commercial
mortgage-backed
securities and mortgage loans. We will seek to invest in residential mortgage-backed securities for which a
U.S. Government agency or a federally chartered corporation guarantees payments of principal and
interest on the securities. In addition, we expect to invest in residential mortgage-backed
securities that are not issued or guaranteed by a U.S. Government agency, commercial
mortgage-backed securities and mortgage loans. To the extent available to us, we may seek to finance our investments in these asset classes with
financings under the Term Asset-Backed Securities Lending Facility or with private financing
sources and, if available, we may also make investments in funds that receive financing under the
U.S. Governments Public-Private Investment Program. We will be externally managed and advised by Invesco Institutional (N.A.), Inc., a
Delaware corporation and an indirect wholly-owned subsidiary of Invesco Ltd., an independent global
investment company listed on the New York Stock Exchange (NYSE: IVZ). Invesco Institutional
(N.A.), Inc. will draw upon the expertise of Invesco Ltd.s Worldwide Fixed Income investment team of 114 investment
professionals operating in six cities, across four countries, with approximately $150 billion in
securities under management and Invesco Real Estates 219 employees operating
in 13 cities across eight countries with over $22 billion in private and public
real estate assets under management. In addition, our Manager will draw upon the mortgage market
insights of WL Ross & Co. LLC, Invesco Ltd.s distressed
investment unit.
This is our initial public offering and no public market currently exists for our common
stock. We are offering shares of our common stock as described in this prospectus. We expect
the initial public offering price of our common stock to be $ per share. Our common stock has
been approved for listing on the New York Stock Exchange, subject to official notice of issuance,
under the symbol IVR.
Concurrently with the completion of this offering, we will complete a private placement in
which we will sell shares of our common stock to Invesco Ltd., through Invesco Institutional
(N.A.), Inc., at $ per share and units of limited partnership interest in our operating
partnership to Invesco Ltd., through Invesco Investments (Bermuda) Ltd., a wholly-owned subsidiary
of Invesco Ltd., at $ per unit, for an aggregate investment equal to % of the gross proceeds
raised in this offering, up to $ million. We refer to Invesco Institutional (N.A.), Inc. and
Invesco Investments (Bermuda) Ltd., collectively in this prospectus as the Invesco Purchaser. Upon
completion of this offering and the concurrent private placement, Invesco Ltd., through Invesco
Institutional (N.A.), Inc., will beneficially own % of our outstanding common stock (or % if
the underwriters fully exercise their option to purchase additional shares). Assuming that all
units of limited partnership interest are redeemed for an equivalent number of shares of our common
stock, Invesco Ltd., through the Invesco Purchaser, would beneficially own % of our outstanding
common stock upon completion of this offering and the concurrent private placement (or % if the
underwriters fully exercise their option to purchase additional shares).
We intend to elect and qualify to be taxed as a real estate investment trust for U.S. federal
income tax purposes, commencing with our taxable year ending December 31, 2009. To assist us in
qualifying as a real estate investment trust, stockholders are generally restricted from owning
more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding
shares of common or capital stock. Different ownership limits will
apply to Invesco Ltd. and its direct and indirect subsidiaries, including but not limited to Invesco Institutional (N.A.), Inc. and Invesco Investments (Bermuda) Ltd. Different ownership limits will apply to Invesco Ltd. and its
direct and indirect subsidiaries. In addition, our charter contains various other restrictions on
the ownership and transfer of our common stock, see Description of Capital StockRestrictions on
Ownership and Transfer.
Investing in our common stock involves risks. See Risk Factors beginning on page of
this prospectus for a discussion of these risks.
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We have no operating history and may not be able to successfully operate our business or
generate sufficient revenue to make or sustain distributions to our stockholders. |
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We have not yet identified any specific investments in our target asset classes. |
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We may allocate the net proceeds from this offering and the concurrent private placement
to investments with which you may not agree. |
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We are dependent on Invesco Institutional (N.A.), Inc. and its key personnel for our
success. |
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There are conflicts of interest in our relationship with Invesco Institutional (N.A.),
Inc. and Invesco Ltd., which could result in decisions that are not in the best interests
of our stockholders. |
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Our failure to qualify as a real estate investment trust would subject us to U.S.
federal income tax and potentially increased state and local taxes, which would reduce the
amount of cash available for distribution to our stockholders. |
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Maintenance of our exemption from registration under the Investment Company Act of 1940
imposes limits on our operations. |
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Per Share |
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Total |
Public offering price |
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$ |
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$ |
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Underwriting discount |
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$ |
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$ |
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Proceeds to us, before expenses |
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$ |
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$ |
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The underwriters may also purchase up to an additional shares of our common stock from us
at the initial public offering price, less the underwriting discount, within 30 days after the date
of this prospectus to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about , 2009.
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Credit Suisse
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Morgan Stanley |
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Barclays Capital
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Keefe, Bruyette & Woods |
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Stifel Nicolaus |
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Jackson Securities |
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Siebert Capital Markets |
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The Williams Capital Group, L.P. |
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The date of this prospectus is , 2009.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus, any free writing
prospectus prepared by us or information to which we have referred you. We have not, and the
underwriters have not, authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not rely on it. We are
not, and the underwriters are not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information appearing in this
prospectus and any free writing prospectus prepared by us is accurate only as of their respective
dates or on the date or dates which are specified in these documents. Our business, financial
condition, results of operations and prospects may have changed since those dates.
Until , 2009 (25 days after the date of this prospectus), all dealers that effect
transactions in these securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or subscriptions.
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SUMMARY
This summary highlights some of the information in this prospectus. It does not contain all
of the information that you should consider before investing in our common stock. You should read
carefully the more detailed information set forth under Risk Factors and the other information
included in this prospectus. Except where the context suggests otherwise, the terms company,
we, us, and our refer to Invesco Mortgage Capital Inc., a Maryland corporation,
together with its consolidated subsidiaries, including IAS Operating Partnership LP, a Delaware
limited partnership, which we refer to as our operating partnership; our Manager refers to
Invesco Institutional (N.A.), Inc., a Delaware corporation, our external manager; Invesco refers
to Invesco Ltd. together with its consolidated subsidiaries (other than us), the indirect parent
company of our Manager; and OP units refers to units of limited partnership interest in our
operating partnership. Unless indicated otherwise, the information in this prospectus assumes
(1) the common stock to be sold in this offering is sold at $ per share, (2) a $ million
investment will be made by the Invesco Purchaser in a private placement to be made concurrently
with the completion of this offering, and (3) no exercise by the underwriters of their
over-allotment option to purchase up to an additional shares of our common stock.
Our Company
We are a newly-formed Maryland corporation focused on investing in, financing
and managing residential and commercial mortgage-backed securities and mortgage loans, which we collectively refer to as our target assets. We will seek to invest
in residential mortgage-backed securities, or RMBS, for which a U.S. Government agency such as the Government
National Mortgage Association, or Ginnie Mae, or a federally chartered corporation such as the
Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage
Corporation, or Freddie Mac, guarantees payments of principal and interest on the securities. We
refer to these securities as Agency RMBS. We also expect to invest in RMBS that are not issued or guaranteed by a U.S. Government agency, or non-Agency RMBS,
commercial mortgage-backed securities, or CMBS, and residential and
commercial mortgage loans.
We anticipate financing our Agency RMBS through traditional repurchase agreement financing.
In addition, to the extent available to us, we may seek to finance our investments in CMBS and
non-Agency RMBS with financings under the Term Asset-Backed Securities Lending Facility, or TALF,
or with private financing sources. If available, we may also finance our investments in certain
CMBS and non-Agency RMBS by contributing capital to one or more of the legacy securities
public-private investment programs, or Legacy Securities PPIFs, that receive financing under the
U.S. Governments Public-Private Investment Program, or PPIP, and our investments in certain legacy
commercial and residential mortgage loans by contributing capital to one or more legacy loan
public-private investment programs, or Legacy Loan PPIFs, that
receive such funding or through private financing sources. Legacy
Securities PPIFs and Legacy Loan PPIFs may be established and managed by our Manager or one of its
affiliates or by unaffiliated third parties; however, our Manager or its affiliates may only
establish a Legacy Securities PPIF if their application to serve as an investment manager of this
type of PPIP fund is accepted by the U.S. Treasury. Our Manager has
agreed not to charge fees
payable to it under the management agreement between our Manager and us, with respect to any equity
investment we may decide to make in any Legacy Securities PPIF or Legacy Loan PPIF which is managed
by our Manager or one of its affiliates.
We will be externally managed and advised by Invesco Institutional (N.A.), Inc., or our
Manager, an SEC-registered investment adviser and indirect wholly-owned subsidiary of Invesco Ltd.
(NYSE: IVZ), or Invesco. Invesco is a leading independent global investment management company with
$348.2 billion in assets under management as of March 31, 2009. Our Manager will draw upon
the expertise of Invescos Worldwide Fixed Income investment team of 114 investment professionals operating in six cities,
across four countries, with approximately $150 billion in securities under management and Invesco Real Estates 219 employees operating in 13 cities across eight
countries with over $22 billion in private and public real estate assets under management. With over
25 years of experience, Invescos teams of dedicated professionals have developed exceptional track
records across multiple fixed income sectors and asset classes, including structured securities,
such as RMBS, asset-backed securities, or ABS, CMBS, and
leveraged loan portfolios. In addition, the investment team will draw upon the mortgage market
insights of WL Ross & Co. LLC, or WL Ross, Invescos distressed investment unit and an indirect,
wholly-owned subsidiary of our Manager.
Our objective is to provide attractive risk adjusted returns to our investors over the long
term, primarily through dividends and secondarily through capital appreciation. We intend to
achieve this objective by selectively acquiring target assets to construct a diversified investment portfolio designed to produce attractive returns across a variety of market conditions and economic
cycles. We intend to construct a diversified investment portfolio by focusing on security
selection and the relative value of various sectors within the mortgage market. We intend to
finance our Agency RMBS investments primarily through short-term borrowings structured as
repurchase agreements. To date, we have signed master repurchase agreements with financial
institutions, and we are in discussions with additional financial institutions for repurchase
facilities. As described in more detail below, to the extent available to us, we may seek
to finance our non-Agency RMBS, CMBS and
mortgage loan portfolios with non-recourse term borrowing facilities and equity
financing under the TALF or with private financing sources and, if available, we may make investments in funds
that receive financing under the PPIP that will be established and managed by our Manager or one of its affiliates if their
application to serve as one of the investment managers for the Legacy Securities Program is accepted by the U.S. Treasury.
We will commence operations upon completion of this offering. We intend to elect and qualify
to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes,
commencing with our taxable year
ending December 31, 2009. We generally will not be subject to U.S. federal income taxes on
our taxable income to the extent that we annually distribute all of our net taxable income to
stockholders and maintain our intended qualification as a REIT. We also intend to operate our
business in a manner that will permit us to maintain our exemption from registration under the
Investment Company Act of 1940, or the 1940 Act.
Our Manager
We will be externally managed and advised by our Manager. Pursuant to the terms of the
management agreement, our Manager will provide us with our management team, including our officers,
along with appropriate support personnel. Each of our officers is an employee of Invesco. We do
not expect to have any employees. Our Manager is not obligated to dedicate any of its employees
exclusively to us, nor is our Manager or its employees obligated to dedicate any specific portion
of its or their time to our business. Our Manager is at all times subject to the supervision and
oversight of our board of directors and has only such functions and authority as we delegate to it.
Our Managers Worldwide Fixed Income investment professionals have extensive experience in
performing advisory services for funds, other investment vehicles, and other managed and
discretionary accounts that focus on investing in Agency and other RMBS as well as CMBS. As of
March 31, 2009, our Manager managed approximately $177.0 billion of fixed income and real estate
investments, including approximately $18.8 billion of structured securities, consisting of approximately $11.0
billion of Agency RMBS, $3.9 billion of ABS, $2.0 billion of non-Agency RMBS and $1.9 billion of
CMBS. We expect that our Manager will continue to manage its existing portfolio and provide
management services to its other clients, including affiliates of Invesco. Neither our Manager nor
Invesco has previously managed or advised a public REIT or managed RMBS or CMBS on a
leveraged basis.
The Invesco Worldwide Fixed Income investment professionals will benefit from the insight and
capabilities of Invescos distressed investment subsidiary, WL Ross, and Invescos real estate
team.
Our Manager will draw upon the professional experience and knowledge of the investment team of
its WL Ross subsidiary. Over the last 30 years,
WL Ross has sponsored and managed more than $8.0 billion of distressed equity investments and has
completed more than $200 billion of workouts around the world. We will benefit from WL Ross
expertise in security selection, portfolio management, and portfolio oversight. When combined with
our Managers investment teams experience in fixed income investing, WL Rosss deep and broad
asset management skills will allow us to draw upon extensive investment expertise in order to
benefit our shareholders.
In addition, WL Ross-sponsored funds have expanded its position to include the mortgage market through
its 2007 investment in American Home Mortgage Servicing, Inc., or AHMSI, the largest independent
sub-prime mortgage loan servicer in the United States with an approximate $108 billion servicing
portfolio and more than 547,000 mortgage loans across 50 states. As a major loan servicer, AHMSI
has tremendous insights regarding mortgage market trends, including prepayment speeds, delinquency
rates, default and severity information, which we intend to capitalize on when valuing our target
assets. Furthermore, WL Ross sponsored funds have made a strategic investment in Assured Guaranty Ltd., or
AGL, which provides credit enhancement products on debt securities issued in the public finance,
structured finance and mortgage markets.
Additionally, our Manager will be able to draw upon the experience and resources of Invescos
real estate team, comprised of approximately 124 investment professionals on the ground in key
investment markets, which has 25 years of direct real estate investing experience.
Our Managers real estate team will provide us with valuable insights, through its research and
monitoring capabilities, on investments in residential and commercial properties. With the
properties under management having an aggregate market value of approximately $22.8 billion as of
March 31, 2009, this team is a leader in the real estate
marketplace and will provide us with residential and commercial
property valuations and other property based information that will be
critical in supporting our Managers assessment of RMBS and CMBS
valuations.
Invesco Aim Advisors, Inc., or Invesco Aim Advisors, an affiliate of our Manager, will serve
as our sub adviser pursuant to an agreement between our Manager and Invesco Aim Advisors. Invesco
Aim Advisors will provide input on overall trends in short-term financing markets and make specific
recommendations regarding financing of our Agency RMBS. We do not expect our Manager to provide
these services to us directly. The fees charged by Invesco Aim Advisors shall be paid by our
Manager and shall not constitute a reimbursable expense by our Manager under the management
agreement. We expect that the fees charged by Invesco Aim Advisors to our Manager will be
substantially similar to the fees Invesco Aim Advisors charges to its other clients for similar
services.
We also expect to benefit from our Managers portfolio management, finance and administration
functions, which address legal, compliance, investor relations and operational matters, trade
allocation and execution, securities valuation, risk management and information technologies in
connection with the performance of its duties.
Concurrently with the completion of this offering, we will complete a private placement in
which we will sell shares of our common stock to Invesco, through our Manager, at $ per
share and OP units to Invesco, through Invesco Investments (Bermuda) Ltd., at $ per
unit for an aggregate investment equal to % of the gross proceeds raised in
this offering, up to $ million. Upon completion of this offering and the concurrent
private placement, Invesco, through our Manager, will beneficially own % of our
outstanding common stock (or % if the underwriters fully exercise their option to purchase
additional shares). Assuming that all OP units are redeemed for an equivalent number of
shares of our common stock, Invesco, through the Invesco Purchaser, would beneficially own %
of our outstanding common stock upon completion of this offering and the concurrent private
placement (or % if the underwriters fully exercise their option to purchase additional
shares). The Invesco Purchaser will agree that, for a period of one year after the date of this
prospectus, it will not, without the prior written consent of Credit Suisse Securities (USA) LLC
and Morgan Stanley & Co. Incorporated, dispose of or hedge any of the shares of our common stock or
OP units that it purchases in the concurrent private placement, subject to certain exceptions and
extension in certain circumstances as described elsewhere in this prospectus.
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About Invesco
Invesco is one of the largest independent global investment management firms with offices
worldwide. As of March 31, 2009, Invesco had 5,122 employees, the majority of whom were located in
North America. Invesco operates under the Invesco Aim Advisors, Invesco Trimark, Atlantic Trust,
Invesco, Invesco Perpetual, Invesco PowerShares, and WL Ross brands.
Our Investment Strategy
We will rely on our Managers expertise in identifying assets within our target assets. Our
Managers investment team has a strong focus on security selection and the relative value of
various sectors within the mortgage markets. We expect that the investment team will make
investment decisions on our behalf, which will incorporate their views on the economic environment
and the outlook for the mortgage markets, including relative valuation, supply and demand trends,
the level of interest rates, the shape of the yield curve, prepayment rates, financing and
liquidity, commercial and residential real estate prices, deliquencies, default rates, recovery of various sectors and vintage of
collateral, subject to maintaining our REIT qualification and our exemption from registration under
the 1940 Act.
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Our Target Assets
Our
target asset classes and the principal assets we expect to acquire in each are as follows:
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Asset Classes |
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Principal Assets |
Agency RMBS
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Mortgage Pass-Through Certificates.
Single-family residential mortgage pass-through
certificates are securities representing
interests in pools of mortgage loans secured
by residential real property where payments of
both interest and principal, plus pre-paid
principal, on the securities are made monthly
to holders of the securities, in effect
passing through monthly payments made by the
individual borrowers on the mortgage loans that
underlie the securities, net of fees paid to
the issuer/guarantor and servicers of the
securities. These mortgage pass-through
certificates are guaranteed by a U.S.
Government agency or federally chartered
corporation. |
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Collateralized Mortgage Obligations.
Collateralized mortgage obligations, or CMOs,
are securities which are structured from U.S.
Government agency, or federally chartered
corporation-backed mortgage pass-through
certificates. CMOs receive monthly payments of
principal and interest. CMOs divide the cash
flows which come from the underlying mortgage
pass-through certificates into different
classes of securities. CMOs can have different
maturities and different weighted average lives
than the underlying mortgage pass-through
certificates. CMOs can re-distribute the risk
characteristics of mortgage pass-through
certificates to better satisfy the demands of
various investor types. These risk
characteristics would include average life
variability, prepayments, volatility, floating
versus fixed interest rate and payment and
interest rate risk. |
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Non-Agency RMBS
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RMBS that are not issued or guaranteed by a U.S.
Government agency or federally charted
corporation, with an emphasis on securities
that when originally issued were rated in the
highest rating category by one or more of the
nationally recognized statistical rating
organizations. |
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CMBS
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Fixed and floating rate commercial
mortgage backed securities, with an emphasis on
securities that when originally issued were
rated in the highest rating category by one or
more of the nationally recognized statistical
rating organizations. |
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Residential Mortgage Loans
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Prime Mortgage Loans. Prime mortgage
loans are mortgage loans that conform to U.S.
Government agency underwriting guidelines.
Jumbo prime mortgage loans are mortgage loans
that conform to U.S. Government agency
underwriting guidelines except that the
mortgage balance exceeds the maximum amount
permitted by the guidelines. |
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Asset Classes |
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Principal Assets |
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Alt-A Mortgage Loans. Alt-A mortgage
loans are mortgage loans made to borrowers
whose qualifying mortgage characteristics do
not conform to U.S. Government agency
underwriting guidelines, but whose borrower
characteristics may. Generally, Alt-A loans
allow homeowners to qualify for a mortgage loan
with reduced or alternate forms of
documentation. |
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Subprime Mortgage Loans. Subprime
mortgage loans are loans that do not conform to
U.S. Government agency underwriting guidelines. |
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Commercial Mortgage Loans
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First or second lien loans, subordinate
interests in first mortgages, or B-Notes,
bridge loans to be used in the acquisition,
construction or redevelopment of a property and
mezzanine financings. |
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We initially expect to finance our investments in Agency MBS primarily through short-term
borrowings structured as repurchase agreements.
To the extent available to us, we may seek to finance our investments in non-Agency RMBS, CMBS and
mortgage loan portfolios with non-recourse term borrowing facilities and equity
financing under the TALF or with private financing sources and, if available, we may make investments in funds that receive financing under the PPIP.
Our board of directors has adopted a set of investment guidelines that set out our target
assets and other criteria to be used by our Manager to evaluate specific assets as well as our
overall portfolio composition. Our Manager will make determinations as to the percentage of our
assets that will be invested in each of our target assets. Our decisions will depend on prevailing
market conditions and may change over time in response to opportunities available in different
interest rate, economic and credit environments. As a result, we cannot predict the percentage of
our assets that will be invested in any of our target asset classes
at any given time. We may change our
strategy and policies without a vote of our stockholders. We believe that the diversification of
our portfolio of assets, our Managers expertise among our target assets and flexibility of our strategy,
combined with our Managers and its affiliates expertise, will enable us to achieve attractive
risk-adjusted returns under a variety of market conditions and economic cycles.
Investment Guidelines
Our board of directors has adopted the following investment guidelines:
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no investment shall be made that would cause us to fail to qualify as a REIT for federal
income tax purposes; |
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no investment shall be made that would cause us to be regulated as an investment company
under the 1940 Act; |
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our investments will be in our target assets; and |
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until appropriate investments can be identified, our Manager may invest the proceeds of
this and any future offerings in interest-bearing, short-term investments, including money
market accounts and/or funds, that are consistent with our intention to qualify as a REIT. |
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These investment guidelines may be changed from time to time by our board of directors without
the approval of our stockholders.
Our Manager has an investment committee, or Investment Committee, comprised of its officers
and investment professionals. The Investment Committee will periodically review our investment
portfolio and its compliance with our investment policies and procedures, including these
investment guidelines, and provide to our board of directors an investment report at the end of
each quarter in conjunction with its review of our quarterly results. From time to
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time, as it deems appropriate or necessary, our board of directors also will review our
investment portfolio and its compliance with our investment policies and procedures, including
these investment guidelines.
Our Financing Strategy
We intend to employ prudent leverage to increase potential returns to our stockholders and to
fund the acquisition of our target assets. Our income will be generated primarily by the net
spread between the income we earn on our investments in our target assets and the cost of our
financing and hedging activities. Although we are not required to maintain any particular leverage
ratio, the amount of leverage we will deploy for particular investments in our target assets will
depend upon our Managers assessment of a variety of factors, which may include, the anticipated
liquidity and price volatility of the assets in our investment portfolio, the gap between the
duration of our assets and liabilities including hedges, the availability and cost of financing the
assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S.
economy and residential and commercial mortgage-related markets, our outlook for the level, slope,
and volatility of interest rates, the credit quality of the loans we acquire, the collateral
underlying our Agency RMBS, non-Agency RMBS and CMBS, and our outlook for asset spreads relative to
the London Interbank Offered Rate, or LIBOR, curve.
We expect, initially, that we may deploy, on a debt-to-equity basis, up to seven to eight
times leverage on our Agency RMBS assets. In addition, we do not expect under current market
conditions to deploy leverage on our non-Agency RMBS, CMBS and mortgage loan assets, except in
conjunction with financings that may be available to us under programs established by the U.S. Government. For these asset
classes, we expect to use approximately five to six times leverage.
We consider these initial leverage ratios to be prudent for these asset classes.
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we
expect to use a number of sources to finance our investments. Initially, we expect our primary
financing sources to include repurchase agreements and, to the extent
available to us, financings under programs
established by the U.S. Government such as the TALF or
private financing sources, as described in more detail
below, and, if available, we may make investments in funds that receive financing under the PPIP.
Repurchase Agreements
Repurchase agreements are financings pursuant to which we will sell our target assets to the
repurchase agreement counterparty, the buyer, for an agreed upon price with the obligation to
repurchase these assets from the buyer at a future date and at a price higher than the original
purchase price. The amount of financing we will receive under a repurchase agreement is limited to
a specified percentage of the estimated market value of the assets we sell to the buyer. The
difference between the sale price and repurchase price is the cost, or interest expense, of
financing under a repurchase agreement. Under repurchase agreement financing arrangements, the
buyer, or lender, could require us to provide additional cash collateral, or a margin call, to
re-establish the ratio of value of the collateral to the amount of borrowing.
The Term Asset-Backed Securities Lending Facility
On November 25, 2008, the U.S. Treasury and the Federal Reserve announced the creation of the
TALF. Under the TALF, The Federal Reserve Bank of New York, or the FRBNY, provides non-recourse
loans to borrowers to fund their purchase of eligible assets, which
initially included certain ABS,
but not RMBS or CMBS. On March 23, 2009, the U.S. Treasury announced
preliminary plans to expand the TALF to include non-Agency RMBS and
CMBS. On May 1, 2009, the Federal Reserve provided more of the
details as to how TALF is to be expanded to CMBS and explained that beginning
on June 16, 2009, up to $100 billion of TALF loans will be
available to finance purchases of CMBS created on or after
January 1, 2009. Additionally,
on May 19, 2009, the Federal Reserve announced that certain high quality legacy
CMBS, including CMBS issued before January 1, 2009, would become eligible collateral under the TALF starting in July 2009.
We believe that the expansion of the TALF to include highly rated CMBS will provide us with
attractively priced non-recourse term borrowings that we could use to purchase newly created and legacy CMBS
that are eligible for funding under this program. To date, the TALF has not yet been
expanded to cover
non-Agency RMBS. We believe that once so expanded, the TALF may provide us with attractively
priced non-recourse term borrowing facilities that we can use to purchase non-Agency RMBS.
However, there can be no assurance that the TALF will be expanded to include this asset class
and, if so expanded, that we will be able to utilize it successfully or at all.
The Public-Private Investment Program
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On March 23, 2009, the U.S. Treasury, in conjunction with the Federal Deposit Insurance
Corporation, or the FDIC, and the Federal Reserve, announced the
creation of the PPIP. The PPIP is designed to
encourage the transfer of certain illiquid legacy real estate-related assets off of the balance
sheets of financial institutions, restarting the market for these assets and supporting the flow of
credit and other capital into the broader economy. PPIP funds under the Legacy Loan Program, or Legacy
Loan PPIFs, will be established to purchase troubled loans from insured depository institutions and
PPIP funds under the Legacy Securities Program, or Legacy Securities PPIFs, will be established to
purchase from financial institutions legacy non-Agency RMBS and newly issued and legacy CMBS that were originally
AAA rated. Legacy Loan PPIFs and Legacy Securities PPIFs will have access to equity capital from
the U.S. Treasury as well as debt financing provided or guaranteed by
the U.S. Government. We anticipate being able to benefit from the financing available under this program primarily as
an investor in one or more Legacy Securities PPIFs that will be established and managed by
our Manager or one of its affiliates if their application to serve as one of the investment
managers for the Legacy Securities Program is accepted by the U.S. Treasury, or in other Legacy
Securities PPIFs established and managed by third parties. We also anticipate being able to benefit from the financing available under the Legacy Loan Program
as an investor in one or more Legacy Loan PPIFs that will be established and managed by our Manager
or one of its affiliates. Our use of these programs and the amount of equity capital we may
contribute to take advantage of them could be substantial.
Risk Management
As part of our risk management strategy, our Manager will actively manage the financing,
interest rate, credit risk, prepayment and convexity (the measure of the sensitivity of the
duration of a bond to changes in interest rates) risks associated with holding a portfolio of our
target assets.
Interest Rate Hedging
Subject to maintaining our qualification as a REIT, we intend to engage in a variety of
interest rate management techniques that seek on one hand to mitigate the influence of interest
rate changes on the values of some of our assets, and on the other hand help us achieve our risk
management objective. We intend to utilize derivative financial instruments, including, among
others, puts and calls on securities or indices of securities, interest rate swaps, interest rate
caps, interest rate swaptions, exchange-traded derivatives, U.S. Treasury securities and options on
U.S. Treasury securities and interest rate floors to hedge all or a portion of the interest rate
risk associated with the financing of our investment portfolio. Specifically, we will seek to
hedge our exposure to potential interest rate mismatches between the interest we earn on our
investments and our borrowing costs caused by fluctuations in short-term interest rates. In
utilizing leverage and interest rate hedges, our objectives will be to improve risk-adjusted
returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield
on our assets and the cost of our financing. We will rely on our Managers expertise to manage
these risks on our behalf. We may implement part of our hedging strategy through a domestic
taxable REIT subsidiary, or TRS, which will be subject to U.S. federal, state and, if applicable,
local income tax.
Market Risk Management
Risk management is an integral component of our strategy to deliver returns to our
stockholders. Because we will invest in MBS, investment losses from prepayment, interest rate
volatility or other risks can meaningfully reduce or eliminate our distributions to stockholders.
In addition, because we will employ financial leverage in funding our portfolio, mismatches in the
maturities of our assets and liabilities can create risk in the need to continually renew or
otherwise refinance our liabilities. Our net interest margins will be dependent upon a positive
spread between the returns on our asset portfolio and our overall cost of funding. To minimize the
risks to our portfolio, we will actively employ portfolio-wide and security-specific risk
measurement and management processes in our daily operations. Our Managers risk management tools
include software and services licensed or purchased from third parties, in addition to proprietary
software and analytical methods developed by Invesco. There can be no guarantee that these tools
will protect us from market risks.
Credit Risk
We believe our investment strategy will generally keep our credit losses and financing costs
low. However, we retain the risk
of potential credit losses on all of the residential and commercial mortgage loans, as well as the
loans underlying the non-Agency RMBS and CMBS we hold. We seek to manage this risk through our
pre-acquisition due diligence process and through use of non-recourse financing which limits our
exposure to credit losses to the specific pool of mortgages that are subject to the non-recourse
financing. In addition, with respect to any particular target asset,
our Managers investment team evaluates, among other things,
relative valuation, supply and demand trends, shape of yield curves,
prepayment rates, delinquency and default rates, recovery of various
sectors and vintage of collateral.
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Our Competitive Advantages
We believe that our competitive advantages include the following:
Significant Experience of Our Manager
The senior management team of our Manager has a long track record and broad experience in managing
residential and commercial mortgage-related assets through a variety of credit and interest rate
environments and has demonstrated the ability to generate attractive risk adjusted returns under
different market conditions and cycles. As of March 31, 2009, our Manager managed approximately
$177.0 billion of fixed income and real estate investments, including $18.8 billion of structured
securities, consisting of approximately $11.0 billion of Agency RMBS, $3.9 billion of ABS, $2.0
billion of non-Agency RMBS and $1.9 billion of CMBS. In addition, our Manager will benefit from
the insight and capabilities of Invescos distressed investment subsidiary, WL Ross, and Invescos
real estate team. Our Manager will draw upon the professional experience and knowledge of the
investment team of its WL Ross subsidiary and benefit from WL Ross expertise in security selection, portfolio management,
and portfolio oversight. Our Manager also will be able to draw upon the experience and resources
of Invescos real estate team, comprised of approximately 124 investment professionals on the
ground in key investment markets, which has 25 years of direct real estate investing
experience. Our Managers real estate team will provide us with valuable insights, through its
research and monitoring capabilities, on investments in residential and commercial properties.
Through our Managers WL Ross subsidiary and Invescos real estate team we will also have access to
broad and deep teams of experienced investment professionals in real estate and distressed
investing. Through these teams, we will have real time access to research and data on the mortgage
and real estate industries. Having in-house access to these resources and expertise provides us
with a competitive advantage over other companies investing in our target assets who have less
internal resources and expertise.
Access to Extensive Repurchase Agreement Financing and Other Strategic Relationships
An affiliate of our Manager and a sub-adviser to us, Invesco Aim Advisors, has been active in
the repurchase agreement lending market since 1980 and currently has master repurchase agreements
in place with a number of counterparties. At March 31, 2009, Invesco Aim Advisors had provided
repurchase agreement financing to these counterparties equal to approximately $20.7 billion.
Invesco Aim Advisors has in place a documented process to mitigate counterparty risk. Our
Manager, together with a dedicated team of professionals at Invesco Aim Advisors pursuant to a
sub-advisory agreement between our Manager and Invesco Aim Advisors, follows this established
process. During these volatile times in which a number of repurchase agreement counterparties have
either defaulted or ceased to exist, we feel that it is critical to have controls in place that
address this recent disruption in the markets. All repurchase agreement counterparty approval
requests must be submitted to the team of nine professionals at Invesco Aim Advisors and undergo a
rigorous review and approval process to determine whether the proposed counterparty meets
established criteria. This process involves a credit analysis of each prospective counterparty to
ensure that it meets Invesco Aim Advisors internal credit risk requirements, a review of the
counterpartys audited financial statements, credit ratings and clearing arrangements, and a
regulatory background check. In addition, all approved counterparties are monitored on an ongoing
basis by Invesco Aim Advisors credit team and, if they deem a credit situation to be
deteriorating, they have the ability to restrict or terminate trading with this counterparty. We
do not expect to enter into any hedging transactions to mitigate any risks associated with our
repurchase agreement counterparties.
Extensive Strategic Relationships and Experience of our Manager and its Affiliates
Our Manager and its affiliates, including Invesco Aim Advisors, maintain extensive long-term
relationships with other financial intermediaries, including primary dealers, leading investment
banks, brokerage firms, leading mortgage originators and commercial banks. We believe these
relationships will enhance our ability to source, finance and hedge investment opportunities and,
thus, enable us to grow in various credit and interest rate environments. In addition, we believe
the contacts our Manager and its affiliates (including Invesco Aim Advisors) have with numerous
investment grade derivative and lending counterparties will assist us in implementing our financing
and hedging strategies.
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Disciplined Investment Approach
We will seek to maximize our risk-adjusted returns through our Managers disciplined
investment approach, which relies on rigorous quantitative and qualitative analysis. Our Manager
will monitor our overall portfolio risk and evaluate the characteristics of our investments in our
target assets including, but not limited to, loan balance distribution, geographic concentration,
property type, occupancy, periodic and periodic interest rate caps, which limit the amount an
interest rate can increase during any given period, or lifetime interest rate caps,
weighted-average loan-to-value and weighted-average credit score. In addition, with respect to any particular target asset,
our Managers investment team evaluates, among other things,
relative valuation, supply and demand trends, shape of yield curves,
prepayment rates, delinquency and default rates recovery of various
sectors and vintage of collateral. As a newly organized company
with no historical investments, we will build an initial portfolio consisting of currently priced
assets and therefore we will likely not be negatively impacted by the recent price declines
experienced by many mortgage portfolios. We believe this strategy and our commitment to capital
preservation will provide us with a competitive advantage when operating in a variety of market
conditions.
Access to Our Managers Sophisticated Analytical Tools, Infrastructure and Expertise
We will utilize our Managers proprietary and third-party mortgage-related security and
portfolio management tools to seek to generate an attractive net interest margin from our
portfolio. We intend to focus on in-depth analysis of the numerous factors that influence our
target assets, including: (1) fundamental market and sector review; (2) rigorous cash flow
analysis; (3) disciplined security selection; (4) controlled risk exposure; and (5) prudent balance
sheet management. We will utilize these tools to guide the hedging strategies developed by our
Manager to the extent consistent with satisfying the requirements for qualification as a REIT. In
addition, we will use our proprietary technology management platform called QTechsm to
monitor investment risk. QTechsm collects and stores real-time market data, and
integrates markets performance with portfolio holdings and proprietary risk models to measure the
risk positions in portfolios. This measurement system portrays overall portfolio risk and its
sources. Through the use of the tools described above, we will analyze factors that affect the
rate at which mortgage prepayments occur, including changes in the level of interest rates,
directional trends in residential and commercial real estate prices, general economic conditions,
the locations of the properties securing the mortgage loans and other social and demographic
conditions in order to acquire the target assets that we believe are undervalued. We believe that
sophisticated analysis of both macro and micro economic factors will enable us to manage cash flow
and distributions while preserving capital.
Our Manager has created and maintains analytical and portfolio management capabilities to aid
in security selection and risk management. We intend to capitalize on the market knowledge and
ready access to data across our target markets that our Manager and its affiliates obtain through
their established platform. We will also benefit from our Managers comprehensive finance and
administrative infrastructure, including its risk management and financial reporting operations, as
well as its business development, legal and compliance teams.
Alignment of Invesco and Our Managers Interests
Concurrently with the completion of this offering, we will complete a private placement in
which we will sell shares of our common stock to Invesco, through our Manager, at $ per
share and OP units to Invesco, through Invesco Investments (Bermuda) Ltd., at $ per
unit, for an aggregate investment equal to % of the gross proceeds raised in this offering, up
to $ million. Upon completion of this
offering and the concurrent private placement, Invesco, through our Manager, will beneficially own % of our common stock (or % if the
underwriters fully exercise their option to purchase additional shares). Assuming that all OP
units are redeemed for an equivalent number of shares of our common stock, Invesco, through
the Invesco Purchaser, would beneficially own % of our outstanding common stock upon completion
of this offering and the concurrent private placement (or % if the underwriters fully exercise
their option to purchase additional shares). We believe that the
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significant ownership of our common stock by Invesco, through the Invesco Purchaser, will
align Invesco and our Managers interests with our interests.
Tax Advantages of REIT Qualification
Assuming that we meet, on a continuing basis, various qualification requirements imposed upon
REITs by the Internal Revenue Code, we will generally be entitled to a deduction for dividends that
we pay and, therefore, will not be subject to U.S. federal corporate income tax on our net income
that is distributed currently to our stockholders. This treatment substantially eliminates the
double taxation at the corporate and stockholder levels that results generally from investment in
a corporation.
Summary Risk Factors
An investment in shares of our common stock involves various risks. You should consider
carefully the risks discussed below and under the heading Risk Factors beginning on page of
this prospectus before purchasing our common stock. If any of the following risks occur, our
business, financial condition or results of operations could be materially and adversely affected.
In that case, the trading price of our common stock could decline, and you may lose some or all of
your investment.
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We are dependent on our Manager and its key personnel for our success. In addition, we
intend to rely on our financing opportunities relating to our repurchase agreement
financing that have been and will be facilitated and/or provided by Invesco Aim Advisors,
an affiliate of our Manager. |
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Neither Invesco nor our Manager have any experience operating a REIT or managing a
portfolio of our target assets on a leveraged basis and we cannot assure you that our
Managers past experience will be sufficient to successfully manage our business as a REIT
with such a portfolio. |
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There are conflicts of interest in our relationship with our Manager and Invesco, which
could result in decisions that are not in the best interests of our stockholders. |
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The management agreement with our Manager was not negotiated on an arms-length basis
and may not be as favorable to us as if it had been negotiated with an unaffiliated third
party and may be costly and difficult to terminate. |
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Our board of directors will approve very broad investment guidelines for our Manager and
will not approve each investment and financing decision made by our Manager. |
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There can be no assurance that the actions of the U.S. Government, Federal Reserve, U.S.
Treasury and other governmental and regulatory bodies for the purpose of stabilizing the
financial markets, including the establishment of the TALF and the PPIP, or market response
to those actions, will achieve the intended effect, and our business may not benefit from
these actions and further government or market developments could adversely impact us. |
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We may change any of our strategies, policies or procedures without stockholder consent. |
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We have no operating history and may not be able to successfully operate our business or
generate sufficient revenue to make or sustain distributions to our stockholders. |
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Maintenance of our 1940 Act exemption imposes limits on our operations. |
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We expect to use leverage in executing our business strategy, which may adversely affect
the return on our assets and may reduce cash available for distribution to our
stockholders, as well as increase losses when economic conditions are unfavorable. |
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We will depend on repurchase agreement financing to acquire Agency RMBS, and our
inability to access this funding for our Agency RMBS could have a material adverse effect
on our results of operations, financial condition and business. |
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As a result of recent market events, including the contraction among and failure of
certain lenders, it may be more difficult for us to secure non-governmental financing. |
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An increase in our borrowing costs relative to the interest we receive on investments in
our target assets may adversely affect our profitability, and our cash available for
distribution to our stockholders. |
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To the extent available to us, we may seek to finance our investments in non-Agency
RMBS, CMBS and mortgage loan portfolio with equity and debt financing under U.S. government programs, and our inability to access this financing could
have a material adverse effect on our results of operations, financial condition and
business. |
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Hedging against interest rate exposure may adversely affect our earnings, which could
reduce our cash available for distribution to our stockholders. |
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We have not yet identified any specific investments in our
target asset classes. |
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We may allocate the net proceeds from this offering and the concurrent private placement to investments with which you may not agree. |
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Our investments may be concentrated and will be subject to risk of default. |
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Continued adverse developments in the residential and commercial mortgage markets,
including recent increases in defaults, credit losses and liquidity concerns, could make it
difficult for us to borrow money to acquire our target assets on a leveraged basis, on
attractive terms or at all, which could adversely affect our profitability. |
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We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these securities. |
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We may acquire non-Agency RMBS collateralized by subprime and
Alt-A mortgage loans, which are
subject to increased risks. |
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The mortgage loans that we will acquire, and the mortgage and other loans underlying the
non-Agency RMBS and CMBS that we will acquire, are subject to defaults, foreclosure
timeline extension, fraud and commercial and residential price depreciation, and unfavorable modification of loan
principal amount, interest rate and amortization of principal, which could result in losses
to us. |
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If our Manager overestimates the loss-adjusted yields of our CMBS investments, we may
experience losses. |
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An increase in interest rates may cause a decrease in the volume of certain of our
target assets which could adversely affect our ability to acquire target assets that
satisfy our investment objectives and to generate income and pay dividends. |
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Prepayment rates may adversely affect the value of our investment portfolio. |
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Our failure to qualify as a REIT would subject us to U.S. federal income tax and
potentially increased state and local taxes, which would reduce the amount of cash
available for distribution to our stockholders. |
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Complying with REIT requirements may cause us to forego otherwise attractive investment
opportunities or financing or hedging strategies. |
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Our Structure
We were organized as a Maryland corporation on June 5, 2008. We consider Invesco to be our
promoter. We will conduct substantially all of our operations through our operating partnership,
of which we are the sole general partner. Subject to certain limitations and exceptions, the
limited partners of the operating partnership, other than us or our subsidiaries, will have the
right to cause the operating partnership to redeem their OP units for cash equal to the market
value of an equivalent number of our shares of common stock, or, at our option, we may purchase
their OP units by issuing one share of common stock for each OP unit redeemed.
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The following chart shows our structure after giving effect to this offering and the
concurrent private placement to the Invesco Purchaser:
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Assuming redemption of all OP units owned by the Invesco Investments (Bermuda) Ltd.
for the equivalent number of shares of our common stock, Invesco would beneficially own
(through the holdings of the Invesco Purchaser) % of our common stock and the public would
own the remaining 91.01%. |
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(2) |
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We expect IAS Asset I LLC to qualify for an exemption from registration under the
1940 Act as an investment company pursuant to Section 3(c)(5)(C) of the 1940 Act. We may in
the future organize special purpose subsidiaries that may borrow under the TALF. We
anticipate that some of these subsidiaries may be organized to rely on the 1940 Act exemption
provided to certain structured financing vehicles by Rule 3a-7. We intend to conduct our
operations so that the value of our operating partnerships investment in IAS I LLC, these
special purpose subsidiaries, as well as other subsidiaries not relying on Section 3(c)(1) or
Section 3(c)(7) of the 1940 Act will at all times, on an unconsolidated basis, exceed 60% of
our operating partnerships total assets. See BusinessOperating and Regulatory
Structure1940 Act Exemption. |
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Management Agreement
We will be externally managed and advised by our Manager. We expect to benefit from the
personnel, infrastructure, relationships and experience of our Manager to enhance the growth of our
business. Each of our officers is an employee of Invesco. We do not expect to have any employees.
Our Manager is not obligated to dedicate certain of its personnel exclusively to us, nor is our
Manager or its personnel obligated to dedicate any specific portion of its or their time to our
business.
We will enter into a management agreement with our Manager effective upon the closing of this
offering. Pursuant to the management agreement, our Manager will implement our business strategy
and perform certain services for us, subject to oversight by our board of directors. Our Manager
will be responsible for, among other duties, (1) performing all of our day-to-day functions,
(2) determining investment criteria in conjunction with our board of directors, (3) sourcing,
analyzing and executing investments, asset sales and financings, and (4) performing asset
management duties. In addition, our Manager has an Investment Committee of our Managers
professionals that will oversee compliance with our investment guidelines, investment portfolio
holdings, financing and leveraging strategies.
The initial term of the management agreement will end two years after the closing of this
offering, with automatic one-year renewal terms that end on the anniversary of the closing of this
offering. Our independent directors will review our Managers performance annually and, following
the initial term, the management agreement may be terminated annually upon the affirmative vote of
at least two-thirds of our independent directors based upon: (1) our Managers unsatisfactory
performance that is materially detrimental to us or (2) our determination that the management fees
payable to our Manager are not fair, subject to our Managers right to prevent termination based on
unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our
independent directors. We will provide our Manager with 180 days prior notice of such termination.
Upon such a termination, we will pay our Manager a termination fee equal to three times the
management fee described in the table below. We may also terminate the management agreement with
30 days prior notice from our board of directors, without payment of a termination fee, for cause,
as defined in the management agreement. Our Manager may terminate the management agreement if we
become required to register as an investment company under the 1940 Act, with such termination
deemed to occur immediately before such event, in which case we would not be required to pay a
termination fee. Our Manager may also decline to renew the management agreement by providing us
with 180 days written notice, in which case we would not be required to pay a termination fee.
Invesco Aim Advisors will serve as our sub-adviser pursuant to an agreement between our
Manager and Invesco Aim Advisors. Invesco Aim Advisors will provide input on overall trends in
short-term financing markets and make specific recommendations regarding financing of Agency RMBS.
We do not expect our Manager to provide these services to us directly. The fees charged by Invesco
Aim Advisors shall be paid by our Manager and shall not constitute a reimbursable expense by our
Manager under the management agreement.
The following table summarizes the fees and expense reimbursements that we will pay to our
Manager:
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Management fee:
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1.50% of our
stockholders equity
per annum and
calculated and payable
quarterly in arrears.
For purposes of
calculating the
management fee, our
stockholders equity
means the sum of the
net proceeds from all
issuances of our
equity securities
since inception
(allocated on a pro
rata daily basis for
such issuances during
the fiscal quarter of
any such issuance),
plus our retained
earnings at the end of
the most recently
completed calendar
quarter (without
taking into account
any non-cash equity
compensation expense
incurred in current or
prior periods), less
any amount that we pay
to repurchase our
common stock since
inception, and
excluding any
unrealized gains,
losses or other items
that do not affect
realized net income
(regardless of whether
such items are
included in other
comprehensive income
or loss, or in net
income). This amount
will be adjusted to
exclude one-time
events pursuant to
changes in accounting
principles generally
accepted in the United
States, or GAAP, and
certain non-cash items
after discussions
between our Manager
and our independent
directors and approved
by a majority of our
independent directors.
Our stockholders
equity, for purposes
of calculating the
management fee, could
be greater or less
than the amount of
stockholders equity
shown on our financial
statements. We will
treat outstanding
limited partner
interests (not held by
us) as outstanding
shares of capital
stock for purposes of
calculating the
management fee. In our management agreement, our
Manager has agreed not to charge the management fee described above payable in
respect of any equity investment
we may decide to make in a Legacy Securities or Legacy Loan
PPIF if managed by our Manager or
any of its affiliates. We will be responsible for any fees payable for any equity investment
we may decide to make in a Legacy Securities or Legacy Loan PPIF managed by an entity other than our Manager
or any of its affiliates.
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Quarterly in cash |
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Expense reimbursement
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Reimbursement of
operating expenses
related to us incurred
by our Manager,
including certain
salary expenses and
other expenses
relating to legal,
accounting, due
diligence and other
services. Our
reimbursement
obligation is not
subject to any dollar
limitation.
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Monthly in cash. |
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Termination fee
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Termination fee equal
to three times the sum
of the average annual
management fee earned
by our Manager during
the prior 24-month
period prior to such
termination,
calculated as of the
end of the most
recently completed
fiscal quarter.
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Upon termination of
the management
agreement by us
without cause or by
our Manager if we
materially breach the
management agreement. |
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Incentive plan
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Our equity incentive
plan includes
provisions for grants
of restricted common
stock and other equity
based awards to our
directors or officers
or any employees of
our Manager. We do
not expect to grant
any awards under our
equity incentive plan
upon completion of
this offering. |
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Conflicts of Interest
We are dependent on our Manager for our day-to-day management and do not have any independent
officers or employees. Each of our officers and two of our directors, Mr. Armour and Ms. Dunn
Kelley, are employees of Invesco. Our management agreement with our Manager was negotiated between
related parties and its terms, including fees and other amounts payable, may not be as favorable to
us as if it had been negotiated at arms length
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with an unaffiliated third party. In addition, the obligations of our Manager and its
officers and personnel to engage in other business activities, including for Invesco, may reduce
the time our Manager and its officers and personnel spend managing us.
As
of March 31, 2009, Invesco had $348.2 billion in managed
assets and our Manager managed approximately $177.0 billion of fixed
income and real estate investments, including approximately $18.8
billion of structured securities, consisting of approximately
$11.0 billion of Agency RMBS, $2.0 billion of non-Agency RMBS and $1.9 billion of CMBS and we will
compete for investment opportunities directly with our Manager or other clients of our Manager or
Invesco and its subsidiaries. A substantial number of separate
accounts managed by our Manager had limited exposure to our target assets.
In addition, in the future our Manager may have additional clients that compete directly with us
for investment opportunities, although Invesco has indicated to us that it expects that we will be
the only publicly traded REIT advised by our Manager or Invesco and
its subsidiaries whose investment strategy is to
invest substantially all of its capital in our target assets. Our Manager and Invesco Aim Advisors
have an investment allocation policy in place that is intended to enable us to share equitably with
the investment companies and institutional and separately managed accounts that effect securities
transactions in fixed income securities for which our Manager and Invesco Aim Advisors are
responsible in the selection of brokers, dealers and other trading counterparties. According to
this policy, investments may be allocated by taking into account factors, including but not limited
to investment objectives or strategies, the size of the available investment, cash availability and
cash flow expectations, and the tax implications of an investment. The investment allocation
policy also requires a fair and equitable allocation of financing opportunities over time among us
and other accounts. The investment allocation policy also includes other procedures intended to
prevent any of its other accounts from receiving favorable treatment in accessing investment
opportunities over any other account. The investment allocation policy may be amended by our
Manager and Invesco Aim Advisors at anytime without our consent. To the extent that a conflict arises with respect to the business of our
Manager or
Invesco Aim Advisors or us in such a way as to give rise to conflicts not currently
addressed by the investment allocation policy, our Manager and Invesco Aim Advisors may need to
refine its policy to address such situation. Our independent directors will review our Managers
and Invesco Aim Advisors compliance with the investment allocation policy. In addition, to avoid
any actual or perceived conflicts of interest with our Manager or Invesco Aim Advisors, a majority
of our independent directors will be required to approve an investment in any security structured
or issued by an entity managed by our Manager, Invesco Aim Advisors, or any of their affiliates, or
any purchase or sale of our assets by or to our Manager, Invesco Aim Advisors or their affiliates
or an entity managed by our Manager, Invesco Aim Advisors or its affiliates.
To the extent available to us, we may seek to finance our non-Agency RMBS and CMBS portfolios with
financings under the Legacy Securities Program, and may seek to acquire residential and commercial
mortgage loans with financing under the Legacy Loan Program. One of the ways we may access this
financing is by contributing our equity capital to one or more Legacy Securities or Legacy Loan
PPIFs that will be established and managed by our Manager or one of its affiliates. To date, the
terms of any equity investment that we would make to any Legacy Securities or Legacy Loan PPIFs
that may be established in the future have not yet been determined. However, we anticipate that
any such Legacy Securities or Legacy Loan PPIF would provide for the payment of fees to the
investment manager of the Legacy Securities or Legacy Loan PPIF, which we anticipate including base
management fees and the payment of an incentive fee to the investment manager after investors
receive minimum hurdle rates of return. Our Manager would have a conflict of interest in
recommending our participation in any Legacy Securities or Legacy Loan PPIFs it manages for the
fees payable to it by the Legacy Securities or Legacy Loan PPIF may be greater than the fees
payable to it by us under the management agreement. We have addressed this conflict by requiring
that the terms of any equity investment we make in any such Legacy Securities or Legacy Loan PPIF
be approved by our board of directors, including a majority of our independent directors. In
addition, we expect that any investment we make will be on terms that are no less favorable to us
than those made available to other third party institutional investors in the Legacy Securities or
Legacy Loan PPIF. Further in our management agreement, our Manager
has agreed not to charge the base
management fee payable in respect of any equity investment we may decide to make in a Legacy
Securities or Legacy Loan PPIF managed by our Manager or any of its affiliates. We will be responsible for any fees payable for any equity investment
we may decide to make in a Legacy Securities or Legacy Loan PPIF managed by an entity other than our Manager
or any of its affiliates.
We do not have a policy that expressly prohibits our directors, officers, security holders or
affiliates from engaging for their own account in business activities of the types conducted by us.
However, subject to Invescos allocation policy, our code of business conduct and ethics contains
a conflicts of interest policy that prohibits our directors, officers and personnel, as well as
employees of our Manager who provide services to us, from engaging in any transaction that involves
an actual conflict of interest with us.
Operating and Regulatory Structure
REIT Qualification
We intend to elect to qualify as a REIT under Sections 856 through 859 of the Internal Revenue
Code commencing with our taxable year ending on December 31, 2009. Our qualification as a REIT
depends upon our ability to meet on a continuing basis, through actual investment and operating
results, various complex requirements under the Internal Revenue Code relating to, among other
things, the sources of our gross income, the composition and values of our assets, our distribution
levels and the diversity of ownership of our shares. We believe that we have been organized in
conformity with the requirements for qualification and taxation as a REIT under the Internal
Revenue Code, and that our intended manner of operation will enable us to meet the requirements for
qualification and taxation as a REIT.
So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax
on our net taxable income we distribute currently to our stockholders. If we fail to qualify as a
REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be
subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying
as a REIT for the subsequent four taxable years following the year during which we lost our REIT
qualification. Even if we qualify for taxation as a REIT, we may be subject to certain
U.S. federal, state and local taxes on our income or property.
- 14 -
1940 Act Exemption
We intend to conduct our operations so that we are not required to register as an investment
company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as
any issuer that is or holds itself out as being engaged primarily in the business of investing,
reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment
company as any issuer that is engaged or proposes to engage in the business of investing,
reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment
securities having a value exceeding 40% of the value of the issuers total assets (exclusive of
U.S. Government securities and cash items) on an unconsolidated basis. Excluded from the term
investment securities, among other things, are U.S. Government securities and securities issued
by majority-owned subsidiaries that are not themselves investment companies and are not relying on
the exception from the definition of investment company set forth in Section 3(c)(1) or
Section 3(c)(7) of the 1940 Act. The company is organized as a holding company that conducts its
businesses primarily through the operating partnership. Both the company and the operating
partnership intend to conduct their operations so that they do not come within the definition of an
investment company because less than 40% of the value of their total assets on an unconsolidated
basis will consist of investment securities. The securities issued to our operating partnership
by any wholly-owned or majority-owned subsidiaries that we may form in the future that are excepted
from the definition of investment company based on Section 3(c)(1) or 3(c)(7) of the 1940 Act,
together with any other investment securities the operating partnership may own, may not have a
value in excess of 40% of the value of the operating partnerships total assets on an
unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance
with this test. In addition, we believe neither the company nor the operating partnership will be
considered an investment company under Section 3(a)(1)(A) of the 1940 Act because it will not
engage primarily or hold itself out as being engaged primarily in the business of investing,
reinvesting or trading in securities. Rather, through the operating partnerships wholly-owned or
majority-owned subsidiaries, the company and the operating
partnership will be primarily engaged in the
non-investment company businesses of these subsidiaries.
If the value of our operating partnerships investments in its subsidiaries that are excepted
from the definition of investment company by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together
with any other investment securities it owns, exceeds 40% of its total assets on an unconsolidated
basis, or if one or more of such subsidiaries fail to maintain an exception or exemption from the
1940 Act, we may have to register under the 1940 Act and could become subject to substantial
regulation with respect to our capital structure (including our ability to use leverage),
management, operations, transactions with affiliated persons (as defined in the 1940 Act),
portfolio composition, including restrictions with respect to diversification and industry
concentration, and other matters.
We expect IAS Asset I LLC to qualify for an exemption from registration under the 1940 Act as
an investment company pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for
entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate. In addition, certain of the operating partnerships
other subsidiaries that we may form in the future also may qualify for the Section 3(c)(5)(C)
exemption. This exemption generally requires that at least 55% of such subsidiaries portfolios must
be comprised of qualifying assets and 80% of each of their portfolios must be comprised of
qualifying assets and real estate-related assets under the 1940 Act. Qualifying assets for this
purpose include mortgage loans and other assets, such as whole pool Agency RMBS that the Securities
and Exchange Commission, or SEC, staff in various no-action letters has determined are the
functional equivalent of mortgage loans for the purposes of the
1940 Act. Real estate-related assets would include non-Agency
RMBS, CMBS, debt and equity securities of companies primarily engaged in real
estate businesses, agency partial pool certificates and securities
issued by pass-through entities of which substantially all of the
assets consist of qualifying assets and/or real estate-related assets. Although we intend to
monitor our portfolio periodically and prior to each investment acquisition, there can be no
assurance that we will be able to maintain this exemption from registration for each of these
subsidiaries.
We may in the future organize special purpose subsidiaries that will borrow under the TALF.
We anticipate that some of these subsidiaries may be organized to rely on the 1940 Act exemption
provided to certain structured financing vehicles by Rule 3a-7. To the extent that we organize
subsidiaries that rely on Rule 3a-7 for an exemption from the 1940 Act, these subsidiaries will
need to comply with the restrictions contained in this Rule. In certain circumstances, compliance
with Rule 3a-7 may require that the indenture governing the subsidiary include limitations on the types of assets the subsidiary may sell or acquire out of the proceeds of assets
that mature, are refinanced or otherwise sold, on the period of time during which such transactions
may occur, and on the level of transactions that may occur.
- 15 -
As
a result, we expect that IAS Asset I LLC and most of our other majority-owned subsidiaries
will not be relying on exemptions under either Section 3(c)(1) or 3(c)(7) of the 1940 Act.
Consequently, we expect that our interests in these subsidiaries (which we expect will constitute a
substantial majority of our assets) will not constitute investment securities. Consequently, we
expect to be able to conduct our operations so that we are not required to register as an
investment company under the 1940 Act.
Qualification for exemption from registration under the 1940 Act will limit our ability to
make certain investments. For example, these restrictions will limit the ability of our
subsidiaries to invest directly in mortgage-backed securities that represent less than the entire
ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain ABS
and real estate companies or in assets not related to real estate.
Restrictions on Ownership of Our Common Stock
To assist us in complying with the limitations on the concentration of ownership of a REIT
imposed by the Internal Revenue Code, our charter prohibits, with certain exceptions, any
stockholder from beneficially or constructively owning, applying certain attribution rules under
the Internal Revenue Code, more than 9.8% by value or number of shares, whichever is more
restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares,
whichever is more restrictive, of our outstanding capital stock. Our board of directors may, in
its sole discretion, waive the 9.8% ownership limit with respect to a particular stockholder if it
is presented with evidence satisfactory to it that such ownership will not then or in the future
jeopardize our qualification as a REIT. In addition, different ownership limits will apply to
Invesco. These ownership limits, which our board of directors has determined will not jeopardize
our REIT qualification, will allow Invesco to hold up to 25% (by value or by number of shares,
whichever is more restrictive) of our common stock or up to 25% (by value or by number of shares,
whichever is more restrictive) of our outstanding capital stock.
Our charter also prohibits any person from, among other things:
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beneficially or constructively owning shares of our capital stock that would result in
our being closely held under Section 856(h) of the Internal Revenue Code, or otherwise
cause us to fail to qualify as a REIT; and |
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transferring shares of our capital stock if such transfer would result in our capital
stock being owned by fewer than 100 persons. |
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In addition, our charter provides that any ownership or purported transfer of our capital
stock in violation of the foregoing restrictions will result in the shares so owned or transferred
being automatically transferred to a charitable trust for the benefit of a charitable beneficiary,
and the purported owner or transferee acquiring no rights in such shares. If a transfer to a
charitable trust would be ineffective for any reason to prevent a violation of the restriction, the
transfer resulting in such violation will be void from the time of such purported transfer.
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THE OFFERING
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Common stock offered by us
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shares (plus up to an additional
shares of our common stock that we may
issue and sell upon the exercise of the
underwriters over-allotment option). |
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Common stock to be
outstanding after this offering
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shares.(1) |
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Use of proceeds
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We intend to invest the net proceeds of
this offering and the concurrent private
placement of common stock and OP units to
the Invesco Purchaser in our target
assets. Our Manager will make determinations as to the percentage of our assets that will be invested in each of our target assets. Our decisions will depend on prevailing
market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. Until appropriate investments can
be identified, our Manager may invest
these funds in interest-bearing short-term
investments, including money market
accounts and/or funds, that are consistent
with our intention to qualify as a REIT.
These initial investments are expected to
provide a lower net return than we will
seek to achieve from investments in our
target assets. See Use of Proceeds. |
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Distribution policy
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We intend to make regular quarterly
distributions to holders of our common
stock. U.S. federal income tax law
generally requires that a REIT distribute
annually at least 90% of its REIT taxable
income, without regard to the deduction
for dividends paid and excluding net
capital gains, and that it pay tax at
regular corporate rates to the extent that
it annually distributes less than 100% of
its net taxable income. We generally
intend over time to pay quarterly
dividends in an amount equal to our net
taxable income. We plan to pay our first
dividend in respect of the period from the
closing of this offering through , 2009
which may be prior to the time that we
have fully invested the net proceeds from
this offering in investments in our target
assets. |
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Any distributions we make will be at the discretion of our board of
directors and will depend upon, among other things, our actual
results of operations. These results and our ability to pay
distributions will be affected by various factors, including the net
interest and other income from our portfolio, our operating expenses
and any other expenditures. For more information, see Distribution
Policy. |
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Proposed NYSE symbol
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IVR |
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Ownership and
transfer restrictions
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To assist us in complying with limitations on the
concentration of ownership of a REIT imposed by the
Internal Revenue Code and for other purposes, our charter generally
prohibits, among other prohibitions, any stockholder
from beneficially or constructively owning more than
9.8% by value or number of shares, whichever is more
restrictive, of our outstanding shares of common
stock, or 9.8% by value or number of shares,
whichever is more restrictive, of our outstanding
capital stock.
Different ownership limits will apply to Invesco and its direct
and indirect subsidiaries, including but not limited to our Manager and Invesco Investments (Bermuda) Ltd.
See Description of Capital
StockRestrictions on Ownership and Transfer. |
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Risk factors
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Investing in our common stock involves a high degree
of risk. You should carefully read and consider the
information set forth under the heading Risk
Factors beginning on page of this prospectus
and all other information in this prospectus before
investing in our common stock. |
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(1) |
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Includes shares of our common stock to be sold to Invesco, through our
Manager, in a concurrent private placement. Excludes (i) shares of our common stock that
we may issue and sell upon the exercise of the underwriters over-allotment option in full,
and (ii)shares that may be issued by us upon a redemption of all of the OP units to be
owned by Invesco, through Invesco Investments (Bermuda) Ltd., upon completion of this
offering. |
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Our Corporate Information
Our principal executive offices are located at 1555 Peachtree Street, NE, Atlanta, Georgia
30309. Our telephone number is (404) 892-0896. Our website is . The contents of our website
are not a part of this prospectus. The information on our website is not intended to form a part
of or be incorporated by reference into this prospectus.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider
the following risk factors and all other information contained in this prospectus before purchasing
our common stock. If any of the following risks occur, our business, financial condition or
results of operations could be materially and adversely affected. In that case, the trading price
of our common stock could decline, and you may lose some or all of your investment.
Risks Related to Our Relationship With Our Manager
We are dependent on our Manager and its key personnel for our success. In addition, we intend to
rely on our financing opportunities relating to our repurchase agreement financing that have been
and will be facilitated and/or provided by Invesco Aim Advisors, an affiliate of our Manager.
We have no separate facilities and are completely reliant on our Manager. We do not expect to
have any employees. Our executive officers are employees of Invesco. Our Manager has significant
discretion as to the implementation of our investment and operating policies and strategies.
Accordingly, we believe that our success will depend to a significant extent upon the efforts,
experience, diligence, skill and network of business contacts of the executive officers and key
personnel of our Manager. The executive officers and key personnel of our Manager will evaluate,
negotiate, close and monitor our investments; therefore, our success will depend on their continued
service. The departure of any of the executive officers or key personnel of our Manager could have
a material adverse effect on our performance. In addition, we offer no assurance that our Manager
will remain our investment manager or that we will continue to have access to our Managers
principals and professionals. The initial term of our management agreement with our Manager only
extends until the second anniversary of the closing of this offering, with automatic one-year
renewals thereafter. If the management agreement is terminated and no suitable replacement is
found to manage us, we may not be able to execute our business plan. Moreover, our Manager is not
obligated to dedicate certain of its personnel exclusively to us nor is it obligated to dedicate
any specific portion of its time to our business, and none of our Managers personnel are
contractually dedicated to us under our management agreement with our Manager.
To
date, we have signed master repurchase
agreements with financial
institutions, and we are in discussions with additional financial institutions for repurchase
facilities, in order to finance our acquisitions of Agency RMBS. Our Manager is in the process of
securing additional commitments on our behalf from a number of the counterparties with whom Invesco
Aim Advisors has long-standing relationships. Therefore, if the management agreement is
terminated, we cannot assure you that we would continue to have access to these sources of
financing for our investments.
Neither Invesco nor our Manager have any experience operating a REIT or managing a portfolio of our
target assets on a leveraged basis and we cannot assure you that our Managers past experience will
be sufficient to successfully manage our business as a REIT with such a portfolio.
Our Manager has never operated a REIT. The REIT provisions of the Internal Revenue Code are
complex, and any failure to comply with those provisions in a timely manner could prevent us from
qualifying as a REIT or force us to pay unexpected taxes and penalties. In such event, our net
income would be reduced and we could incur a loss. In addition, neither Invesco Aim Advisors nor
our Manager have experience managing a portfolio of our target assets using leverage.
There are conflicts of interest in our relationship with our Manager and Invesco, which could
result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with Invesco and our
Manager. Specifically, each of our officers and two of our directors, Mr. Armour and Ms. Dunn
Kelley, are employees of Invesco. Our Manager and our executive officers may have conflicts
between their duties to us and their duties to, and interests in, Invesco. Our Manager is not
required to devote a specific amount of time to our operations. As of
March 31, 2009, our Manager managed approximately
$177.0 billion of fixed income and real estate investments, including
approximately $18.8 billion
of structured securities consisting of approximately $11.0 billion of Agency
- 19 -
RMBS, $2.0 billion of non-Agency RMBS and $1.9 billion of CMBS, and we will compete for
investment opportunities directly with our Manager or other clients
of our Manager or Invesco and its subsidiaries. A
substantial number of separate accounts managed by our Manager
had limited exposure to our target assets. In addition,
in the future our Manager may have additional clients that compete directly with us for investment
opportunities, although Invesco has indicated to us that it expects that we will be the only
publicly traded REIT advised by our Manager or Invesco and its
subsidiaries whose investment strategy is to invest
substantially all of its capital in our target assets. Our Manager and Invesco Aim Advisors have
an investment and financing allocation policy in place intended to enable us to share equitably
with the investment companies and institutional and separately managed accounts that effect
securities transactions in fixed income securities for which our Manager and Invesco Aim Advisors
are responsible in the selection of brokers, dealers and other trading counterparties. Therefore,
we may compete with our Manager and Invesco Aim Advisors for investment or financing opportunities
sourced by our Manager and Invesco Aim Advisors and, as a result, we may either not be presented
with the opportunity or have to compete with our Manager and Invesco Aim Advisors to acquire these
investments or have access to these sources of financing. Our Manager and our executive officers
may choose to allocate favorable investments to Invesco or other clients of Invesco instead of to
us. Further, at times when there are turbulent conditions in the mortgage markets or distress in
the credit markets or other times when we will need focused support and assistance from our
Manager, Invesco or entities for which our Manager also acts as an investment manager will likewise
require greater focus and attention, placing our Managers resources in high demand. In such
situations, we may not receive the level of support and assistance that we may receive if we were
internally managed or if our Manager did not act as a manager for other entities. There is no
assurance that our Managers allocation policies that address some of the conflicts relating to our
access to investment and financing sources, which are described under ManagementConflicts of
Interest, will be adequate to address all of the conflicts that may arise.
We will pay our Manager substantial management fees regardless of the performance of our
portfolio. Our Managers entitlement to a management fee, which is not based upon performance
metrics or goals, might reduce its incentive to devote its time and effort to seeking investments
that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our
ability to make distributions to our stockholders and the market price of our common stock.
Concurrently with the completion of this offering, we will complete a private placement in
which we will sell shares of our common stock to Invesco, through our Manager, at $ per
share and OP units to Invesco, through Invesco Investments (Bermuda) Ltd., a wholly-owned
subsidiary of Invesco, at $ per unit, for an aggregate investment equal to % of the gross
proceeds raised in this offering, up to $ million. Upon completion of this offering and the
concurrent private placement, Invesco, through our Manager, will beneficially own % of our
common stock (or % if the underwriters fully exercise their option to purchase additional
shares). Assuming that all OP units are redeemed for an equivalent number of shares of our common
stock, Invesco, through the Invesco Purchaser, would beneficially own % of our outstanding
common stock upon completion of this offering and the concurrent private placement (or % if the
underwriters fully exercise their option to purchase additional shares). Each of our Manager and
Invesco Investments (Bermuda) Ltd. will agree that, for a period of one year after the date of this
prospectus, neither will, without the prior written consent of Credit Suisse Securities (USA) LLC
and Morgan Stanley & Co. Incorporated, dispose of or hedge any of the shares of our common stock or
OP units that it purchases in the concurrent private placement, subject to extension in certain
circumstances. Each of our Manager and Invesco Investments (Bermuda) Ltd. may sell any of these
securities at any time following the expiration of this one-year lock-up period. To the extent our
Manager or Invesco Investments (Bermuda) Ltd. sell some of these securities, its interests may be
less aligned with our interests.
Our
Manager would have a conflict in recommending
our participation in any Legacy Security or Legacy
Loan PPIFs it manages.
To the extent available to us, we may seek to finance our non-Agency RMBS and CMBS portfolios with
financings under the Legacy Securities Program, and may seek to acquire residential and commercial
mortgage loans with financing under the Legacy Loan Program. One of the ways we may access this
financing is by contributing our equity capital to one or more Legacy Securities or Legacy Loan
PPIFs that will be established and managed by our Manager or one of its affiliates. To date, the
terms of any equity investment that we would make to any Legacy Securities or Legacy Loan PPIFs
that may be established in the future have not yet been determined. However, we anticipate that
any such Legacy Securities or Legacy Loan PPIF would provide for the payment of fees to the
investment manager of the Legacy Securities or Legacy Loan PPIF, which we anticipate including base
management fees and the payment of an incentive fee to the investment manager after investors
receive minimum hurdle rates of return. Our Manager would have a conflict of interest in
recommending our participation in any Legacy Securities or Legacy Loan PPIFs it manages for the
fees payable to it by the Legacy Securities or Legacy Loan PPIF may be greater than the fees
payable to it by us under the management agreement.
The management agreement with our Manager was not negotiated on an arms-length basis and may not
be as favorable to us as if it had been negotiated with an unaffiliated third party and may be
costly and difficult to terminate.
Our executive officers and two of our five directors are employees of Invesco. Our management
agreement with our Manager was negotiated between related parties and its terms, including fees
payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third
party.
Termination of the management agreement with our Manager without cause is difficult and
costly. Our independent directors will review our Managers performance and the management fees
annually and, following the
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initial two-year term, the management agreement may be terminated annually upon the
affirmative vote of at least two-thirds of our independent directors based upon: (1) our Managers
unsatisfactory performance that is materially detrimental to us, or (2) a determination that the
management fees payable to our Manager are not fair, subject to our Managers right to prevent
termination based on unfair fees by accepting a reduction of management fees agreed to by at least
two-thirds of our independent directors. Our Manager will be provided 180 days prior notice of any
such termination. Additionally, upon such a termination, the management agreement provides that we
will pay our Manager a termination fee equal to three times the sum of the average annual
management fee received by our Manager during the prior 24-month period before such termination,
calculated as of the end of the most recently completed fiscal quarter. These provisions may
increase the cost to us of terminating the management agreement and adversely affect our ability to
terminate our Manager without cause.
Our Manager is only contractually committed to serve us until the second anniversary of the
closing of this offering. Thereafter, the management agreement is renewable for one-year terms;
provided, however, that our Manager may terminate the management agreement annually upon 180 days
prior notice. If the management agreement is terminated and no suitable replacement is found to
manage us, we may not be able to execute our business plan.
Pursuant to the management agreement, our Manager will not assume any responsibility other
than to render the services called for thereunder and will not be responsible for any action of our
board of directors in following or declining to follow its advice or recommendations. Our Manager
maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the
management agreement, our Manager, its officers, stockholders, members, managers, directors,
personnel, any person controlling or controlled by our Manager and any person providing
sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our
directors, our stockholders or any subsidiarys stockholders or partners for acts or omissions
performed in accordance with and pursuant to the management agreement, except because of acts
constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties
under the management agreement. In addition, we have agreed to indemnify our Manager, its
officers, stockholders, members, managers, directors, personnel, any person controlling or
controlled by our Manager and any person providing sub-advisory services to our Manager with
respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from
acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless
disregard of duties, performed in good faith in accordance with and pursuant to the management
agreement.
Our board of directors will approve very broad investment guidelines for our Manager and will not
approve each investment and financing decision made by our Manager.
Our Manager will be authorized to follow very broad investment guidelines. Our board of
directors will periodically review our investment guidelines and our investment portfolio but will
not, and will not be required to, review all of our proposed investments, except that an investment
in a security structured or issued by an entity managed by Invesco must be approved by a majority
of our independent directors prior to such investment. In addition, in conducting periodic
reviews, our board of directors may rely primarily on information provided to them by our Manager.
Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager
may be costly, difficult or impossible to unwind by the time they are reviewed by our board of
directors. Our Manager will have great latitude within the broad parameters of our investment
guidelines in determining the types and amounts of Agency RMBS, non-Agency RMBS, CMBS and mortgage
loans it may decide are attractive investments for us, which could result in investment returns
that are substantially below expectations or that result in losses, which would materially and
adversely affect our business operations and results. Further, decisions made and investments and
financing arrangements entered into by our Manager may not fully reflect the best interests of our
stockholders.
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Risks Related to Our Company
There can be no assurance that the actions of the U.S. Government, Federal Reserve, U.S. Treasury
and other governmental and regulatory bodies for the purpose of stabilizing the financial markets,
including the establishment of the TALF and the PPIP, or market response to those actions, will
achieve the intended effect, and our business may not benefit from these actions and further
government or market developments could adversely impact us.
In response to the financial issues
affecting the banking system and the financial markets and going concern threats to investment
banks and other financial institutions, the U.S. Government, Federal Reserve and U.S. Treasury and
other governmental and regulatory bodies have taken action to stabilize the financial markets. Significant measures
include: the enactment of the Emergency Economic Stabilization Act of 2008, or the EESA, to,
among other things, establish TARP; the enactment of the Housing and Economic Recovery Act of 2008,
or the HERA, which established a new regulator for Fannie Mae and Freddie Mac; and the establishment of the
TALF and the PPIP.
There can be no assurance
that the EESA, HERA, TALF, PPIP or other recent U.S. Government actions will have a beneficial impact
on the financial markets, including on current extreme levels of volatility. To the extent the
market does not respond favorably to these initiatives or these initiatives do not function as intended,
our business may not receive the anticipated positive impact from the legislation. There can also be no
assurance that we will be eligible to participate in any programs established by the U.S. Government such
as the TALF or the PPIP or, if we are eligible, that we will be able to utilize them successfully or at
all. In addition, because the programs are designed, in part, to restart the market for certain of our
target assets, the establishment of these programs may result in increased competition for attractive
opportunities in our target assets. It is also possible that our competitors may utilize the programs
which would provide them with attractive debt and equity capital funding from the U.S. Government. In
addition, the U.S. Government, the Federal Reserve, the U.S. Treasury and other governmental and
regulatory bodies have taken or are considering taking other actions to address the financial crisis. We cannot
predict whether or when such actions may occur, and such actions could have a dramatic impact on our
business, results of operations and financial condition.
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We may change any of our strategies, policies or procedures without stockholder consent.
We may change any of our strategies, policies or procedures with respect to investments,
acquisitions, growth, operations, indebtedness, capitalization and distributions at any time
without the consent of our stockholders, which could result in an investment portfolio with a
different risk profile. A change in our investment strategy may increase our exposure to interest
rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset
allocation could result in our making investments in asset categories different from those
described in this prospectus. These changes could adversely affect our financial condition,
results of operations, the market price of our common stock and our ability to make distributions
to our stockholders.
We have no operating history and may not be able to successfully operate our business or generate
sufficient revenue to make or sustain distributions to our stockholders.
We were organized in June 2008 and have no operating history. We have no assets and will
commence operations only upon completion of this offering. We cannot assure you that we will be
able to operate our business successfully or implement our operating policies and strategies as
described in this prospectus. The results of our operations depend on several factors, including
the availability of opportunities for the acquisition of assets, the level and volatility of
interest rates, the availability of adequate short and long-term financing, conditions in the
financial markets and economic conditions.
We are highly dependent on information systems and systems failures could significantly disrupt our
business, which may, in turn, negatively affect the market price of our common stock and our
ability to pay dividends.
Our business is highly dependent on communications and information systems of Invesco. Any
failure or interruption of Invescos systems could cause delays or other problems in our securities
trading activities, which could have a material adverse effect on our operating results and
negatively affect the market price of our common stock and our ability to pay dividends to our
stockholders.
Maintenance of our 1940 Act exemption imposes limits on our operations.
The company intends to conduct its operations so as not to become regulated as an investment
company under the 1940 Act. Because the company is a holding company that will conduct its
businesses through the operating partnership and its wholly-owned or majority-owned subsidiaries,
the securities issued by these subsidiaries that are excepted from the definition of investment
company under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other
investment securities the operating partnership may own, may not have a combined value in excess of
40% of the value of the operating partnerships total assets on an unconsolidated basis. This
requirement limits the types of businesses in which we may engage through our subsidiaries.
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IAS Asset I LLC and certain of the operating partnerships other subsidiaries that we may form
in the future intend to rely upon the exemption from registration as an investment company under
the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities
primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate. This exemption generally
requires that at least 55% of our
subsidiaries portfolios must be comprised of qualifying assets and 80% of each of their portfolios
must be comprised of qualifying assets and real estate-related assets under the 1940 Act.
In addition, if we organize special purpose subsidiaries in the future that will borrow under
the TALF, we anticipate that some of these subsidiaries may be organized to rely on the 1940 Act
exemption provided to certain structured financing vehicles by
Rule 3a-7. To the extent that we
organize subsidiaries that rely on Rule 3a-7 for an exemption from the 1940 Act, these subsidiaries
will need to comply with the restrictions contained in this Rule. In
general, Rule 3a-7 exempts
from the 1940 Act issuers that limit their activities as follows:
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the issuer issues securities the payment of which depends primarily on the cash flow from
eligible assets, which include many of the types of assets that we expect to acquire in our TALF
fundings, that by their terms convert into cash within a finite time period;
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the securities sold are fixed income securities rated investment grade by at least one
rating agency (fixed income securities which are unrated or rated below investment grade may be
sold to institutional accredited investors and any securities may be sold to qualified
institutional buyers and to persons involved in the organization or operation of the issuer);
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the issuer acquires and disposes of eligible assets (1) only in accordance with the
agreements pursuant to which the securities are issued, (2) so that the acquisition or disposition
does not result in a downgrading of the issuers fixed income securities and (3) the eligible
assets are not acquired or disposed of for the primary purpose of recognizing gains or decreasing
losses resulting from market value changes; and
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unless the issuer is issuing only commercial paper, the issuer appoints an independent
trustee, takes reasonable steps to transfer to the trustee an ownership or perfected security
interest in the eligible assets, and meets rating agency requirements for commingling of cash
flows.
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addition, in certain circumstances, compliance with Rule 3a-7 may also require that the
indenture governing the subsidiary include additional limitations on the types of assets the
subsidiary may sell or acquire out of the proceeds of assets that mature, are refinanced or
otherwise sold, on the period of time during which such transactions may occur, and on the level of
transactions that may occur. In light of the requirements of Rule 3a-7, our ability to manage assets held in a special purpose subsidiary that complies with Rule 3a-7 will be limited and we may not be able to purchase
or sell assets owned by that subsidiary when we would otherwise desire to do so, which could lead to losses.
There
can be no assurance that the laws and regulations governing the 1940
Act status of REITs, including the
Division of Investment Management of the SEC providing more specific or different guidance
regarding these exemptions, will not change in a manner that adversely affects our operations. If
we, the operating partnership or its subsidiaries fail to maintain an exception or
exemption from the 1940 Act, we could, among other things, be required either to (a) change the
manner in which we conduct our operations to avoid being required to register as an investment
company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise
choose to do so, or (c) register as an investment company, any of which could negatively affect the
value of our common stock, the sustainability of our business model, and our ability to make
distributions which could have an adverse effect on our business and the market price for our
shares of common stock.
Risks Related to Financing and Hedging
We expect to use leverage in executing our business strategy, which may adversely affect the return
on our assets and may reduce cash available for distribution to our stockholders, as well as
increase losses when economic conditions are unfavorable.
We expect to use leverage to finance our assets through borrowings from repurchase agreements,
to the extent available to us, borrowings under programs established by the U.S. Government such as the TALF, and other secured and unsecured forms of borrowing and, if available, we may make investments in funds that receive financing under the PPIP. Initially, we do not expect to
deploy leverage on our non-Agency
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RMBS, CMBS and mortgage loan assets, except with borrowings, to the extent available to us, under programs established by the
U.S. Government. Although we are not required to maintain any particular assets-to-equity leverage
ratio, the amount of leverage we may deploy for particular assets will depend upon our Managers
assessment of the credit and other risks of those assets. We expect, initially, that we may
deploy, on a debt-to-equity basis, up to seven to eight times leverage on our Agency RMBS assets
and approximately to times leverage on our non-Agency RMBS, CMBS and mortgage loan
assets. We consider these initial leverage ratios to be prudent for these asset classes.
The capital and credit markets have been experiencing extreme volatility and disruption since July 2007. In recent months, the volatility and disruption have reached unprecedented
levels. In a large number of cases, the markets have exerted downward pressure on stock prices and
credit capacity for issuers. Our access to capital depends upon a number of factors over which we
have little or no control, including:
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the markets perception of our growth potential; |
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our eligibility to participate in and access capital from programs established by the U.S. Government; |
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our current and potential future earnings and cash distributions; and |
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The current weakness in the financial markets, the residential and commercial mortgage markets
and the economy generally could adversely affect one or more of our potential lenders and could
cause one or more of our potential lenders to be unwilling or unable to provide us with financing
or to increase the costs of that financing. Current market conditions have affected different
types of financing for mortgage-related assets to varying degrees, with some sources generally
being unavailable, others being available but at a higher cost, while others being largely
unaffected. For example, in the repurchase agreement market, non-Agency RMBS have been more
difficult to finance than Agency RMBS. In connection with repurchase agreements, financing rates
and advance rates, or haircut levels, have also increased. Repurchase agreement counterparties
have taken these steps in order to compensate themselves for a perceived increased risk due to the
illiquidity of the underlying collateral. In some cases, margin calls have forced borrowers to
liquidate collateral in order to meet the capital requirements of these margin calls, resulting in
losses.
The return on our assets and cash available for distribution to our stockholders may be
reduced to the extent that market conditions prevent us from leveraging our assets or cause the
cost of our financing to increase relative to the income that can be derived from the assets
acquired. Our financing costs will reduce cash available for distributions to stockholders. We
may not be able to meet our financing obligations and, to the extent that we cannot, we risk the
loss of some or all of our assets to liquidation or sale to satisfy the obligations. We plan to
leverage our Agency RMBS through repurchase agreements. A decrease in the value of these
assets may lead to margin calls which we will have to satisfy. We may not have the funds available
to satisfy any such margin calls and may be forced to sell assets at significantly depressed prices
due to market conditions or otherwise, which may result in losses. The satisfaction of such margin
calls may reduce cash flow available for distribution to our stockholders. Any reduction in
distributions to our stockholders may cause the value of our common stock to decline.
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As a result of recent market events, including the contraction among and failure of certain
lenders, it may be more difficult for us to secure non-governmental financing.
Our results of operations are materially affected by conditions in the financial markets and
the economy generally. Recently, concerns over inflation, energy price volatility, geopolitical
issues, unemployment, the availability and cost of credit, the mortgage market and a declining real estate market have
contributed to increased volatility and diminished expectations for the economy and markets.
Dramatic declines in the residential and commercial real estate markets, with decreasing home
prices and increasing foreclosures and unemployment, have resulted in significant asset write-downs
by financial institutions, which have caused many financial institutions to seek additional
capital, to merge with other institutions and, in some cases, to fail. We rely on the availability
of repurchase agreement financing to acquire Agency RMBS on a
leveraged basis. Although, to the extent available to us, we
initially may use U.S. Government
financing to acquire our other target assets, we may in the future
seek private funding sources to acquire these assets as well. Institutions from which we seek to
obtain financing may have owned or financed residential or commercial mortgage loans, real
estate-related securities and real estate loans which have declined in value and caused losses as a
result of the recent downturn in the markets. Many lenders and institutional investors have
reduced and, in some cases, ceased to provide funding to borrowers, including other financial
institutions. If these conditions persist, these institutions may become insolvent. As a result
of recent market events, it may be more difficult for us to secure non-governmental financing as
there are fewer institutional lenders and those remaining lenders have tightened their lending
standards.
If a counterparty to our repurchase transactions defaults on its obligation to resell the
underlying security back to us at the end of the transaction term, or if the value of the
underlying security has declined as of the end of that term, or if we default on our obligations
under the repurchase agreement, we will lose money on our repurchase transactions.
When we engage in repurchase transactions, we generally sell securities to lenders (repurchase
agreement counterparties) and receive cash from these lenders. The lenders are obligated to resell
the same securities back to us at the end of the term of the transaction. Because the cash we
receive from the lender when we initially sell the securities to the lender is less than the value
of those securities (this difference is the haircut), if the lender defaults on its obligation to
resell the same securities back to us we may incur a loss on the transaction equal to the amount of
the haircut (assuming there was no change in the value of the securities). We would also lose
money on a repurchase transaction if the value of the underlying securities has declined as of the
end of the transaction term, as we would have to repurchase the securities for their initial value
but would receive securities worth less than that amount. Further, if we default on one of our
obligations under a repurchase transaction, the lender can terminate the transaction and cease
entering into any other repurchase transactions with us. We expect our repurchase agreements will
contain cross-default provisions, so that if a default occurs under any one agreement, the lenders
under our other agreements could also declare a default. Any losses we incur on our repurchase
transactions could adversely affect our earnings and thus our cash available for distribution to
our stockholders.
Our use of repurchase agreements to finance our Agency RMBS may give our lenders greater rights in
the event that either we or a lender files for bankruptcy.
Our
borrowings under repurchase agreements for our Agency RMBS may qualify for special treatment under the
U.S. Bankruptcy Code, giving our lenders the ability to avoid the automatic stay provisions of the
U.S. Bankruptcy Code and to take possession of and liquidate the assets that we have pledged under
their repurchase agreements without delay in the event that we file for bankruptcy. Furthermore,
the special treatment of repurchase agreements under the U.S. Bankruptcy Code may make it difficult
for us to recover our pledged assets in the event that a lender party to such agreement files for
bankruptcy. Therefore, our use of repurchase agreements to finance our investments exposes our
pledged assets to risk in the event of a bankruptcy filing by either a lender or us.
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We will depend on repurchase agreement financing to acquire Agency RMBS, and our inability to
access this funding for our Agency RMBS could have a material adverse effect on our results of
operations, financial condition and business.
We may use repurchase agreement financing as a strategy to increase the return on our assets.
However, we may not be able to achieve our desired leverage ratio for a number of reasons,
including if the following events occur:
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our lenders do not make repurchase agreement financing available to us at acceptable
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certain of our lenders exit the repurchase market; |
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our lenders require that we pledge additional collateral to cover our borrowings, which
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Our ability to fund our Agency RMBS may be impacted by our ability to secure
repurchase agreement financing on acceptable terms. We can provide no assurance
that lenders will be willing or able to provide us with sufficient financing. In addition, because
repurchase agreements are short term commitments of capital, lenders may respond to market
conditions making it more difficult for us to secure continued financing. During certain periods
of the credit cycle, lenders may curtail their willingness to provide financing.
If major market participants continue to exit the repurchase agreement financing business, the value of our Agency RMBS could be negatively impacted, thus reducing net stockholder equity, or book value. Furthermore, if many of our potential
lenders are unwilling or unable to provide us with repurchase agreement financing, we could be forced to sell our Agency RMBS assets
at an inopportune time when prices are depressed. In addition, if the regulatory capital
requirements imposed on our lenders change, they may be required to significantly increase the cost
of the financing that they provide to us. Our lenders also may revise their eligibility
requirements for the types of assets they are willing to finance or the terms of such financings,
based on, among other factors, the regulatory environment and their management of perceived risk,
particularly with respect to assignee liability. Moreover, the amount of financing we will receive
under our repurchase agreements will be directly related to the lenders valuation of the Agency RMBS
that secure the outstanding borrowings. Typically repurchase agreements grant the respective
lender the absolute right to reevaluate the market value of the assets that secure outstanding
borrowings at any time. If a lender determines in its sole discretion that the value of the assets
has decreased, it has the right to initiate a margin call. A margin call would require us to
transfer additional assets to such lender without any advance of funds from the lender for such
transfer or to repay a portion of the outstanding borrowings. Any such margin call could have a
material adverse effect on our results of operations, financial condition, business, liquidity and
ability to make distributions to our stockholders, and could cause the value of our common stock to
decline. We may be forced to sell assets at significantly depressed prices to meet such margin
calls and to maintain adequate liquidity, which could cause us to incur losses. Moreover, to the
extent we are forced to sell assets at such time, given market conditions, we may be selling at the
same time as others facing similar pressures, which could exacerbate a difficult market environment
and which could result in our incurring significantly greater losses on our sale of such assets.
In an extreme case of market duress, a market may not even be present for certain of our assets at
any price.
Our liquidity may also be adversely affected by margin calls under repurchase agreements for our
Agency RMBS because we will be dependent in part on the lenders valuation of the collateral
securing the financing. Any such margin call could harm our liquidity, results of operation,
and financial condition. Additionally, in order to obtain cash to satisfy a margin call, we may
be required to liquidate assets at a disadvantageous time, which could cause us to incur further
losses and adversely affect our results of operations and financial condition.
The current dislocations in the residential and commercial mortgage sector could cause one or
more of our potential lenders to be unwilling or unable to provide us with financing for our
target assets on attractive terms or at all.
The current dislocations in the residential mortgage sector have caused many lenders to
tighten their lending standards, reduce their lending capacity or exit the market altogether.
Further contraction among lenders, insolvency of lenders or other general market disruptions could
adversely affect one or more of our potential lenders and could cause one or more of our potential
lenders to be unwilling or unable to provide us with financing on attractive terms or at all. This
could increase our financing costs and reduce our access to liquidity. If one or more major market
participants fails or otherwise experiences a major liquidity crisis, as was the case for Bear
Stearns & Co. in March 2008 and Lehman Brothers Holdings Inc. in September 2008, it could
negatively impact the marketability of all fixed income securities, including our target assets,
and this could negatively impact the value of the assets we acquire, thus reducing our net book
value. Furthermore, if many of our potential lenders are unwilling or unable to provide us with
financing, we could be forced to sell our assets at an inopportune time when prices are depressed.
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The repurchase agreements that we will use to finance our investments may require us to provide
additional collateral and may restrict us from leveraging our assets as fully as desired.
We intend to use repurchase agreements to finance our acquisition of Agency RMBS. If the
market value of the Agency RMBS pledged or sold by us to a financing institution declines, we may
be required by the financing institution to provide additional collateral or pay down a portion of
the funds advanced, but we may not have the funds available to do so, which could result in
defaults. Posting additional collateral to support our credit will reduce our liquidity and limit
our ability to leverage our assets, which could adversely affect our business. In the event we do
not have sufficient liquidity to meet such requirements, financing institutions can accelerate
repayment of our indebtedness, increase interest rates, liquidate our collateral or terminate our
ability to borrow. Such a situation would likely result in a rapid deterioration of our financial
condition and possibly necessitate a filing for bankruptcy protection.
Further, financial institutions providing the repurchase facilities may require us to maintain
a certain amount of cash uninvested or to set aside non-levered assets sufficient to maintain a
specified liquidity position which would allow us to satisfy our collateral obligations. As a
result, we may not be able to leverage our assets as fully as we would choose, which could reduce
our return on equity. If we are unable to meet these collateral obligations, our financial
condition could deteriorate rapidly.
Lenders may require us to enter into restrictive covenants relating to our operations.
When we obtain financing, lenders could impose restrictions on us that would affect our
ability to incur additional debt, our capability to make distributions to stockholders and our
flexibility to determine our operating policies. Loan documents we execute may contain negative
covenants that limit, among other things, our ability to repurchase stock, distribute more than a
certain amount of our funds from operations, and employ leverage beyond certain amounts.
An increase in our borrowing costs relative to the interest we receive on investments in our target
assets may adversely affect our profitability, and our cash available for distribution to our
stockholders.
As our financings mature, we will be required either to enter into new borrowings or to sell
certain of our investments. An increase in short-term interest rates at the time that we seek to
enter into new borrowings would reduce the spread between our returns on our assets and the cost of
our borrowings. This would adversely affect our returns on our assets, which might reduce earnings
and, in turn, cash available for distribution to our stockholders.
We may use U.S. government equity and debt financing to acquire our non-Agency RMBS,
CMBS and mortgage loan portfolio.
We may seek to acquire non-Agency RMBS and CMBS with financings under the TALF.
On March 23, 2009, the U.S. Treasury announced preliminary plans to expand the TALF to
include non-Agency RMBS and CMBS that were originally rated AAA. On May 1, 2009, the
Federal Reserve published the terms for the expansion of TALF to CMBS and announced that,
beginning on June 16, 2009, up to $100 billion of TALF loans will be available to finance purchases
of CMBS created on or after January 1, 2009. Additionally, on May 19, 2009, the Federal Reserve announced that certain high quality legacy
CMBS, including CMBS issued before January 1, 2009, would become eligible collateral under the TALF starting in July 2009.
However, the TALF has not yet been expanded to cover
any other CMBS. In addition, to date, neither the FRBNY nor the U.S. Treasury has announced
how the TALF will be expanded to non-Agency RMBS. There can no assurance that the TALF
will be expanded to include these asset classes and, if so expanded, that we will be able to utilize
this program successfully or at all.
We may also seek to acquire non-Agency RMBS and CMBS with financings under the
Legacy Securities Program. However, the equity and debt financing under the Legacy Securities
Program are available to Legacy Securities PPIFs managed by investment managers who have
been selected as a Legacy Securities PPIF asset manager under the program. Invesco has applied
to serve as one of the investment managers for the Legacy Securities Program. However, there
can be no assurance that Invesco will be selected for this role.
We may also acquire residential and commercial mortgage loans with financing under the
Legacy Loan Program. However, the details of this program are still emerging and there can no
assurance that we will be eligible to participate in this program or, if we are eligible, that we will
be able to utilize it successfully or at all.
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Risks Relating to the PPIP and TALF
The
terms and conditions of the PPIP have not been finalized and there is
no assurance it will be finalized or that the
final terms will enable us to participate in the PPIP in a manner consistent with our investment
strategy.
While the U.S. Treasury and the FDIC have released a summary of proposed terms and conditions
for the PPIP, they have not released the final terms and conditions
governing these programs and there is no assurance that these
programs will be finalized. The
existing proposed terms and conditions do not address the specific terms and conditions relating
to: (1) the guaranteed debt to be issued by participants in the Legacy Loan Program, (2) the debt
financing from the U.S. Treasury in the Legacy Securities Program and (3) the warrants the U.S.
Treasury will receive under both programs. In addition, the U.S. Treasury and the FDIC have
reserved the right to modify the proposed terms of the PPIP. If final terms and conditions
are released, there is no assurance that we will be able to participate in the PPIP in a manner
acceptable to us consistent with our investment strategy.
The terms and conditions of the TALF may change, which could adversely affect our investments.
The terms and conditions of the TALF, including asset and borrower eligibility, could be
changed at any time. Any such modifications may adversely affect the market value of any of our
assets financed through the TALF or our ability to obtain additional TALF financing. If the TALF
is prematurely discontinued or reduced while our assets financed through the TALF are still
outstanding, there may be no market for these assets and the market value of these assets would be
adversely affected.
There is no assurance that we will be able to participate in the PPIP or, if we are able to
participate, that funding will be available.
Investors in the Legacy Loan Program must be pre-qualified by the FDIC. The FDIC has complete
discretion regarding the qualification of investors in the Legacy Loan Program and is under no
obligation to approve Invescos participation even if it meets all of the applicable criteria.
Requests for funding under the PPIP may surpass the amount of funding authorized by the U.S.
Treasury, resulting in an early termination of the PPIP. In addition, under the terms of the
Legacy Securities Program, the U.S. Treasury has the right to cease funding of committed but
undrawn equity capital and debt financing to a specific fund participating in the Legacy Securities
Program in its sole discretion. We may be unable to obtain capital and debt financing on similar
terms and such actions may adversely affect our ability to purchase eligible assets and may
otherwise affect expected returns on our investments.
There is no assurance that we will be able to obtain any TALF loans.
The
TALF is to be operated by the FRBNY. The FRBNY has complete discretion regarding the
extension of credit under the TALF and is under no obligation to make any loans to us even if we
meet all of the applicable criteria. Requests for TALF loans may surpass the amount of funding
authorized by the Federal Reserve and the U.S. Treasury, resulting in an early termination of the
TALF. Depending on the demand for TALF loans and the general state of the credit markets, the
Federal Reserve and the U.S. Treasury may decide to modify the terms and conditions of the TALF.
Such actions may adversely affect our ability to obtain TALF loans and use the loan leverage to
enhance returns, and may otherwise affect expected returns on our investments.
We could lose our eligibility as a TALF borrower, which would adversely affect our ability to
fulfill our investment objectives.
Any U.S. company is permitted to participate in the TALF, provided that it maintains an
account relationship with a primary dealer. An entity is a U.S. company for purposes of the TALF
if it is (1) a business entity or institution that is organized under the laws of the United States
or a political subdivision or territory thereof (U.S.-organized) and conducts significant
operations or activities in the United States, including any U.S.-organized subsidiary of such an
entity; (2) a U.S. branch or agency of a non-U.S. bank (other than a foreign central bank) that
maintains reserves with a Federal Reserve Bank; (3) a U.S. insured depository institution; or (4)
an investment fund that is U.S.-organized and managed by an investment manager that has its
principal place of business in the United States. An entity that satisfies any one of the
requirements above is a U.S. company regardless of whether it is controlled by, or managed by, a
company that is not U.S.-organized. Notwithstanding the foregoing, a U.S. company excludes any
entity, other than those described in clauses (2) and (3) above, that is controlled by a non-U.S.
government or is managed by an investment manager controlled by a non-U.S. government, other than
those described in clauses (2) and (3) above. For these purposes, a non-U.S. government controls a
company if, among other things, such non-U.S. government owns, controls, or holds with power to
vote 25% or more of a class of voting securities of the company. The application of these rules
under the TALF is not clear. For instance, it is uncertain how a change of control subsequent to a
stockholders purchase of shares of common stock which results in such shareholder being owned or
controlled by a non-U.S. government will be treated for purposes of the 25% limitation. If for any
reason we are deemed not to be eligible to participate in the TALF, all of our outstanding TALF
loans will become immediately due and payable and we will not be eligible to obtain future TALF
loans.
It
may be difficult to acquire sufficient amounts of eligible assets to
qualify to participate in
the PPIP or the TALF consistent with our investment strategy.
Assets to be used as collateral for PPIP and TALF loans must meet strict eligibility criteria
with respect to characteristics such as issuance date, maturity, and credit rating and with respect
to the origination date of the underlying collateral. These restrictions may limit the
availability of eligible assets, and it may be difficult to acquire sufficient amounts of assets to
obtain financing under the PPIP and TALF consistent with our investment strategy.
In the Legacy Loan Program, eligible financial institutions must consult with the FDIC before
offering an asset pool for sale and there is no assurance that a sufficient number of eligible
financial institutions will be willing to participate as sellers in the Legacy Loan Program.
Once an asset pool has been offered for sale by an eligible financial institution, the FDIC
will determine the amount of leverage available to finance the purchase of the asset pool.
There is no assurance that the amount of leverage available to finance the purchase of eligible
assets will be acceptable to our Manager.
The asset pools will be purchased through a competitive auction conducted by the FDIC. The
auction process may increase the price of these eligible asset pools.
Even if a fund in which we invest submits the
winning bid on an eligible asset pool at a price that is acceptable
to the fund, the selling financial
institution may refuse to sell to the fund the eligible asset pool at that price.
These
factors may limit the availability of eligible assets, and it may be
difficult to acquire
sufficient amounts of assets to obtain financing under the Legacy Loan Program consistent with our
investment strategy.
It
may be difficult to transfer any assets purchased using PPIP and TALF
funding.
Any
assets purchased using funding will be pledged to the FRBNY as collateral for the
TALF loans. Transfer or sale of any of these assets requires repayment
of the related TALF loan or
the consent of the FRBNY to assign obligations under the related TALF loan to the
applicable assignee. The FRBNY in its discretion may restrict or
prevent assignment of loan obligations to a third party, including a third party that meets the criteria of an eligible
borrower. In addition, the FRBNY will not consent to any assignments after the termination date
for making new loans, which is December 31, 2009, unless extended by the Federal Reserve.
Any
assets purchased using PPIP funding, to the extent available, will be pledged to the FDIC as collateral for their
guarantee under the Legacy Loan Program and to the U.S. Treasury as collateral for debt financing
under the Legacy Securities Program. Transfer or sale of any of these
assets requires repayment of the related loan or the consent of the FDIC or the U.S. Treasury to assign obligations
to the applicable assignee. The FDIC or the U.S. Treasury, each in its discretion, may restrict or
prevent assignment of obligations to a third party, including a third party that meets the
criteria for participation in the PPIP.
These restrictions may limit our ability to trade or otherwise dispose of our investments, and
may adversely affect our ability to take advantage of favorable market conditions and make
distributions to stockholders.
We may need to surrender eligible TALF assets to repay TALF loans at maturity.
Each TALF loan must be repaid within three to five years. We intend to invest in CMBS that do
not mature within the term of the TALF loan. If we do not have sufficient funds to repay interest
and principal on the related TALF loan at maturity and if these assets cannot be sold for an amount
equal to or greater than the amount owed on such loan, we must surrender the assets to the FRBNY in
lieu of repayment. If we are forced to sell any assets to repay a TALF loan, we may not be able to
obtain a favorable price. If we default on our obligation to pay a TALF loan and the FRBNY elects
to liquidate the assets used as collateral to secure such TALF loan, the proceeds from that sale
will be applied, first, to any enforcement costs, second, to unpaid principal and, finally, to
unpaid interest. Under the terms of the TALF, if assets are surrendered to the FRBNY in lieu of
repayment, all assets that collateralize that loan must be surrendered. In these situations, we
would forfeit any equity that we held in these assets.
FRBNY consent is required to exercise our voting rights on CMBS.
As a requirement of the TALF, we must agree not to exercise or refrain from exercising any
voting, consent or waiver rights under a CMBS without the consent of
the FRBNY. During the continuance
of a collateral enforcement event, the FRBNY will have the right to exercise voting rights in the
collateral.
We will be dependent on the activities of our primary dealers.
To obtain TALF loans, we must execute a customer agreement with at least one primary dealer
which will act on our behalf under the agreement with the FRBNY. The primary dealer will
submit aggregate loan request amounts on behalf of its customers in the form and manner specified
by the FRBNY. Each primary dealer is required to apply its internal customer identification
program and due diligence procedures to each borrower and represent that each borrower is an
eligible borrower for purposes of the TALF, and to provide the FRBNY with information sufficient to
describe the dealers customer risk assessment methodology. These customer agreements may impose
additional requirements that could affect our ability to obtain TALF loans. Each primary dealer is expected to have relationships with other TALF borrowers,
and a primary dealer may allocate more resources toward assisting other borrowers with whom it has
other business dealings. Primary dealers are also responsible for distributing principal and
interest after receipt thereof from The Bank of New York Mellon, as custodian for the TALF. Once
funds or collateral are transferred to a primary dealer or at the direction of a primary dealer,
neither the custodian nor the FRBNY has any obligation to account for whether the funds or
collateral are transferred to the borrower. We will therefore be exposed to bankruptcy risk of our
primary dealers.
We will be subject to interest rate risk, which can adversely affect our net income.
We
expect interest rates on fixed-rate TALF loans will be set at a premium over the then-current
three-year or five-year LIBOR swap rate. As a result, we may be exposed to
(1) timing risk between the dates on which payments are received
on assets financed through the TALF and the dates on which
interest payments are due on the TALF loans and (2) asset/liability repricing risk,
due to
differences in the dates and indices on which floating rates on the
financed assets and on the
related TALF loans are reset.
Our ability to receive the interest earnings may be limited.
We
expect to make interest payments on any TALF loan from the interest
paid to us on the assets
used as collateral for the TALF loan. To the extent
that we receive distributions from pledged assets in excess of our required interest payments on a TALF
loan during any loan year, the amount of excess interest we may
retain will be limited.
Under certain conditions, we may be required to provide full recourse for TALF loans or to make
indemnification payments.
To participate in the TALF, we must execute a customer agreement with a primary dealer
authorizing it, among other things, to act as our agent under TALF and to act on our behalf under
the agreement with the FRBNY and with The Bank of New York Mellon as administrator and as the
FRBNYs custodian of the CMBS. Under such agreements, we will be required to represent to the
primary dealer and to the FRBNY that, among other things, we are an eligible borrower and that the
CMBS that we pledge meet the TALF eligibility criteria. The FRBNY will have full recourse to us
for repayment of the loan for any breach of these representations. Further, the FRBNY may have
full recourse to us for repayment of a TALF loan if the eligibility criteria for collateral under
the TALF are considered continuing requirements and the pledged collateral no longer satisfies such
criteria. In addition, we will be required to pay to our primary dealers fees under the customer
agreements and to indemnify our primary dealers for certain breaches under the customer agreements
and to indemnify the FRBNY and its custodian for certain breaches under the agreement with the
FRBNY. Payments made to satisfy such full recourse requirements and indemnities could have a
material adverse effect on our net income and our distributions to
our stockholders, including any
proceeds of this offering that we have not yet invested in CMBS or
distributed to our stockholders.
Changes in accounting treatment may adversely affect our reported profitability.
In February 2008, the Financial Accounting Standards Board, or FASB, issued final guidance
regarding the accounting and financial statement presentation for transactions that involve the
acquisition of Agency RMBS from a counterparty and the subsequent financing of these securities
through repurchase agreements with the same counterparty. We will evaluate our position based on
the final guidance issued by FASB. If we do not meet the criteria under the final guidance to
account for the transactions on a gross basis, our accounting treatment would not affect the
economics of these transactions, but would affect how these transactions are reported on our
financial statements. If we are not able to comply with the criteria under this final guidance for
same party transactions we would be precluded from presenting Agency RMBS and the related
financings, as well as the related interest income and interest expense, on a gross basis on our
financial statements. Instead, we would be required to account for the purchase commitment and
related repurchase agreement on a net basis and record a forward commitment to purchase Agency RMBS
as a derivative instrument. Such forward commitments would be recorded at fair value with
subsequent changes in fair value recognized in earnings. Additionally, we would record the cash
portion of our investment in Agency RMBS as a mortgage related receivable from the counterparty on
our balance sheet. Although we would not expect this change in presentation to have a material
impact on our net income, it could have an adverse impact on our operations. It could have an
impact on our ability to include certain Agency RMBS purchased and simultaneously financed from the
same counterparty as qualifying real estate interests or real estate-related assets used to qualify
under the exemption to not have to register as an investment company under the 1940 Act. It could
also limit our investment opportunities as we may need to limit our purchases of Agency RMBS that
are simultaneously financed with the same counterparty.
We may enter into hedging transactions that could expose us to contingent liabilities in the
future.
Subject to maintaining our qualification as a REIT, part of our investment strategy will
involve entering into hedging transactions that could require us to fund cash payments in certain
circumstances (such as the early termination of the hedging instrument caused by an event of
default or other early termination event, or the decision by a counterparty to request margin
securities it is contractually owed under the terms of the hedging instrument). The amount due
would be equal to the unrealized loss of the open swap positions with the respective counterparty
and could also include other fees and charges. These economic losses will be reflected in our
results of operations, and our ability to fund these obligations will depend on the liquidity of
our assets and access to capital at the time, and the need to fund these obligations could
adversely impact our financial condition.
Hedging against interest rate exposure may adversely affect our earnings, which could reduce our
cash available for distribution to our stockholders.
Subject to maintaining our qualification as a REIT, we intend to pursue various hedging
strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging
activity will vary in scope based on the level
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and volatility of interest rates, the type of assets held and other changing market
conditions. Interest rate hedging may fail to protect or could adversely affect us because, among
other things:
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interest rate hedging can be expensive, particularly during periods of rising and
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available interest rate hedges may not correspond directly with the interest rate risk
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due to a credit loss, the duration of the hedge may not match the duration of the
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the amount of income that a REIT may earn from hedging transactions (other than hedging
transactions that satisfy certain requirements of the Internal Revenue Code or that are
done through a TRS) to offset interest rate losses is limited by U.S. federal tax
provisions governing REITs; |
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the credit quality of the hedging counterparty owing money on the hedge may be
downgraded to such an extent that it impairs our ability to sell or assign our side of the
hedging transaction; and |
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the hedging counterparty owing money in the hedging transaction may default on its
obligation to pay. |
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Our hedging transactions, which are intended to limit losses, may actually adversely affect
our earnings, which could reduce our cash available for distribution to our stockholders.
In addition, hedging instruments involve risk since they often are not traded on regulated
exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect to record keeping,
financial responsibility or segregation of customer funds and positions. Furthermore, the
enforceability of agreements underlying hedging transactions may depend on compliance with
applicable statutory and commodity and other regulatory requirements and, depending on the identity
of the counterparty, applicable international requirements. The business failure of a hedging
counterparty with whom we enter into a hedging transaction will most likely result in its default.
Default by a party with whom we enter into a hedging transaction may result in the loss of
unrealized profits and force us to cover our commitments, if any, at the then current market price.
Although generally we will seek to reserve the right to terminate our hedging positions, it may
not always be possible to dispose of or close out a hedging position without the consent of the
hedging counterparty and we may not be able to enter into an offsetting contract in order to cover
our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments
purchased or sold, and we may be required to maintain a position until exercise or expiration,
which could result in losses.
We may fail to qualify for hedge accounting treatment.
We intend to record derivative and hedging transactions in accordance with Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, or SFAS 133. Under these standards, we may fail to qualify for hedge accounting
treatment for a number of reasons, including if we use instruments that do not meet the SFAS 133
definition of a derivative (such as short sales), we fail to satisfy SFAS 133 hedge documentation
and hedge effectiveness assessment requirements or our instruments are not highly effective. If we
fail to qualify for hedge accounting treatment, our operating results may suffer because losses on
the derivatives that we enter into may not be offset by a change in the fair value of the related
hedged transaction.
We have limited experience in making critical accounting estimates, and our financial statements
may be materially affected if our estimates prove to be inaccurate.
Financial statements prepared in accordance with GAAP require the use of estimates, judgments
and assumptions that affect the reported amounts. Different estimates, judgments and assumptions
reasonably could be used that would have a material effect on the financial statements, and changes
in these estimates, judgments and assumptions are likely to occur from period to period in the
future. Significant areas of accounting requiring the application of managements judgment
include, but are not limited to (1) assessing the adequacy of the allowance for loan losses and (2)
determining the fair value of investment securities. These estimates, judgments and
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assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk
that charges to income will be required. In addition, because we have limited operating history in
some of these areas and limited experience in making these estimates, judgments and assumptions,
the risk of future charges to income may be greater than if we had more experience in these
areas. Any such charges could significantly harm our business, financial condition, results of
operations and the price of our securities. See Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical Accounting Policies for a discussion of the
accounting estimates, judgments and assumptions that we believe are the most critical to an
understanding of our business, financial condition and results of operations.
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Risks Related to Our Investments
We have not yet identified any specific investments in our target assets.
We have not yet identified any specific investments for our portfolio and, thus, you will not
be able to evaluate any proposed investments before purchasing shares of our common stock.
Additionally, our investments will be selected by our Manager and our stockholders will not have
input into such investment decisions. Both of these factors will increase the uncertainty, and
thus the risk, of investing in shares of our common stock.
Until appropriate investments can be identified, our Manager may invest the net proceeds of
this offering and the concurrent private offering in interest-bearing short-term investments,
including money market accounts and/or funds, that are consistent with our intention to qualify as
a REIT. These investments are expected to provide a lower net return than we will seek to achieve
from investments in our target assets. We expect to reallocate a portion of the net proceeds from
these offerings into a portfolio of our target assets within three months, subject to the
availability of appropriate investment opportunities, although Invesco has indicated to us that it
expects that we will be the only publicly traded REIT advised by our
Manager or Invesco and its subsidiaries whose
investment strategy is to invest substantially all of its capital in our target assets. Our
Manager intends to conduct due diligence with respect to each investment and suitable investment
opportunities may not be immediately available. Even if opportunities are available, there can be
no assurance that our Managers due diligence processes will uncover all relevant facts or that any
investment will be successful.
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We may allocate the net proceeds from this offering and the concurrent private placement to
investments with which you may not agree.
You will be unable to evaluate the manner in which the net proceeds of these offerings will be
invested or the economic merit of our expected investments and, as a result, we may use the net
proceeds from these offerings to invest in investments with which you may not agree. The failure
of our management to apply these proceeds effectively or find investments that meet our investment
criteria in sufficient time or on acceptable terms could result in unfavorable returns, could cause
a material adverse effect on our business, financial condition, liquidity, results of operations
and ability to make distributions to our stockholders, and could cause the value of our common
stock to decline.
Because assets we expect to acquire may experience periods of illiquidity, we may lose profits or
be prevented from earning capital gains if we cannot sell mortgage-related assets at an opportune
time.
We bear the risk of being unable to dispose of our target assets at advantageous times or in a
timely manner because mortgage-related assets generally experience periods of illiquidity,
including the recent period of delinquencies and defaults with respect to residential and
commercial mortgage loans. The lack of liquidity may result from the absence of a willing buyer or
an established market for these assets, as well as legal or contractual restrictions on resale or
the unavailability of financing for these assets. As a result, our ability to vary our portfolio
in response to changes in economic and other conditions may be relatively limited, which may cause
us to incur losses.
The lack of liquidity in our investments may adversely affect our business.
We expect that the assets that we will acquire will not be publicly traded. A portion of
these securities may be subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly-traded securities. The illiquidity of our investments may make it difficult
for us to sell such investments if the need or desire arises. In addition, if we are required to
liquidate all or a portion of our portfolio quickly, we may realize significantly less than the
value at which we have previously recorded our investments. Further, we may face other
restrictions on our ability to liquidate an investment in a business entity to the extent that we
or our Manager has or could be attributed with material, non-public information regarding such
business entity. As a result, our ability to vary our portfolio in response to changes in economic
and other conditions may be relatively limited, which could adversely affect our results of
operations and financial condition.
Our investments may be concentrated and will be subject to risk of default.
While we intend to diversify our portfolio of investments in the manner described in this
prospectus, we are not required to observe specific diversification criteria, except as may be set
forth in the investment guidelines adopted by our board of directors. Therefore, our investments
in our target assets may at times be concentrated in certain property types that are subject to
higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic
locations. To the extent that our portfolio is concentrated in any one region or type of security,
downturns relating generally to such region or type of security may result in defaults on a number
of our investments within a short time period, which may reduce our net income and the value of our
common stock and accordingly reduce our ability to pay dividends to our stockholders.
Difficult conditions in the mortgage, residential and commercial real estate markets may cause us
to experience market losses related to our holdings, and we do not expect these conditions to
improve in the near future.
Our results of operations are materially affected by conditions in the mortgage market, the
residential and commercial real estate markets, the financial markets and the economy generally.
Recently, concerns about the mortgage market and a declining real estate market, as well as
inflation, energy costs, geopolitical issues and the availability and cost of credit, have
contributed to increased volatility and diminished expectations for the economy and markets going
forward. The mortgage market has been severely affected by changes in the lending landscape and
there is no assurance that these conditions have stabilized or that they will not worsen.
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The
disruption in the mortgage market has an impact on new demand for homes, which will compress
the home ownership rates and weigh heavily on future home price performance. There is a strong
correlation between home price growth rates and mortgage loan delinquencies. The further
deterioration of the RMBS market may cause us to experience losses related to our assets and to
sell assets at a loss. Declines in the market values of our investments may adversely affect our
results of operations and credit availability, which may reduce earnings and, in turn, cash
available for distribution to our stockholders.
Dramatic declines in the residential and commercial real estate markets, with falling home
prices and increasing foreclosures and unemployment, have resulted in significant asset write-downs
by financial institutions, which have caused many financial institutions to seek additional
capital, to merge with other institutions and, in some cases, to fail. Institutions from which we
may seek to obtain financing may have owned or financed residential or commercial mortgage loans,
real estate-related securities and real estate loans, which have declined in value and caused them
to suffer losses as a result of the recent downturn in the residential and commercial mortgage
markets. Many lenders and institutional investors have reduced and, in some cases, ceased to
provide funding to borrowers, including other financial institutions. If these conditions persist,
these institutions may become insolvent or tighten their lending standards, which could make it
more difficult for us to obtain financing on favorable terms or at all. Our profitability may be
adversely affected if we are unable to obtain cost-effective financing for our assets.
Continued adverse developments in the residential and commercial mortgage markets, including recent
increases in defaults, credit losses and liquidity concerns, could make it difficult for us to
borrow money to acquire our target assets on a leveraged basis, on attractive terms or at all,
which could adversely affect our profitability.
Since mid-2008, there have been several announcements of proposed mergers, acquisitions or
bankruptcies of investment banks and commercial banks that have historically acted as repurchase
agreement counterparties. This has resulted in a fewer number of potential repurchase agreement
counterparties operating in the market. In addition, many commercial banks, investment banks and
insurance companies have announced extensive losses from exposure to the residential and commercial
mortgage markets. These losses have reduced financial industry capital, leading to reduced
liquidity for some institutions. Many of these institutions may have
owned or financed assets which have declined in value and caused them to suffer losses, enter
bankruptcy proceedings, further tighten their lending standards or increase the amount of equity
capital or haircut required to obtain financing. These difficulties have resulted in part from
declining markets for their mortgage loans as well as from claims for repurchases of mortgage loans
previously sold under provisions that require repurchase in the event of early payment defaults or
for breaches of representations regarding loan quality. In addition, a rising interest rate
environment and declining real estate values may decrease the number of borrowers seeking or able
to refinance their mortgage loans, which would result in a decrease in overall originations. In
addition, the Federal Reserves program to purchase Agency RMBS could cause an increase in the
price of Agency RMBS, which would negatively impact the net interest margin with respect to Agency
RMBS we expect to purchase. The general market conditions discussed above may make it difficult or
more expensive for us to obtain financing on attractive terms or at all, and our profitability may
be adversely affected if we were unable to obtain cost-effective financing for our investments.
We operate in a highly competitive market for investment opportunities and competition may limit
our ability to acquire desirable investments in our target assets and could also affect the pricing
of these securities.
We operate in a highly competitive market for investment opportunities. Our profitability
depends, in large part, on our ability to acquire our target assets at attractive prices. In
acquiring our target assets, we will compete with a variety of institutional investors, including
other REITs, specialty finance companies, public and private funds (including other funds managed
by Invesco), commercial and investment banks, commercial finance and insurance companies and other
financial institutions. Many of our competitors are substantially larger and have considerably
greater financial, technical, marketing and other resources than we do. Several other REITs have
recently raised, or are expected to raise, significant amounts of capital, and may have investment
objectives that overlap with ours, which may create additional competition for investment
opportunities. Some competitors may have a lower cost of funds and access to funding sources that
may not be available to us, such as funding from the U.S. Government, if we are not eligible to
participate in programs established by the U.S. Government. Many of our competitors are not
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subject to the operating constraints associated with REIT tax compliance or maintenance of an
exemption from the 1940 Act. In addition, some of our competitors may have higher risk tolerances
or different risk assessments, which could allow them to consider a wider variety of investments
and establish more relationships than us. Furthermore, competition for investments in our target
assets may lead to the price of such assets increasing, which may further limit our ability to
generate desired returns. We cannot assure you that the competitive pressures we face will not
have a material adverse effect on our business, financial condition and results of operations.
Also, as a result of this competition, desirable investments in our target assets may be limited in
the future and we may not be able to take advantage of attractive investment opportunities from
time to time, as we can provide no assurance that we will be able to identify and make investments
that are consistent with our investment objectives. In addition, the Federal Reserves program to
purchase Agency RMBS could cause an increase in the price of Agency RMBS, which would negatively
impact the net interest margin with respect to Agency RMBS we expect to purchase.
We
may acquire non-Agency RMBS collateralized by subprime and Alt A mortgage loans, which are subject to
increased risks.
We may acquire non-Agency RMBS backed by collateral pools of mortgage loans that have been
originated using underwriting standards that are less restrictive than those used in underwriting
prime mortgage loans and Alt A mortgage loans. These lower standards include mortgage loans
made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of
the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made
to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that
represents a large portion of their income and mortgage loans made to borrowers whose income is not
required to be disclosed or verified. Due to economic conditions, including increased interest
rates and lower home prices, as well as aggressive lending practices, subprime mortgage loans have
in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and
they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that
are higher, and that may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner. Thus, because of the higher delinquency rates and
losses associated with subprime mortgage loans, the performance of non-Agency RMBS backed by
subprime mortgage loans that we may acquire could be correspondingly adversely affected, which
could adversely impact our results of operations, financial condition and business.
The mortgage loans that we will acquire, and the mortgage and other loans underlying the non-Agency
RMBS and CMBS that we will acquire, are subject to defaults, foreclosure timeline extension, fraud
and commercial and residential price depreciation, and unfavorable modification of loan principal amount, interest rate
and amortization of principal, which could result in losses to us.
Residential mortgage loans are secured by single family residential property and are subject
to risks of delinquency and foreclosure and risks of loss. The ability of a borrower to repay a
loan secured by a residential property typically is dependent upon the income or assets of the
borrower. A number of factors, including a general economic downturn, acts of God, terrorism,
social unrest and civil disturbances, may impair borrowers abilities to repay their loans. In
addition, we intend to acquire non-Agency RMBS, which are backed by residential real property but,
in contrast to Agency RMBS, their principal and interest are not guaranteed by federally chartered
entities such as Fannie Mae and Freddie Mac and, in the case of Ginnie Mae, the U.S. Government.
The ability of a borrower to repay these loans or other financial assets is dependent upon the
income or assets of these borrowers.
CMBS are secured by a single commercial mortgage loan or a pool of commercial mortgage loans.
Accordingly, the CMBS we invest in is subject to all of the risks of the respective underlying
commercial mortgage loans. Commercial mortgage loans are secured by multifamily or commercial
property and are subject to risks of delinquency and foreclosure, and risks of loss that are
greater than similar risks associated with loans made on the security of single-family residential
property. The ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property rather than upon
the existence of independent income or assets of the borrower. If the net operating income of the
property is reduced, the borrowers ability to repay the loan may be impaired.
In the event of any default under a mortgage loan held directly by us, we will bear a risk of
loss of principal to the extent of any deficiency between the value of the collateral and the
principal and accrued interest of the mortgage loan, which could have a material adverse effect on
our cash flow from operations. In the event of the
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bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to
be secured only to the extent of the value of the underlying collateral at the time of bankruptcy
(as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to
the avoidance powers of the bankruptcy trustee or debtor in possession to the extent the lien is
unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy
process which could have a substantial negative effect on our anticipated return on the foreclosed
mortgage loan.
Agency RMBS are subject to risks particular to investments secured by mortgage loans on residential
real property.
Our investments in Agency RMBS will be subject to the risks of defaults, foreclosure timeline
extension, fraud and home price depreciation and unfavorable modification of loan principal amount,
interest rate and amortization of principal, accompanying the underlying residential mortgage
loans. The ability of a borrower to repay a mortgage loan secured by a residential property is
dependent upon the income or assets of the borrower. A number of factors may impair borrowers
abilities to repay their loans, including:
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acts of God, including earthquakes, floods and other natural disasters, which may result
in uninsured losses; |
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acts of war or terrorism, including the consequences of terrorist attacks, such as those
that occurred on September 11, 2001; |
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adverse changes in national and local economic and market conditions; |
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changes in governmental laws and regulations, fiscal policies and zoning ordinances and
the related costs of compliance with laws and regulations, fiscal policies and ordinances; |
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costs of remediation and liabilities associated with environmental conditions such as
indoor mold; and |
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In the event of defaults on the residential mortgage loans that underlie our investments in
Agency RMBS and the exhaustion of any underlying or any additional credit support, we may not
realize our anticipated return on our investments and we may incur a loss on these investments.
The
commercial mortgage loans we expect to acquire and the commercial mortgage loans underlying the CMBS we may acquire
will be subject to defaults, foreclosure timeline extension, fraud and home price depreciation and
unfavorable modification of loan principal amount, interest rate and amortization of principal.
Commercial mortgage loans are secured by multifamily or commercial property and are subject to
risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks
associated with loans made on the security of single-family residential property. The ability of a
borrower to repay a loan secured by an income-producing property typically is dependent primarily
upon the successful operation of such property rather than upon the existence of independent income
or assets of the borrower. If the net operating income of the property is reduced, the borrowers
ability to repay the loan may be impaired. Net operating income of an income-producing property can
be affected by, among other things,
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tenant mix; |
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success of tenant businesses; |
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property management decisions; |
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property location and condition; |
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competition from comparable types of properties; |
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changes in laws that increase operating expenses or limit rents that may be charged; |
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any need to address environmental contamination at the property or the occurrence of any
uninsured casualty at the property; |
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changes in national, regional or local economic conditions and/or specific industry
segments; |
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declines in regional or local real estate values; |
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declines in regional or local rental or occupancy rates; |
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increases in interest rates; |
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real estate tax rates and other operating expenses; |
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changes in governmental rules, regulations and fiscal policies, including environmental
legislation; and |
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acts of God, terrorist attacks, social unrest and civil disturbances. |
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In the event of any default under a mortgage loan held directly by us, we will bear a risk of
loss of principal to the extent of any deficiency between the value of the collateral and the
principal and accrued interest of the mortgage loan, which could have a material adverse effect on
our cash flow from operations and limit amounts available for distribution to our stockholders. In
the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be
deemed to be secured only to the extent of the value of the underlying collateral at the time of
bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be
subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the
lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and
lengthy process, which could have a substantial negative effect on our anticipated return on the
foreclosed mortgage loan.
Our
investments in CMBS are generally subject to losses.
We may acquire CMBS. In general, losses on a mortgaged property securing a mortgage loan
included in a securitization will be borne first by the equity holder of the property, then by a
cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if
any, then by the first loss subordinated security holder (generally, the B-Piece buyer) and
then by the holder of a higher-rated security. In the event of default and the exhaustion of any
equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of
securities junior to those in which we invest, we will not be able to recover all of our investment
in the securities we purchase. In addition, if the underlying mortgage portfolio has been
overvalued by the originator, or if the values subsequently decline and, as a result, less
collateral is available to satisfy interest and principal payments due on the related MBS. The
prices of lower credit quality securities are generally less sensitive to interest rate changes
than more highly rated investments, but more sensitive to adverse economic downturns or individual
issuer developments.
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We may not control the special servicing of the mortgage loans included in the CMBS in which we
invest and, in such cases, the special servicer may take actions that could adversely affect our
interests.
With respect to each series of CMBS in which we invest, overall control over the special
servicing of the related underlying mortgage loans will be held by a directing certificateholder
or a controlling class representative, which is appointed by the holders of the most subordinate
class of CMBS in such series. Since we will focus on
acquiring classes of existing series of CMBS originally rated AAA, we will not have the right to
appoint the directing certificateholder. In connection with the servicing of the specially
serviced mortgage loans, the related special servicer may, at the direction of the directing
certificateholder, take actions with respect to the specially serviced mortgage loans that could
adversely affect our interests.
If our Manager overestimates the loss-adjusted yields of our CMBS investments, we may experience
losses.
Our Manager will value our potential CMBS investments based on loss-adjusted yields, taking
into account estimated future losses on the mortgage loans included in the securitizations pool of
loans, and the estimated impact of these losses on expected future cash flows. Based on these loss
estimates, our Manager will either adjust the pool composition accordingly through loan removals
and other credit enhancement mechanisms or leave loans in place and negotiate for a price
adjustment. Our Managers loss estimates may not prove accurate, as actual results may vary from
estimates. In the event that our Manager overestimates the pool level losses relative to the price
we pay for a particular CMBS investment, we may experience losses with respect to such investment.
The B-Notes we may acquire may be subject to additional risks related to the privately negotiated
structure and terms of the transaction, which may result in losses to us.
We may acquire B-Notes. A B-Note is a mortgage loan typically (1) secured by a first mortgage
on a single large commercial property or group of related properties and (2) subordinated to an
A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower
defaults, there may not be sufficient funds remaining for B-Note holders after payment to the
A-Note holders. However, because each transaction is privately negotiated, B-Notes can vary in
their structural characteristics and risks. For example, the rights of holders of B-Notes to
control the process following a borrower default may vary from transaction to transaction.
Further, B-Notes typically are secured by a single property and so reflect the risks associated
with significant concentration. Significant losses related to our B-Notes would result in
operating losses for us and may limit our ability to make distributions to our stockholders.
Our mezzanine loan assets will involve greater risks of loss than senior loans secured by
income-producing properties.
We may acquire mezzanine loans, which take the form of subordinated loans secured by second
mortgages on the underlying property or loans secured by a pledge of the ownership interests of
either the entity owning the property or a pledge of the ownership interests of the entity that
owns the interest in the entity owning the property. These types of assets involve a higher degree
of risk than long-term senior mortgage lending secured by income-producing real property, because
the loan may become unsecured as a result of foreclosure by the senior lender. In the event of a
bankruptcy of the entity providing the pledge of its ownership interests as security, we may not
have full recourse to the assets of such entity, or the assets of the entity may not be sufficient
to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the
senior debt. As a result, we may not recover some or all of our initial expenditure. In addition,
mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in
less equity in the property and increasing the risk of loss of principal. Significant losses
related to our mezzanine loans would result in operating losses for us and may limit our ability to
make distributions to our stockholders.
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Bridge loans will involve a greater risk of loss than traditional investment-grade mortgage loans
with fully insured borrowers.
We may acquire bridge loans secured by first lien mortgages on a property to borrowers who are
typically seeking short-term capital to be used in an acquisition, construction or redevelopment of
a property. The borrower has usually identified an undervalued asset that has been under-managed
and/or is located in a recovering market. If the market in which the asset is located fails to
recover according to the borrowers projections, or if the borrower fails to improve the quality of
the assets management and/or the value of the asset, the borrower may not receive a sufficient
return on the asset to satisfy the bridge loan, and we bear the risk that we may not recover some
or all of our initial expenditure.
In addition, borrowers usually use the proceeds of a conventional mortgage to repay a bridge
loan. Bridge loans therefore are subject to risks of a borrowers inability to obtain permanent
financing to repay the bridge loan. Bridge loans are also subject to risks of borrower defaults,
bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard
insurance. In the event of any default under bridge loans held by us, we bear the risk of loss of
principal and non-payment of interest and fees to the extent of any deficiency between the value of
the mortgage collateral and the principal amount of the bridge loan. To the extent we suffer such
losses with respect to our bridge loans, the value of our company and the price of our shares of
common stock may be adversely affected.
Increases in interest rates could adversely affect the value of our investments and cause our
interest expense to increase, which could result in reduced earnings or losses and negatively
affect our profitability as well as the cash available for distribution to our stockholders.
We expect to invest in Agency RMBS, non-Agency RMBS, CMBS and mortgage loans. In a normal
yield curve environment, an investment in such assets will generally decline in value if long-term
interest rates increase. Declines in market value may ultimately reduce earnings or result in
losses to us, which may negatively affect cash available for distribution to our stockholders.
A significant risk associated with our target assets is the risk that both long-term and
short-term interest rates will increase significantly. If long-term rates increased significantly,
the market value of these investments would decline, and the duration and weighted average life of
the investments would increase. We could realize a loss if the securities were sold. At the same
time, an increase in short-term interest rates would increase the amount of interest owed on the
repurchase agreements we may enter into to finance the purchase of Agency RMBS.
Market values of our investments may decline without any general increase in interest rates
for a number of reasons, such as increases or expected increases in defaults, or increases or
expected increases in voluntary prepayments for those investments that are subject to prepayment
risk or widening of credit spreads.
In addition, in a period of rising interest rates, our operating results will depend in large
part on the difference between the income from our assets and financing costs. We anticipate that,
in most cases, the income from such assets will respond more slowly to interest rate fluctuations
than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term
interest rates, may significantly influence our net income. Increases in these rates will tend to
decrease our net income and market value of our assets.
An increase in interest rates may cause a decrease in the volume of certain of our target assets
which could adversely affect our ability to acquire target assets that satisfy our investment
objectives and to generate income and pay dividends.
Rising interest rates generally reduce the demand for mortgage
loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated
may affect the volume of our target assets available to us, which could adversely affect our
ability to acquire assets that satisfy our investment objectives. Rising interest rates may also
cause our target assets that were issued prior to an interest rate increase to provide yields that
are below prevailing market interest rates. If rising interest rates cause us to be unable to
acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our
ability to satisfy our investment objectives and to generate income and pay dividends may be
materially and adversely affected.
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The relationship between short-term and longer-term interest rates is often referred to as the
yield curve. Ordinarily, short-term interest rates are lower than longer-term interest rates. If
short-term interest rates rise disproportionately relative to longer-term interest rates (a
flattening of the yield curve), our borrowing costs may increase more rapidly than the interest
income earned on our assets. Because we expect our investments, on average, generally will bear
interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend
to decrease our net income and the market value of our net assets. Additionally, to the extent
cash flows from investments that return scheduled and unscheduled principal are reinvested, the
spread between the yields on the new investments and available borrowing rates may decline, which
would likely decrease our net income. It is also possible that short-term interest rates may
exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may
exceed our interest income and we could incur operating losses.
Interest rate fluctuations may adversely affect the level of our net income and the value of our
assets and common stock.
Interest rates are highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and other factors beyond
our control. Interest rate fluctuations present a variety of risks, including the risk of a
narrowing of the difference between asset yields and borrowing rates, flattening or inversion of
the yield curve and fluctuating prepayment rates, and may adversely affect our income and the value
of our assets and common stock.
Interest rate mismatches between our Agency RMBS backed by ARMs or hybrid ARMs and our borrowings used to
fund our purchases of these assets may reduce our net interest income and cause us to suffer a loss
during periods of rising interest rates.
We expect to fund most of our investments in Agency RMBS with borrowings that have interest rates
that adjust more frequently than the interest rate indices and repricing terms of Agency RMBS backed by
ARMs or hybrid ARMs. Accordingly, if short-term interest rates increase, our borrowing costs may
increase faster than the interest rates on Agency RMBS backed by ARMs or hybrid ARMs adjust. As a result,
in a period of rising interest rates, we could experience a decrease in net income or a net loss.
In most cases, the interest rate indices and repricing terms of Agency RMBS backed by ARMs or hybrid
ARMs and our borrowings will not be identical, thereby potentially creating an interest rate
mismatch between our investments and our borrowings. While the historical spread between relevant
short-term interest rate indices has been relatively stable, there have been periods when the
spread between these indices was volatile. During periods of changing interest rates, these
interest rate index mismatches could reduce our net income or produce a net loss, and adversely
affect the level of our dividends and the market price of our common stock.
In addition, Agency RMBS backed by ARMs or hybrid ARMs will typically be subject to lifetime interest
rate caps which limit the amount an interest rate can increase through the maturity of the Agency RMBS.
However, our borrowings under repurchase agreements typically will not be subject to similar
restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates
paid on our borrowings could increase without limitation while caps could limit the interest rates
on these types of Agency RMBS. This problem is magnified for Agency RMBS backed by ARMs or hybrid ARMs that are
not fully indexed. Further, some Agency RMBS backed by ARMs or hybrid ARMs may be subject to periodic
payment caps that result in a portion of the interest being deferred and added to the principal
outstanding. As a result, we may receive less cash income on these types of Agency RMBS than we need to
pay interest on our related borrowings. These factors could reduce our net interest income and
cause us to suffer a loss during periods of rising interest rates.
Because we may acquire fixed-rate securities, an increase in interest rates on our borrowings may
adversely affect our book value.
Increases in interest rates may negatively affect the market value of our assets. Any
fixed-rate securities we invest in generally will be more negatively affected by these increases
than adjustable-rate securities. In accordance with accounting rules, we will be required to
reduce our book value by the amount of any decrease in the market value of our assets that are
classified for accounting purposes as available-for-sale. We will be required to evaluate our
assets on a quarterly basis to determine their fair value by using third party bid price
indications provided by
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dealers who make markets in these securities or by third-party pricing
services. If the fair value of a security is not available from a dealer or third-party pricing
service, we will estimate the fair value of the security using a variety of methods including, but
not limited to, discounted cash flow analysis, matrix pricing, option-adjusted spread models and
fundamental analysis. Aggregate characteristics taken into consideration include, but are not
limited to, type of collateral, index, margin, periodic cap, lifetime cap, underwriting standards,
age and delinquency experience. However, the fair value reflects estimates and may not be
indicative of the amounts we would receive in a current market exchange. If we determine that an
agency security is other-than-temporarily impaired, we would be required to reduce the value of
such agency security on our balance sheet by recording an impairment charge in our income statement
and our stockholders equity would be correspondingly reduced. Reductions in stockholders equity
decrease the amounts we may borrow to purchase additional target assets, which could restrict our
ability to increase our net income.
We may experience a decline in the market value of our assets.
A decline in the market value of our assets may require us to recognize an
other-than-temporary impairment against such assets under GAAP if we were to determine that, with
respect to any assets in unrealized loss positions, we do not have the ability and intent to hold
such assets to maturity or for a period of time sufficient to allow for recovery to the amortized
cost of such assets. If such a determination were to be made, we would recognize unrealized losses
through earnings and write down the amortized cost of such assets to a new cost basis, based on the
fair market value of such assets on the date they are considered to be other-than-temporarily
impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent
disposition or sale of such assets could further affect our future losses or gains, as they are
based on the difference between the sale price received and adjusted amortized cost of such assets
at the time of sale.
Some of our portfolio investments will be recorded at fair value and, as a result, there will be
uncertainty as to the value of these investments.
Some of our portfolio investments will be in the form of securities that are not publicly
traded. The fair value of securities and other investments that are not publicly traded may not be
readily determinable. We will value these investments quarterly at fair value, as determined in
accordance with Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value
Measurements, or SFAS 157, which may include unobservable inputs. Because such valuations are
subjective, the fair value of certain of our assets may fluctuate over short periods of time and
our determinations of fair value may differ materially from the values that would have been used if
a ready market for these securities existed. The value of our common stock could be adversely
affected if our determinations regarding the fair value of these investments were materially higher
than the values that we ultimately realize upon their disposal.
Prepayment rates may adversely affect the value of our investment portfolio.
Pools of residential mortgage loans underlie the
RMBS that we will
acquire. In the case of residential mortgage loans, there are seldom any restrictions on borrowers
abilities to prepay their loans. We will generally receive payments from principal payments that
are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster than
expected, this results in prepayments that are faster than expected on the
RMBS. Faster than expected prepayments could adversely affect our profitability,
including in the following ways:
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We may purchase RMBS that have a higher interest rate than
the market interest rate at the time. In exchange for this higher interest rate, we may pay
a premium over the par value to acquire the security. In accordance with GAAP, we may
amortize this premium over the estimated term of the RMBS. If the RMBS is prepaid in whole or
in part prior to its maturity date, however, we may be required to expense the premium that
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We anticipate that a substantial portion of our adjustable-rate
RMBS may bear interest rates that are lower than their fully indexed rates,
which are equivalent to the applicable index rate plus a margin. If an adjustable-rate
RMBS is prepaid prior to or soon |
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after the time of adjustment to
a fully-indexed rate, we will have held that RMBS while it was
least profitable and lost the opportunity to receive interest at the fully indexed rate
over the remainder of its expected life. |
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If we are unable to acquire new RMBS similar to the prepaid
RMBS, our financial condition, results of operation and cash
flow would suffer. Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise, but changes in prepayment rates are difficult to
predict. Prepayment rates also may be affected by conditions in the housing and financial
markets, general economic conditions and the relative interest rates on fixed rate mortgage
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While we will seek to minimize prepayment risk to the extent practical, in selecting
investments we must balance prepayment risk against other risks and the potential returns of each
investment. No strategy can completely insulate us from prepayment risk.
Recent market conditions may upset the historical relationship between interest rate changes and
prepayment trends, which would make it more difficult for us to analyze our investment portfolio.
Our success depends on our ability to analyze the relationship of changing interest rates on
prepayments of the mortgage loans that underlie our RMBS and mortgage loans we acquire. Changes in
interest rates and prepayments affect the market price of the target assets that we intend to
purchase and any target assets that we hold at a given time. As part of our overall portfolio risk
management, we will analyze interest rate changes and prepayment trends separately and collectively
to assess their effects on our investment portfolio. In conducting our analysis, we will depend on
certain assumptions based upon historical trends with respect to the relationship between interest
rates and prepayments under normal market conditions. If the recent dislocations in the mortgage
market or other developments change the way that prepayment trends have historically responded to
interest rate changes, our ability to (1) assess the market value of our investment portfolio, (2)
implement our hedging strategies and (3) implement techniques to reduce our prepayment rate
volatility would be significantly affected, which could materially adversely affect our financial
position and results of operations.
Mortgage loan modification programs and future legislative action may adversely affect the value
of, and the returns on, the target assets in which we intend to invest.
The U.S. Government, through the Federal Reserve, the FHA and the FDIC, commenced
implementation of programs designed to provide homeowners with assistance in avoiding residential
or commercial mortgage loan foreclosures. The programs may involve, among other things, the
modification of mortgage loans to reduce the principal amount of the loans or the rate of interest
payable on the loans, or to extend the payment terms of the loans. In addition, members of
Congress have indicated support for additional legislative relief for homeowners, including an
amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy
proceedings. The servicer will have the authority to modify mortgage loans that are in default, or
for which default is reasonably foreseeable, if such modifications are in the best interests of the
holders of the mortgage securities and such modifications are done in accordance with the terms of
the relevant agreements. Loan modifications are more likely to be used when borrowers are less
able to refinance or sell their homes due to market conditions, and when the potential recovery
from a foreclosure is reduced due to lower property values. A significant number of loan
modifications could result in a significant reduction in cash flows to the holders of the mortgage
securities on an ongoing basis. These loan modification programs, as well as future legislative or
regulatory actions, including
amendments to the bankruptcy laws, that result in the modification of outstanding mortgage
loans may adversely affect the value of, and the returns on, the target assets in which we intend
to invest.
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Risks Related to Our Common Stock
There is no public market for our common stock and a market may never develop, which could result
in holders of our common stock being unable to monetize their investment.
Our shares of common stock are newly-issued securities for which there is no established
trading market. Our common stock has been approved for listing on the NYSE subject to official
notice of issuance, but there can be no assurance that an active trading market for our common
stock will develop. Accordingly, no assurance can be given as to the ability of our stockholders
to sell their common stock or the price that our stockholders may obtain for their common stock.
Some of the factors that could negatively affect the market price of our common stock include:
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our actual or anticipated variations in our quarterly operating results; |
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changes in our earnings estimates or publication of research reports about us or the real estate industry; |
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changes in market valuations of similar companies; |
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adverse market reaction to any increased indebtedness we incur in the future; |
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additions to or departures of our Managers key personnel; |
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actions by our stockholders; and |
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speculation in the press or investment community. |
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Market factors unrelated to our performance could also negatively impact the market price of
our common stock. One of the factors that investors may consider in deciding whether to buy or
sell our common stock is our distribution rate as a percentage of our stock price relative to
market interest rates. If market interest rates increase, prospective investors may demand a
higher distribution rate or seek alternative investments paying higher dividends or interest. As a
result, interest rate fluctuations and conditions in the capital markets can affect the market
value of our common stock. For instance, if interest rates rise, it is likely that the market
price of our common stock will decrease as market rates on interest-bearing securities increase.
Common stock eligible for future sale may have adverse effects on our share price.
We are offering shares of our common stock as described in this prospectus. In addition,
concurrently with the completion of this offering, we will complete a private placement in which we
will sell shares of our common stock to Invesco, through our Manager at $ per share and
OP units to Invesco, through Invesco Investments (Bermuda) Ltd., at $ per unit. Upon
completion of this offering and the concurrent private placement, Invesco, through our
Manager, will beneficially own % of our common stock (or % if the underwriters fully exercise
their option to purchase additional shares). Assuming that all OP units are redeemed for an
equivalent number of shares of our common stock, Invesco, through the Invesco Purchaser, would
beneficially own % of our outstanding common stock upon completion of this offering and the
concurrent private placement (or % if the underwriters fully exercise their option to purchase
additional shares). Our equity incentive plan provides for grants of restricted common stock and
other equity-based awards up to an aggregate of 6% of the issued and outstanding shares of our
common stock (on a fully diluted basis) at the time of the award, subject to a ceiling of 40
million shares of our common stock.
We, our Manager, each of our executive officers and directors and each officer of our Manager
have agreed with the underwriters to a 180 day lock-up period (subject to extension in certain
circumstances), meaning that, until
the end of the 180 day lock-up period, we and they will not, subject to certain exceptions,
sell or transfer any shares of common stock without the prior consent of Credit Suisse Securities
(USA) LLC and Morgan Stanley & Co. Incorporated, the representatives of the underwriters. Each of
our Manager and Invesco Investments (Bermuda) Ltd.
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will agree that, for a period of one year after
the date of this prospectus, it will not, without the prior written consent of Credit Suisse
Securities (USA) LLC and Morgan Stanley & Co. Incorporated, dispose of or hedge any of the shares
of our common stock or OP units, respectively, that it purchases in the concurrent private
placement, subject to extension in certain circumstances. The representatives of the underwriters
may, in their sole discretion, at any time from time to time and without notice, waive the terms
and conditions of the lock-up agreements to which they are a party. Additionally, each of our
Manager and Invesco Investments (Bermuda) Ltd. has agreed with us to a further lock-up period that
will expire at the earlier of (i) the date which is one year following the date of this prospectus
or (ii) the termination of the management agreement. Assuming no exercise of the underwriters
over-allotment option to purchase additional shares, approximately % of our shares of common
stock are subject to lock-up agreements. When the lock-up periods expire, these shares of common
stock will become eligible for sale, in some cases subject to the requirements of Rule 144 under
the Securities Act of 1933, as amended (or the Securities Act), which are described under Shares
Eligible for Future Sale.
We cannot predict the effect, if any, of future sales of our common stock, or the availability
of shares for future sales, on the market price of our common stock. The market price of our
common stock may decline significantly when the restrictions on resale by certain of our
stockholders lapse. Sales of substantial amounts of common stock or the perception that such sales
could occur may adversely affect the prevailing market price for our common stock.
Also, we may issue additional shares in subsequent public offerings or private placements to
make new investments or for other purposes. We are not required to offer any such shares to
existing stockholders on a preemptive basis. Therefore, it may not be possible for existing
stockholders to participate in such future share issuances, which may dilute the existing
stockholders interests in us.
We have not established a minimum distribution payment level and we cannot assure you of our
ability to pay distributions in the future.
We intend to pay quarterly distributions and to make distributions to our stockholders in an
amount such that we distribute all or substantially all of our REIT taxable income in each year,
subject to certain adjustments. We have not established a minimum distribution payment level and
our ability to pay distributions may be adversely affected by a number of factors, including the
risk factors described in this prospectus. All distributions will be made at the discretion of our
board of directors and will depend on our earnings, our financial condition, debt covenants,
maintenance of our REIT qualification and other factors as our board of directors may deem relevant
from time to time. We believe that a change in any one of the following factors could adversely
affect our results of operations and impair our ability to pay distributions to our stockholders:
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the profitability of the investment of the net proceeds of this offering; |
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our ability to make profitable investments; |
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margin calls or other expenses that reduce our cash flow; |
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defaults in our asset portfolio or decreases in the value of our portfolio; and |
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the fact that anticipated operating expense levels may not prove accurate, as actual
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We cannot assure you that we will achieve investment results that will allow us to make a
specified level of cash distributions or year-to-year increases in cash distributions in the
future. In addition, some of our distributions may include a return in capital.
Investing in our common stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives may result in a high
amount of risk when compared to alternative investment options and volatility or loss of principal.
Our investments may be highly
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speculative and aggressive, and therefore an investment in our
common stock may not be suitable for someone with lower risk tolerance.
Future offerings of debt or equity securities, which would rank senior to our common stock, may
adversely affect the market price of our common stock.
If we decide to issue debt or equity securities in the future, which would rank senior to our
common stock, it is likely that they will be governed by an indenture or other instrument
containing covenants restricting our operating flexibility. Additionally, any convertible or
exchangeable securities that we issue in the future may have rights, preferences and privileges
more favorable than those of our common stock and may result in dilution to owners of our common
stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such
securities. Because our decision to issue debt or equity securities in any future offering will
depend on market conditions and other factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future offerings. Thus holders of our common stock will bear the
risk of our future offerings reducing the market price of our common stock and diluting the value
of their stock holdings in us.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect
of deterring a third party from making a proposal to acquire us or of impeding a change in control
under circumstances that otherwise could provide the holders of our common stock with the
opportunity to realize a premium over the then-prevailing market price of our common stock. We are
subject to the business combination provisions of the MGCL that, subject to limitations, prohibit
certain business combinations (including a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or reclassification of equity
securities) between us and an interested stockholder (defined generally as any person who
beneficially owns 10% or more of our then outstanding voting capital stock or an affiliate or
associate of ours who, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of our then outstanding voting capital stock) or an affiliate
thereof for five years after the most recent date on which the stockholder becomes an interested
stockholder. After the five-year prohibition, any business combination between us and an
interested stockholder generally must be recommended by our board of directors and approved by the
affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding
shares of our voting capital stock; and (2) two-thirds of the votes entitled to be cast by holders
of voting capital stock of the corporation other than shares held by the interested stockholder
with whom or with whose affiliate the business combination is to be effected or held by an
affiliate or associate of the interested stockholder. These super-majority vote requirements do
not apply if our common stockholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other consideration in the same form as previously paid by the
interested stockholder for its shares. These provisions of the MGCL do not apply, however, to
business combinations that are approved or exempted by a board of directors prior to the time that
the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board
of directors has by resolution exempted business combinations between us and any other person,
provided that such business combination is first approved by our board of directors (including a
majority of our directors who are not affiliates or associates of such person).
The control share provisions of the MGCL provide that control shares of a Maryland
corporation (defined as shares which, when aggregated with other shares controlled by the
stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one
of three increasing ranges of voting power in electing directors) acquired in a control share
acquisition (defined as the direct or indirect acquisition of ownership or control of control
shares) have no voting rights except to the extent approved by our stockholders by the affirmative
vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes
entitled to be cast by the acquiror of control shares, our officers and our personnel who are also
our directors. Our Bylaws contain
a provision exempting from the control share acquisition statute any and all acquisitions by
any person of shares of our stock. There can be no assurance that this provision will not be
amended or eliminated at any time in the future.
The unsolicited takeover provisions of the MGCL permit our board of directors, without
stockholder approval and regardless of what is currently provided in our charter or Bylaws, to
implement takeover defenses, some of
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which (for example, a classified board) we do not yet have.
These provisions may have the effect of inhibiting a third party from making an acquisition
proposal for us or of delaying, deferring or preventing a change in control of us under the
circumstances that otherwise could provide the holders of shares of common stock with the
opportunity to realize a premium over the then current market price. Our charter contains a
provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the
MGCL relating to the filling of vacancies on our board of directors. See Certain Provisions of
The Maryland General Corporation Law and Our Charter and BylawsBusiness Combinations and
Certain Provisions of The Maryland General Corporation Law and Our Charter and BylawsControl
Share Acquisitions.
Our authorized but unissued shares of common and preferred stock may prevent a change in our
control.
Our charter authorizes us to issue additional authorized but unissued shares of common or
preferred stock. In addition, our board of directors may, without stockholder approval, amend our
charter to increase the aggregate number of our shares of stock or the number of shares of stock of
any class or series that we have authority to issue and classify or reclassify any unissued shares
of common or preferred stock and set the preferences, rights and other terms of the classified or
reclassified shares. As a result, our board of directors may establish a series of shares of
common or preferred stock that could delay or prevent a transaction or a change in control that
might involve a premium price for our shares of common stock or otherwise be in the best interest
of our stockholders.
We are the sole general partner of our operating partnership and could become liable for the debts
and other obligations of our operating partnership beyond the amount of our initial expenditure.
We are the sole general partner of our operating partnership, IAS Operating Partnership LP.
As the sole general partner, we are liable for our operating partnerships debts and other
obligations. Therefore, if our operating partnership is unable to pay its debts and other
obligations, we will be liable for such debts and other obligations beyond the amount of our
expenditure for ownership interests in our operating partnership. These obligations could include
unforeseen contingent liabilities and could materially adversely affect our financial condition,
operating results and ability to make distributions to our stockholders.
Ownership limitations may restrict change of control of business combination opportunities in which
our stockholders might receive a premium for their shares.
In order for us to qualify as a REIT for each taxable year after 2008, no more than 50% in
value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals during the last half of any calendar year. Individuals for this purpose include
natural persons, private foundations, some employee benefit plans and trusts, and some charitable
trusts. To preserve our REIT qualification, our charter generally prohibits any person from
directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more
restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number
of shares, whichever is more restrictive, of the outstanding shares of our common stock. This
ownership limitation could have the effect of discouraging a takeover or other transaction in which
holders of our common stock might receive a premium for their shares over the then prevailing
market price or which holders might believe to be otherwise in their best interests. Different
ownership limits will apply to Invesco. These ownership limits, which our board of directors has
determined will not jeopardize our REIT qualification, will allow Invesco to hold up to 25% (by
value or by number of shares, whichever is more restrictive) of our common stock or up to 25% (by
value or by number of shares, whichever is more restrictive) of our outstanding capital stock.
Tax Risks
Your investment has various U.S. federal income tax risks.
This summary of certain tax risks is limited to the U.S. federal tax risks addressed below.
Additional risks or issues may exist that are not addressed in this prospectus and that could
affect the U.S. federal income tax treatment of us or our stockholders.
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We strongly urge you to review carefully the discussion under U.S. Federal Income Tax
Considerations and to seek advice based on your particular circumstances from an independent tax
advisor concerning the effects of U.S. federal, state and local income tax law on an investment in
our common stock and on your individual tax situation.
Our failure to qualify as a REIT would subject us to U.S. federal income tax and potentially
increased state and local taxes, which would reduce the amount of cash available for distribution
to our stockholders.
We have been organized and we intend to operate in a manner that will enable us to qualify as
a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31,
2009. We have not requested and do not intend to request a ruling from the Internal Revenue
Service, or the IRS, that we qualify as a REIT. The U.S. federal income tax laws governing REITs
are complex. The complexity of these provisions and of the applicable U.S. Treasury Department
regulations that have been promulgated under the Internal Revenue Code, or Treasury Regulations, is
greater in the case of a REIT that, like us, holds its assets through a partnership, and judicial
and administrative interpretations of the U.S. federal income tax laws governing REIT qualification
are limited. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the
nature of our assets and our income, the ownership of our outstanding shares, and the amount of our
distributions. Moreover, new legislation, court decisions or administrative guidance, in each case
possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a
REIT. Thus, while we intend to operate so that we will qualify as a REIT, given the highly complex
nature of the rules governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in our circumstances, no assurance can be given that we will so
qualify for any particular year. These considerations also might restrict the types of assets that
we can acquire in the future.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain
statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable
income, and distributions to our stockholders would not be deductible by us in determining our
taxable income. In such a case, we might need to borrow money or sell assets in order to pay our
taxes. Our payment of income tax would decrease the amount of our income available for
distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT,
we no longer would be required to distribute substantially all of our net taxable income to our
stockholders. In addition, unless we were eligible for certain statutory relief provisions, we
could not re-elect to qualify as a REIT until the fifth calendar year following the year in which
we failed to qualify.
Complying with REIT requirements may cause us to forego otherwise attractive investment
opportunities or financing or hedging strategies.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy various
tests regarding the sources of our income, the nature and diversification of our assets, the
amounts we distribute to our stockholders and the ownership of our stock. To meet these tests, we
may be required to forego investments we might otherwise make. We may be required to make
distributions to stockholders at disadvantageous times or when we do not have funds readily
available for distribution. Thus, compliance with the REIT requirements may hinder our investment
performance.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we generally must ensure that at the end of each calendar quarter at
least 75% of the value of our total assets consists of cash, cash items, government securities and
qualified REIT real estate assets, including certain mortgage loans and MBS. The remainder of our
investment in securities (other than government
securities and qualifying real estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the
outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of
our assets (other than government securities and qualifying real estate assets) can consist of the
securities of any one issuer, and no more than 25% of the value of our total securities can be
represented by securities of one or more TRSs. See U.S. Federal Income Tax ConsiderationsAsset
Tests. If we fail to comply with these requirements at the end of any quarter, we must correct the
failure within 30 days after the end of such calendar quarter or qualify for certain statutory
relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.
As a result, we may be required to liquidate from our
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portfolio otherwise attractive investments.
These actions could have the effect of reducing our income and amounts available for distribution
to our stockholders.
Potential characterization of distributions or gain on sale may be treated as unrelated business
taxable income to tax exempt investors.
If (1) all or a portion of our assets are subject to the rules relating to taxable mortgage
pools, (2) we are a pension held REIT, (3) a tax exempt stockholder has incurred debt to purchase
or hold our common stock, or (4) the residual REMIC interests we buy generate excess inclusion
income, then a portion of the distributions to and, in the case of a stockholder described in
clause (3), gains realized on the sale of common stock by such tax exempt stockholder may be
subject to federal income tax as unrelated business taxable income under the Internal Revenue Code.
Failure to make required distributions would subject us to tax, which would reduce the cash
available for distribution to our stockholders.
To qualify as a REIT, we must distribute to our stockholders each calendar year at least 90%
of our REIT taxable income (including certain items of non-cash income), determined without regard
to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy
the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be
subject to U.S. federal corporate income tax on our undistributed income. In addition, we will
incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any
calendar year are less than the sum of:
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We intend to distribute our net taxable income to our stockholders in a manner intended to
satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4%
nondeductible excise tax. However, there is no requirement that TRSs distribute their after tax
net income to their parent REIT or their stockholders.
Our taxable income may substantially exceed our net income as determined based on GAAP,
because, for example, realized capital losses will be deducted in determining our GAAP net income,
but may not be deductible in computing our taxable income. In addition, we may invest in assets, including debt instruments requiring us to accrue
original issue discounts, or OID, that generate taxable income in excess of economic income or in advance of the corresponding cash
flow from the assets referred to as phantom income. Although some types of phantom income are excluded to the extent they exceed 5% of our net income
for purposes of the REIT 90% distribution requirement, we may incur corporate income tax and the 4% nondeductible excise tax on that income if we do
not distribute such income to stockholders in a particular year. Further, we may invest in assets, including through a Legacy Loan or Legacy Securities PPIF, that accrue market
discounts which may result in the recognition of taxable income in excess of our economic gain in certain situations or the deferral of a portion of our interest deduction paid on debt to incur such assets. As a result of the foregoing, we may
generate less cash flow than taxable income in a particular year. In that event, we may be
required to use cash reserves, incur debt, or liquidate non-cash assets at rates or at times that
we regard as unfavorable to satisfy the distribution requirement and to avoid corporate income tax
and the 4% nondeductible excise tax in that year.
We may choose to pay dividends in our own stock, in which case our stockholders may be required to
pay income taxes in excess of the cash dividends received.
We may distribute taxable dividends that are payable in cash and shares of our common stock at
the election of each stockholder. Under IRS Revenue Procedure 2009-15, up to 90% of any such
taxable dividend for 2009 could be payable in our stock. Taxable stockholders receiving such
dividends will be required to include the full amount of the dividend as ordinary income to the
extent of our current and accumulated earnings and profits for federal income tax purposes. As a
result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in
excess of the cash dividends received. If a U.S. stockholder sells the stock it receives as a
dividend in order to pay this tax, the sales proceeds may be less than the amount included in
income with respect to the dividend, depending on the market price of our stock at the time of the
sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax
with respect to such dividends, including in respect of all or a
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portion of such dividend that is
payable in stock. In addition, if a significant number of our stockholders determine to sell
shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on
the trading price of our common stock.
Our ownership of and relationship with any TRS which we may form or acquire following the
completion of this offering will be limited, and a failure to comply with the limits would
jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would
not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT
must jointly elect to treat the subsidiary as a TRS. Overall, no more than 25% of the value of a
REITs assets may consist of stock or securities of one or more TRSs. A TRS will pay federal,
state and local income tax at regular corporate rates on any income that it earns. In addition,
the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT
that are not conducted on an arms length basis.
Any TRS that we may form following the completion of this offering would pay U.S. federal,
state and local income tax on its taxable income, and its after tax net income would be available
for distribution to us but would not be required to be distributed to us. We anticipate that the
aggregate value of the TRS stock and securities owned by us will be less than 25% of the value of
our total assets (including the TRS stock and securities). Furthermore, we will monitor the value
of our investments in our TRSs to ensure compliance with the rule that no more than 25% of the
value of our assets may consist of TRS stock and securities (which is applied at the end of each
calendar quarter). In addition, we will scrutinize all of our transactions with TRSs to ensure
that they are entered into on arms length terms to avoid incurring the 100% excise tax described
above. There can be no assurance, however, that we will be able to comply with the TRS limitations
or to avoid application of the 100% excise tax discussed above.
Liquidation of our assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of
income. If we are compelled to liquidate our investments to repay obligations to our lenders, we
may be unable to comply with these requirements, ultimately jeopardizing our qualification as a
REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets in transactions
that are considered to be prohibited transactions.
Characterization of the repurchase agreements we enter into to finance our investments as sales for
tax purposes rather than as secured lending transactions or the failure of a mezzanine loan to
qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
We anticipate entering into repurchase agreements with a variety of counterparties to achieve
our desired amount of leverage for the assets in which we intend to invest. When we enter into a
repurchase agreement, we generally sell assets to our counterparty to the agreement and receive
cash from the counterparty. The counterparty is obligated to resell the assets back to us at the
end of the term of the transaction. We believe that for U.S. federal income tax purposes we will
be treated as the owner of the assets that are the subject of repurchase agreements and that the
repurchase agreements will be treated as secured lending transactions notwithstanding that such
agreements may transfer record ownership of the assets to the counterparty during the term of the
agreement. It is possible, however, that the IRS could successfully assert that we did not own
these assets during the term of the repurchase agreements, in which case we could fail to qualify
as a REIT.
In addition, we may acquire mezzanine loans, which are loans secured by equity interests in a
partnership or limited liability company that directly or indirectly owns real property. In
Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan, if it
meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a
real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine
loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test.
Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not
prescribe rules of substantive tax law. We may acquire mezzanine loans that may not meet all of
the requirements for reliance on this safe harbor. In the event we own a mezzanine loan that does
not meet the safe harbor, the IRS could challenge such loans treatment as a real estate asset for
purposes of the REIT asset and income tests, and if such a challenge were sustained, we could fail
to qualify as a REIT.
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Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code limit our ability to hedge MBS and related
borrowings. Under these provisions, our annual gross income from non-qualifying hedges, together
with any other income not generated from qualifying real estate assets, cannot exceed 25% of our
gross income (excluding for this purpose, gross income from qualified hedges). In addition, our
aggregate gross income from non-qualifying hedges, fees, and certain other non qualifying sources
cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of
advantageous hedging techniques or implement those hedges through a TRS, which we may form
following the completion of this offering. This could increase the cost of our hedging activities
or expose us to greater risks associated with changes in interest rates than we would otherwise
want to bear.
Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
Even if we qualify as a REIT, we may be subject to certain U.S. federal, state and local taxes
on our income and assets, including taxes on any undistributed income, tax on income from some
activities conducted as a result of a foreclosure, and state or local income, franchise, property
and transfer taxes, including mortgage related taxes. See U.S. Federal Income Tax
ConsiderationsTaxation of REITs in General. In addition, any TRSs we own will be subject to U.S.
federal, state, and local corporate taxes. In order to meet the REIT qualification requirements,
or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales
of inventory or property held primarily for sale to customers in the ordinary course of business,
we may hold some of our assets through taxable subsidiary corporations, including TRSs. Any taxes
paid by such subsidiary corporations would decrease the cash available for distribution to our
stockholders.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market
price of our common stock.
At
any time, the U.S. federal income tax laws or regulations governing
REITs or the
administrative interpretations of those laws or regulations may be amended. We cannot predict when
or if any new U.S. federal income tax law, regulation or administrative interpretation, or any
amendment to any existing federal income tax law, regulation or administrative interpretation, will
be adopted, promulgated or become effective and any such law, regulation or interpretation may take
effect retroactively. We and our stockholders could be adversely affected by any such change in,
or any new, federal income tax law, regulation or administrative interpretation.
Dividends payable by REITs do not qualify for the reduced tax rates.
Legislation enacted in 2003 generally reduces the maximum tax rate for dividends payable to
domestic stockholders that are individuals, trusts and estates from 38.6% to 15% (through 2010).
Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although
this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the
more favorable rates applicable to regular corporate dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be relatively less attractive
than investments in stock of non REIT corporations that pay dividends, which could adversely affect
the value of the stock of REITs, including our common stock.
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FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus that are subject to risks and
uncertainties. These forward-looking statements include information about possible or assumed
future results of our business, financial condition, liquidity, results of operations, plans and
objectives. When we use the words believe, expect, anticipate, estimate, plan,
continue, intend, should, may or similar expressions, we intend to identify forward-looking
statements. Statements regarding the following subjects, among others, may be forward-looking:
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use of proceeds of this offering; |
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our business and investment strategy; |
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our projected operating results; |
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actions and initiatives of the U.S. Government and changes to U.S. Government policies; |
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our ability to obtain financing arrangements; |
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financing and advance rates for our target assets; |
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our expected leverage; |
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general volatility of the securities markets in which we invest; |
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our expected investments; |
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interest rate mismatches between our target assets and our borrowings used to fund such investments; |
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changes in interest rates and the market value of our target assets; |
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changes in prepayment rates on our target assets; |
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effects of hedging instruments on our target assets; |
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rates of default or decreased recovery rates on our target assets; |
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the degree to which our hedging strategies may or may not protect us from interest rate volatility; |
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changes in governmental regulations, tax law and rates, and similar matters; |
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our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; |
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our ability to maintain our exemption from registration under the 1940 Act; |
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availability of investment opportunities in mortgage-related, real estate-related and other securities; |
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availability of qualified personnel; |
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estimates relating to our ability to make distributions to our stockholders in the future; |
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our understanding of our competition; and |
|
- 53 -
|
|
|
|
market trends in our industry, interest rates, real estate values, the debt securities
markets or the general economy. |
|
The forward-looking statements are based on our beliefs, assumptions and expectations of our
future performance, taking into account all information currently available to us. You should not
place undue reliance on these forward-looking statements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. Some of these factors are described in this prospectus under the headings Summary, Risk
Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations
and Business. If a change occurs, our business, financial condition, liquidity and results of
operations may vary materially from those expressed in our forward-looking statements. Any
forward-looking statement speaks only as of the date on which it is made. New risks and
uncertainties arise over time, and it is not possible for us to predict those events or how they
may affect us. Except as required by law, we are not obligated to, and do not intend to, update or
revise any forward-looking statements, whether as a result of new information, future events or
otherwise.
- 54 -
USE OF PROCEEDS
We are offering shares of our common stock at the anticipated public offering price of
$ per share. Concurrently with the completion of this offering, we will complete a private
placement in which we will sell shares of our common stock to Invesco, through our
Manager, at $ per share and units of limited partnership interest in our operating
partnership to Invesco, through Invesco Investments (Bermuda) Ltd., at $ per unit. We
estimate that the net proceeds we will receive from selling common stock in this offering will be
approximately $ million, after deducting underwriting discounts and commissions and estimated
offering expenses of approximately $ million (or, if the underwriters exercise their
over-allotment option in full, approximately $ million, after deducting underwriting discounts
and commissions and estimated offering expenses of approximately $ million). We estimate that
the net proceeds we will receive in the concurrent private placement of our common stock and OP
units will be approximately $ million.
We plan to use all the net proceeds from this offering and the concurrent private placement as
described above to acquire our target assets in accordance with our objectives and strategies
described in this prospectus. See BusinessOur Investment Strategy. We expect that our focus
will be on purchasing Agency RMBS, non-Agency RMBS, CMBS and certain mortgage loans, subject to our
investment guidelines and to the extent consistent with maintaining our REIT qualification.
Our Manager will make determinations as to the percentage of our assets that will be invested in each of our target assets. Our decisions will depend on prevailing
market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.
Until appropriate assets can be identified, our Manager may invest the net proceeds from this offering
and the concurrent private placement in interest-bearing short-term investments, including money
market accounts, that are consistent with our intention to qualify as a REIT. These investments
are expected to provide a lower net return than we will seek to achieve from our target assets.
Prior to the time we have fully used the net proceeds of this offering and the concurrent private
placement to acquire our target assets, we may fund our quarterly distributions out of such net
proceeds.
- 55 -
DISTRIBUTION POLICY
We intend to make regular quarterly distributions to holders of our common stock. U.S.
federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT
taxable income, without regard to the deduction for dividends paid and excluding net capital gains,
and that it pay tax at regular corporate rates to the extent that it annually distributes less than
100% of its net taxable income. We generally intend over time to pay quarterly dividends in an
amount equal to our net taxable income. We plan to pay our first dividend in respect of the period
from the closing of this offering through September , 2009, which may be prior to the time
when we have fully invested the net proceeds from this offering in our target assets.
To the extent that in respect of any calendar year, cash available for distribution is less
than our net taxable income, we could be required to sell assets or borrow funds to make cash
distributions or make a portion of the required distribution in the form of a taxable stock
distribution or distribution of debt securities. In addition, prior to the time we have fully
invested the net proceeds of this offering, we may fund our quarterly distributions out of such net
proceeds. We will generally not be required to make distributions with respect to activities
conducted through any TRS that we form following the completion of this offering. For more
information, see U.S. Federal Income Tax ConsiderationsTaxation of Our Company in General.
To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal
income and excise tax, we intend to make regular quarterly distributions of all or substantially
all of our net taxable income to holders of our common stock out of assets legally available
therefor. Any distributions we make will be at the discretion of our board of directors and will
depend upon our earnings and financial condition, debt covenants, funding or margin requirements
under repurchase agreements, warehouse facilities or other secured and unsecured borrowing
agreements, maintenance of our REIT qualification, applicable provisions of the MGCL, and such
other factors as our board of directors deems relevant. Our earnings and financial condition will
be affected by various factors, including the net interest and other income from our portfolio, our
operating expenses and any other expenditures. For more information regarding risk factors that
could materially adversely affect our earnings and financial condition, see Risk Factors.
We anticipate that our distributions generally will be taxable as ordinary income to our
stockholders, although a portion of the distributions may be designated by us as qualified dividend
income or capital gain, or may constitute a return of capital. We will furnish annually to each of
our stockholders a statement setting forth distributions paid during the preceding year and their
characterization as ordinary income, return of capital, qualified dividend income or capital gain.
For more information, see U.S. Federal Income Tax ConsiderationsTaxation of Taxable U.S.
Stockholders.
- 56 -
CAPITALIZATION
The following table sets forth (1) our actual capitalization at March 31, 2009 and (2) our
capitalization as adjusted to reflect the effect of the sale of our common stock in this offering
at an assumed offering price of $ per share after deducting the underwriting discount and
estimated organizational and offering expenses payable by us and the concurrent private placement
to the Invesco Purchaser of $ million of our common stock and OP units at the assumed initial
public offering price. You should read this table together with Use of Proceeds included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2009
(unaudited) |
|
|
|
Actual |
|
|
As Adjusted(1) |
|
Stockholders deficiency: |
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share;
100,000 shares authorized, and 100 shares
issued and outstanding, actual and
450,000,000 shares authorized and shares
outstanding, as adjusted |
|
$ |
1 |
|
|
$ |
|
|
Preferred Stock, par value $0.01 per share;
0 shares authorized and 0 shares issued and
outstanding, actual and 50,000,000 shares
authorized and 0 shares outstanding, as
adjusted |
|
|
|
|
|
|
|
|
Additional paid in capital |
|
|
999 |
|
|
|
|
|
Accumulated deficit during development stage |
|
|
(70,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficiency |
|
$ |
(69,327 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include the underwriters option to purchase up to additional shares. |
|
- 57 -
SELECTED FINANCIAL INFORMATION
The
following table presents selected historical financial information as of March 31, 2009 and
December 31, 2008, and for the three months ended March 31,
2009 and for the period from June 5, 2008 (date of
incorporation) to December 31, 2008. The historical financial information as of December 31, 2008
and for the period from June 5, 2008 (date of incorporation) to December 31, 2008 presented in the
table below has been derived from our audited financial statements. The information presented
below is not necessarily indicative of the trends in our performance or our results for a full
fiscal year.
The information presented below is only a summary and does not provide all of the information
contained in our historical financial statements, including the related notes. You should read the
information below in conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and our historical financial statements, including the related notes,
included elsewhere in this prospectus.
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
|
|
|
|
(Unaudited) |
|
|
As of December 31, 2008 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,000 |
|
|
$ |
1,000 |
|
Other assets deferred offering costs |
|
|
1,213,582 |
|
|
|
978,333 |
|
Total Assets |
|
$ |
1,214,582 |
|
|
$ |
979,333 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders |
|
|
|
|
|
|
|
|
Deficiency: |
|
|
|
|
|
|
|
|
Due to affiliate |
|
$ |
1,283,909 |
|
|
$ |
1,000,714 |
|
|
|
|
|
|
|
|
Stockholders deficiency |
|
|
(69,327 |
) |
|
|
(21,381 |
) |
Total Liabilities and Stockholders Deficiency |
|
$ |
1,214,582 |
|
|
$ |
979,333 |
|
|
|
|
|
|
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period June 5, 2008 |
|
|
|
For the Three Months |
|
|
(date of incorporation) |
|
|
|
Ended March 31, 2009 |
|
|
through |
|
|
|
(Unaudited) |
|
|
December 31, 2008 |
|
Revenue |
|
$ |
|
|
|
$ |
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
45,237 |
|
|
|
|
|
Organizational Costs |
|
|
2,709 |
|
|
|
22,381 |
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(47,946 |
) |
|
$ |
(22,381 |
) |
|
|
|
|
|
|
|
- 58 -
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the sections of this prospectus
entitled Risk Factors, Forward-Looking Statements, Business and our audited balance sheet as
of December 31, 2008 and the related notes thereto included elsewhere in this prospectus. This
discussion contains forward-looking statements reflecting current expectations that involve risks
and uncertainties. Actual results and the timing of events may differ materially from those
contained in these forward-looking statements due to a number of factors, including those discussed
in the section entitled Risk Factors and elsewhere in this prospectus.
Overview
We
are a newly-formed Maryland corporation focused on investing in,
financing and managing residential and commercial mortgage-backed
securities and mortgage loans. We will seek to invest
in Agency RMBS, non-Agency RMBS, CMBS and residential and commercial
mortgage loans. We anticipate financing our Agency RMBS through traditional repurchase agreement financing. In
addition, to the extent available to us, we may seek to finance our investments in CMBS and
non-Agency RMBS with financings under TALF, or with private financing sources. If available, we
may also finance our investments in certain CMBS and non-Agency RMBS by contributing capital to one
or more of the Legacy Securities PPIFs, that receive financing under PPIP, and our investments in
certain legacy commercial and residential mortgage loans by contributing capital to one or more
Legacy Loan PPIFs, that receive such funding or through private
financing sources. Legacy Securities PPIFs and Legacy Loan PPIFs may be
established and managed by our Manager or one of its affiliates or by unaffiliated third parties;
however, our Manager or its affiliates may only establish a Legacy Securities PPIF if their
application to serve as an investment manager of this type of PPIP fund is accepted by the U.S.
Treasury. Our Manager has agreed not to charge fees payable to it under the management agreement
between our Manager and us, with respect to any equity investment we may decide to make in any
Legacy Securities PPIF or Legacy Loan PPIF which is managed by our Manager or one of its
affiliates.
We will be externally managed and advised by our Manager, an SEC-registered investment adviser
and indirect wholly-owned subsidiary of Invesco. Invesco is a leading independent global
investment management company with $348.2 billion in assets under management as of March 31, 2009.
Our Manager will draw upon the expertise of Invescos Worldwide Fixed Income
investment team of 114 investment
professionals operating in six cities, across four countries, with approximately $150 billion in
securities under management and Invesco Real Estates 219 employees operating in 13 cities across eight
countries with over $22 billion in private and public real estate assets under management. With over 25 years of experience, Invescos teams of dedicated
professionals have developed exceptional track records across multiple fixed income sectors and
asset classes, including structured securities, such as RMBS, ABS, CMBS, and leveraged loan
portfolios. In addition, the investment team will draw upon the mortgage market insights of our
Managers WL Ross subsidiary.
Our objective is to provide attractive risk adjusted returns to our investors over the long
term, primarily through dividends and secondarily through capital appreciation. We intend to
achieve this objective by selectively acquiring target assets to
construct a diversified investment portfolio designed to produce attractive returns across a variety of market conditions and economic
cycles. We intend to construct a diversified investment portfolio by focusing on security
selection and the relative value of various sectors within the mortgage market. We intend to
finance our Agency RMBS investments primarily through short-term borrowings structured as
repurchase agreements. To date, we have signed master repurchase agreements with financial
institutions, and we are in discussions with additional financial institutions for repurchase
facilities. As described in more detail below, to the extent
available to us, we may seek to finance our non-Agency RMBS, CMBS and
mortgage loan portfolios with attractive non-recourse term borrowing facilities and equity
financing under the TALF or with private financing sources and, if
available, we may make investments in funds that receive financing
under the PPIP that will be established and managed by our Manager or one of its affiliates if their
application to serve as one of the investment managers for the Legacy Securities Program is accepted by the U.S. Treasury.
We will commence operations upon completion of this offering. We intend to elect and qualify
to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ending
December 31, 2009. We generally will not be subject to U.S. federal income taxes on our taxable
income to the extent that we annually distribute all of our net taxable income to stockholders and
maintain our intended qualification as a REIT. We also intend to operate our business in a manner
that will permit us to maintain our exemption from registration under the 1940 Act.
Factors Impacting Our Operating Results
We expect that the results of our operations will be affected by a number of factors and
primarily depend on, among other things, the level of our net interest income, the market value of
our assets and the supply of, and demand for, the target assets in which we intend to invest. Our
net interest income, which includes the amortization of purchase premiums and accretion of purchase
discounts, varies primarily as a result of changes in market interest rates and prepayment speeds,
as measured by the Constant Prepayment Rate, or CPR, on our target assets. Interest rates and
prepayment speeds vary according to the type of investment, conditions in the financial markets,
competition and other factors, none of which can be predicted with any certainty.
- 59 -
Changes in Market Interest Rates
With respect to our proposed business operations, increases in interest rates, in general, may
over time cause: (1) the interest expense associated with our borrowings to increase; (2) the
value of our investment portfolio to decline; (3) coupons on our ARMs and hybrid ARMs, RMBS, CMBS
and mortgage loans mortgage loans to reset, although on a delayed basis, to higher interest rates;
(4) prepayments on our RMBS and residential mortgage loans to slow, thereby slowing the amortization of our purchase
premiums and the accretion of our purchase discounts; and (5) to the extent we enter into interest
rate swap agreements as part of our hedging strategy, the value of these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause: (1) prepayments on our
RMBS and residential mortgage loans to increase, thereby accelerating the
amortization of our purchase premiums and the accretion of our purchase discounts; (2) the interest
expense associated with our borrowings to decrease; (3) the value of our investment portfolio to
increase; (4) to the extent we enter into interest rate swap agreements as part of our hedging
strategy, the value of these agreements to decrease; and (5) coupons on our adjustable-rate and
hybrid Agency RMBS and non-Agency RMBS assets and mortgage loans to reset, although on a delayed basis, to lower interest
rates.
Residential
Mortgage Loan Prepayment Speeds
Prepayment speeds vary according to interest rates, the type of investment, conditions in the
financial markets, competition, foreclosures and other factors, none of which can be predicted with
any certainty. We expect that over time our adjustable-rate and
hybrid Agency RMBS and non-Agency RMBS will experience higher
prepayment rates than do fixed-rate RMBS, as we believe that homeowners with ARMs and hybrid ARMs
exhibit more rapid housing turnover levels or refinancing activity compared to fixed-rate
borrowers.
Spreads on RMBS
The spread between swap rates and RMBS has recently been volatile. Spreads on non-Treasury,
fixed income assets have moved sharply wider due to the difficult credit conditions. The poor
collateral performance of the sub-prime mortgage sector coupled with declining home prices have had
a negative impact on investor confidence. As the prices of securitized assets have declined, a
number of investors and a number of structured investment vehicles have faced margin calls from
dealers and have been forced to sell assets in order to reduce leverage. The price volatility of
these assets has also impacted lending terms in the repurchase market, as counterparties have
raised margin requirements to reflect the more difficult environment. The spread between the yield
on our assets and our funding costs is an important factor in the performance of our business.
Wider spreads imply greater income on new asset purchases but may have a negative impact on our
stated book value. Wider spreads may also negatively impact asset prices. In an environment where
spreads are widening, counterparties may require additional collateral to secure borrowings which
may require us to reduce leverage by selling assets. Conversely, tighter spreads imply lower
income on new asset purchases but may have a positive impact on our stated book value. Tighter
spreads may have a positive impact on asset prices. In this case we may be able to reduce the
amount of collateral required to secure borrowings.
- 60 -
RMBS Extension Risk
Our Manager will compute the projected weighted-average life of our investments based on
assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In
general, when we acquire a FRM or hybrid ARM security, we may, but are not required to, enter into
an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing
costs for a period close to the anticipated average life of the fixed-rate portion of the related
assets. This strategy is designed to protect us from rising interest rates, because the borrowing
costs are fixed for the duration of the fixed-rate portion of the related RMBS.
However, if prepayment rates decrease in a rising interest rate environment, the life of the
fixed-rate portion of the related assets could extend beyond the term of the swap agreement or
other hedging instrument. This could have a negative impact on our results of operations, as
borrowing costs would no longer be fixed after the end of the hedging instrument while the income
earned on the hybrid ARM security would remain fixed. This situation may also cause the market
value of our hybrid ARM security to decline, with little or no offsetting gain from the related
hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate
liquidity, which could cause us to incur losses.
CMBS
Real Estate Risk
Commercial property values and net operating income derived from such properties are
subject to volatility and may be affected adversely by a number of factors, including, but not
limited to: national, regional and local economic conditions (which may be adversely affected by
industry slowdowns and other factors); local real estate conditions (such as an oversupply of
housing, retail, industrial, office or other commercial space); changes or continued weakness in
specific industry segments; construction quality, age and design; demographic factors;
retroactive changes to building or similar codes; and increases in operating expenses (such as
energy costs). In the event net operating income decreases, a borrower may have difficulty
making its debt service payments, which could adversely affect the value of our CMBS.
Size of Investment Portfolio
The size of our investment portfolio, as measured by the aggregate principal balance of our
mortgage related securities and the other assets we own, is also a key revenue driver. Generally,
as the size of our investment portfolio grows, the amount of interest income we receive increases.
A larger investment portfolio, however, drives increased expenses, as we incur additional interest
expense to finance the purchase of our assets.
Since changes in interest rates may significantly affect our activities, our operating results
depend, in large part, upon our ability to effectively manage interest rate risks and prepayment
risks while maintaining our qualification as a REIT.
Market Conditions
Beginning in the summer of 2007, significant adverse changes in financial market conditions
have resulted in a deleveraging of the entire global financial system. As part of this process,
residential and commercial mortgage markets in the United States have experienced a variety of
difficulties including loan defaults, credit losses and reduced liquidity. As a result, many
lenders have tightened their lending standards, reduced lending capacity, liquidated significant
portfolios or exited the market altogether, and therefore, financing with attractive terms is
generally unavailable. In response to these unprecedented events, the U.S. Government has taken a
number of actions to improve stability in the financial markets and encourage lending.
Housing and Economic Recovery Act of 2008
In response to general market instability and, more specifically, the financial conditions of
Fannie Mae and Freddie Mac, on July 30, 2008, the HERA established a new regulator for Fannie Mae
and Freddie Mac, the U.S. Federal Housing Finance Agency, or the FHFA. On September 7, 2008, the
U.S. Treasury, the FHFA, and the U.S. Federal Reserve announced a comprehensive action plan to help
stabilize the financial markets, support the availability of mortgage finance and protect
taxpayers. Under this plan, among other things, the FHFA has been appointed as conservator of both
Fannie Mae and Freddie Mac, allowing the FHFA to control the actions of the two government
sponsored enterprises, or GSEs, without forcing them to liquidate, which would be the case under
receivership. Importantly, the primary focus of the plan is to increase the availability of
mortgage financing by allowing these GSEs to continue to grow their guarantee business without
limit, while limiting net purchase of Agency RMBS to a modest amount through the end of 2009.
Beginning in 2010, these GSEs will gradually reduce their Agency RMBS portfolios. In addition, in
an effort to further stabilize the U.S. mortgage market, the U.S. Treasury took three additional
actions. First, it entered into a preferred stock purchase agreement with each of the GSEs,
pursuant to which $100 billion will be available to each GSE. Second, it established a new secured
credit facility, the GSECF, available to each of Fannie Mae and Freddie Mac (as well as Federal
Home Loan Banks) through December 31, 2009, when other funding sources are unavailable. Third, it
established an Agency RMBS purchase program, under which the U.S. Treasury may purchase Agency RMBS
in the open market. This Agency RMBS purchase program will also expire on December 31, 2009.
Initially, Fannie Mae and Freddie Mac each issued $1.0 billion of senior preferred stock to the
U.S. Treasury and warrants to purchase 79.9% of the fully-diluted common stock outstanding of each
GSE at a nominal exercise price. Pursuant to these agreements, each of Fannie Maes and Freddie
Macs mortgage and Agency RMBS portfolio may not exceed $850 billion as of December 31, 2009, and
will decline by 10% each year until such portfolio reaches $250 billion. After reporting a
substantial loss in the third quarter of 2008, Freddie Mac requested a capital injection of $13.8
billion by the U.S. Treasury pursuant to its preferred stock purchase agreement. Although the U.S.
Government has committed capital to Fannie Mae and Freddie Mac, there can be no assurance that
these actions will be adequate for their needs. These uncertainties lead to questions about the
future of the GSEs in their current form, or at all, and the availability of, and trading market
for, Agency RMBS. If these actions are inadequate, and the GSEs continue to suffer losses or cease
to exist, our business, operations and financial condition could be materially adversely affected.
See Risk FactorsRisks
- 61 -
Related to Our CompanyThere can be no assurance that the actions of the U.S. Government,
Federal Reserve, U.S. Treasury and other governmental and regulatory bodies for the purpose of
stabilizing the financial markets, including the establishment of the TALF and the PPIP, or market
response to those actions, will achieve the intended effect, and our business may not benefit from
these actions and further government or market developments could adversely impact us.
Guarantee Program for Money Market Funds
In an effort to stabilize the money market fund industry, the U.S. Treasury on September 19,
2008 announced the establishment of the Temporary Guarantee Program for Money Market Funds, through
which U.S. Treasury guarantees the share price of any publicly offered eligible money market mutual
fund both retail and institutional that applies for and pays a fee to participate in the
program. The temporary measure will enable the Exchange Stabilization Fund, established in 1934 as
part of the Gold Reserve Act, to insure the holdings of any publicly offered money market mutual
fund for both retail and institutional clients. The current termination date for the guarantee
program is September 18, 2009.
Money market funds are a vital source of short-term liquidity in the financial markets. Money
market funds provide for repurchase agreement financing by lending cash versus collateral, such as
debt issued by the U.S. Treasury and Agency RMBS, for short periods of time. Pressure on asset
prices in the credit markets has recently caused several money market funds to come under pressure
from a pricing and redemption standpoint. This insurance program will help ease this pressure over
time and should allow lending capacity offered by money market funds to return to more normal
levels.
As we will rely on short-term borrowing in the form of repurchase agreements to fund the
purchase of some of our target assets, we believe that this action should positively impact us by
stabilizing a major source of our anticipated borrowings.
Capital Assistance Program and Bank Stress Tests
On February 25, 2009, the U.S. Treasury and federal banking agencies released details about
the Capital Assistance Program, or the CAP. The CAP has two elements: (1) a forward looking
stress test to determine if any major bank requires an additional capital buffer, and (2) access to
preferred shares convertible into common equity from the government as a bridge to private capital
in the future. Nineteen banks with risk weighted assets exceeding $100 billion have been stress
tested under various economic assumptions relating to further contractions in the U.S. economy and
further declines in housing prices and increases in unemployment. The stress tests were completed
on April 24, 2009 and shared confidentially with the institutions subject to the test. The results
were made public on May 7, 2009. We believe that in the aftermath of the completion of the
bank stress tests being conducted by the U.S. Treasury, banks determined to be undercapitalized
may be pressured to dispose of some or all of their non-Agency RMBS, CMBS and mortgage loan
portfolios, which could make significant quantities of these assets available to us at attractive
prices.
The Term Asset-Backed Securities Lending Facility
In response to the severe dislocation in the credit markets, the U.S. Treasury and the Federal
Reserve jointly announced the establishment of the TALF on November 25, 2008. The TALF is designed
to increase credit availability and support economic activity by facilitating renewed
securitization activities. Under the initial version of TALF, or TALF 1.0, the FRBNY makes
non-recourse loans to borrowers to fund their purchase of ABS collateralized by certain assets such
as student loans, auto loans and leases, floor plan loans, credit card receivables, receivables
related to residential mortgage services advances, equipment loans and leases and loans guaranteed
by the SBA. Under TALF 1.0, the FRBNY announced its intention to lend up to $200 billion to
certain holders of TALF-eligible ABS. Any U.S. company that owns TALF-eligible ABS may borrow from
the FRBNY under TALF, provided that the company maintains an account relationship with a primary
dealer. TALF 1.0 is presently expected to run through December 31, 2009.
- 62 -
On March 23, 2009, the U.S. Treasury announced preliminary plans to expand the TALF to include
non-Agency RMBS that were originally rated AAA and outstanding CMBS that are rated AAA. On May 1,
2009, the Federal Reserve published the terms for the expansion of TALF to CMBS and announced that,
beginning on June 16, 2009, up to $100 billion of TALF loans will be available to finance purchases of
eligible CMBS. In this publication, the Federal Reserve stated conditions for TALF eligibility.
Such conditions are described under BusinessOur Financing Strategy below. The Federal Reserve
also described the terms for CMBS collateralized TALF loans. Such conditions are described under
BusinessOur Financing Strategy below. Additionally, on May 19, 2009, the Federal Reserve announced that certain high quality legacy
CMBS, including CMBS issued before January 1, 2009, would become eligible collateral under the TALF starting in July 2009.
We
believe that the expansion of the TALF to include highly rated CMBS,
to the extent available to us, may provide us with
attractively priced non-recourse term borrowings that we could use to purchase newly created and legacy CMBS
that are eligible for funding under this program. Although there can be no assurance in this regard, as described
in more detail below, we may be able to use funding provided under the Legacy Securities
Program, to the extent available to us, to acquire older vintage CMBS.
To date, neither the FRBNY nor the U.S. Treasury has announced how TALF will be expanded to
non-Agency RMBS. We believe that once so expanded, the TALF should provide us with attractively
priced non-recourse term borrowing facilities that we can use to purchase non-Agency RMBS. However, there can
be no assurance that the TALF will be expanded to include this asset class and, if so expanded,
that we will be able to utilize it successfully or at all. Although there can be no assurance in
this regard, as described below under BusinessOur Financing Strategy, we anticipate being able
to use funding provided under the Legacy Securities Program to acquire RMBS.
The Public-Private Investment Program
On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve,
announced the establishment of the PPIP. The PPIP is designed to encourage the transfer of certain
illiquid legacy real estate-related assets off of the balance sheets of financial institutions,
restarting the market for these assets and supporting the flow of credit and other capital into the
broader economy. The PPIP is expected to be $500 billion to $1 trillion in size and has two
primary components: the Legacy Securities Program and the Legacy Loan Program. Under the Legacy
Securities Program, Legacy Securities PPIFs will be established to purchase from financial
institutions certain non-Agency RMBS and newly issued and legacy CMBS that were originally rated in the highest rating
category by one or more of the national recognized statistical rating organizations. Under the
Legacy Loan Program, Legacy Loan PPIFs will be established to purchase troubled loans (including
residential and commercial mortgage loans) from insured depository institutions. The terms of the
Legacy Loan and Legacy Securities Program are described under BusinessOur Financing Strategy
below.
To the extent
available to us, we may seek to finance our non-Agency RMBS and CMBS portfolios with
financings under the Legacy Securities Program. We may access this financing by contributing our
equity capital to one or more Legacy Securities PPIFs that will be established and managed by our
Manager or one of its affiliates if their application to serve as one of the investment managers
for the Legacy Securities Program is accepted by the U.S. Treasury, or to other Legacy Securities
PPIFs established and managed by third parties. We expect that these Legacy Securities PPIFs would directly access the favorable financing available under this program.
We may seek to
acquire residential and commercial mortgage loans with financing under the Legacy
Loan Program. To the extent available to us, we anticipate that we would access this financing by
contributing equity capital to one or more Legacy Loan PPIFs that will be established and managed
by our Manager or one of its affiliates. We expect that these Legacy Loan PPIFs would directly
access the favorable financing available under this program.
To date,
the terms of any equity investment that we would make to any Legacy Securities or Legacy
Loan PPIFs that may be established in the future have not yet been determined. However, we
anticipate that any such Legacy Securities or Legacy Loan PPIF would:
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be structured as partnership for U.S. tax purposes; |
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have a finite life, meaning that after a specified holding period the assets held by the
Legacy Securities or Legacy Loan PPIF would be sold and the proceeds from such sale would
be distributed to the applicable Legacy Securities and Legacy Loan PPIF investors; |
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provide for the payment of fees to the investment manager of the Legacy Securities or
Legacy Loan PPIF, which we anticipate to include base management fees and the payment of an
incentive fee to the investment manager after investors receive minimum hurdle rates of
return; and |
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require minimum distributions be made to the investors in the Legacy Securities or
Legacy Loan PPIF so as to enable us to satisfy the distribution requirements applicable to
us as a REIT. |
Any equity investment we may
make in any such Legacy Securities or Legacy Loan PPIF may be subject to transfer restrictions. The
terms of any equity investment we make in any such Legacy Securities or Legacy Loan PPIF must
be approved by our board of directors, including a majority of our independent directors. In
addition, we expect that any investment we make will be on terms that are no less favorable to us
than those made available to other third party institutional investors in the Legacy Securities or
Legacy Loan PPIF. In our management agreement, our Manager has agreed
not to charge the management fee
payable in respect of any equity investment we may decide to make in a Legacy Securities or Legacy
Loan PPIF managed by our Manager or any of its affiliates. We will be responsible for any fees payable for any equity investment
we may decide to make in a Legacy Securities or Legacy Loan PPIF managed by an entity other than our Manager
or any of its affiliates.
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Emergency Economic Stabilization Act of 2008 and TARP
On October 3, 2008, President George Bush signed into law the EESA. The EESA provides the
Secretary of the U.S. Treasury with the authority to establish a Troubled Asset Relief Program, or
TARP, to purchase from financial institutions up to $700 billion of residential or commercial
mortgages and any securities, obligations or other instruments that are based on or related to such
mortgages, that in each case was originated or issued on or before March 14, 2008, as well as any
other financial instrument that the Secretary of the U.S. Treasury, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which
is necessary to promote financial market stability, upon transmittal of such determination, in
writing, to the appropriate committees of the U.S. Congress.
Capital Purchase Program
The Capital Purchase Program, or the CPP, is a voluntary program designed to encourage U.S.
financial institutions to build capital to increase the flow of financing to U.S. businesses and
consumers and to support the U.S. economy. Under this program, the U.S. Treasury is authorized to
purchase up to $250 billion of senior preferred shares in qualifying domestically-controlled banks,
savings associations, and certain bank and savings and loan holding companies engaged only in
financial activities. As of January 13, 2009, the U.S. Treasury had invested approximately $192
billion in 258 publicly-traded and private banking organizations under the CPP.
Targeted Investment Program
The Targeted Investment Program, or the TIP, is intended to prevent significant market
disruptions that could result from a loss of confidence in a particular financial institution. The
U.S. Treasury will determine whether a financial institution is eligible for the program on a case
by case basis based on a number of considerations. As of January 16, 2009, the U.S. Treasury had
invested $40 billion in two banking organizations under the TIP.
Systemically Significant Failing Institutions Program
The Systemically Significant Failing Institutions Program, or the SSFIP, is intended to
provide stability and prevent disruption to financial markets that could result from the failure of
a systemically significant institution. The U.S. Treasury will consider whether an institution is
systemically significant and at substantial risk of failure, and thereby eligible for the SSFIP, on
a case by case basis based on a number of considerations. As of January 13, 2008, the U.S. Treasury
had invested $40 billion in one institution under the SSFIP. This institution was an insurance
company and not a bank. However, banks are certainly of the types of institutions that are eligible
for the SSFIP.
Asset Guarantee Program
The Asset Guarantee Program, or AGP, is designed to provide guarantees for assets held by
systemically significant financial institutions that face a high risk of losing market confidence
due in large part to a portfolio of distressed or illiquid assets. The U.S. Treasury will determine
the eligibility of participants and the allocation of resources on a case-by-case basis. In a
report to Congress, the U.S. Treasury stated that it may use this program in coordination with a
broader guarantee involving one or more other U.S. government agencies. As of January 20, 2008, the
U.S. Treasury had released no data about the use of this program.
We believe that the relatively low cost capital infusions and other assistance made available
to banking organizations under the TARP programs will improve, the functioning of financial markets
which will improve as banks make loans supported by the capital infusions. We further believe that
there is a reasonable likelihood that banks will deploy at least a portion of the capital that they
receive in the Agency RMBS market, resulting in narrower Agency RMBS spreads. We anticipate that
narrower spreads on Agency RMBS will be offset in part by
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improved financing levels and rates, as overall liquidity improves. While we anticipate
spreads on Agency RMBS and financing spreads will be positively correlated going forward, there can
be no assurance this will occur. Additionally, the amount of tightening that can occur in financing
levels and advance rates is limited by the overall low absolute level of short-term funding rates.
Advance rates on repurchase agreement funding with respect to Agency RMBS generally are
approximately 90% to 95% (which means a 5% to 10% haircut), down from 97% (which means a 3%
haircut).
As the banks overall capital positions improve because of capital infusions under the TARP
programs (and the CPP, in particular), we believe that they will seek to once again deploy capital
through various lending channels, including repurchase lending.
However, there can be no assurance that the EESA or the TARP programs will have a beneficial
impact on the financial markets, including on current levels of volatility. To the extent the
market does not respond favorably to the TARP programs or the TARP programs do not function as
intended, our business may not receive the anticipated positive impact from the legislation. We
cannot predict whether or when the TARP programs will have any impact and to what extent it will
affect our business, results of operations and financial condition.
Hope for Homeowners Act of 2008
On July 30, 2008, the Hope for Homeowners Act of 2008, or the H4H Act, was signed into law.
The H4H Act created a new, temporary, voluntary program within the FHA to back FHA-insured
mortgages to distressed borrowers. The Hope for Homeowners program, which is effective from October
1, 2008 through September 30, 2011, will enable certain distressed borrowers to refinance their
mortgages into FHA-insured loans.
Ginnie Mae, which guarantees the payment of principal and interest on Hope for Homeowners MBS,
requires that all loans under the H4H Act must be pooled only under the Ginnie Mae II programs
multiple issuer type, or MFS. Ginnie Mae will accept loan packages under the H4H Act to be pooled
in MFS securities with a November 1, 2008 issue date and thereafter. If a loan in an existing or
seasoned pool is refinanced under this program the prepayment speeds on existing pools may rise.
Depending on whether or not the bond was purchased at a premium or discount, the yield may be
positively or negatively impacted. Furthermore, the coupons on new pools generated under this
program based on refinanced loans may be lower potentially negatively impacting our yield on new
opportunities.
Other Initiatives
Federal Reserve
During 2008, the Federal Reserve also initiated a number of other programs aimed at improving
broader financial markets, such as establishing a $1.8 trillion commercial paper funding facility
and a $200 billion facility to finance consumer asset-backed securities. The U.S. Treasury
committed $20 billion from TARP to support the Federal Reserves $200 billion consumer facility. In
addition, in order to provide further liquidity to financial institutions, the Federal Reserve has
provided primary dealers with access to the Federal Reserves discount window and, in instances of
distress, arranged financing for certain holding entities. For example, in September 2008, the
Federal Reserve took action to help American International Group, or AIG, a large insurance
company, avoid insolvency by providing AIG with an emergency $85 billion credit facility. By
November 2008, AIG needed additional help, leading the Federal Reserve, in conjunction with the
U.S. Treasury, to replace the $85 billion facility with a revised emergency government assistance
package totaling over $150 billion ($60 billion of which was a credit facility from the Federal
Reserve). We believe that programs have and will continue to improve short-term credit markets,
including the repurchase financing market. Given the Federal Reserves actions to date, we believe
the Federal Reserve will remain committed to assuring that short-term credit markets function
efficiently, which, in turn, will reduce our borrowing costs over time. The Federal Reserve
programs are likely to result in both Agency RMBS spreads tightening and improved liquidity in this
market. The improved liquidity should increase the availability and attractiveness of repurchase
financing, as banks become more comfortable with their ability to value and, in the event of
default, efficiently liquidate collateral.
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On November 25, 2008, the Federal Reserve announced that it will initiate a program to
purchase $100 billion in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan
Banks and $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie
Mae. The Federal Reserve stated that its actions are intended to reduce the cost and increase the
availability of credit for the purchase of houses, which in turn should support housing markets and
foster improved conditions in financial markets more generally. The purchases of direct obligations
began during the first week of December 2008, and the purchases of Agency RMBS began during the
first week of January 2009. The Federal Reserves program to purchase Agency RMBS could cause an
increase in the price of Agency RMBS, which would negatively impact the net interest margin with
respect to Agency RMBS we expect to purchase.
FDIC
During 2008, the FDIC also initiated programs in an effort to restore confidence and
functioning in the banking system and attempt to reduce foreclosures through loan modifications.
Specifically, the FDIC adopted the Temporary Liquidity Guarantee Program, which has two primary
components: the Debt Guarantee Program, by which the FDIC will guarantee the payment of certain
newly issued senior unsecured debt and the Transaction Account Guarantee, Program by which the FDIC
will guarantee up to an unlimited amount certain transaction accounts bearing no or minimal
interest (e.g. NOW accounts paying no more than 0.50% interest), until December 31, 2009. The FDIC
also raised the deposit insurance limits to $250,000 up from $100,000 through December 31, 2009.
Additionally, in an attempt to reduce foreclosures, the FDIC encouraged uniform guidelines for loan
modifications, which include reduction of interest rate, extension of maturity and balance
reductions.
Recent Interagency Coordinated Efforts
The Federal Reserve, U.S. Treasury and FDIC on January 16, 2009 announced the execution of
agreements under which they would guarantee large pools of assets held by Citigroup and Bank of
America. We believe this action reflects improved coordination among the principal government
agencies responsible for implementing the U.S. Governments response to the current financial
crisis.
The agreement with Citigroup (a non-binding version of which was initially announced November
23, 2008) provides loss protection on an asset pool of approximately $301 billion of loans and
securities backed by residential and commercial real estate and other such assets, all of which
will remain on Citigroups balance sheet. According to a term sheet released by Citigroup, the
first loss position of $39.5 billion would be absorbed by Citigroup, the second loss position would
be absorbed 90% by Treasury, up to its advance of $5 billion, and 10% by Citigroup, the third loss
position would be absorbed 90% by FDIC, up to its advance of $10 billion, and 10% by Citigroup.
Additional losses would be addressed through a loan provided to Citigroup by the Federal Reserve.
The agreement with Bank of America called for the U.S. Treasury and FDIC to provide loss
protection on an asset pool of approximately $118 billion of loans, securities backed by
residential and commercial real estate loans, and other such assets. Under the agreement, the first
loss position of $10 billion would be absorbed by Bank of America, and the second loss position
would be absorbed 90% by the U.S. Treasury and the FDIC, up to their advance of $10 billion, and
10% by Bank of America. Additional losses would be absorbed 10% by Bank of America and the
remaining 90% through a loan provided to Bank of America by the Federal Reserve.
Critical Accounting Policies
Our financial statements will be prepared in accordance with GAAP which requires the use of
estimates and assumptions that involve the exercise of judgment and use of assumptions as to future
uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting
policies that we will apply based on our expectation of our initial operations. Our most critical
accounting policies will involve decisions and assessments that could affect our reported assets
and liabilities, as well as our reported revenues and expenses. We believe that all of the
decisions and assessments upon which our financial statements will be based will be reasonable at
the time made and based upon information available to us at that time. We will rely on independent
pricing of our assets at each quarters end to arrive at what we believe to be reasonable estimates
of fair market value. We have identified what we believe will be our most critical accounting
policies to be the following:
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Repurchase Agreements
We will finance the acquisition of
Agency RMBS for our investment portfolio
through the use of repurchase agreements. Repurchase agreements will be treated as collateralized
financing transactions and will be carried at primarily their contractual amounts, including accrued
interest, as specified in the respective agreements.
In instances where we acquire
Agency RMBS through repurchase agreements with
the same counterparty from whom the Agency RMBS were purchased, we will account for the purchase
commitment and repurchase agreement on a net basis and record a forward commitment to purchase
Agency RMBS as a derivative instrument if the transaction does not comply with the criteria in
FASB Staff Position, or FSP, FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions, or FSP FAS 140-3, for gross presentation. If the transaction complies with
the criteria for gross presentation in FSP FAS 140-3, we will record the assets and the related
financing on a gross basis in our statements of financial condition, and the corresponding interest
income and interest expense in our statements of operations and comprehensive income (loss). Such
forward commitments are recorded at fair value with subsequent changes in fair value recognized in
income. Additionally, we will record the cash portion of our investment in Agency RMBS as
a mortgage related receivable from the counterparty on our balance sheet.
Fair Value Measurements
The FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair
value, establishes a framework for measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy (levels 1, 2, and 3, as defined). Additionally,
companies are required to provide enhanced disclosure regarding instruments in the level 3 category
(which require significant management judgment), including a reconciliation of the beginning and
ending balances separately for each major category of assets and liabilities.
Additionally, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of SFAS No. 115, or SFAS 159. SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date.
Securities Held for Investment
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, or SFAS 115, requires that at the time of purchase, we designate a
security as either held-to-maturity, available-for-sale, or trading, depending on our ability and
intent to hold such security to maturity. Securities available-for-sale will be reported at fair
value, while securities held-to-maturity will be reported at amortized cost. Although we generally
intend to hold most of our RMBS and CMBS until maturity, we may, from time to time, sell any of our
RMBS and CMBS as part of our overall management of our investment portfolio.
All securities classified as
available-for-sale will be reported at fair value, based on market prices from third-party sources
when available, with unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders equity. We do not have an investment portfolio at this time.
Our
Manager will evaluate securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market conditions warrant such evaluation. The determination
of whether a security is other-than-temporarily impaired will involve judgments and assumptions
based on subjective and objective factors. Consideration will be given to (1) the length of time
and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of recovery in fair value of the agency security, and (3) our intent and
ability to retain our investment in the RMBS or CMBS for a period of time sufficient to allow for
any anticipated recovery in fair value.
Investments with unrealized losses will not be considered
other-than-temporarily impaired if we have the ability and intent to hold the investments for a
period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to
or beyond the cost of the investments. Unrealized losses on securities that are considered
other-than-temporary, as measured by the amount of the difference between the securities cost
basis
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and their fair value, will be recognized in earnings as unrealized losses and the cost basis
of the securities will be adjusted.
Interest Income Recognition
Interest income on available-for-sale securities will be recognized over the life of the
investment using the effective interest method. Interest income on
mortgage-backed securities is recognized using the
effective interest method as described by SFAS No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, or SFAS 91, for
securities of high credit quality and Emerging Issues Task Force No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets, or EITF 99-20, for all other securities.
Under SFAS 91 and EITF 99-20, management will estimate, at the time of purchase, the future
expected cash flows and determine the effective interest rate based on these estimated cash flows
and our purchase price. As needed, these estimated cash flows will be updated and a revised yield
computed based on the current amortized cost of the investment. In estimating these cash flows,
there will be a number of assumptions that will be subject to uncertainties and contingencies.
These include the rate and timing of principal payments (including prepayments, repurchases,
defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In
addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to
be judgmentally estimated. These uncertainties and contingencies are difficult to predict and are
subject to future events that may impact managements estimates and our interest income.
Security transactions will be recorded on the trade date. Realized gains and losses from
security transactions will be determined based upon the specific identification method and recorded
as gain (loss) on sale of available-for-sale securities and loans held for investment in the
statement of income.
We will account for accretion of discounts or premiums on available-for-sale securities and
real estate loans using the effective interest yield method. Such amounts will be included as a
component of interest income in the income statement.
Residential and Commercial Real Estate Loans Fair Value
Residential and commercial real estate loans at fair value are loans where we will elect the fair
value option under SFAS 159. Interest will be recognized as revenue when earned and deemed
collectible or until a loan becomes more than 90 days past due. Changes in fair value (gains and
losses) will be reported through our consolidated statements of (loss) income.
Residential and Commercial Real Estate Loans Held-for-Sale
Residential and commercial real estate loans held-for-sale are loans that we will be marketing for
sale to independent third parties. These loans are carried at the lower of their cost or fair
value in accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities as
measured on an individual basis. Interest will be recognized as revenue when earned and deemed
collectible or until a loan becomes more than 90 days past due. If fair value is lower than
amortized cost, changes in fair value (gains and losses) are reported through our consolidated
statements of (loss) income.
Residential and Commercial Real Estate Loans Held-for-Investment
Real estate loans held-for-investment will be carried at their unpaid principal balances adjusted
for net unamortized premiums or discounts and net of any allowance for credit losses. Interest
will be recognized as revenue when earned and deemed collectible or until a loan becomes more than
90 days past due. Pursuant to SFAS 91, we will use the interest method to determine an effective
yield and to amortize the premium or discount on real estate loans held-for-investment.
Real Estate Loans Allowance for Loan Losses
For real estate loans classified as held-for-investment, we will establish and maintain an
allowance for loan losses based on our estimate of credit losses inherent in our loan portfolios.
To calculate the allowance for loan losses, we will assess inherent losses by determining loss
factors (defaults, the timing of defaults, and loss severities upon defaults) that can be
specifically applied to each of the consolidated loans or pool of loans.
We will follow the guidelines of SEC Staff Accounting Bulletin No. 102, Selected Loan Loss
Allowance Methodology and Documentation, SFAS No. 5, Accounting for Contingencies, SFAS No.114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures in setting the allowance for loan losses.
We will consider the following factors in determining the allowance for loan losses:
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Ongoing analyses of loans, including, but not limited to, the age of
loans, underwriting standards, business climate, economic conditions,
geographical considerations, and other observable data; |
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Historical loss rates and past performance of similar loans; |
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Relevant environmental factors; |
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Relevant market research and publicly available third-party reference
loss rates; |
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Trends in delinquencies and charge-offs; |
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Effects and changes in credit concentrations; |
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Information supporting a borrowers ability to meet obligations; |
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Ongoing evaluations of fair values of collateral using current
appraisals and other valuations; and, |
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Discounted cash flow analyses. |
Accounting for Derivative Financial Instruments
Our policies permit us to enter into derivative contracts, including interest rate swaps,
interest rate caps and interest rate floors, as a means of mitigating our interest rate risk. We
intend to use interest rate derivative financial instruments to mitigate interest rate risk rather
than to enhance returns.
We will account for derivative financial instruments in accordance with SFAS 133 Accounting
for Derivative Instruments and Hedging Activities, or SFAS 133, as amended and interpreted.
SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the
balance sheets and to measure those instruments at fair value. Additionally, the fair value
adjustments will affect either other comprehensive income in stockholders equity until the hedged
item is recognized in earnings or net income depending on whether the derivative instrument
qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
In the normal course of business, we may use a variety of derivative financial instruments to
manage or hedge interest rate risk. These derivative financial instruments must be effective in
reducing our interest rate risk exposure in order to qualify for hedge accounting. When the terms
of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all
changes in the fair value of the instrument are marked-to-market with changes in value included in
net income for each period until the derivative instrument matures or is settled. Any derivative
instrument used for risk management that does not meet the hedging criteria is marked-to-market
with the changes in value included in net income.
Derivatives will be used for hedging purposes rather than speculation. We will rely on
quotations from a third party to determine these fair values. If our hedging activities do not
achieve our desired results, our reported earnings may be adversely affected.
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Income Taxes
We intend to elect and qualify to be taxed as a REIT, commencing with our taxable year ending
December 31, 2009. Accordingly, we will generally not be subject to corporate U.S. federal or
state income tax to the extent that we make qualifying distributions to our stockholders, and
provided that we satisfy on a continuing basis, through actual investment and operating results,
the REIT requirements including certain asset, income, distribution and stock ownership tests. If
we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will
be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a
REIT for the subsequent four taxable years following the year in which we lost our REIT
qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact
on our results of operations and amounts available for distribution to our stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is
computed using our taxable income as opposed to net income reported on the financial statements.
Taxable income, generally, will differ from net income reported on the financial statements because
the determination of taxable income is based on tax provisions and not financial accounting
principles.
We may elect to treat certain of our subsidiaries as TRSs. In general, a TRS of ours may hold
assets and engage in activities that we cannot hold or engage in directly and generally may engage
in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state
and local corporate income taxes.
While a TRS will generate net income, a TRS can declare dividends to us which will be included
in our taxable income and necessitate a distribution to our stockholders. Conversely, if we retain
earnings at a TRS level, no distribution is required and we can increase book equity of the
consolidated entity.
Share-Based Compensation
The
Company will follow SFAS No. 123R, Share-Based Payments, or SFAS 123(R), with regard to its
stock option plan. SFAS 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS 123 (R) requires that compensation cost relating
to share-based payment transactions be recognized in financial statements. The cost is measured
based on the fair value of the equity or liability instruments issued.
The
Company intends to adopt an equity incentive plan under which its independent directors are
eligible to receive annual nondiscretionary awards of nonqualified stock options. The board of
directors may make appropriate adjustments to the number of shares available for awards and the
terms of outstanding awards under the stock option plan to reflect any change in the Companys
capital structure.
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Recent Accounting Pronouncements
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment to SFAS 133, or SFAS 161. This new standard requires enhanced
disclosures for derivative instruments, including those used in hedging activities. It is
effective for fiscal years and interim periods beginning after November 15, 2008 and will be
applicable to the Company in the first quarter of fiscal 2009. The Company is assessing the
potential impact that the adoption of SFAS 161 may have on its financial statements.
The FASB issued FSP FAS 140-3 relating to SFAS 140, Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions, or SFAS 140, to address questions where assets
purchased from a particular counterparty and financed through a repurchase agreement with the same
counterparty can be considered and accounted for as separate transactions. Currently, we are still
evaluating our ability to record such assets and the related financing on a gross basis in our
statements of financial condition, and the corresponding interest income and interest expense in
our statements of operations and comprehensive income (loss). For assets representing
available-for-sale investment securities, as in our case, any change in fair value will be reported
through other comprehensive income under SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, with the exception of impairment losses, which will be recorded in the
statement of operations and comprehensive (loss) income as realized losses. FASBs staff position
requires that all of the following criteria be met in order to continue the application of SFAS
No. 140 as described above: (1) the initial transfer of repurchase financing cannot be
contractually contingent; (2) the repurchase financing entered into between the parties provides
full recourse to the transferee, and the repurchase price is fixed; (3) the financial asset has an
active market, and the transfer is executed at market rates; and (4) the repurchase agreement and
financial asset do not mature simultaneously.
On October 10, 2008, FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active, or FSP 157-3, in response to the deterioration of
the credit markets. This FSP provides guidance clarifying how SFAS 157 should be applied when
valuing securities in markets that are not active. The guidance provides an illustrative example
that applies the objectives and framework of SFAS 157, utilizing managements internal cash flow
and discount rate assumptions when relevant observable data does not exist. It further clarifies
how observable market information and market quotes should be considered when measuring fair value
in an inactive market. It reaffirms the notion of fair value as an exit price as of the
measurement date and that fair value analysis is a transactional process and should not be broadly
applied to a group of assets. FSP 157-3 is effective upon issuance including prior periods for
which financial statements have not been issued. FSP 157-3 does not have a material effect on the
fair value of its assets as the Company intends to continue to hold assets that can be valued via
level 1 and level 2 criteria, as defined under SFAS No. 157.
Pursuant to Section 133 of the EESA, the SEC has commenced a study of the impact of the fair
value or mark-to-market accounting standards, including, but not limited to: (1) the effects of
such accounting standards on a financial institutions balance sheet; (2) the impacts of such
accounting on bank failures in 2008; (3) the impact of such standards on the quality of financial
information available to investors; (4) the process used by the Financial Accounting Standards
Board in developing accounting standards; (5) the advisability and feasibility of modification to
such standards; and (6) alternative accounting standards to those provided in SFAS 157. The study,
which is being conducted in consultation with the Secretary of the Treasury and the Board of
Governors of the Federal Reserve System, is expected to be completed before the end of the 90-day
period beginning on the date of the enactment of this Act, which is October 3, 2008.
On December 11, 2008, the FASB issued FSP 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities. The FSP increases disclosures for public companies about securitizations, asset-backed
financings and variable interest entities. The FSP is effective for reporting periods that end
after December 15, 2008.
In January 2009, the FASB issued FASB Staff Position No. EITF 99-20-1, Amendments to the
Impairment Guidance of EITF Issue No. 99-20 or FSP EITF 99-20-1, which became effective for us on
December 31, 2008. FSP EITF 99-20-1 revises the impairment guidance provided by EITF 99-20 for
beneficial interests to make it consistent with the requirements of FASB Statement No. 115 for
determining whether an impairment of other debt and equity securities is other-than-temporary. FSP
EITF 99-20-1 eliminates the requirement that a holders best estimate of cash flows be based upon
those that a market participant would use. Instead, FSP 99-20-1 requires that
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an other-than-temporary impairment be recognized when it is probable that there has been an
adverse change in the holders estimated cash flows. FSP EITF 99-20-1 did not have a material
impact on our financial statements.
On April 9, 2009, the FASB issued three FSPs intended to provide additional application
guidance and enhance disclosures regarding fair value measurements and impairments of securities.
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly or, FSP
157-4, provides guidelines for making fair value measurements more consistent with the principles
presented in FASB Statement No. 157. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments or FSP 107-1, enhances consistency in financial reporting by
increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, or FSP 115-2, provides additional guidance
designed to create greater clarity and consistency in accounting for and presenting impairment
losses on securities.
FSP 157-4 addresses the measurement of fair value of financial assets when there is no active
market or where the price inputs being used could be indicative of distressed sales. FSP 157-4
reaffirms the definition of fair value already reflected in FASB Statement No. 157, which is the
price that would be paid to sell an asset in an orderly transaction (as opposed to a distressed or
forced transaction) at the measurement date under current market conditions. FSP 157-4 also
reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and
in determining fair values when markets have become inactive.
FSP 107-1 was issued to improve the fair value disclosures for any financial instruments that
are not currently reflected on the balance sheet of companies at fair value. Prior to issuing FSP
107-1, fair values of these assets and liabilities were only disclosed once a year. FSP 107-1 now
requires these disclosures on a quarterly basis, providing qualitative and quantitative information
about fair value estimates for all those financial instruments not measured on the balance sheet at
fair value.
FSP 115-2 on other-than-temporary impairments is intended to improve the consistency in the
timing of impairment recognition, and provide greater clarity to investors about the credit and
noncredit components of impaired debt securities that are not expected to be sold. FSP 115-2
requires increased and more timely disclosures sought by investors regarding expected cash flows,
credit losses, and an aging of securities with unrealized losses.
FSP 157-4, FSP 107-1 and FSP 115-2 are effective for interim and annual periods ending after
June 15, 2009, and provide for early adoption for the interim and annual periods ending after March
15, 2009. All three FSPs must be adopted in conjunction with each other. We will adopt all three
FSPs for the interim period ending June 30, 2009.
Results of Operations
As of the date of this prospectus, we have not commenced any significant operations because we
are in our organization stage. We will not commence any significant operations until we have
completed this offering. We are not aware of any material trends or uncertainties, other than
economic conditions affecting mortgage loans, MBS and real estate, generally, that may reasonably
be expected to have a material impact, favorable or unfavorable, on revenues or income from the
acquisition of real estate-related investments, other than those referred to in this prospectus.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including
ongoing commitments to pay dividends, fund investments and other general business needs. Our
primary sources of funds for liquidity will consist of the net proceeds from this offering and the
concurrent private placements, net cash provided by operating activities, cash from repurchase
agreements and other financing arrangements and future issuances of common equity, preferred
equity, convertible securities, trust preferred and/or debt
securities. To the extent available to us, we may seek to also finance our
assets under, and may otherwise participate in, programs established by the U.S. Government such as
the TALF and, if
available, we may make investments in funds that receive financing
under the PPIP. See BusinessOur Financing Strategy.
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We anticipate that, upon repayment of each borrowing under a repurchase agreement, we will use
the collateral immediately for borrowing under a new repurchase agreement. We have not at the
present time entered into any commitment agreements under which the lender would be required to
enter into new repurchase agreements during a specified period of time.
Under repurchase agreements, we may be required to pledge additional assets to our repurchase
agreement counterparties (lenders) in the event that the estimated fair value of the existing
pledged collateral under such agreements declines and such lenders demand additional collateral
which may take the form of additional securities or cash. Generally, repurchase agreements contain
a financing rate, term and trigger levels for margin calls and haircuts depending on the types of
collateral and the counterparties involved. If the estimated fair value of investment securities
increase due to changes in market interest rates or market factors, lenders may release collateral
back to us. Specifically, margin calls result from a decline in the value of the investments
securing our repurchase agreements, prepayments on the mortgages securing such investments and from
changes in the estimated fair value of such investments generally due to principal reduction of
such investments from scheduled amortization and resulting from changes in market interest rates
and other market factors. Counterparties also may choose to increase haircuts based on credit
evaluations of our company and/or the performance of the bonds in question. We believe that the
current levels of haircuts are approximately 5% on fixed-rate Agency RMBS that are mortgage
pass-through certificates, approximately 5% to 7% on adjustable-rate or hybrid Agency RMBS that are
mortgage pass-through certificates and approximately 10% on Agency RMBS that are CMOs. Trigger
levels for margin calls generally vary from $250,000 to $1 million at the discretion of the
counterparty. The recent disruptions in the financial and credit markets have resulted in
increased volatility in these levels, and we expect further changes as market conditions continue
to change. Should prepayment speeds on the mortgages underlying our investments or market interest
rates suddenly increase, margin calls on our repurchase agreements could result, causing an adverse
change in our liquidity position.
Invesco Aim Advisors has been active in the repurchase agreement lending market since 1980 and
currently has master repurchase agreements in place with a number of counterparties. At March 31,
2009, Invesco Aim Advisors had provided repurchase agreement financing to these counterparties
equal to approximately $20.7 billion.
To
the extent available to us, we may finance our non-Agency RMBS and
CMBS portfolios with financings under the TALF or with private
financing sources. If available, we may also finance our investments
in certain CMBS and non-Agency RMBS by contributing capital to one or
more of the Legacy Securities PPIFs that receive financing under the
PPIP. We also expect to focus our residential and
commercial mortgage loan acquisitions through our investments in
Legacy Loan PPIFs on the purchase of loan
portfolios made available to us under the Legacy Loan Program, to the
extent available to us. There can be no assurance that we will be
eligible to participate in these funds or programs or, if we are eligible,
that we will be able to utilize them successfully or at all.
We believe these identified sources of funds will be adequate for purposes of meeting our
short-term (within one year) liquidity and long-term liquidity needs. Our short-term and long-term
liquidity needs include funding future investments, operating costs and distributions to our
stockholders. Our ability to meet our long-term liquidity and capital resource requirements may be
subject to additional financing. A number of financial institutions, including potential and
current repurchase agreement lenders with whom we are speaking, have tightened their lending
standards and reduced their lending overall. If we are unable to obtain or renew our sources of
financing or unable to obtain them on attractive terms, it may have an adverse effect on our
business and results of operations.
To qualify as a REIT, we must distribute annually at least 90% of our taxable income. These
distribution requirements limit our ability to retain earnings and thereby replenish or increase
capital for operations.
Contractual Obligations and Commitments
Prior to the completion of this offering, we will enter into a management agreement with our
Manager. Our Manager will be entitled to receive a management fee and the reimbursement of certain
expenses. The management fee will be calculated and payable quarterly in arrears in an amount
equal to 1.50% of our stockholders equity, per annum, calculated and payable quarterly in arrears.
Our Manager will use the proceeds from its management fee in part to pay compensation to its
officers and personnel who, notwithstanding that certain of them also are our officers, will
receive no cash compensation directly from us. In addition, we expect to enter into a license
agreement with Invesco Holding Company Limited relating to the use of the Invesco name and logo.
Under our equity incentive plan, our compensation committee appointed by the board to
administer the plan (or our board of directors, if no such committee is designated by the board) is
authorized to approve grants of equity-based awards to our directors and executive officers, our
Manager, its personnel and its affiliates as well as certain other service providers. To date, our
board of directors has not approved any grants of equity awards. See ManagementEquity Incentive
Plan.
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We expect to enter into certain contracts that may contain a variety of indemnification
obligations, principally with brokers, underwriters and counterparties to repurchase agreements.
The maximum potential future payment amount we could be required to pay under these indemnification
obligations may be unlimited.
Off-Balance Sheet Arrangements
As
of March 31, 2009, we had no off-balance sheet arrangements.
Dividends
We intend to make regular quarterly distributions to holders of our common stock.
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its
REIT taxable income, without regard to the deduction for dividends paid and excluding net capital
gains, and that it pay tax at regular corporate rates to the extent that it annually distributes
less than 100% of its net taxable income. We intend to pay regular quarterly dividends to our
stockholders in an amount equal to our net taxable income. Before we pay any dividend, whether for
U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements
and debt service on our repurchase agreements and other debt payable. If our cash available for
distribution is less than our net taxable income, we could be required to sell assets or borrow
funds to make cash distributions, or we may make a portion of the required distribution in the form
of a taxable stock distribution or distribution of debt securities.
Inflation
Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a
result, interest rates and other factors influence our performance far more so than does inflation.
Changes in interest rates do not necessarily correlate with inflation rates or changes in
inflation rates. Our financial statements are prepared in accordance with GAAP, and our
distributions will be determined by our board of directors consistent with our obligation to
distribute to our stockholders at least 90% of our net taxable income on an annual basis in order
to maintain our REIT qualification; in each case, our activities and balance sheet are measured
with reference to historical cost and/or fair market value without considering inflation.
Quantitative and Qualitative Disclosures About Market Risk
The primary components of our market risk are related to interest rate, prepayment and market
value risk. While we do not seek to avoid risk completely, we believe the risk can be quantified
from historical experience and seek to actively manage that risk, to earn sufficient compensation
to justify taking those risks and to maintain capital levels consistent with the risks we
undertake.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations, and other factors
beyond our control.
We will be subject to interest rate risk in connection with our investments and our repurchase
agreements. Our repurchase agreements will typically be of limited duration will be periodically
refinanced at current market rates. We intend to mitigate this risk through utilization of
derivative contracts, primarily interest rate swap agreements, interest rate caps and interest rate
floors.
Interest Rate Effect on Net Interest Income
Our operating results will depend in large part on differences between the yields earned on
our investments and our cost of borrowing and interest rate hedging activities. Most of our
repurchase agreements will provide financing based on a floating rate of interest calculated on a
fixed spread over LIBOR. The fixed spread will vary depending on the type of underlying asset
which collateralizes the financing. Accordingly, the portion of our portfolio which consists of
floating interest rate assets will be match-funded utilizing our expected sources of short-term
financing, while our fixed interest rate assets will not be match-funded. During periods of rising
interest rates, the borrowing
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costs associated with our investments tend to increase while the income earned on our fixed
interest rate investments may remain substantially unchanged. This will result in a narrowing of
the net interest spread between the related assets and borrowings and may even result in losses.
Further, during this portion of the interest rate and credit cycles, defaults could increase and
result in credit losses to us, which could adversely affect our liquidity and operating results.
Such delinquencies or defaults could also have an adverse effect on the spread between
interest-earning assets and interest-bearing liabilities.
Hedging techniques are partly based on assumed levels of prepayments of our RMBS. If
prepayments are slower or faster than assumed, the life of the RMBS will be longer or shorter,
which would reduce the effectiveness of any hedging strategies we may use and may cause losses on
such transactions. Hedging strategies involving the use of derivative securities are highly
complex and may produce volatile returns.
Interest Rate Effects on Fair Value
Another component of interest rate risk is the effect changes in interest rates will have on
the market value of the assets we acquire. We will face the risk that the market value of our
assets will increase or decrease at different rates than those of our liabilities, including our
hedging instruments.
We will primarily assess our interest rate risk by estimating the duration of our assets and
the duration of our liabilities. Duration essentially measures the market price volatility of
financial instruments as interest rates change. We generally calculate duration using various
financial models and empirical data. Different models and methodologies can produce different
duration numbers for the same securities.
It is important to note that the impact of changing interest rates on fair value can change
significantly when interest rates change materially. Therefore, the volatility in the fair value
of our assets could increase significantly when interest rates change materially. In addition,
other factors impact the fair value of our interest rate-sensitive investments and hedging
instruments, such as the shape of the yield curve, market expectations as to future interest rate
changes and other market conditions. Accordingly, changes in actual interest rates may have a
material adverse effect on us.
Prepayment Risk
As we receive prepayments of principal on these investments, premiums paid on such investments
will be amortized against interest income. In general, an increase in prepayment rates will
accelerate the amortization of purchase premiums, thereby reducing the interest income earned on
the investments. Conversely, discounts on such investments are accreted into interest income. In
general, an increase in prepayment rates will accelerate the accretion of purchase discounts,
thereby increasing the interest income earned on the investments.
Extension Risk
Our Manager will compute the projected weighted-average life of our investments based on
assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In
general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may,
but are not required to, enter into an interest rate swap agreement or other hedging instrument
that effectively fixes our borrowing costs for a period close to the anticipated average life of
the fixed-rate portion of the related assets. This strategy is designed to protect us from rising
interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of
the related target asset.
However, if prepayment rates decrease in a rising interest rate environment, the life of the
fixed-rate portion of the related assets could extend beyond the term of the swap agreement or
other hedging instrument. This could have a negative impact on our results from operations, as
borrowing costs would no longer be fixed after the end of the hedging instrument, while the income
earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the
market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain
from the related hedging transactions. In extreme situations, we may be forced to sell assets to
maintain adequate liquidity, which could cause us to incur losses.
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Market Risk
Market Value Risk
Our available-for-sale securities will be reflected at their estimated fair value with
unrealized gains and losses excluded from earnings and reported in other comprehensive income
pursuant to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. The
estimated fair value of these securities fluctuates primarily due to changes in interest rates and
other factors. Generally, in a rising interest rate environment, the estimated fair value of these
securities would be expected to decrease; conversely, in a decreasing interest rate environment,
the estimated fair value of these securities would be expected to increase.
Real Estate Risk
Residential and commercial property values are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to: national, regional and local
economic conditions (which may be adversely affected by industry slowdowns and other factors);
local real estate conditions (such as an oversupply of housing); changes or continued weakness in
specific industry segments; construction quality, age and design; demographic factors; and
retroactive changes to building or similar codes. In addition, decreases in property values reduce
the value of the collateral and the potential proceeds available to a borrower to repay our loans,
which could also cause us to suffer losses.
Credit Risk
We believe our investment strategy will generally keep our credit losses and financing costs
low. However, we retain the risk
of potential credit losses on all of the residential and commercial mortgage loans, as well as the
loans underlying the non-Agency RMBS and CMBS we hold. We seek to manage this risk through our
pre-acquisition due diligence process and through use of non-recourse financing which limits our
exposure to credit losses to the specific pool of mortgages that are subject to the non-recourse
financing. In addition, with respect to any particular target asset,
our Managers investment team evaluates, among other things,
relative valuation, supply and demand trends, shape of yield curves,
prepayment rates, delinquency and default rates, recovery of various
sectors and vintage of collateral.
Risk Management
To the extent consistent with maintaining our REIT qualification, we will seek to manage risk
exposure to protect our investment portfolio against the effects of major interest rate changes.
We generally seek to manage this risk by:
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monitoring and adjusting, if necessary, the reset index and interest rate related to our
target assets and our financings; |
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attempting to structure our financing agreements to have a range of different
maturities, terms, amortizations and interest rate adjustment periods; |
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using hedging instruments, primarily interest rate swap agreements but also financial
futures, options, interest rate cap agreements, floors and forward sales to adjust the
interest rate sensitivity of our target assets and our borrowings; and |
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actively managing, on an aggregate basis, the interest rate indices, interest rate
adjustment periods, and gross reset margins of our target assets and the interest rate
indices and adjustment periods of our financings. |
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BUSINESS
Our Company
We are a newly-formed Maryland corporation focused on investing in, financing
and managing residential and commercial mortgage-backed securities
and mortgage loans. We will seek to invest
in Agency RMBS, non-Agency RMBS, CMBS and residential and commercial
mortgage loans. We anticipate financing our Agency RMBS through traditional repurchase agreement financing. In
addition, to the extent available to us, we may seek to finance our investments in CMBS and
non-Agency RMBS with financings under TALF, or with private financing sources. If available, we
may also finance our investments in certain CMBS and non-Agency RMBS by contributing capital to one
or more of the Legacy Securities PPIFs, that receive financing under PPIP, and our investments in
certain legacy commercial and residential mortgage loans by contributing capital to one or more
Legacy Loan PPIFs, that receive such funding or through private
financing sources. Legacy Securities PPIFs and Legacy Loan PPIFs may be
established and managed by our Manager or one of its affiliates or by unaffiliated third parties;
however, our Manager or its affiliates may only establish a Legacy Securities PPIF if their
application to serve as an investment manager of this type of PPIP fund is accepted by the U.S.
Treasury. Our Manager has agreed not to charge fees payable to it under the management agreement
between our Manager and us, with respect to any equity investment we may decide to make in any
Legacy Securities PPIF or Legacy Loan PPIF which is managed by our Manager or one of its
affiliates.
We will be externally managed and advised by our Manager, an SEC-registered investment adviser
and indirect wholly-owned subsidiary of Invesco. Invesco is a leading independent global
investment management company with $348.2 billion in assets under management as of March 31, 2009.
Our
Manager will draw upon the expertise of Invescos Worldwide Fixed Income
investment team of 114 investment
professionals operating in six cities, across four countries, with approximately $150 billion in
securities under management and Invesco Real Estates 219 employees operating in 13 cities across eight
countries with over $22 billion in private and public real estate assets under management. With over 25 years of experience, Invescos teams of dedicated
professionals have developed exceptional track records across multiple fixed income sectors and
asset classes, including structured securities, such as RMBS, ABS, CMBS, and leveraged loan
portfolios. In addition, the investment team will draw upon the mortgage market insights of WL
Ross, Invescos distressed investment unit.
Our objective is to provide attractive risk adjusted returns to our investors over the long
term, primarily through dividends and secondarily through capital appreciation. We intend to
achieve this objective by selectively acquiring target assets to
construct a diversified investment portfolio designed to produce attractive returns across a variety of market conditions and economic
cycles. We intend to construct a diversified investment portfolio by focusing on security
selection and the relative value of various sectors within the mortgage market. We intend to
finance our Agency RMBS investments primarily through short-term borrowings structured as
repurchase agreements. To date, we have signed master repurchase agreements with financial
institutions, and we are in discussions with additional financial institutions for repurchase
facilities. As described in more detail below, to the extent
available to us, we may seek to finance our non-Agency RMBS, CMBS and
mortgage loan portfolios with attractive non-recourse term borrowing facilities and equity
financing under the TALF or with private financing sources and, if
available, we may make investments in funds that receive financing
under the PPIP that will be established and managed by our Manager or one of its affiliates if their
application to serve as one of the investment managers for the Legacy Securities Program is accepted by the U.S. Treasury.
We will commence operations upon completion of this offering. We intend to elect and qualify
to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ending
December 31, 2009. We generally will not be subject to U.S. federal income taxes on our taxable
income to the extent that we annually distribute all of our net taxable income to stockholders and
maintain our intended qualification as a REIT. We also intend to operate our business in a manner
that will permit us to maintain our exemption from registration under the 1940 Act.
Our Manager
We will be externally managed and advised by our Manager. Pursuant to the terms of the
management agreement, our Manager will provide us with our management team, including our officers,
along with appropriate support personnel. Each of our officers is an employee of Invesco. We do
not expect to have any employees. Our Manager is not obligated to dedicate any of its employees
exclusively to us, nor is our Manager or its employees obligated to dedicate any specific portion
of its or their time to our business. Our Manager is at all times subject to the supervision and
oversight of our board of directors and has only such functions and authority as we delegate to it.
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Our Managers Worldwide Fixed Income investment professionals have extensive experience in
performing advisory services for funds, other investment vehicles, and other managed and
discretionary accounts that focus on investing in Agency and other RMBS as well as CMBS. As of
March 31, 2009, our Manager managed approximately $177.0 billion of fixed income and real estate
investments, including approximately $18.8 billion of structured securities, consisting of approximately $11.0
billion of Agency RMBS, $3.9 billion of ABS, $2.0 billion of non-Agency RMBS and $1.9 billion of
CMBS. We expect that our Manager will continue to manage its existing portfolio and provide
management services to its other clients, including affiliates of Invesco. Neither our Manager nor
Invesco has previously managed or advised a public REIT or managed RMBS or CMBS on a
leveraged basis.
The
Invesco Worldwide Fixed Income investment professionals will benefit from the insight and
capabilities of its distressed investment subsidiary, WL Ross, and Invescos real estate
team.
Our Manager will draw upon the professional experience and knowledge of the investment team of
its WL Ross subsidiary. Over the last 30 years,
WL Ross has sponsored and managed more than $8.0 billion of distressed equity investments and has
completed more than $200 billion of workouts around the world. We will benefit from WL Ross
expertise in security selection, portfolio management, and portfolio oversight. When combined with
our Managers investment teams experience in fixed income investing, WL Rosss deep and broad
asset management skills will allow us to draw upon extensive investment expertise in order to
benefit our shareholders.
In addition, WL Ross-sponsored funds have expanded its position to include the mortgage market through
its 2007 investment in AHMSI, the largest independent sub-prime mortgage loan servicer in the United
States with an approximate $108 billion servicing portfolio and
more than 547,000 mortgage loans
across 50 states. As a major loan servicer, AHMSI has tremendous insights regarding mortgage market
trends, including prepayment speeds, delinquency rates, default and severity information, which we
intend to capitalize on when valuing our target assets. Furthermore, WL Ross sponsored funds have made a strategic investment in Assured Guaranty Ltd., or
AGL, which provides credit enhancement products on debt securities issued in the public finance,
structured finance and mortgage markets.
Additionally, our Manager will be able to draw upon the experience and resources of Invescos
real estate team, comprised of approximately 124 investment professionals on the ground in key
investment markets, which has 25 years of direct
real estate investing experience.
Our Managers real estate team will provide us with valuable insights, through its research and
monitoring capabilities, on investments in residential and commercial properties. With the
properties under management having an aggregate market value of
approximately $22.8 billion as of
March 31, 2009, this team is a leader in the real estate marketplace and will provide us with residential and commercial
property valuations and other property based information that will be
critical in supporting our Managers assessment of RMBS and CMBS
valuations.
Invesco Aim Advisors, an affiliate of our Manager, will serve as our sub adviser pursuant to
an agreement between our Manager and Invesco Aim Advisors. Invesco Aim Advisors will provide input
on overall trends in short-term financing markets and make specific recommendations regarding
financing of our Agency RMBS. We do not expect our Manager to provide these services to us
directly. The fees charged by Invesco Aim Advisors shall be paid by our Manager and shall not
constitute a reimbursable expense by our Manager under the management agreement. We expect that
the fees charged by Invesco Aim Advisors to our Manager will be substantially similar to the fees
Invesco Aim Advisors charges to its other clients for similar services.
We also expect to benefit from our Managers portfolio management, finance and administration
functions, which address legal, compliance, investor relations and operational matters, trade
allocation and execution, securities valuation, risk management and information technologies in
connection with the performance of its duties.
Concurrently with the completion of this offering, we will complete a private placement in
which we will
sell shares of our common stock to Invesco, through our Manager, at $
per share and OP units to Invesco, through Invesco Investments (Bermuda) Ltd., at $
per unit for an aggregate investment equal to % of the gross proceeds raised in
this offering, up to $ million. Upon completion of this offering and the concurrent
private placement, Invesco, through our Manager, will beneficially own % of our
outstanding common stock (or % if the underwriters fully exercise their option to purchase
additional shares). Assuming that all OP units are redeemed for an equivalent number of
shares of our common stock, Invesco, through the Invesco Purchaser, would beneficially own
% of our outstanding common stock upon completion of this offering and the concurrent private
placement (or % if the underwriters fully exercise their option to purchase additional
shares). The Invesco Purchaser will agree that, for a period of one year after the date of this
prospectus, it will not, without the prior written consent of Credit Suisse Securities (USA) LLC
and Morgan Stanley & Co. Incorporated, dispose of or hedge any of the shares of our common stock or
OP units that it purchases in the concurrent private placement, subject to certain exceptions and
extension in certain circumstances as described elsewhere in this prospectus.
About Invesco
Invesco is one of the largest independent global investment management firms with offices
worldwide. As of March 31, 2009, Invesco had 5,122 employees, the majority of whom were located in
North America. Invesco operates under the Invesco Aim Advisors, Invesco Trimark, Atlantic Trust,
Invesco, Invesco Perpetual, Invesco PowerShares, and WL Ross brands.
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Our Competitive Advantages
We believe that our competitive advantages include the following:
Significant Experience of Our Manager
The senior management team of our Manager has a long track record and broad experience in managing
residential and commercial mortgage-related assets through a variety of credit and interest rate
environments and has demonstrated the ability to generate attractive risk adjusted returns under
different market conditions and cycles. As of March 31, 2009, our Manager managed approximately
$177.0 billion of fixed income and real estate investments, including approximately $18.8 billion of structured
securities, consisting of approximately $11.0 billion of Agency RMBS, $3.9 billion of ABS, $2.0
billion of non-Agency RMBS and $1.9 billion of CMBS. In addition, our Manager will benefit from
the insight and capabilities of its distressed investment subsidiary, WL Ross, and Invescos
real estate team. Our Manager will draw upon the professional experience and knowledge of the
investment team of its WL Ross subsidiary
and benefit from WL Ross expertise in security selection, portfolio management,
and portfolio oversight. Our Manager also will be able to draw upon the experience and resources
of Invescos real estate team, comprised of approximately 124 investment professionals on the
ground in key investment markets, which has 25 years of direct real estate investing
experience. Our Managers real estate team will provide us with valuable insights, through its
research and monitoring capabilities, on investments in residential and commercial properties.
Through our Managers WL Ross subsidiary and Invescos real estate team we will also have access to
broad and deep teams of experienced investment professionals in real estate and distressed
investing. Through these teams, we will have real time access to research and data on the mortgage
and real estate industries. Having in-house access to these resources and expertise provides us
with a competitive advantage over other companies investing in our target assets who have less
internal resources and expertise.
Access to Extensive Repurchase Agreement Financing and Other Strategic Relationships
An affiliate of our Manager and a sub-adviser to us, Invesco Aim Advisors, has been active in
the repurchase agreement lending market since 1980 and currently has master repurchase agreements
in place with a number of counterparties. At March 31, 2009, Invesco Aim Advisors had provided
repurchase agreement financing to these counterparties equal to approximately $20.7 billion.
Invesco Aim Advisors has in place a documented process to mitigate counterparty risk. Our
Manager, together with a dedicated team of professionals at Invesco Aim Advisors pursuant to a
sub-advisory agreement between our Manager and Invesco Aim Advisors, follows this established
process. During these volatile times in which a number of repurchase agreement counterparties have
either defaulted or ceased to exist, we feel that it is critical to have controls in place that
address this recent disruption in the markets. All repurchase agreement counterparty approval
requests must be submitted to the team of nine professionals at Invesco Aim Advisors and undergo a
rigorous review and approval process to determine whether the proposed counterparty meets
established criteria. This process involves a credit analysis of each prospective counterparty to
ensure that it meets Invesco Aim Advisors internal credit risk requirements, a review of the
counterpartys audited financial statements, credit ratings and clearing arrangements, and a
regulatory background check. In addition, all approved counterparties are monitored on an ongoing
basis by Invesco Aim Advisors credit team and, if they deem a credit situation to be
deteriorating, they have the ability to restrict or terminate trading with this counterparty. We
do not expect to enter into any hedging transactions to mitigate any risks associated with our
repurchase agreement counterparties.
Extensive Strategic Relationships and Experience of our Manager and its Affiliates
Our Manager and its affiliates, including Invesco Aim Advisors, maintain extensive long-term
relationships with other financial intermediaries, including primary dealers, leading investment
banks, brokerage firms, leading mortgage originators and commercial banks. We believe these
relationships will enhance our ability to source, finance and hedge investment opportunities and,
thus, enable us to grow in various credit and interest rate environments. In addition, we believe
the contacts our Manager and its affiliates (including Invesco Aim Advisors) have with numerous
investment grade derivative and lending counterparties will assist us in implementing our financing
and hedging strategies.
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Disciplined Investment Approach
We will seek to maximize our risk-adjusted returns through our Managers disciplined
investment approach, which relies on rigorous quantitative and qualitative analysis. Our Manager
will monitor our overall portfolio risk and evaluate the characteristics of our investments in our
target assets including, but not limited to, loan balance distribution, geographic concentration,
property type, occupancy, periodic and lifetime interest rate caps, weighted-average loan-to-value
and weighted-average credit score. In addition, with respect to any particular target asset,
our Managers investment team evaluates, among other things,
relative valuation, supply and demand trends, shape of yield curves,
prepayment rates, delinquency and default rules recovery of various
sectors and vintage of collateral. As a newly organized company with no historical investments, we
will build an initial portfolio consisting of currently priced assets and therefore we will likely
not be negatively impacted by the recent price declines experienced by many mortgage portfolios.
We believe this strategy and our commitment to capital preservation will provide us with a
competitive advantage when operating in a variety of market conditions.
Access to Our Managers Sophisticated Analytical Tools, Infrastructure and Expertise
We will utilize our Managers proprietary and third-party mortgage-related security and
portfolio management tools to seek to generate an attractive net interest margin from our
portfolio. We intend to focus on in-depth analysis of the numerous factors that influence our
target assets, including: (1) fundamental market and sector review; (2) rigorous cash flow
analysis; (3) disciplined security selection; (4) controlled risk exposure; and (5) prudent balance
sheet management. We will utilize these tools to guide the hedging strategies developed by our
Manager to the extent consistent with satisfying the requirements for qualification as a REIT. In
addition, we will use our proprietary technology management platform called QTech to monitor
investment risk. QTech collects and stores real-time market data, and integrates markets
performance with portfolio holdings and proprietary risk models to measure the risk positions in
portfolios. This measurement system portrays overall portfolio risk and its sources. Through the
use of the tools described above, we will analyze factors that affect the rate at which mortgage
prepayments occur, including changes in the level of interest rates, directional trends in
residential and commercial real estate prices, general economic conditions, the locations of the
properties securing the mortgage loans and other social and demographic conditions in order to
acquire the target assets that we believe are undervalued. We believe that sophisticated analysis
of both macro and micro economic factors will enable us to manage cash flow and distributions while
preserving capital.
Our Manager has created and maintains analytical and portfolio management capabilities to aid
in security selection and risk management. We intend to capitalize on the market knowledge and
ready access to data across our target markets that our Manager and its affiliates obtain through
their established platform. We will also benefit from our Managers comprehensive finance and
administrative infrastructure, including its risk management and financial reporting operations, as
well as its business development, legal and compliance teams.
Alignment of Invesco and Our Managers Interests
Concurrently with the completion of this offering, we will complete a private placement in
which we will sell shares of our common stock to Invesco, through our Manager, at $ per
share and OP units to Invesco, through Invesco Investments (Bermuda) Ltd., at $ per
unit, for an aggregate investment equal to % of the gross proceeds raised in this offering, up
to $ million. Upon completion of this offering and the concurrent private placement, Invesco, through our Manager, will beneficially own % of our common stock (or % if the
underwriters fully exercise their option to purchase additional shares). Assuming that all OP
units are redeemed for an equivalent number of shares of our common stock, Invesco, through
the Invesco Purchaser, would beneficially own % of our outstanding common stock upon completion
of this offering and the concurrent private placement (or % if the underwriters fully exercise
their option to purchase additional shares). We believe that the significant ownership of our
common stock by Invesco, through the Invesco Purchaser, will align Invesco and our Managers
interests with our interests.
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Tax Advantages of REIT Qualification
Assuming that we meet, on a continuing basis, various qualification requirements imposed upon
REITs by the Internal Revenue Code, we will generally be entitled to a deduction for dividends that
we pay and, therefore, will not be subject to U.S. federal corporate income tax on our net income
that is distributed currently to our stockholders. This treatment substantially eliminates the
double taxation at the corporate and stockholder levels that results generally from investment in
a corporation.
Our Investment Strategy
We will rely on our Managers expertise in identifying assets within our target assets. Our
Managers investment team has a strong focus on security selection and the relative value of
various sectors within the mortgage markets. We expect that the investment team will make
investment decisions on our behalf, which will incorporate their views on the economic environment
and the outlook for the mortgage market, including relative valuation, supply and demand trends,
the level of interest rates, the shape of the yield curve, credit risk, prepayment rates, financing
and liquidity, housing prices, deliquencies, default rates, recovery of various sectors and vintage of
collateral, subject to maintaining our REIT qualification and our exemption from registration under
the 1940 Act.
Our investment strategy is designed to enable us to:
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build an investment portfolio consisting of Agency RMBS, non-Agency RMBS, CMBS and
mortgage loans that seeks to generate attractive returns while having a moderate risk
profile; |
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manage financing, interest, prepayment rate risks and credit risks; |
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capitalize on discrepancies in the relative valuations in the mortgage market; |
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provide regular quarterly distributions to stockholders; |
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qualify as a REIT; and |
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remain exempt from the requirements of the 1940 Act. |
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We may change our investment strategy and policies without a vote of our stockholders.
We intend to elect and qualify to be taxed as a REIT and to operate our business so as to be
exempt from registration under the 1940 Act, and therefore we will be required to invest a
substantial majority of our assets in loans secured by mortgages on real estate and real
estate-related assets. See Operating and Regulatory Structure. Subject to maintaining our REIT
qualification and our 1940 Act exemption, we do not have any limitations on the amounts we may
invest in our targeted asset class.
Our Target Assets
Our target assets and the principal assets we expect to acquire in each are as follows:
Agency RMBS
Agency RMBS are residential mortgage-backed securities for which a U.S. Government agency such
as Ginnie Mae, or a federally chartered corporation such as Fannie Mae or Freddie Mac guarantees
payments of principal and interest on the securities. Payments of principal and interest on Agency
RMBS, not the market value of the securities themselves, are guaranteed. See Freddie Mac Gold
Certificates, Fannie Mae Certificates and Ginnie Mae Certificates below.
Agency RMBS differ from other forms of traditional debt securities, which normally provide for
periodic payments of interest in fixed amounts with principal payments at maturity or on specified
call dates. Instead,
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Agency RMBS provide for monthly payments, which consist of both principal and interest. In
effect, these payments are a pass-through of scheduled and prepaid principal payments and the
monthly interest made by the individual borrowers on the mortgage loans, net of any fees paid to
the issuers, servicers or guarantors of the securities.
The principal may be prepaid at any time due to prepayments on the underlying mortgage loans
or other assets. These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed-income securities.
Various factors affect the rate at which mortgage prepayments occur, including changes in the
level and directional trends in housing prices, interest rates, general economic conditions, the
age of the mortgage loan, the location of the property and other social and demographic conditions.
Generally, prepayments on Agency RMBS increase during periods of falling mortgage interest rates
and decrease during periods of rising mortgage interest rates. However, this may not always be the
case. We may reinvest principal repayments at a yield that is higher or lower than the yield on
the repaid investment, thus affecting our net interest income by altering the average yield on our
assets.
However, when interest rates are declining, the value of Agency RMBS with prepayment options
may not increase as much as other fixed income securities. The rate of prepayments on underlying
mortgages will affect the price and volatility of Agency RMBS and may have the effect of shortening
or extending the duration of the security beyond what was anticipated at the time of purchase.
When interest rates rise, our holdings of Agency RMBS may experience reduced returns if the owners
of the underlying mortgages pay off their mortgages slower than anticipated. This is generally
referred to as extension risk.
The types of Agency RMBS described below are collateralized by either FRMs, ARMs, or hybrid
ARMs. FRMs have an interest rate that is fixed for the term of the loan and do not adjust. The
interest rates on ARMs generally adjust annually (although some may adjust more frequently) to an
increment over a specified interest rate index. Hybrid ARMs have interest rates that are fixed for
a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to
an increment over a specified interest rate index. ARMs and hybrid ARMs generally have periodic
and lifetime constraints on how much the loan interest rate can change on any predetermined
interest rate reset date. Our allocation of our Agency RMBS collateralized by FRMs, ARMs or hybrid
ARMs will depend on various factors including, but not limited to, relative value, expected future
prepayment trends, supply and demand, costs of hedging, costs of financing, expected future
interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield
curves. We intend to take these factors into account when we make investments.
In the future our residential portfolio may extend to debentures that are issued and
guaranteed by Freddie Mac or Fannie Mae or mortgage-backed securities the collateral of which is
guaranteed by Ginnie Mae, Freddie Mac, Fannie Mae or another federally chartered corporation.
In our Agency RMBS portfolio the types of mortgage pass-through certificates in which we
intend to invest or which comprise CMOs in which we intend to invest, are described below.
Mortgage Pass-Through Certificates
Single-family residential mortgage pass-through certificates are securities representing
interests in pools of mortgage loans secured by residential real property where payments of both
interest and principal, plus pre-paid principal, on the securities are made monthly to holders of
the securities, in effect passing through monthly payments made by the individual borrowers on
the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and
servicers of the securities.
CMOs
CMOs are securities which are structured from U.S. Government agency or federally chartered
corporation-backed mortgage pass-through certificates. CMOs receive monthly payments of principal
and interest. CMOs
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divide the cash flows which come from the underlying mortgage pass-through certificates into
different classes of securities. CMOs can have different maturities and different weighted average
lives than the underlying mortgage pass-through certificates. CMOs can re-distribute the risk
characteristics of mortgage pass-through certificates to better satisfy the demands of various
investor types. These risk characteristics would include average life variability, prepayments,
volatility, floating versus fixed interest rate and payment and interest rate risk.
Freddie Mac Gold Certificates
Freddie Mac is a shareholder-owned, federally-chartered corporation created pursuant to an act
of Congress on July 24, 1970. The principal activity of Freddie Mac currently consists of the
purchase of mortgage loans or participation interests in mortgage loans and the resale of the loans
and participations in the form of guaranteed mortgage-backed securities. Freddie Mac guarantees to
each holder of Freddie Mac gold certificates the timely payment of interest at the applicable
pass-through rate and principal on the holders pro rata share of the unpaid principal balance of
the related mortgage loans. The obligations of Freddie Mac under its guarantees are solely those
of Freddie Mac and are not backed by the full faith and credit of the United States. If Freddie
Mac were unable to satisfy these obligations, distributions to holders of Freddie Mac certificates
would consist solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, defaults and delinquencies on the underlying mortgage loans would adversely affect
monthly distributions to holders of Freddie Mac certificates.
Freddie Mac gold certificates are backed by pools of single-family mortgage loans or
multi-family mortgage loans. These underlying mortgage loans may have original terms to maturity
of up to 40 years. Freddie Mac certificates may be issued under cash programs (composed of
mortgage loans purchased from a number of sellers) or guarantor programs (composed of mortgage
loans acquired from one seller in exchange for certificates representing interests in the mortgage
loans purchased).
Fannie Mae Certificates
Fannie Mae is a shareholder-owned, federally-chartered corporation organized and existing
under the Federal National Mortgage Association Charter Act, created in 1938 and rechartered in
1968 by Congress as a stockholder-owned company. Fannie Mae provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby replenishing their funds
for additional lending. Fannie Mae guarantees to the registered holder of a certificate that it
will distribute amounts representing scheduled principal and interest on the mortgage loans in the
pool underlying the Fannie Mae certificate, whether or not received, and the full principal amount
of any such mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal
amount is actually received. The obligations of Fannie Mae under its guarantees are solely those
of Fannie Mae and are not backed by the full faith and credit of the United States. If Fannie Mae
were unable to satisfy its obligations, distributions to holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying mortgage loans and, accordingly,
defaults and delinquencies on the underlying mortgage loans would adversely affect monthly
distributions to holders of Fannie Mae.
Fannie Mae certificates may be backed by pools of single-family or multi-family mortgage
loans. The original term to maturity of any such mortgage loan generally does not exceed 40 years.
Fannie Mae certificates may pay interest at a fixed rate or an adjustable rate. Each series of
Fannie Mae ARM certificates bears an initial interest rate and margin tied to an index based on all
loans in the related pool, less a fixed percentage representing servicing compensation and Fannie
Maes guarantee fee. The specified index used in different series has included the U.S. Treasury
Index, the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San
Francisco, LIBOR and other indices. Interest rates paid on fully-indexed Fannie Mae ARM
certificates equal the applicable index rate plus a specified number of percentage points. The
majority of series of Fannie Mae ARM certificates issued to date have evidenced pools of mortgage
loans with monthly, semi-annual or annual interest rate adjustments. Adjustments in the interest
rates paid are generally limited to an annual increase or decrease of either 1.00% or 2.00% and to
a lifetime cap of 5.00% or 6.00% over the initial interest rate.
Ginnie Mae Certificates
Ginnie Mae is a wholly-owned corporate instrumentality of the United States within HUD. The
National Housing Act of 1934 authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on
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certificates which represent an interest in a pool of mortgages insured by the FHA or
partially guaranteed by the Department of Veterans Affairs and other loans eligible for inclusion
in mortgage pools underlying Ginnie Mae certificates. Section 306(g) of the Housing Act provides
that the full faith and credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guarantee by Ginnie Mae.
At present, most Ginnie Mae certificates are backed by single-family mortgage loans. The
interest rate paid on Ginnie Mae certificates may be a fixed rate or an adjustable rate. The
interest rate on Ginnie Mae certificates issued under Ginnie Maes standard ARM program adjusts
annually in relation to the Treasury index. Adjustments in the interest rate are generally limited
to an annual increase or decrease of 1.00% and to a lifetime cap of 5.00% over the initial coupon
rate.
We may, in the future, utilize to-be-announced forward contracts, or TBAs, in order to
invest in Agency RMBS. Pursuant to these TBAs, we would agree to purchase, for future delivery,
Agency RMBS with certain principal and interest terms and certain types of underlying collateral,
but the particular Agency RMBS to be delivered would not be identified until shortly before the TBA
settlement date. Our ability to purchase Agency RMBS through TBAs may be limited by the 75% asset
test applicable to REITs. See U.S. Federal Income Tax ConsiderationsAsset Tests and
U.S. Federal Income Tax ConsiderationsGross Income Tests.
Non-Agency RMBS
Non-Agency RMBS are residential mortgage-backed securities that are not issued or guaranteed
by a U.S. Government agency. Like Agency RMBS, non-Agency RMBS represent interests in pools of
mortgage loans secured by residential real property. To the extent
available to us, we may seek to finance our non-Agency RMBS portfolio with financings under the
TALF or with private financing sources and, if available, we may also
make investments in funds that receive financing under the Legacy
Securities Program. See Our Financing Strategy below.
Non-Agency RMBS may be AAA rated through unrated. The rating, as determined by one or more of
the nationally recognized statistical rating organizations, including Fitch, Inc. Moodys Investors
Service, Inc. and Standard & Poors Corporation, indicates the organizations view of the
creditworthiness of the investment. The mortgage loan collateral for non-Agency RMBS generally
consists of residential mortgage loans that do not generally conform to the U.S. Government agency
underwriting guidelines due to certain factors including mortgage balance in excess of such
guidelines, borrower characteristics, loan characteristics and level of documentation.
Residential Mortgage Loans
Residential mortgage loans are loans secured by residential real properties. We generally
expect to focus our residential mortgage loan acquisitions on the purchase of loan portfolios made
available to us under the Legacy Loan Program. See Our Financing Strategy below. We expect
that the residential mortgage loans we acquire will be first lien, single-family FRMs, ARMs and
Hybrid ARMs with original terms to maturity of not more than 40 years and that are either fully
amortizing or are interest-only for up to ten years, and fully amortizing thereafter.
Prime and Jumbo Mortgage Loans
Prime mortgage loans are mortgage loans that generally conform to U.S. Government agency
underwriting guidelines. Jumbo prime mortgage loans are mortgage loans that generally conform to
U.S. Government agency underwriting guidelines except that the mortgage balance exceeds the maximum
amount permitted by U.S. Government agency underwriting guidelines.
Alt-A Mortgage Loans
Alt-A mortgage loans are mortgage loans made to borrowers whose qualifying mortgage
characteristics do not conform to U.S. Government agency underwriting guidelines, but whose
borrower characteristics may. Generally, Alt-A mortgage loans allow homeowners to qualify for a
mortgage loan with reduced or alternate forms of documentation. The credit quality of Alt-A
borrowers generally exceeds the credit quality of subprime borrowers.
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Subprime Mortgage Loans
Subprime mortgage loans are loans that do not conform to U.S. Government agency underwriting
guidelines.
CMBS
CMBS are securities backed by obligations (including certificates of participation in
obligations) that are principally secured by commercial mortgages on real property or interests
therein having a multifamily or commercial use, such as regional malls, other retail space, office
buildings, industrial or warehouse properties, hotels, apartments, nursing homes and senior living
facilities. To the extent available to us, we may seek to finance
our CMBS portfolio with financings
under the TALF and Legacy Securities Program or with private financing
sources. See Our Financing
Strategy below.
CMBS are typically issued in multiple tranches whereby the more senior classes are entitled to
priority distributions from the trusts income to make specified interest and principal payments on
such tranches. Losses and other shortfalls from expected amounts to be received on the mortgage
pool are borne by the most subordinate classes, which receive payments only after the more senior
classes have received all principal and/or interest to which they are entitled. The credit quality
of CMBS depends on the credit quality of the underlying mortgage loans, which is a function of
factors such as the following: the principal amount of loans relative to the value of the related
properties; the mortgage loan terms, such as amortization; market assessment and geographic
location; construction quality of the property; and the creditworthiness of the borrowers.
Commercial Mortgage Loans
We generally expect to focus our commercial mortgage loan acquisitions on the purchase of loan
portfolios made available to us under the Legacy Loan Program. See Our Financing Strategy
below.
First and Second Lien Loans
Commercial mortgage loans are mortgage loans secured by first or second liens on commercial
properties such as regional malls, other retail space, office buildings, industrial or warehouse
properties, hotels, apartments, nursing homes and senior living facilities. These loans, which
tend to range in term from five to 15 years, can carry either fixed or floating interest rates.
They generally permit pre-payments before final maturity but only with the payment to the lender of
yield maintenance pre-payment penalties. First lien loans represent the senior lien on a property
while second lien loans or second mortgages represent a subordinate or second lien on a property.
B-Notes
A B-Note, unlike a second mortgage loan, is part of a single larger commercial mortgage loan,
with the other part evidenced by an A-Note, which are evidenced by a single commercial mortgage.
The holder of the A-Note and B-Note enter into an agreement which sets forth the respective rights
and obligations of each of the holders. The terms of the agreement provide that the holder of the
A-Note has a priority of payment over the holder of the B-Note. A loan evidenced by a note which is
secured by a second mortgage is a separate loan and the holder has a direct relationship with the
borrower. In addition, unlike the holder of a B-Note, the holder of the loan would also be the
holder of the mortgage. The holder of the second mortgage loan typically enters into an
intercreditor agreement with the holder of the first mortgage loan which sets forth the respective
rights and obligations of each of the holders, similar in substance to the agreement that is
entered into between the holder of the A-Note and the holder of the B-Note. B-Note lenders have
the same obligations, collateral and borrower as the A-Note lender, but typically are subordinated
in recovery upon a default.
Bridge Loans
Bridge loans tend to be floating rate whole loans made to borrowers who are seeking short-term
capital (with terms of up to five years) to be used in the acquisition, construction or
redevelopment of a property. This type of
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bridge financing enables the borrower to secure short-term financing while improving the
property and avoid burdening it with restrictive long-term debt.
Mezzanine Loans
Mezzanine loans are generally structured to represent senior positions to the borrowers
equity in, and subordinate to a first mortgage loan on, a property. These loans are generally
secured by pledges of ownership interests, in whole or in part, in entities that directly or
indirectly own the real property. At times, mezzanine loans may be secured by additional
collateral, including letters of credit, personal guarantees, or collateral unrelated to the
property. Mezzanine loans may be structured to carry either fixed or floating interest rates as
well as carry a right to participate in a percentage of gross revenues and a percentage of the
increase in the fair market value of the property securing the loan. Mezzanine loans may also
contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and
enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of
the related mortgage loan but may have shorter or longer terms.
Investment Methods
We may, in the future, utilize TBAs in order to invest in Agency RMBS. Pursuant to these
TBAs, we would agree to purchase, for future delivery, Agency RMBS with certain principal and
interest terms and certain types of underlying collateral, but the particular Agency RMBS to be
delivered would not be identified until shortly before the TBA settlement date. Our ability to
purchase Agency RMBS through TBAs may be limited by the 75% asset test applicable to REITs. See
U.S. Federal Income Tax ConsiderationsAsset Tests and U.S. Federal Income Tax
ConsiderationsGross Income Tests.
Investment Sourcing
We expect our Manager to take advantage of the broad network of relationships it and Invesco
have established to identify investment opportunities, although Invesco has indicated to us that it
expects that we will be the only publicly traded REIT advised by our
Manager or Invesco and its subsidiaries whose
investment strategy is to invest substantially all of its capital in our target assets. Our
Manager and its affiliates, including Invesco Aim Advisors, have extensive long-term relationships
with financial intermediaries, including primary dealers, leading investment banks, brokerage
firms, leading mortgage originators and commercial banks.
Investing in, and sourcing financing for, Agency RMBS, non-Agency RMBS, CMBS and mortgage
loans is highly competitive. Although our Manager competes with many other investment managers for
profitable investment opportunities in fixed-income asset classes and related investment
opportunities and sources of financing, we believe that a combination of our Managers experience,
together with the vast resources and relationships of Invesco, provide us with a significant
advantage in identifying and capitalizing on attractive opportunities.
Investment Guidelines
Our board of directors has adopted the following investment guidelines:
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no investment shall be made that would cause us to fail to qualify as a REIT for federal
income tax purposes; |
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no investment shall be made that would cause us to be regulated as an investment company
under the 1940 Act; |
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our assets will be invested within our target assets; and |
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until appropriate investments can be identified, our Manager may invest the proceeds of
this and any future offerings in interest-bearing, short-term investments, including money
market accounts and/or funds, that are consistent with our intention to qualify as a REIT. |
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These investment guidelines may be changed from time to time by our board of directors without
the approval of our stockholders.
Investment Committee
Our Manager has an Investment Committee comprised of its officers and investment
professionals. The Investment Committee will periodically review our investment portfolio and its
compliance with our investment policies and procedures, including these investment guidelines, and
provide to our board of directors an investment report at the end of each quarter in conjunction
with its review of our quarterly results. From time to time, as it deems appropriate or necessary,
our board of directors also will review our investment portfolio and its compliance with our
investment policies and procedures, including these investment guidelines. For a description of
the members comprising the Investment Committee, see Our Manager and The Management
AgreementInvestment Committee, and Management.
Investment Process
We expect our investment process will benefit from our Managers resources and professionals.
Moreover our Managers Investment Committee will oversee our investment guidelines and will meet
periodically, at least every quarter, to discuss investment opportunities.
The investment team has a strong focus on security selection and on the relative value of
various sectors within the mortgage market. Our Manager will utilize this expertise to build a
diversified portfolio of Agency RMBS, non-Agency RMBS and CMBS. Our Manager will incorporate its
views on the economic environment and the outlook for the mortgage market including relative
valuation, supply and demand trends, the level of interest rates, the shape of the yield curve,
prepayment rates, financing and liquidity, housing prices,
deliquencies, default rates, recovery of various
sectors and vintage of collateral.
Our investment process will include sourcing and screening of investment opportunities,
assessing investment suitability, conducting interest rate and prepayment analysis, evaluating cash
flow and collateral performance, reviewing legal structure and servicer and originator information
and investment structuring, as appropriate, to seek an attractive return commensurate with the risk
we are bearing. Upon identification of an investment opportunity, the investment will be screened
and monitored by our Manager to determine its impact on maintaining our REIT qualification and our
exemption from registration under the 1940 Act. We will seek to make investments in sectors where
our Manager has strong core competencies and where we believe market risk and expected performance
can be reasonably quantified.
Our Manager evaluates each one of our investment opportunities based on its expected
risk-adjusted return relative to the returns available from other, comparable investments. In
addition, we evaluate new opportunities based on their relative expected returns compared to our
comparable securities held in our portfolio. The terms of any leverage available to us for use in
funding an investment purchase are also taken into consideration, as are any risks posed by
illiquidity or correlations with other securities in the portfolio. Our Manager also develops a
macro outlook with respect to each target asset class by examining factors in the broader economy
such as GDP, interest rates, unemployment rates and availability of credit, among other things.
Our Manager also analyzes fundamental trends in the relevant target asset class sector to
adjust/maintain its outlook for that particular target asset class. Views on a particular target
asset class are recorded in our Managers QTech system. These macro decisions guide our Managers
assumptions regarding model inputs and portfolio allocations among target assets. Additionally,
our Manager conducts extensive diligence with respect to each target asset class by, among other
things, examining and monitoring the capabilities and financial wherewithal of the parties
responsible for the origination, administration and servicing of relevant target assets.
Additionally, through our Managers WL Ross subsidiary
and our Invescos in-house real estate team, we will have access to broad and deep teams of
experienced investment professionals in real estate and distressed investing. Through these teams,
we will have real time access to research and data on the mortgage and real estate industries.
Having in-house access to these resources and expertise provides us with a competitive advantage
over other companies investing in our target assets who have less internal resources and expertise.
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Our Financing Strategy
We intend to employ prudent leverage to increase potential returns to our stockholders and to
fund the acquisition of our target assets. Our income will be generated primarily by the net
spread between the income we earn on our investments in our target assets and the cost of our
financing and hedging activities. Although we are not required to maintain any particular leverage
ratio, the amount of leverage we will deploy for particular investments in our target assets will
depend upon our Managers assessment of a variety of factors, which may include the anticipated
liquidity and price volatility of the assets in our investment portfolio, the gap between the
duration of our assets and liabilities, including hedges, the availability and cost of financing
the assets, our opinion of the creditworthiness of our financing counterparties, the health of the
U.S. economy and residential and commercial mortgage-related markets, our outlook for the level,
slope, and volatility of interest rates, the credit quality of the loans we acquire, the collateral
underlying our Agency RMBS, non-Agency RMBS and CMBS, and our outlook for asset spreads relative to
the LIBOR curve.
We expect, initially, that we may deploy, on a debt-to-equity basis, up to seven to eight
times leverage on our Agency RMBS assets. In addition, initially we do not expect under current
market conditions to deploy leverage on our non-Agency RMBS, CMBS and mortgage loan assets, except
in conjunction with financings that may be available to us under programs established by the U.S. Government. For these asset
classes, we expect to use approximately to times leverage pursuant to the U.S.
Government programs. We consider these initial leverage ratios to be prudent for these asset classes.
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we
expect to use a number of sources to finance our investments. Initially, we expect our primary
financing sources to include repurchase agreements and, to the extent
available to us, fundings under programs
established by the U.S. Government such as the TALF or
private financing sources and, if
available, we may make investments in funds that receive financing
under the PPIP.
Descriptions of the types of financings we expect to employ are described in more detail
below.
Repurchase Agreements
Repurchase agreements are financings pursuant to which we will sell our target assets to the
repurchase agreement counterparty, the buyer, for an agreed upon price with the obligation to
repurchase these assets from the buyer at a future date and at a price higher than the original
purchase price. We expect to use repurchase agreements primarily to finance the purchase of our
Agency RMBS portfolio. The amount of financing we will receive under a repurchase agreement is
limited to a specified percentage of the estimated market value of the assets we sell to the buyer.
The difference between the sale price and repurchase price is the interest expense of financing
under a repurchase agreement. Under repurchase agreement financing arrangements, the buyer, or
lender, could require us to provide additional cash collateral to re-establish the ratio of value
of the collateral to the amount of borrowing. In the current economic climate, we believe that the
lender generally will advance a borrower approximately 90% to 95% of the market value of the
securities financed (meaning a 5% to 10% haircut). A significant decrease in advance rate or an
increase in the haircut could result in the borrower having to sell securities in order to meet any
additional margin requirements by the lender, regardless of market condition. We expect to
mitigate our risk of margin calls by employing a prudent amount of leverage that is below what
could be used under current advance rates.
Invesco Aim Advisors has been active in the repurchase agreement lending market since 1980 and
currently has master repurchase agreements in place with a number of counterparties. At March 31,
2009, Invesco Aim Advisors had provided repurchase agreement financing to these counterparties
equal to approximately $20.7 billion.
We plan to leverage our Managers and its affiliates existing relationships with financial
intermediaries, including primary dealers, leading investment banks, brokerage firms, commercial
banks and other repurchase agreement counterparties to execute repurchase agreements for our Agency
RMBS portfolio concurrently with or shortly after the closing of this offering.
To the extent that we invest in Agency RMBS through TBAs in the future, we may enter into
dollar roll transactions using TBAs in which we would sell a TBA and simultaneously purchase a
similar, but not identical,
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TBA. Our ability to enter into dollar roll transactions with respect to TBAs may be limited
by the 75% gross income test applicable to REITs. See U.S. Federal Income Tax
ConsiderationsGross Income Tests.
Government Financing
To the extent available to us, we may seek to finance our non-Agency RMBS and
CMBS portfolios with financings
under the TALF or with private financing sources. If available to us,
we may also finance our investments in non-Agency RMBS and CMBS by
contributing capital to one or more Legacy Securities PPIFs that
receive financing under the PPIP. We
also expect to focus our residential and commercial mortgage loan
acquisitions by contributing capital to one or more Legacy Loan PPIFs. A description of the financing
that may be made available to us under these programs is set forth below. There can be no
assurance that we will be eligible to participate in these funds or programs or, if we are eligible, that we
will be able to utilize them successfully or at all.
The Term Asset-Backed Securities Lending Facility
In response to the severe dislocation in the credit markets, the U.S. Treasury and the Federal
Reserve jointly announced the establishment of the TALF on November 25, 2008. The TALF is designed
to increase credit availability and support economic activity by facilitating renewed
securitization activities. Under TALF as announced on
November 28, 2008, the FRBNY makes non-recourse loans to borrowers to fund
their purchase of ABS collateralized by certain assets such as student loans, auto loans and
leases, floor plan loans, credit card receivables, receivables related to residential mortgage
services advances, equipment loans and leases and loans guaranteed by
the SBA. The
FRBNY also announced its intention to lend up to $200 billion to certain holders of TALF-eligible ABS.
Any U.S. company that owns TALF-eligible ABS may borrow from the FRBNY under the TALF, provided that
the company maintains an account relationship with a primary dealer. TALF 1.0 is presently
expected to run through December 31, 2009.
On March 23, 2009, the U.S. Treasury announced preliminary plans to expand the TALF to include
non-Agency RMBS that were originally rated AAA and outstanding CMBS that are rated AAA. On May 1,
2009, the Federal Reserve published the terms for the expansion of TALF to newly issued CMBS and announced that,
beginning on June 16, 2009, up to $100 billion of TALF loans will be available to finance purchases of
eligible CMBS. The Federal Reserve stated that, to be eligible for TALF
funding, the following conditions must be satisfied with respect to the newly issued CMBS:
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The CMBS must be collateralized by first-priority mortgage loans or
participations therein that are current in payment at the time of securitization; |
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The underlying mortgage loans must be fixed-rate loans that do not provide for
interest-only payments during any part of their term; |
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The underlying mortgage loans must be secured by one or more income-generating
commercial properties located in the United States or one of its territories; |
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The CMBS must be issued on or after January 1, 2009 and the underlying mortgage
loans must have been originated on or after July 1, 2008; |
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The underwriting for the CMBS must be prepared generally on the basis of
then-current in-place, stabilized and recurring net operating income and
then-current property appraisals; |
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The CMBS collateralizing the TALF borrowing must have a credit rating in the
highest long-term investment-grade rating category, without the benefit of third
party credit support, from at least two CMBS eligible national rating agencies; |
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The CMBS must entitle its holders to payments of principal and interest (that
is, must not be an interest-only or principal-only security); |
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The CMBS must bear interest at a pass-through rate that is fixed or based on the
weighted average of the underlying fixed mortgage rates; |
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The CMBS collateralizing the TALF borrowing must not be junior to other
securities with claims on the same pool of loans; and |
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Control over the servicing of the underlying mortgage loans must not be held by
investors in a subordinate class of the CMBS once the principal balance of that
class is reduced to less than 25% of its initial principal balance as a result of
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On May 19, 2009, the Federal Reserve announced that certain high quality legacy CMBS, including
CMBS issued before January 1, 2009, would become eligible collateral under the TALF starting in
July 2009. The Federal Reserve stated that, to be eligible for TALF funding, the
following conditions must be satisfied with respect to the legacy CMBS:
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Legacy CMBS must be senior in payment priority to all other interests in the underlying
pool of commercial mortgages; |
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As of the TALF loan subscription date, at least 95% of the properties, by related loan
principal balance, must be located in the United States or one of its territories; |
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The security for each mortgage loan must include a mortgage or similar instrument on a
fee or leasehold interest in one or more income-generating commercial properties; |
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The CMBS must entitle its holders to payments of principal and interest (that is, must
not be an interest-only or principal-only security); |
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The CMBS collateralizing the TALF borrowing must have a credit rating in the highest
long-term investment-grade rating category, without the benefit of third party credit
support, from at least two CMBS eligible national rating agencies; |
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The CMBS must bear interest at a pass-through rate that is fixed or based on the
weighted average of the underlying fixed mortgage rates; |
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The CMBS must not be issued by an agency or instrumentality of the United States or a
government-sponsored enterprise; and |
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Each CMBS must evidence an interest in a trust fund consisting of fully-funded mortgage
loans and not other CMBS, other securities or interest rate swap or cap instruments or
other hedging instruments. A participation or other ownership interest in such a loan will
be considered a mortgage loan and not a CMBS or other security if, following a loan
default, the ownership interest is senior to or pari passu with all other interests in the
same loan in right of payment of principal and interest. |
The Federal Reserve also described the following terms for newly issued and legacy
CMBS collateralized TALF loans:
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Each TALF loan secured by CMBS will have a three-year maturity or five-year
maturity, at the election of the borrower; |
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A three-year TALF loan will bear interest at a fixed rate per annum equal to 100
basis points over the three-year LIBOR swap rate. A five-year TALF loan is
expected to bear interest at a fixed rate per annum equal to 100 basis points over
the five-year LIBOR swap rate; |
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The collateral haircut for each CMBS with an average life of five years or less
will be 15%. For CMBS with average lives beyond five years, collateral haircuts
will increase by one percentage point for each additional year of average life
beyond five years. No newly issued CMBS may have an average life beyond ten years; |
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Any remittance of principal on the CMBS must be used immediately to reduce the
principal amount of the TALF loan in proportion to the TALF advance rate; |
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The loans will be non-recourse to the borrower, unless the borrower breaches its
representations, warranties or covenants; |
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The loans will be exempt from margin calls related to a decrease in the
underlying collateral value; |
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The loans are pre-payable in whole or in part at the option of the borrower, and
generally prohibit collateral substitutions; and |
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A TALF borrower must agree not to exercise or refrain from exercising any
voting, consent or waiver rights under a CMBS without the consent of the FRBNY. |
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The initial subscription
date will be June 16, 2009 for newly issued CMBS and late July 2009 for legacy CMBS. The subscription and
settlement cycle for newly issued and legacy CMBS will occur in the latter part of each month.
We believe that the expansion of the TALF to include highly rated CMBS may provide us with
attractively priced non-recourse term borrowings that we could use to purchase newly created CMBS
that are eligible for funding under this program. However, to date, the TALF has not yet been
expanded to cover non-Agency RMBS. We believe that once so expanded, the TALF may provide us with attractively
priced non-recourse term borrowing facilities that we can use to purchase non-Agency RMBS.
However, there can be no assurance that the TALF will be expanded to include this asset class
and, if so expanded, that we will be able to utilize it successfully or at all.
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The Public-Private Investment Program
On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve,
announced the establishment of the PPIP. The PPIP is designed to encourage the transfer of certain
illiquid legacy real estate-related assets off of the balance sheets of financial institutions,
restarting the market for these assets and supporting the flow of credit and other capital into the
broader economy. The PPIP is expected to be $500 billion to $1 trillion in size and has two
primary components: the Legacy Securities Program and the Legacy Loan Program.
Under the Legacy Securities Program, Legacy Securities PPIFs will be established to purchase
from financial institutions certain non-Agency RMBS and CMBS that were originally rated in the
highest rating category by one or more of the national recognized statistical rating organizations.
The U.S. Treasury will invest up to 50% of the equity capital raised
for each Legacy Securities PPIF and will also
provide attractively priced secured non-recourse loans in an aggregate amount of up to 50% of the
Legacy Securities PPIFs total equity capital so long as the Legacy Securities PPIFs private investors do not have voluntary
withdrawal rights. In addition, the U.S. Treasury will consider requests for debt financing of up
to 100% of a Legacy Securities PPIFs total equity capital, subject to restrictions on asset level leverage,
withdrawal rights, disposition priorities and other factors to be developed by the U.S. Treasury.
Loans made by the U.S. Treasury to any Legacy Securities PPIF will accrue interest at an annual rate to be determined
by the U.S. Treasury and will be payable in full on the date of termination of the Legacy Securities PPIF. The
equity and debt financing under the Legacy Securities Program is available to Legacy Securities
PPIFs managed by investment managers who have been selected as a Legacy Securities PPIF asset
manager under the program. An affiliate of our Manager has applied to serve as one of the
investment managers for the Legacy Securities Program. There can be no assurance that this
affiliate will be selected for this role.
To the extent available to us, we may seek to finance our non-Agency RMBS and CMBS portfolios with
financings under the Legacy Securities Program. We may access this financing by contributing our
equity capital to one or more Legacy Securities PPIFs that will be established and managed by our
Manager or one of its affiliates if their application to serve as one of the investment managers
for the Legacy Securities Program is accepted by the U.S. Treasury, or to other Legacy Securities
PPIFs established and managed by third parties. We expect that these Legacy Securities PPIFs would directly access the favorable financing available under this program.
Under the Legacy Loan Program, Legacy Loan PPIFs will be established to purchase troubled
loans (including residential and commercial mortgage loans) from insured depository institutions.
In the loan sales, assets will be priced through an auction process to be established under the
program. For a bid to be considered in the auction process, the bid must be accompanied by a
refundable cash deposit for 5% of the bid value. The Legacy Loan PPIF will be able to fund the
asset purchase through the issuance of senior notes issued by the Legacy Loan PPIF. The notes will
be collateralized by Legacy Loan PPIF assets and guaranteed by the FDIC in exchange for a debt guarantee fee.
The amount of the purchase price that can be funded through the issuance of these notes will vary
from transaction to transaction based on standards to be established by the FDIC, but is not
expected to exceed six times the amount of equity used by the Legacy
Loan PPIF to fund the acquisition. It is
expected that financing terms and leverage ratios for fundings will be established and disclosed to
potential investors prior to bid submission in Legacy Loan Program auctions.
The U.S. Treasury will also provide up to 50% of the equity capital financing for each Legacy
Loan PPIF. As required by the EESA, the U.S. Treasury will receive warrants in the transaction.
The terms and amounts of such warrants have not yet been determined.
Legacy Loan PPIFs, through their investment manager, will control and manage their asset pools
within parameters pre-established by the FDIC and the U.S. Treasury, with reporting to and
oversight by the FDIC. Legacy Loan PPIFs must agree to waste, fraud and abuse protections and will
be required to make certain representations,
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warranties and covenants regarding the conduct of their business and compliance with
applicable law. They must also provide information to the FDIC in performance of its oversight
role.
We may seek to acquire residential and commercial mortgage loans with financing under the Legacy
Loan Program. To the extent available to us, we anticipate that we would access this financing by
contributing equity capital to one or more Legacy Loan PPIFs that will be established and managed
by our Manager or one of its affiliates. We expect that these Legacy Loan PPIFs would directly
access the favorable financing available under this program.
To date, the terms of any equity investment that we would make to any Legacy Securities or Legacy
Loan PPIFs that may be established in the future have not yet been determined. However, we
anticipate that any such Legacy Securities or Legacy Loan PPIF would:
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be structured as partnership for U.S. tax purposes; |
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have a finite life, meaning that after a specified holding period the assets held by the
Legacy Securities or Legacy Loan PPIF would be sold and the proceeds from such sale would
be distributed to the applicable Legacy Securities and Legacy Loan PPIF investors; |
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provide for the payment of fees to the investment manager of the Legacy Securities or
Legacy Loan PPIF, which we anticipate to include base management fees and the payment of an
incentive fee to the investment manager after investors receive minimum hurdle rates of
return; and |
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require minimum distributions be made to the investors in the Legacy Securities or
Legacy Loan PPIF so as to enable us to satisfy the distribution requirements applicable to
us as a REIT. |
Any equity investment we may
make in any such Legacy Securities or Legacy Loan PPIF may be subject to transfer restrictions. The terms of any equity investment we make in any such Legacy Securities or Legacy Loan PPIF must
be approved by our board of directors, including a majority of our independent directors. In
addition, we expect that any investment we make will be on terms that are no less favorable to us
than those made available to other third party institutional investors in the Legacy Securities or
Legacy Loan PPIF. In our management agreement, our Manager has agreed
not to charge the management fee
payable in respect of any equity investment we may decide to make in a Legacy Securities or Legacy
Loan PPIF managed by our Manager or any of its affiliates. We will be responsible for any fees payable for any equity investment
we may decide to make in a Legacy Securities or Legacy Loan PPIF managed by an entity other than our Manager
or any of its affiliates.
Other Financing
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we
may in the future use other funding sources to acquire our assets, including warehouse facilities,
securitizations and other secured and unsecured forms of borrowing. We may also need to use
repurchase agreement financings for target assets in addition to Agency RMBS.
Risk Management
As part of our risk management strategy, our Manager will actively manage the financing,
interest rate, credit risk, prepayment and convexity risks associated with holding a portfolio of
our target assets.
Interest Rate Hedging
Subject to maintaining our qualification as a REIT, we intend to engage in a variety of
interest rate management techniques that seek on one hand to mitigate the influence of interest
rate changes on the values of some of our assets, and on the other hand help us achieve our risk
management objective. Under the U.S. federal income tax laws applicable to REITs, we generally
will be able to enter into certain transactions to hedge indebtedness that we may incur, or plan to
incur, to acquire or carry real estate assets, although our total gross income from interest rate
hedges that do not meet this requirement and other non-qualifying income must not exceed 25% of our
gross income.
Subject to maintaining our qualification as a REIT, we intend to engage in a variety of
interest rate management techniques that seek on one hand to mitigate the influence of interest
rate changes on the values of some of our assets and on the other hand help us achieve our
management objective. We intend to utilize derivative financial instruments, including, among
others, puts and calls on securities or indices of securities, interest rate swaps, interest rate
caps, interest rate swaptions, exchange-traded derivatives, U.S. Treasury securities and options on
U.S. Treasury securities and interest rate floors to hedge all or a portion of the interest rate
risk associated with the financing of our portfolio. Specifically, we will seek to hedge our
exposure to potential interest rate mismatches between the interest we earn on our investments and
our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and
interest rate hedges, our objectives will be to improve risk-adjusted returns and, where possible,
to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost
of our financing. We will rely on our Managers expertise to manage these risks on our behalf.
The U.S. federal income tax rules applicable to REITs, may require us to implement certain of
these techniques through a TRS that is fully subject to U.S. federal corporate income taxation.
Market Risk Management
Risk management is an integral component of our strategy to deliver returns to our
stockholders. Because we will invest in MBS, investment losses from prepayment, interest rate
volatility or other risks can meaningfully reduce or eliminate our distributions to stockholders.
In addition, because we will employ financial leverage in funding our portfolio, mismatches in the
maturities of our assets and liabilities can create risk in the need to
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continually renew or otherwise refinance our liabilities. Our net interest margins will be
dependent upon a positive spread between the returns on our asset portfolio and our overall cost of
funding. To minimize the risks to our portfolio, we will actively employ portfolio-wide and
security-specific risk measurement and management processes in our daily operations. Our Managers
risk management tools include software and services licensed or purchased from third parties, in
addition to proprietary software and analytical methods developed by Invesco. There can be no
guarantee that these tools will protect us from market risks.
Policies With Respect to Certain Other Activities
If our board of directors determines that additional funding is required, we may raise such
funds through additional offerings of equity or debt securities or the retention of cash flow
(subject to provisions in the Internal Revenue Code concerning distribution requirements and the
taxability of undistributed REIT taxable income) or a combination of these methods. In the event
that our board of directors determines to raise additional equity capital, it has the authority,
without stockholder approval, to issue additional common stock or preferred stock in any manner and
on such terms and for such consideration as it deems appropriate, at any time.
In addition, we may borrow money to finance the acquisition of investments. We intend to use
traditional forms of financing, such as repurchase agreements. We also may utilize structured
financing techniques to create attractively priced non-recourse financing at an all-in borrowing
cost that is lower than that provided by traditional sources of financing and that provide
long-term, floating rate financing. Our investment guidelines and our portfolio and leverage are
periodically reviewed by our board of directors as part of their oversight of our Manager.
As of the date of this prospectus, we do not intend to offer equity or debt securities in
exchange for property. We have not in the past but may in the future repurchase or otherwise
reacquire our shares.
As of the date of this prospectus, we do not intend to invest in the securities of other
REITs, other entities engaged in real estate activities or securities of other issuers for the
purpose of exercising control over such entities.
We engage in the purchase and sale of investments. We have not in the past but may in the
future make loans to third parties in the ordinary course of business for investment purposes. As
of the date of this prospectus, we do not intend to underwrite the securities of other issuers.
We intend to furnish our stockholders with annual reports containing consolidated financial
statements audited by our independent certified public accountants and file quarterly reports with
the SEC containing unaudited consolidated financial statements for each of the first three quarters
of each fiscal year.
Our board of directors may change any of these policies without prior notice to you or a vote
of our stockholders.
Operating and Regulatory Structure
REIT Qualification
We intend to elect to qualify as a REIT under Sections 856 through 859 of the Internal Revenue
Code commencing with our taxable year ending on December 31, 2009. Our qualification as a REIT
depends upon our ability to meet on a continuing basis, through actual investment and operating
results, various complex requirements under the Internal Revenue Code relating to, among other
things, the sources of our gross income, the composition and values of our assets, our distribution
levels and the diversity of ownership of our shares. We believe that we have been organized in
conformity with the requirements for qualification and taxation as a REIT under the Internal
Revenue Code, and that our intended manner of operation will enable us to meet the requirements for
qualification and taxation as a REIT.
So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax
on our REIT taxable income we distribute currently to our stockholders. If we fail to qualify as a
REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be
subject to U.S. federal income tax at regular
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corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable
years following the year during which we lost our REIT qualification. Even if we qualify for
taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income
or property.
1940 Act Exemption
We intend to conduct our operations so that we are not required to register as an investment
company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as
any issuer that is or holds itself out as being engaged primarily in the business of investing,
reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment
company as any issuer that is engaged or proposes to engage in the business of investing,
reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment
securities having a value exceeding 40% of the value of the issuers total assets (exclusive of
U.S. Government securities and cash items) on an unconsolidated basis. Excluded from the term
investment securities, among other things, are U.S. Government securities and securities issued
by majority-owned subsidiaries that are not themselves investment companies and are not relying on
the exception from the definition of investment company set forth in Section 3(c)(1) or Section
3(c)(7) of the 1940 Act. The company is organized as a holding company that conducts its
businesses primarily through the operating partnership. Both the company and the operating
partnership intend to conduct their operations so that they do not come within the definition of an
investment company because less than 40% of the value of their total assets on an unconsolidated
basis will consist of investment securities. The securities issued to our operating partnership
by any wholly-owned or majority-owned subsidiaries that we may form in the future that are excepted
from the definition of investment company based on Section 3(c)(1) or 3(c)(7) of the 1940 Act,
together with any other investment securities the operating partnership may own, may not have a
value in excess of 40% of the value of the operating partnerships total assets on an
unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance
with this test. In addition, we believe neither the company nor the operating partnership will be
considered an investment company under Section 3(a)(1)(A) of the 1940 Act because it will not
engage primarily or hold itself out as being engaged primarily in the business of investing,
reinvesting or trading in securities. Rather, through the operating partnerships wholly-owned or
majority-owned subsidiaries, the company and the operating
partnership will be primarily engaged in the
non-investment company businesses of these subsidiaries.
If the value of our operating partnerships investments in its subsidiaries that are excepted
from the definition of investment company by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together
with any other investment securities it owns, exceeds 40% of its total assets on an unconsolidated
basis, or if one or more of such subsidiaries fail to maintain an exception or exemption from the
1940 Act, we may have to register under the 1940 Act and could become subject to substantial
regulation with respect to our capital structure (including our ability to use leverage),
management, operations, transactions with affiliated persons (as defined in the 1940 Act),
portfolio composition, including restrictions with respect to diversification and industry
concentration, and other matters.
We expect IAS Asset I LLC to qualify for an exemption from registration under the 1940 Act as
an investment company pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for
entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate. In addition, certain of the operating partnerships
other subsidiaries that we may form in the future also may qualify for the Section 3(c)(5)(C)
exemption. This exemption generally requires that at least 55% of such subsidiaries portfolios must
be comprised of qualifying assets and 80% of each of their portfolios must be comprised of
qualifying assets and real estate-related assets under the 1940 Act. Qualifying assets for this
purpose include mortgage loans and other assets, such as whole pool Agency RMBS that the SEC staff
in various no-action letters has determined are the functional equivalent of mortgage loans for the
purposes of the 1940 Act. Real estate-related assets would include
non-Agency
RMBS, CMBS, debt and equity securities of companies primarily engaged in real
estate businesses, agency partial pool certificates and securities
issued by pass-through entities of which substantially all of the
assets consist of qualifying assets and/or real estate-related assets. Although we intend to monitor our portfolio periodically and prior to
each investment acquisition, there can be no assurance that we will be able to maintain this
exemption from registration for each of these subsidiaries.
We may in the future organize special purpose subsidiaries that will borrow under the TALF.
We anticipate that some of these subsidiaries may be organized to rely on the 1940 Act exemption
provided to certain structured financing vehicles by Rule 3a-7. To the extent that we organize
subsidiaries that rely on Rule 3a-7 for an exemption from the 1940 Act, these subsidiaries will
need to comply with the restrictions contained in this Rule. In general, Rule 3a-7 exempts from
the 1940 Act issuers that limit their activities as follows:
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the issuer issues securities the payment of which depends primarily on the cash flow
from eligible assets, which include many of the types of assets that we expect to
acquire in our TALF fundings, that by their terms convert into cash within a finite
time period; |
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the securities sold are fixed-income securities rated investment grade by at least
one rating agency (fixed-income securities which are unrated or rated below investment
grade may be sold to institutional accredited investors and any securities may be sold
to qualified institutional buyers and to persons involved in the organization or
operation of the issuer); |
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the issuer acquires and disposes of eligible assets (1) only in accordance with the
agreements pursuant to which the securities are issued, (2) so that the acquisition or
disposition does not result in a downgrading of the issuers fixed-income securities
and (3) the eligible assets are not acquired or disposed of for the primary purpose of
recognizing gains or decreasing losses resulting from market value changes; and |
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unless the issuer is issuing only commercial paper, the issuer appoints an
independent trustee, takes reasonable steps to transfer to the trustee an ownership or
perfected security interest in the eligible assets, and meets rating agency
requirements for commingling of cash flows. |
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In addition, in certain circumstances, compliance with Rule 3a-7 may also require that the
indenture governing the subsidiary include additional limitations on the types of assets the
subsidiary may sell or acquire out of the proceeds of assets that mature, are refinanced or
otherwise sold, on the period of time during which such transactions may occur, and on the level of
transactions that may occur.
As
a result, we expect that IAS Asset I LLC and most of our other majority-owned subsidiaries
will not be relying on exemptions under either Section 3(c)(1) or 3(c)(7) of the 1940 Act.
Consequently, we expect that our interests in these subsidiaries (which we expect will constitute a
substantial majority of our assets) will not constitute investment securities. Consequently, we
expect to be able to conduct our operations so that we are not required to register as an
investment company under the 1940 Act.
Qualification for exemption from registration under the 1940 Act will limit our ability to
make certain investments. For example, these restrictions will limit the ability of our
subsidiaries to invest directly in mortgage-backed securities that represent less than the entire
ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain ABS
and real estate companies or in assets not related to real estate.
Competition
Our net income will depend, in large part, on our ability to acquire assets at favorable
spreads over our borrowing costs. In acquiring our target assets, we will compete with other
REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers,
insurance companies, mutual funds, institutional investors, investment banking firms, financial
institutions, governmental bodies and other entities. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsMarket Conditions. In addition, there are numerous
REITs with similar asset acquisition objectives, including a number that have been recently formed,
and others may be organized in the future. These other REITs will increase competition for the
available supply of mortgage assets suitable for purchase. Many of our anticipated competitors are
significantly larger than we are, have access to greater capital and other resources and may have
other advantages over us. In addition, some of our competitors may have higher risk tolerances or
different risk assessments, which could allow them to consider a wider variety of investments and
establish more relationships than we can. Current market conditions may attract more competitors,
which may increase the competition for sources of financing. An increase in the competition for
sources of funding could adversely affect the availability and cost of financing, and thereby
adversely affect the market price of our common stock. See Managements Discussion and Analysis
of Financial Condition and Results of OperationsMarket Conditions.
In the face of this competition, we expect to have access to our Managers professionals and
their industry expertise, which may provide us with a competitive advantage and help us assess
investment risks and determine
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appropriate pricing for certain potential investments. We expect that these relationships
will enable us to compete more effectively for attractive investment opportunities. In addition,
we believe that current market conditions may have adversely affected the financial condition of
certain competitors. Thus, not having a legacy portfolio may also enable us to compete more
effectively for attractive investment opportunities. However, we may not be able to achieve our
business goals or expectations due to the competitive risks that we face. For additional
information concerning these competitive risks, see Risk FactorsRisks Related to Our
InvestmentsWe operate in a highly competitive market for investment opportunities and competition
may limit our ability to acquire desirable investments in our target assets and could also affect
the pricing of these securities.
Staffing
We will be managed by our Manager pursuant to the management agreement between our Manager and
us. All of our officers are employees of Invesco. Upon completion of this offering, we will have
officers but no employees. See Our Manager and The Management AgreementManagement Agreement.
Legal Proceedings
Neither we nor, to our knowledge, our Manager is currently subject to any legal proceedings
which we or our Manager consider to be material.
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MANAGEMENT
Our Directors, Director Nominees and Executive Officers
Currently, we have two directors. Upon completion of the offering, our board of directors
will be comprised of five members. Our directors will each be elected to serve a term of one year.
Our board of directors has determined that each of our director nominees satisfy the listing
standards for independence of the NYSE. Our Bylaws provide that a majority of the entire board of
directors may at any time increase or decrease the number of directors. However, unless our Bylaws
are amended, the number of directors may never be less than the minimum number required by the MGCL
nor more than 15.
The following sets forth certain information with respect to our directors, director nominees,
executive officers and other key personnel:
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Name |
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Age |
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Position Held with Us |
G. Mark Armour |
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55 |
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Director |
Karen Dunn Kelley |
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48 |
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Director |
James S. Balloun |
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71 |
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Director Nominee |
John S. Day |
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60 |
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Director Nominee |
Neil Williams |
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73 |
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Director Nominee |
Richard J. King |
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50 |
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President and Chief Executive Officer |
John Anzalone |
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44 |
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Chief Investment Officer |
Donald R. Ramon |
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45 |
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Chief Financial Officer |
Robson J. Kuster* |
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35 |
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Head of Research |
Jason Marshall* |
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34 |
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Portfolio Manager |
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* |
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Messrs. Kuster and Marshall are not our executive officers; they are key personnel of our
Manager. |
Set forth below is biographical information for our directors, director nominees, executive
officers and other key personnel.
Directors and Director Nominees
G. Mark Armour, Director. Mr. Armour is the Chief Executive Officer, President and a Director
of our Manager. Mr. Armour is also the Senior Managing Director and Head of Invescos Worldwide
Institutional business, positions he has held since January 2007. Mr. Armour was previously the
Head of Sales & Client Service for the Worldwide Institutional business. He was Chief Executive
Officer of Invesco Australia from September 2002 until July 2006. Prior to joining Invesco, Mr.
Armour held significant leadership roles in the funds management business, both in Australia and
Hong Kong. He previously served as Chief Investment Officer for ANZ Investments and spent almost
20 years with the National Mutual/AXA Australia Group, where he was Chief Executive, and Funds
Management from 1998 to 2000. Mr. Armour graduated with honors with a Bachelor of Economics from
La Trobe University in Melbourne, Australia.
Karen Dunn Kelley, Director. Ms. Dunn Kelley is the Chief Executive Officer of Invesco
Worldwide Fixed Income, with responsibility for its fixed income and cash management business and
is also a member of Invescos Executive Management and Worldwide Institutional Strategy Committees.
She is President and Principal Executive Officer of Short-Term Investments Trust and Aim
Treasurers Series Trust and serves on the board of directors for the Short-Term Investments
Company (Global Services) plc and Aim Global Management Company, Ltd. Ms. Dunn Kelley joined
Invesco Aim Management Group, Inc. in 1989 as a money market Portfolio Manager. Ms. Dunn Kelley
has been in the investment business since 1982. Ms. Dunn Kelley graduated magna cum laude with a
Bachelor of Science from Villanova University, College of Commerce and Finance.
James S. Balloun, Director Nominee. Mr. Balloun will serve as a non-executive director of our
Company and as Chairman of the Compensation Committee. Mr. Balloun was previously the Chairman and
Chief Executive Officer of Acuity Brands, Inc. from November 2001 until his retirement in September
2004 and was the Chairman,
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President and Chief Executive Officer of National Services Industries, Inc. prior to National
Services Industries, Inc.s spin-off of Acuity Brands in November 2001. Prior to joining National
Services Industries, Inc., Mr. Balloun was with McKinsey & Company, Inc. from 1965 to 1996. Mr.
Balloun is on the board of directors of Radiant Systems, Inc. where he is the Chairman of the
Nominating and Corporate Governance Committee, Enzymatic Deinking Technologies, LLC and
Unisen/StarTrac. Mr. Balloun received a Bachelor of Science from Iowa State University and a
Master of Business Administration from Harvard Business School.
John S. Day, Director Nominee. Mr. Day will serve as a non-executive director of our Company
and as Chairman of the Audit Committee. Mr. Day was previously with Deloitte & Touche LLP from
2002 until his retirement in December 2005. Prior to joining Deloitte & Touche LLP, Mr. Day was
with Arthur Andersen LLP from 1976 to 2002. Mr. Day serves on the board of directors of Force
Protection, Inc., where he is the Chairman of the Audit Committee, and Lenbrook Square Foundation,
Inc. Mr. Day received a Bachelor of Arts from the University of North Carolina and a Master of
Business Administration from Harvard Business School.
Neil Williams, Director Nominee. Mr. Williams will serve as a non-executive chairman of our
Company and as Chairman of the Nominating and Governance Committee. Mr. Williams was previously
the general counsel of Invesco from 1999 to 2002. Mr. Williams was a partner of Alston & Bird LLP
from 1965 to 1999 where he was managing partner from 1984 through 1996. Mr. Williams serves on the
board of directors of Acuity Brands, Inc. where he is the Chairman of the Governance Committee and
on the board of directors of Printpack, Inc. Mr. Williams received a Bachelor of Arts in 1958 and
a J.D. in 1961 from Duke University.
Executive Officers
Richard J. King, CFA, President and Chief Executive Officer. Mr. King is our President and
Chief Executive Officer. He is also a member of the Invesco Worldwide Fixed Income senior
management team, and is the Head of Fixed Income Investment, contributing 24 years of fixed income
investment expertise. Mr. King joined Invesco in 2000 and has held positions as Senior Portfolio
Manager and Product Manager for Core and Core Plus, Head of the Structured Team, and Head of
Portfolio Management, leading a team responsible for portfolio management of all investment-grade
domestic fixed income portfolios. Prior to Invesco, Mr. King spent two years as Head of Fixed
Income at Security Management, and ten years with Criterion Investment Management, where he served
as Chairman of the Core Sector Group. He also served as Managing Director and Portfolio Manager
with Bear Stearns Asset Management. Starting in 1984, he spent four years with Ohio PERS as an
Investment Analyst, with the responsibility of analyzing and trading corporate bonds and
mortgage-backed securities. Mr. King began his career in 1981, as an auditor for Touche Ross & Co.
Mr. King received a Bachelor of Science in Business Administration from Ohio State University.
Mr. King is a Chartered Financial Analyst.
John M. Anzalone, CFA, Chief Investment Officer. Mr. Anzalone is our Chief Investment
Officer. He is also a Senior Director and Head of Research & Trading, Mortgage-Backed Securities
for our Manager. Mr. Anzalone joined Invescos Fixed Income Division in 2002. As the Head of the
MBS group, he is responsible for the application of investment strategy across portfolios
consistent with client investment objectives and guidelines. Additionally, the MBS team is
responsible for analyzing and implementing investment actions in the residential and commercial
mortgage-backed securities sectors. Mr. Anzalone began his investment career in 1992 at Union
Trust. In 1994 he moved to AgriBank, FCB, where he served as a Senior Trader for six years. Mr.
Anzalone is also a former employee of Advantus Capital Management where he was a Senior Trader
responsible for trading mortgage-backed, asset-backed and commercial mortgage securities. Mr.
Anzalone received a Bachelor of Arts in Economics from Hobart College and a Master of Business
Administration from the Simon School at the University of Rochester. Mr. Anzalone is a Chartered
Financial Analyst.
Donald R. Ramon, Chief Financial Officer. Mr. Ramon is our Chief Financial Officer. Mr.
Ramon has 22 years of banking and financial institution experience which includes five years
working directly with mortgage REITs. Mr. Ramon began his career in 1986 with SunTrust Banks, Inc.
where he held several accounting and internal audit positions over 13 years, including two years as
the Senior Financial Officer for numerous private mortgage REITs. From 1999 to 2005, Mr. Ramon
worked for GE Capital Corporation, overseeing their U.S. banking operations. In addition, Mr.
Ramon spent two years as Chairman of the Board, Chief Executive Officer and President of GE Money
Bank and Monogram Credit Card Bank of Georgia and four years as Chief Financial Officer for the
same. From 2005 to 2008, Mr. Ramon was SVP and Controller of HomeBanc Corp., a publicly held
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mortgage REIT that filed a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code in August 2007. In 2008, Mr. Ramon was named Acting Chief Executive Officer and
Chief Financial Officer. Mr. Ramon received a bachelors degree in Accounting from the University
of South Florida. Mr. Ramon is a Certified Public Accountant.
Other Key Personnel
Robson J. Kuster, CFA, Head of Research. Mr. Kuster is our Head of Research. He is also the
Head of Structured Securities Research for Invesco Worldwide Fixed Income. Mr. Kuster is
responsible for overseeing all structured securities positions across stable value and total return
platforms and is supported by a team of seasoned analysts. Additionally, he is closely involved in
all structured product development efforts. Mr. Kuster provides the bias decision for
mortgage-backed securities and subordinate asset-backed securities which drive long-term
positioning across all worldwide fixed income product lines. Prior to joining Invesco in 2002, Mr.
Kuster served as a Credit Analyst with Bank One Capital Markets, which he joined in 2000. Mr.
Kuster received a Bachelor of Arts in both Economics and American History from Cornell College and
a Master of Business Administration from DePaul University. Mr. Kuster is a Chartered Financial
Analyst.
Jason Marshall, Portfolio Manager. Mr. Marshall is our Portfolio Manager. Mr. Marshall is
also a Portfolio Manager on Invescos structured team with a focus in the mortgage-backed sector.
He is responsible for providing expertise for the mortgage-related focus products and working
collectively with the structured team to implement strategies throughout the fixed income platform.
Prior to joining Invesco, Mr. Marshall worked for PNC Financial Services Group, Inc., which he
joined in 1997. He was most recently Vice President of Portfolio Management, responsible for the
trading and strategic implementation of the firms large mortgage-backed securities portfolio. Mr.
Marshall received his Bachelor of Science in Finance from Indiana University of Pennsylvania and a
Master of Business Administration with a concentration in Finance from Duquesne University.
Corporate Governance Board of Directors and Committees
Our business is managed by our Manager, subject to the supervision and oversight of our board
of directors, which has established investment guidelines described under BusinessInvestment
Guidelines for our Manager to follow in its day-to-day management of our business. A majority of
our board of directors is independent, as determined by the requirements of the NYSE and the
regulations of the SEC. Our directors keep informed about our business by attending meetings of
our board of directors and its committees and through supplemental reports and communications. Our
independent directors meet regularly in executive sessions without the presence of our corporate
officers or non-independent directors.
Upon completion of this offering, our board of directors will form an audit committee, a
compensation committee and a nominating and corporate governance committee and adopt charters for
each of these committees. Each of these committees will have three directors and will be composed
exclusively of independent directors, as defined by the listing standards of the NYSE. Moreover,
the compensation committee will be composed exclusively of individuals intended to be, to the
extent provided by Rule 16b-3 of the Exchange Act, non-employee directors and will, at such times
as we are subject to Section 162(m) of the Internal Revenue Code, qualify as outside directors for
purposes of Section 162(m) of the Internal Revenue Code.
Audit Committee
The audit committee will comprise Messrs. Balloun, Day and Williams, each of whom will be an
independent director and financially literate under the rules of the NYSE. Mr. Day will chair
our audit committee and serve as our audit committee financial expert, as that term is defined by
the SEC.
The committee assists the board of directors in overseeing:
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our financial reporting, auditing and internal control activities, including the
integrity of our financial statements; |
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our compliance with legal and regulatory requirements; |
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the independent auditors qualifications and independence; and |
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the performance of our internal audit function and independent auditor. |
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The audit committee is also responsible for engaging our independent registered public
accounting firm, reviewing with the independent registered public accounting firm the plans and
results of the audit engagement, approving professional services provided by the independent
registered public accounting firm, reviewing the independence of the independent registered public
accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of
our internal accounting controls.
Compensation Committee
The compensation committee will comprise Messrs. Balloun, Day and Williams, each of whom will
be an independent director. Mr. Balloun will chair our compensation committee.
The principal functions of the compensation committee will be to:
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review and approve on an annual basis the corporate goals and objectives relevant to
Chief Executive Officer compensation, if any, evaluate our Chief Executive Officers
performance in light of such goals and objectives and, either as a committee or together
with our independent directors (as directed by the board of directors), determine and
approve the remuneration of our Chief Executive Officer based on such evaluation; |
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review and oversee managements annual process, if any, is paid by us for evaluating the
performance of our senior officers and review and approve on an annual basis the
remuneration of our senior officers; |
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oversee our equity-based remuneration plans and programs; |
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assist the board of directors and the chairman in overseeing the development of
executive succession plans; and |
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determine from time to time the remuneration for our non-executive directors (including
the chairman). |
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Nominating and Corporate Governance Committee
The nominating and corporate governance committee will comprise Messrs. Balloun, Day and
Williams, each of whom will be an independent director. Mr. Williams will chair our nominating and
corporate governance committee.
The nominating and corporate governance committee will be responsible for
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providing counsel to the board of directors with respect to the organization, function
and composition of the board of directors and its committees; |
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overseeing the self-evaluation of the board of directors and the board of directors
evaluation of management; |
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periodically reviewing and, if appropriate, recommending to the board of directors
changes to, our corporate governance policies and procedures; and |
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identifying and recommending to the board of directors potential director candidates for
nomination. |
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Executive and Director Compensation
Compensation of Directors
A member of our board of directors who is also an employee of Invesco is referred to as an
executive director. Executive directors will not receive compensation for serving on our board of
directors. Each non-executive director will receive an upfront fee of $5,000, an annual base fee
for his or her services of $25,000 and an annual deferred director fee of $25,000 in restricted
shares of our common stock under our equity incentive plan. Base director fees will be paid in
cash and deferred director fees will be paid in restricted shares of our common stock which may not
be sold or transferred during the non-executive directors service on our board of directors. Both
base and deferred director fees will be paid on a quarterly basis. We will also reimburse each of
our directors for their travel expenses incurred in connection with their attendance at full board
of directors and committee meetings.
We have not made any payments to any of our directors or director nominees to date.
Executive Compensation
Because our management agreement provides that our Manager is responsible for managing our
affairs, our executive officers, who are employees of Invesco, do not receive cash compensation
from us for serving as our executive officers. Instead we will pay our Manager the management fees
described in Our Manager and the Management AgreementManagement AgreementManagement Fees and
Expense Reimbursements. However, we have agreed to reimburse our Manager for the compensation
expense of our Chief Financial Officer in respect of the services he provides to us. Our current
Chief Financial Officers annual base salary is $175,000, and he is eligible to receive an annual
bonus between 25% and 100% per annum of his base salary. We expect our Chief Financial Officer to
be dedicated exclusively to us and, as a result, we will be responsible for his total compensation.
In their capacities as officers or personnel of Invesco, persons other than our Chief Financial
Officer will devote such portion of their time to our affairs as is necessary to enable us to
operate our business.
Except for certain equity grants that we may make in the future, our Manager compensates each
of our executive officers. We pay our Manager a management fee and our Manager uses the proceeds
from the management fee in part to pay compensation to its officers and personnel. We will adopt
an equity incentive plan for our officers, our non-employee directors, our Managers personnel and
other service providers to encourage their efforts toward our continued success, long-term growth
and profitability and to attract, reward and retain key personnel. See Equity Incentive Plan
for detailed description of our equity incentive plan.
Equity Incentive Plan
Prior to the completion of this offering, we will adopt an equity incentive plan to provide
incentive compensation to attract and retain qualified directors, officers, advisors, consultants
and other personnel, including our Manager and affiliates and personnel of our Manager and its
affiliates, and any joint venture affiliates of ours. Unless terminated earlier, our equity
incentive plan will terminate in 2019, but will continue to govern unexpired awards. Our equity
incentive plan provides for grants of share options, restricted shares of common stock, phantom
shares, dividend equivalent rights and other equity-based awards up to an aggregate of 6% of the
issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the
award, subject to a ceiling of 40 million shares available for issuance under the plan. In making
awards under the plan, our board of directors or the compensation committee, as applicable, may
consider the recommendations of our Manager as to the personnel who should receive awards and the
amounts of the awards. Prior to the completion of this offering, we have not issued any
equity-based compensation.
The equity incentive plan is administered by the compensation committee appointed for such
purposes. The compensation committee, as appointed by our board of directors, has the full
authority (1) to administer and interpret the equity incentive plan, (2) to authorize the granting
of awards, (3) to determine the eligibility of directors, officers, advisors, consultants and other
personnel, including our Manager and affiliates and personnel of our Manager and its affiliates,
and any joint venture affiliates of ours, to receive an award, (4) to determine the number of
shares of common stock to be covered by each award (subject to the individual participant
limitations provided in the equity
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incentive plan), (5) to determine the terms, provisions and conditions of each award (which
may not be inconsistent with the terms of the equity incentive plan), (6) to prescribe the form of
instruments evidencing such awards and (7) to take any other actions and make all other
determinations that it deems necessary or appropriate in connection with the equity incentive plan
or the administration or interpretation thereof. In connection with this authority, the
compensation committee may, among other things, establish performance goals that must be met in
order for awards to be granted or to vest, or for the restrictions on any such awards to lapse.
From and after the consummation of this offering, the compensation committee will consist solely of
non-employee directors, each of whom is intended to be, to the extent required by Rule 16b-3 under
the Exchange Act, a non-employee director and will, at such times as we are subject to Section
162(m) of the Internal Revenue Code, qualify as an outside director for purposes of Section 162(m)
of the Internal Revenue Code, or, if no committee exists, the board of directors.
Code of Business Conduct and Ethics
Our board of directors has established a code of business conduct and ethics that applies to
our officers and directors and to our Managers officers, directors and personnel when such
individuals are acting for or on our behalf. Among other matters, our code of business conduct and
ethics is designed to deter wrongdoing and to promote:
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honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; |
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full, fair, accurate, timely and understandable disclosure in our SEC reports and other
public communications; |
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compliance with applicable governmental laws, rules and regulations; |
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prompt internal reporting of violations of the code to appropriate persons identified in
the code; and |
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accountability for adherence to the code. |
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Any waiver of the code of business conduct and ethics for our executive officers or directors
may be made only by our board of directors or one of our board committees and will be promptly
disclosed as required by law or stock exchange regulations.
Conflicts of Interest
We are dependent on our Manager for our day-to-day management and do not have any independent
officers or employees. Each of our officers and two of our directors, Mr. Armour and Ms. Dunn
Kelley, are employees of Invesco. Our management agreement with our Manager was negotiated between
related parties and its terms, including fees and other amounts payable, may not be as favorable to
us as if it had been negotiated at arms length with an unaffiliated third party. In addition, the
obligations of our Manager and its officers and personnel to engage in other business activities,
including for Invesco, may reduce the time our Manager and its officers and personnel spend
managing us.
As
of March 31, 2009, Invesco had $348.2 billion in managed
assets and our Manager managed approximately $177.0 billion of fixed
income and real estate investments, including approximately $18.8
billion of structured securities, consisting of approximately
$11.0 billion of Agency RMBS, $2.0 billion of non-Agency RMBS and $1.9 billion of CMBS, and we will
compete for investment opportunities directly with our Manager or other clients of our Manager or
Invesco and its subsidiaries. A substantial number of separate accounts managed by our
Managers had limited exposure to our target assets.
In addition, in the future our Manager may have additional clients that compete directly with us
for investment opportunities, although Invesco has indicated to us that it expects that we will be
the only publicly traded REIT advised by our Manager or Invesco and
its subsidiaries whose investment strategy is to
invest substantially all of its capital in our target assets. Our Manager and Invesco Aim Advisors
have an investment allocation policy in place that is intended to enable us to share equitably with
the investment companies and institutional and separately managed accounts that effect securities
transactions in fixed income securities for which our Manager and Invesco Aim Advisors are
responsible in the selection of brokers, dealers and other trading counterparties. According to
this policy, investments may be allocated by taking into account factors,
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including but not limited to investment objectives or strategies, the size of the available
investment, cash availability and cash flow expectations, and the tax implications of an
investment. The investment allocation policy also requires a fair and equitable allocation of
financing opportunities over time among us and other accounts. The investment allocation policy
also includes other procedures intended to prevent any of its other accounts from receiving
favorable treatment in accessing investment opportunities over any other account. The investment
allocation policy may be amended by our Manager and Invesco Aim Advisors at anytime without our
consent. To the extent that a conflict arises with respect to the business of our Manager or Invesco Aim Advisor or us in such a way as to
give rise to conflicts not currently addressed by the investment allocation policy, our Manager and
Invesco Aim Advisors may need to refine its policy to address such situation. Our independent
directors will review our Managers and Invesco Aim Advisors compliance with the investment
allocation policy. In addition, to avoid any actual or perceived conflicts of interest with our
Manager or Invesco Aim Advisors, a majority of our independent directors will be required to
approve an investment in any security structured or issued by an entity managed by our Manager,
Invesco Aim Advisors, or any of their affiliates, or any purchase or sale of our assets by or to
our Manager, Invesco Aim Advisors or their affiliates or an entity managed by our Manager, Invesco
Aim Advisors or its affiliates.
To the extent available to us, we may seek to finance our non-Agency RMBS and CMBS portfolios with
financings under the Legacy Securities Program, and may seek to acquire residential and commercial
mortgage loans with financing under the Legacy Loan Program. One of the ways we may access this
financing is by contributing our equity capital to one or more Legacy Securities or Legacy Loan
PPIFs that will be established and managed by our Manager or one of its affiliates. To date, the
terms of any equity investment that we would make to any Legacy Securities or Legacy Loan PPIFs
that may be established in the future have not yet been determined. However, we anticipate that
any such Legacy Securities or Legacy Loan PPIF would provide for the payment of fees to the
investment manager of the Legacy Securities or Legacy Loan PPIF, which we anticipate including base
management fees and the payment of an incentive fee to the investment manager after investors
receive minimum hurdle rates of return. Our Manager would have a conflict of interest in
recommending our participation in any Legacy Securities or Legacy Loan PPIFs it manages for the
fees payable to it by the Legacy Securities or Legacy Loan PPIF may be greater than the fees
payable to it by us under the management agreement. We have addressed this conflict by requiring
that the terms of any equity investment we make in any such Legacy Securities or Legacy Loan PPIF
be approved by our board of directors, including a majority of our independent directors. In
addition, we expect that any investment we make will be on terms that are no less favorable to us
than those made available to other third party institutional investors in the Legacy Securities or
Legacy Loan PPIF. Further in our management agreement, our Manager
has agreed not to charge the base
management fee payable in respect of any equity investment we may decide to make in a Legacy
Securities or Legacy Loan PPIF managed by our Manager or any of its affiliates. We will be responsible for any fees payable for any equity investment
we may decide to make in a Legacy Securities or Legacy Loan PPIF managed by an entity other than our Manager
or any of its affiliates.
We do not have a policy that expressly prohibits our directors, officers, security holders or
affiliates from engaging for their own account in business activities of the types conducted by us.
However, subject to Invescos allocation policy, our code of business conduct and ethics contains
a conflicts of interest policy that prohibits our directors, officers and personnel, as well as
employees of our Manager who provide services to us, from engaging in any transaction that involves
an actual conflict of interest with us.
Limitation of Liability and Indemnification
Maryland law permits a Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (1) actual receipt of an improper benefit or profit in money,
property or services or (2) active and deliberate dishonesty established by a final judgment as
being material to the cause of action. Our charter contains such a provision and limits the
liability of our directors and officers to the maximum extent permitted by Maryland law.
Our charter authorizes us, to the maximum extent permitted by Maryland law, to indemnify and
pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (1) any
present or former director or officer of our company or (2) any individual who, while serving as
our director or officer and at our request, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, REIT, partnership, joint venture,
trust, employee benefit plan or other enterprise, from and against any claim or liability to which
such person may become subject or which such person may incur by reason of his or her service in
such capacity or capacities. Our Bylaws obligate us, to the maximum extent permitted by Maryland
law, to indemnify and pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (1) any present or former director or officer of our company who is made or
threatened to be made a party to the proceeding by reason of his service in that capacity or (2)
any individual who, while serving as our director or officer and at our request, serves or has
served another corporation, REIT, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation, REIT, partnership,
joint venture, trust, employee benefit plan or other enterprise, and who is made or threatened to
be made a party to the proceeding by reason of his service in that capacity. Our charter and
Bylaws also permit us to indemnify and advance expenses to any person who served any predecessor of
our company in any of the capacities described above and to any personnel or agent of our company
or of any predecessor.
The MGCL requires us (unless our charter provides otherwise, which our charter does not) to
indemnify a director or officer who has been successful, on the merits or otherwise, in the defense
of any proceeding to which he is made or threatened to be made a party by reason of his service in
that capacity. The MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be made or threatened
to be made a party by reason of their service in those or other capacities unless it is established
that (1) the act or omission of the director or officer was material to the matter giving rise to
the proceeding and (A) was committed in bad faith or (B) was the result of active and deliberate
dishonesty, (2) the director or officer actually received an improper personal benefit in money,
property or services, or (3) in the case of
- 102 -
any criminal proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify a
director or officer in a suit by or in the right of the corporation in which the director or
officer was adjudged liable on the basis that a personal benefit was improperly received. A court
may order indemnification if it determines that the director or officer is fairly and reasonably
entitled to indemnification, even though the director or officer did not meet the prescribed
standard of conduct or was adjudged liable on the basis that personal benefit was improperly
received. However, indemnification for an adverse judgment in a suit by us or in our right, or for
a judgment of liability on the basis that personal benefit was improperly received, is limited to
expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director
or officer upon the corporations receipt of (1) a written affirmation by the director or officer
of his good faith belief that he has met the standard of conduct necessary for indemnification by
the corporation and (2) a written undertaking by him or on his behalf to repay the amount paid or
reimbursed by the corporation if it is ultimately determined that the appropriate standard of
conduct was not met.
- 103 -
OUR MANAGER AND THE MANAGEMENT AGREEMENT
General
We will be externally managed and advised by our Manager. Each of our officers is an employee
of Invesco. Our Manager will be entitled to receive a management fee pursuant to the management
agreement. The executive offices of our Manager are located at 1555 Peachtree Street, NE, Atlanta,
Georgia 30309, and the telephone number of our Managers executive offices is (404) 892-0896.
Executive Officers and Key Personnel of Our Manager
The following sets forth certain information with respect to each of the executive officers
and certain other key personnel of our Manager:
|
|
|
|
|
|
|
Executive Officer |
|
Age |
|
Position Held with Our Manager |
G. Mark Armour |
|
|
55 |
|
|
Chief Executive Officer, President and Director |
David A. Hartley |
|
|
47 |
|
|
Chief Accounting Officer and Director |
Jeffrey H. Kupor |
|
|
40 |
|
|
General Counsel and Secretary |
Todd L. Spillane |
|
|
50 |
|
|
Chief Compliance Officer |
Set forth below is biographical information for the executive officers and certain other key
personnel of our Manager.
G. Mark Armour. See ManagementOur Directors, Director Nominees and Executive
OfficersDirectors and Director Nominees for his biographical information.
David A. Hartley, Chief Accounting Officer and Director. Mr. Hartley is the Chief Accounting
Officer and a Director of our Manager. He has also served as Chief Accounting Officer of Invesco
since April 2004. Mr. Hartley served as Chief Financial Officer of our Manager from September 1998
to January 2003. During this time, he was the Head of Institutional Services for our Manager,
providing operational, administrative and back office support to Invesco. Since 1993, Mr. Hartley
served as the Principal Accounting Officer for AMVESCAP PLC, as Invesco was then known. In 1991,
Mr. Hartley joined Invesco as Controller for Invesco North American operations. Mr. Hartley began
his career in 1982 at KPMG Peat Marwick in London before moving to Atlanta in 1987. Mr. Hartley
received a Bachelor of Science in Economics and Accounting from the University of Bristol. Mr.
Hartley is an English Chartered Accountant.
Jeffrey H. Kupor, General Counsel and Secretary. Mr. Kupor is the General Counsel and
Secretary of our Manager. He has also served as the Head of Invesco Worldwide Institutionals
legal department since August 2006. Mr. Kupor served as General Counsel of Invesco North America
from December 2003 until August 2006. From January 2002 to November 2003, he was the Assistant
General Counsel of AMVESCAP PLC, as Invesco was then known. Mr. Kupor received a Bachelor of
Science in Economics from the Wharton School of the University of Pennsylvania and a Juris
Doctorate from Boalt Hall School of Law of the University of California at Berkeley.
Todd Spillane, Chief Compliance Officer. Mr. Spillane is the Chief Compliance Officer of our
Manager. He has also served as Chief Compliance Officer of Invesco U.S. Compliance since March
2006. As Chief Compliance Officer, Mr. Spillane directs the compliance teams that support the U.S.
Retail and U.S. Institutional operations of Invesco Aim Advisors and Invesco. Previously, Mr.
Spillane served as the Advisory Compliance Director for Invesco Aim Advisors and was responsible
for the management of the Advisory Compliance group. Prior to joining Invesco Aim Advisors in
2004, Mr. Spillane was the Vice President of global product development with AIG Global Investment
Group. While at AIG, he also served as Chief Compliance Officer and Deputy General Counsel for
AIG/SunAmerica Asset Group and AIG/American General Investment Management. Mr. Spillane began his
career in 1988 as an attorney with Aetna Life Insurance Company. He also served as Director of
Compliance for Nicholas-Applegate Capital Management from 1994 to 1999. Mr. Spillane received a
Bachelor of Arts in Politics from Fairfield University and a Juris Doctorate from Western New
England School of Law. He is a member of the Connecticut Bar Association.
- 104 -
Brian P. Norris, CFA, Portfolio Manager, Mortgage-Backed Securities. Mr. Norris is a
Portfolio Manager on the structured securities team with a focus in the mortgage-backed sector. He
is responsible for trading for the mortgage-related focus products and works collectively with the
structured team to implement strategies throughout the fixed income platform. Mr. Norris moved to
the investment team in 2006. He has been employed by Invesco since March 2001 and served for five
years as an Account Manager, where he was responsible for communicating the fixed income investment
process and strategy to both clients and consultants. Mr. Norris began his investment career in
1999 with Todd Investment Advisers in Louisville, Kentucky, as a Securities Trader. Mr. Norris
received a Bachelor of Science in Business Administration majoring in Finance from the University
of Louisville. Mr. Norris is a Chartered Financial Analyst and a member of the CFA Institute.
Clint Dudley, Portfolio Manager, Mortgage-Backed Securities. Mr. Dudley is a Portfolio
Manager for Invesco Worldwide Fixed Income and is responsible for the management of mortgage-backed
securities in the long-term investment grade bond funds. Mr. Dudley joined Invesco Aim Advisors in
1998 as a Systems Analyst in the information technology department. Mr. Dudley was promoted to
Money Market Portfolio Manager in 2000 and assumed his current duties in 2001. Mr. Dudley received
a Bachelor of Business Administration and a Master of Business Administration from Baylor
University. Mr. Dudley is a Chartered Financial Analyst.
David B. Lyle, Senior Analyst, Structured Securities. Mr. Lyle joined our Manager in June
2006 as a Structured Securities Analyst. He is responsible for evaluating and forming credit
opinions of issuers, originators, servicers, insurance providers and other parties associated with
a range of structured securities and related collateral. Mr. Lyle is also involved in the
management of structured credit vehicles and the development and marketing of new investment
products. Prior to joining Invesco, Mr. Lyle spent three years at Friedman Billings Ramsey where
he was a Vice President in the Investment Banking ABS group. From 2001 to 2003, Mr. Lyle was an
Analyst in the Mortgage Finance group at Wachovia Securities. Mr. Lyle graduated magna cum laude
with a Bachelor of Engineering from Vanderbilt University.
Kevin M. Collins, Senior Analyst, Structured Securities. Mr. Collins joined our Manager in
2007 and is currently a Senior Analyst in the Structured Securities division. He is responsible
for evaluating residential mortgage, commercial mortgage and asset-backed securities investments
and determining views on issuers, originators, servicers, insurance providers, and other parties
involved in the structured securities market. Additionally, Mr. Collins is involved in identifying
new investment strategies and creating related product offerings for Invesco Worldwide Fixed
Income. Prior to joining Invesco, Mr. Collins raised capital for banks and specialty finance
companies by originating and executing securitizations at Credit Suisse from 2004 to 2007. Mr.
Collins began his career in the Structured Finance Advisory Services practice at Ernst and Young
LLP in 2002. Mr. Collins graduated magna cum laude with a Bachelor of Science in Accounting from
Florida State University.
Laurie F. Brignac, CFA, Senior Portfolio Manager, Cash Management. Ms. Brignac is a Senior
Portfolio Manager for Invesco Worldwide Fixed Income and is responsible for the management of all
cash management products, including institutional, retail and offshore money funds, as well as
private accounts. She joined Invesco Aim Advisors in 1992 as a Money Market Trader specializing in
the repurchase agreement and time deposit markets. She was promoted to Investment Officer in 1994
and to Senior Portfolio Manager in 2002. Her duties have expanded to include all forms of
short-term taxable fixed income securities, but her primary responsibility lies in the enhanced
cash and short-term cash management area. Prior to joining Invesco Aim Advisors, Ms. Brignac was a
Sales Assistant for HSBC Securities, Inc. She began her investment career as a Money Market Trader
responsible for managing the Federal Reserve position at Premier Bank in Louisiana. Ms. Brignac
received a Bachelor of Science in Accounting from Louisiana State University. Ms. Brignac is a
Chartered Financial Analyst and a member of the Association for Investment Management and Research.
Lyman Missimer III, CFA, Chief Investment Officer, Cash Management, Senior Vice President of
Invesco Aim Distributors, Inc., Assistant Vice President of Invesco Aim Advisors and Invesco Aim
Capital Management, Inc. Mr. Missimer is responsible for directing the management of all cash
management products including, institutional, retail, offshore money market funds, as well as
enhanced cash and private accounts. Mr. Missimer has been in the investment business since 1980.
He joined Invesco in 1995 as a Senior Portfolio Manager and the Head of the Money Market desk.
Previously, he served as a Senior Portfolio Manager at Bank of America in Illinois, an
Institutional Salesman at Wells Fargo Bank and a Senior Analyst in the Economics division at
Continental Bank.
- 105 -
Mr. Missimer received a Bachelor of Arts in Economics from Dartmouth College and a Master of
Business Administration from The University of Chicago. He is a Chartered Financial Analyst.
Thomas Gerhardt, Portfolio Manager, Cash Management. Mr. Gerhardt is a Portfolio Manager for
Invesco Worldwide Fixed Income and is responsible for the management of all cash management
products, including institutional, retail and offshore money funds, as well as private accounts.
Mr. Gerhardt joined Invesco Aim Advisors in 1992 as a Portfolio Administrator specializing in the
pricing of collateral for repurchase agreements and assisting in the day-to-day operations
surrounding the money market funds. In 1999, he rejoined Invesco Aim Advisors after several years
in the teaching profession. He joined Invesco Aim Advisors Cash Management Marketing team in 2002
as an Internal Wholesaler and he assumed his current position as Portfolio Manager in 2006. Mr.
Gerhardt received a Bachelor of Arts in Communications from Trinity University and a Master of
Business Administration from the University of St. Thomas.
Mark V. Matthews, Ph.D., Head of Global Process Management. Mr. Matthews joined Invescos
Quantitative Research group in September 2000. He is responsible for developing models and
forecasting tools for fixed income markets. Mr. Matthews develops models and measurement
algorithms for investment opportunity and performance, and works on quantitative product design,
risk measurement, and performance attribution. Mr. Matthews began his career in 1991 as Assistant
Professor of Applied Math at the Massachusetts Institute of Technology. From 1996 to 1999, he
worked on security analytics for a financial software company. Immediately prior to joining
Invesco, Mr. Matthews was a Quantitative Analyst in the Equity Trading group at Fidelity
Investments. He became Director of Quantitative Research for Invesco in 2004. In 2007, he joined
Invescos Global Process Management team as Head of Research and Development and was named Head of
Global Process Management in 2008. Mr. Matthews received a Bachelor of Arts from Harvard
University, and a Masters of Science and Doctor of Philosophy in Statistics from Stanford
University.
- 106 -
Historical Performance of Our Managers Investments in RMBS and CMBS
Our Managers investment professionals have extensive experience in performing advisory
services for funds, other investment vehicles, and other managed and discretionary accounts that
focus on investing in RMBS and CMBS. As of March 31, 2009, our Manager managed approximately
$18.8 billion of structured securities, consisting of approximately $11.0 billion of Agency RMBS,
$3.9 billion of consumer ABS, $2.0 billion of non-Agency RMBS and $1.9 billion of CMBS.
Invescos proprietary structured securities fund managed by our Manager, is the only fund
managed by our Manager that follows an investment strategy comparable to our business strategy. At March 31, 2009,
the proprietary structured securities fund had approximately $10.5 billion in assets.
The proprietary structured securities fund is managed by the same individuals at our Manager who will be
responsible for our day-to-day management. The table below identifies
the target assets of the proprietary structured securities fund
compared to our target assets, while the graph below illustrates the
historical sector weights of the target assets of the proprietary
structured securities fund as well as the total percentage of the
proprietary structured securities fund invested in structured
securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Structured |
|
|
Invesco Mortgage |
|
|
Asset Class |
|
|
Securities Fund |
|
|
Capital Inc. |
|
|
Agency RMBS
|
|
|
ü
|
|
|
ü |
|
|
Non-Agency RMBS
|
|
|
ü
|
|
|
ü |
|
|
CMBS
|
|
|
ü
|
|
|
ü |
|
|
Debt issued by the U.S. Treasury
or a U.S. Government agency
|
|
|
ü |
|
|
|
|
|
Residential and Commercial
Mortgage Loans
|
|
|
|
|
|
ü |
|
|
Invescos
Proprietary Structured Securities Fund
Historical Sector Weights
100 90 80 70 60 50 % Structured Securities % Non-Agency RMBS 40 % CMBS % Agency MBS 30 20 10 0 4 4
4 4 5 6 6 6 7 7 7 8 0 03 0 00 04 20 00 0 /20 0 /20 0 /2005 0 05 0 060 060 00 0 /20 00 0 /20 0 /20 0
/2007 /20080 0 080 08 /20 00 09 1/2 /1/2 /1 1/2006 1/21/2 /1 1/21/2008 /1 1/2 2 / 1/2004 4/ 1/2 6 /
8/ 1/ 2/ 14/ 16/ 1 2 / 4 / 6 / 8/10/1/2 2/ 1/2 4/ 16/ 18/ 1 10 /1 2/ 14 / 6 / 8 / 2 / 12/1/2 1 01 2
8/1/2005 10 /1 /2005 12/1/2 1 2 12/1/2007 10/1/2 1 2 |
The average portfolio weight in our proprietary structured securities fund in each of our
target assets are calculated using monthly data over the period
from December 2003 to
March 2009 and are approximately as
follows: 30% Agency RMBS, 30% non-Agency RMBS, 15% CMBS and 25%
government debt. As
illustrated in the graph above, over time, 80% to 100% of
the proprietary structured securities funds investments have been in structured securities
and the various asset classes of
the proprietary structured securities fund are substantially similar to our target assets.
- 107 -
The
proprietary structured securities fund was established in April 2002. The
information in the graph and tables below detail the return profile of the proprietary structured securities fund
from December 31, 2003 through March 31, 2009. The data presented is based on internal
portfolio accounting system output. The proprietary structured securities fund produced positive
returns for each of the past five calendar years and annualized
returns of 1.11%, 4.52% and 3.31%
respectively on a one, three, and five year basis as of March 31, 2009.
|
|
|
|
|
|
|
|
|
Trailing Period Returns |
|
|
|
|
|
|
|
|
(Quarterly Data as of 3/31/09) |
|
1Q09 |
|
1 Year |
|
3 Years |
|
5 Years |
Invescos proprietary
structured securities fund
(gross) |
|
2.52 |
|
1.11 |
|
4.52 |
|
3.31 |
Invescos proprietary
structured securities fund
(net) |
|
2.47 |
|
0.92 |
|
4.32 |
|
3.11 |
Blended Benchmark1 |
|
-4.91 |
|
-10.56 |
|
-2.3 |
|
-0.68 |
|
|
|
|
|
|
|
|
|
|
|
Calendar Year Returns |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Invescos proprietary
structured securities fund
(gross) |
|
0.13 |
|
6.82 |
|
4.61 |
|
2.06 |
|
2.44 |
Invescos proprietary
structured securities fund
(net) |
|
-0.06 |
|
6.62 |
|
4.41 |
|
1.87 |
|
2.25 |
Blended Benchmark1 |
|
-8.29 |
|
2.08 |
|
4.86 |
|
2.14 |
|
3.66 |
|
|
|
1 |
|
The Blended Benchmark used for comparison consists of 30% Barclays Capital MBS Index,
30% Barclays AAA Home Equity ABS Index, 15% Barclays AAA CMBS Index and 25% Barclays 1-5 Year
Government Index. |
We
have included this historical performance data because we believe it
may be useful in assessing the capabilities of our Manager and our
ability to manage a portfolio including both RMBS and CMBS. The gross performance results are
presented before management and custodial fees but after all trading commissions and withholding
taxes on dividends, interest and capital gains. The net performance results are calculated
by subtracting the highest tier of the published fee schedule for
this product from the gross quarterly returns.
We
provide an asset-weighted custom benchmark
index return for the proprietary structured securities fund constructed
using the indices and weighting described in the table above using the average weights of the
proprietary structured securities fund as described above. We believe
that by weighting the custom index in a similar manner as the
weighting in the proprietary structured securities fund, we
demonstrate our Managers historical performance in our target
assets against the most relevant benchmark.
- 108 -
Although the investment objectives and
strategy of the proprietary structured securities fund
have significant overlap with our investment objectives and strategy,
we intend to use significantly more leverage than the proprietary structured
securities fund. While we
anticipate using significant financing for our assets as our Manager deems
appropriate and consistent with our investment objectives and
strategy, the proprietary structured
securities fund has historically employed modest amounts of leverage through its use of U.S.
Treasury futures, Eurodollar futures and TBA contracts and is not
permitted to borrow against its assets, other than on a
temporary basis. The proprietary structured securities fund does not issue debt or borrow through
repurchase agreement financing or through the U.S. Government
programs in which we may participate. We expect, at least initially,
that we may deploy on a debt-to-equity basis leverage up to seven to eight times on our Agency
RMBS assets and up to five to six times on our non-Agency RMBS, CMBS and mortgage loans assets. The
higher levels of leverage we expect to deploy in our investment strategy compared to the levels
of leverage historically deployed by the proprietary structured securities fund is expected to provide
us with opportunities to earn higher returns on invested capital, while at the same time exposing
us to greater risk of loss, in comparison to the proprietary structured securities fund. For
additional information regarding our financing strategy, see
BusinessOur Financing Strategy.
The historical
performance and other data relating to the proprietary structured securities fund presented above is not the performance of us or a model portfolio
that we might build. The performance presented should not be considered to be indicative
of our future performance and should not be considered a substitute for or guarantee of our future
performance.
Investment Committee
Our Manager has an Investment Committee comprised of our Managers professionals comprising
Messrs. King, Anzalone, Kuster, Marshall and Missimer. For biographical information on the members
of the Investment Committee, see ManagementOur Directors, Director Nominees and Executive
OfficersExecutive Officers, ManagementOur Directors, Director Nominees and Executive
OfficersOther Key Personnel and Our Manager and the Management AgreementExecutive Officers
and Key Personnel of Our Manager. The role of the Investment Committee is to oversee our
investment guidelines, our investment portfolio holdings and related compliance with our investment
policies. The Investment Committee will meet as frequently as it believes is necessary.
Management Agreement
Upon completion of this offering, we will enter into a management agreement with our Manager
pursuant to which it will provide for the day-to-day management of our operations. The management
agreement will require our Manager to manage our business affairs in conformity with the investment
guidelines and other policies that are approved and monitored by our board of directors. Our
Managers role as Manager will be under the supervision and direction of our board of directors.
Management Services
Our Manager will be responsible for (1) the selection, purchase and sale of our portfolio
investments, (2) our financing activities, and (3) providing us with investment advisory services.
Our Manager will be responsible for our day-to-day operations and will perform (or will cause to be
performed) such services and activities relating to our assets and operations as may be
appropriate, which may include, without limitation, the following:
(i) serving as our consultant with respect to the periodic review of the investment guidelines
and other parameters for our investments, financing activities and operations, any modification to
which will be approved by a majority of our independent directors;
(ii) investigating, analyzing and selecting possible investment opportunities and acquiring,
financing, retaining, selling, restructuring or disposing of investments consistent with the
investment guidelines;
(iii) with respect to prospective purchases, sales or exchanges of investments, conducting
negotiations on our behalf with sellers, purchasers and brokers and, if applicable, their
respective agents and representatives;
(iv) negotiating and entering into, on our behalf, repurchase agreements, interest rate swap
agreements, agreements relating to borrowings under programs established by the U.S. Government and
other agreements and instruments required for us to conduct our business;
- 109 -
(v) engaging and supervising, on our behalf and at our expense, independent contractors that
provide investment banking, securities brokerage, mortgage brokerage, other financial services, due
diligence services, underwriting review services, legal and accounting services, and all other
services (including transfer agent and registrar services) as may be required relating to our
operations or investments (or potential investments);
(vi) advising us on, preparing, negotiating and entering into, on our behalf, applications and
agreements relating to programs established by the U.S. Government;
(vii) coordinating and managing operations of any joint venture or co-investment interests
held by us and conducting all matters with the joint venture or co-investment partners;
(viii) providing executive and administrative personnel, office space and office services
required in rendering services to us;
(ix) administering the day-to-day operations and performing and supervising the performance of
such other administrative functions necessary to our management as may be agreed upon by our
Manager and our board of directors, including, without limitation, the collection of revenues and
the payment of our debts and obligations and maintenance of appropriate computer services to
perform such administrative functions;
(x) communicating on our behalf with the holders of any of our equity or debt securities as
required to satisfy the reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(xi) counseling us in connection with policy decisions to be made by our board of directors;
(xii) evaluating and recommending to our board of directors hedging strategies and engaging in
hedging activities on our behalf, consistent with such strategies as so modified from time to time,
with our qualification as a REIT and with our investment guidelines;
(xiii) counseling us regarding the maintenance of our qualification as a REIT and monitoring
compliance with the various REIT qualification tests and other rules set out in the Internal
Revenue Code and Treasury Regulations thereunder and using commercially reasonable efforts to cause
us to qualify for taxation as a REIT;
(xiv) counseling us regarding the maintenance of our exemption from the status of an
investment company required to register under the 1940 Act, monitoring compliance with the
requirements for maintaining such exemption and using commercially reasonable efforts to cause us
to maintain such exemption from such status;
(xv) furnishing reports and statistical and economic research to us regarding our activities
and services performed for us by our Manager;
(xvi) monitoring the operating performance of our investments and providing periodic reports
with respect thereto to the board of directors, including comparative information with respect to
such operating performance and budgeted or projected operating results;
(xvii) investing and reinvesting any moneys and securities of ours (including investing in
short-term investments pending investment in other investments, payment of fees, costs and
expenses, or payments of dividends or distributions to our stockholders and partners) and advising
us as to our capital structure and capital raising;
(xviii) causing us to retain qualified accountants and legal counsel, as applicable, to assist
in developing appropriate accounting procedures and systems, internal controls and other compliance
procedures and testing systems with respect to financial reporting obligations and compliance with
the provisions of the Internal Revenue Code applicable to REITs and, if applicable, TRSs, and to
conduct quarterly compliance reviews with respect thereto;
- 110 -
(xix) assisting us in qualifying to do business in all applicable jurisdictions and to obtain
and maintain all appropriate licenses;
(xx) assisting us in complying with all regulatory requirements applicable to us in respect of
our business activities, including preparing or causing to be prepared all financial statements
required under applicable regulations and contractual undertakings and all reports and documents,
if any, required under the Exchange Act, the Securities Act, or by the NYSE;
(xxi) assisting us in taking all necessary action to enable us to make required tax filings
and reports, including soliciting stockholders for required information to the extent required by
the provisions of the Internal Revenue Code applicable to REITs;
(xxii) placing, or arranging for the placement of, all orders pursuant to our Managers
investment determinations for us either directly with the issuer or with a broker or dealer
(including any affiliated broker or dealer);
(xxiii) handling and resolving all claims, disputes or controversies (including all
litigation, arbitration, settlement or other proceedings or negotiations) in which we may be
involved or to which we may be subject arising out of our day-to-day operations (other than with
our Manager or its affiliates), subject to such limitations or parameters as may be imposed from
time to time by the board of directors;
(xxiv) using commercially reasonable efforts to cause expenses incurred by us or on our behalf
to be commercially reasonable or commercially customary and within any budgeted parameters or
expense guidelines set by the board of directors from time to time;
(xxv) advising us with respect to and structuring long-term financing vehicles for our
portfolio of assets, and offering and selling securities publicly or privately in connection with
any such structured financing;
(xxvi) forming the Investment Committee, which will propose investment guidelines to be
approved by a majority of our independent directors;
(xxvii) serving as our consultant with respect to decisions regarding any of our financings,
hedging activities or borrowings undertaken by us including (1) assisting us in developing criteria
for debt and equity financing that is specifically tailored to our investment objectives, and (2)
advising us with respect to obtaining appropriate financing for our investments;
(xxviii) providing us with portfolio management;
(xxvix) arranging marketing materials, advertising, industry group activities (such as
conference participations and industry organization memberships) and other promotional efforts
designed to promote our business;
(xxx) performing such other services as may be required from time to time for management and
other activities relating to our assets and business as our board of directors shall reasonably
request or our Manager shall deem appropriate under the particular circumstances; and
(xxxi) using commercially reasonable efforts to cause us to comply with all applicable laws.
Liability and Indemnification
Pursuant to the management agreement, our Manager will not assume any responsibility other
than to render the services called for thereunder and will not be responsible for any action of our
board of directors in following or declining to follow its advice or recommendations. Our Manager
maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the
management agreement, our Manager, its officers, stockholders, members, managers, directors,
personnel, any person controlling or controlled by our Manager and any person providing
sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our
directors, our
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stockholders or any subsidiarys stockholders or partners for acts or omissions performed in
accordance with and pursuant to the management agreement, except because of acts constituting bad
faith, willful misconduct, gross negligence, or reckless disregard of their duties under the
management agreement, as determined by a final non-appealable order of a court of competent
jurisdiction.
We have agreed to indemnify our Manager, its officers, stockholders, members,
managers, directors, personnel, any person controlling or controlled by our Manager and any person
providing sub-advisory services to our Manager with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of our Manager not constituting bad
faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good
faith in accordance with and pursuant to the management agreement. Our Manager has agreed to
indemnify us, our directors and officers, personnel, agents and any persons controlling or
controlled by us with respect to all expenses, losses, damages, liabilities, demands, charges and
claims arising from acts of our Manager constituting bad faith, willful misconduct, gross
negligence or reckless disregard of its duties under the management agreement or any claims by our
Managers personnel relating to the terms and conditions of their employment by our Manager. Our
Manager will not be liable for trade errors that may result from ordinary negligence, such as
errors in the investment decision making process (such as a transaction that was effected in
violation of our investment guidelines) or in the trade process (such as a buy order that was
entered instead of a sell order, or the wrong purchase or sale of security, or a transaction in
which a security was purchased or sold in an amount or at a price other than the correct amount or
price). Notwithstanding the foregoing, our Manager will carry errors and omissions and other
customary insurance upon the completion of this offering.
Management Team
Pursuant to the terms of the management agreement, our Manager is required to provide us with
our management team, including a Chief Executive Officer, Chief Financial Officer, Chief Investment
Officer, Chief Accounting Officer, Head of Research and Portfolio Manager and along with
appropriate support personnel, to provide the management services to be provided by our Manager to
us. None of the officers or employees of our Manager will be dedicated exclusively to us.
Our Manager is required to refrain from any action that, in its sole judgment made in good
faith, (1) is not in compliance with the investment guidelines, (2) would adversely and materially
affect our status as a REIT under the Internal Revenue Code or our status as an entity intended to
be exempted or excluded from investment company status under the 1940 Act or (3) would violate any
law, rule or regulation of any governmental body or agency having jurisdiction over us or that
would otherwise not be permitted by our charter or Bylaws. If our Manager is ordered to take any
action by our board of directors, our Manager will promptly notify the board of directors if it is
our Managers judgment that such action would adversely and materially affect such status or
violate any such law, rule or regulation or our charter or Bylaws. Our Manager, its directors,
members, officers, stockholders, managers, personnel, employees and any person controlling or
controlled by our Manager and any person providing sub-advisory services to our Manager will not be
liable to us, our board of directors, our stockholders, partners or members, for any act or
omission by our Manager, its directors, officers, stockholders or employees except as provided in
the management agreement.
Term and Termination
The management agreement may be amended or modified by agreement between us and our Manager.
The initial term of the management agreement expires on the second anniversary of the closing of
this offering and will be automatically renewed for a one-year term each anniversary date
thereafter unless previously terminated as described below. Our independent directors will review
our Managers performance and the management fees annually and, following the initial term, the
management agreement may be terminated annually upon the affirmative vote of at least two-thirds of
our independent directors, based upon (1) unsatisfactory performance that is materially detrimental
to us or (2) our determination that the management fees payable to our Manager are not fair,
subject to our Managers right to prevent such termination due to unfair fees by accepting a
reduction of management fees agreed to by at least two-thirds of our independent directors. We
must provide 180 days prior notice of any such termination. Unless terminated for cause, our
Manager will be paid a termination fee equal to three times the sum of the average annual
management fee during the 24-month period immediately preceding such termination, calculated as of
the end of the most recently completed fiscal quarter before the date of termination.
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We may also terminate the management agreement at any time, including during the initial term,
without the payment of any termination fee, with 30 days prior written notice from our board of
directors for cause, which is defined as:
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our Managers continued material breach of any provision of the management agreement
following a period of 30 days after written notice thereof (or 45 days after written notice
of such breach if our Manager, under certain circumstances, has taken steps to cure such
breach within 30 days of the written notice); |
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our Managers fraud, misappropriation of funds, or embezzlement against us; |
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our Managers gross negligence of duties under the management agreement; |
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the occurrence of certain events with respect to the bankruptcy or insolvency of our
Manager, including an order for relief in an involuntary bankruptcy case or our Manager
authorizing or filing a voluntary bankruptcy petition; |
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our Manager is convicted (including a plea of nolo contendere) of a felony; and |
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the dissolution of our Manager. |
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Our Manager may assign the agreement in its entirety or delegate certain of its duties under
the management agreement to any of its affiliates without the approval of our independent directors
if such assignment or delegation does not require our approval under the Investment Advisers Act of
1940.
Our Manager may terminate the management agreement if we become required to register as an
investment company under the 1940 Act, with such termination deemed to occur immediately before
such event, in which case we would not be required to pay a termination fee. Our Manager may
decline to renew the management agreement by providing us with 180 days written notice, in which
case we would not be required to pay a termination fee. In addition, if we default in the
performance of any material term of the agreement and the default continues for a period of 30 days
after written notice to us, our Manager may terminate the management agreement upon 60 days
written notice. If the management agreement is terminated by our Manager upon our breach, we would
be required to pay our Manager the termination fee described above.
We may not assign our rights or responsibilities under the management agreement without the
prior written consent of our Manager, except in the case of assignment to another REIT or other
organization which is our successor, in which case such successor organization will be bound under
the management agreement and by the terms of such assignment in the same manner as we are bound
under the management agreement.
Management Fees and Expense Reimbursements
We do not expect to maintain an office or directly employ personnel. Instead we rely on the
facilities and resources of our Manager to manage our day-to-day operations.
Management Fee
We will pay our Manager a management fee in an amount equal to 1.50% of our stockholders
equity, per annum, calculated and payable quarterly in arrears. For purposes of calculating the
management fee, our stockholders equity means the sum of the net proceeds from all issuances of
our equity securities since inception (allocated on a pro rata basis for such issuances during the
fiscal quarter of any such issuance), plus our retained earnings at the end of the most recently
completed calendar quarter (without taking into account any non-cash equity compensation expense
incurred in current or prior periods), less any amount that we pay to repurchase our common stock
since inception, and excluding any unrealized gains, losses or other items that do not affect
realized net income (regardless of whether such items are included in other comprehensive income or
loss, or in net income). This amount will be adjusted to exclude one-time events pursuant to
changes in GAAP, and certain non-cash items after discussions between our Manager and our
independent directors and approved by a majority of our
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independent directors. Our stockholders equity, for purposes of calculating the management
fee, could be greater or less than the amount of stockholders equity shown on our financial
statements. We will treat outstanding limited partner interests (not held by us) as outstanding
shares of capital stock for purposes of calculating the management fee. Our Manager uses the
proceeds from its management fee in part to pay compensation to its officers and personnel who,
notwithstanding that certain of them also are our officers, receive no cash compensation directly
from us. The management fee is payable independent of the performance
of our portfolio. In our management agreement, our
Manager has agreed not to charge the management fee payable in
respect of any equity investment
we may decide to make in any Legacy Securities or Legacy Loan PPIF if managed by our Manager or
any of its affiliates. We will be responsible for any fees payable for any equity investment
we may decide to make in a Legacy Securities or Legacy Loan PPIF managed by an entity other than our Manager
or any of its affiliates.
The management fee of our Manager shall be calculated within 30 days after the end of each
quarter and such calculation shall be promptly delivered to us. We are obligated to pay the
management fee in cash within five business days after delivery to us of the written statement of
our Manager setting forth the computation of the management fee for such quarter.
Although there is no current intention to do so, as a component of our Managers compensation,
we may in the future issue to personnel of our Manager stock-based compensation under our equity
incentive plan.
Reimbursement of Expenses
We will be required to reimburse our Manager for the expenses described below. Expense
reimbursements to our Manager are made in cash on a monthly basis following the end of each month.
Our reimbursement obligation is not subject to any dollar limitation. Because our Managers
personnel perform certain legal, accounting, due diligence tasks and other services that outside
professionals or outside consultants otherwise would perform, our Manager is paid or reimbursed for
the documented cost of performing such tasks, provided that such costs and reimbursements are in
amounts which are no greater than those which would be payable to outside professionals or
consultants engaged to perform such services pursuant to agreements negotiated on an arms-length
basis.
We also pay all operating expenses, except those specifically required to be borne by our
Manager under the management agreement. The expenses required to be paid by us include, but are
not limited to:
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expenses in connection with the issuance and transaction costs incident to the
acquisition, disposition and financing of our investments; |
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costs of legal, tax, accounting, consulting, auditing, administrative and other similar
services rendered for us by providers retained by our Manager or, if provided by our
Managers personnel, in amounts which are no greater than those which would be payable to
outside professionals or consultants engaged to perform such services pursuant to
agreements negotiated on an arms-length basis; |
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the compensation and expenses of our directors and the cost of liability insurance to
indemnify our directors and officers; |
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costs associated with the establishment and maintenance of any of our credit or other
indebtedness of ours (including commitment fees, accounting fees, legal fees, closing and
other similar costs) or any of our securities offerings; |
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expenses connected with communications to holders of our securities or of our
subsidiaries and other bookkeeping and clerical work necessary in maintaining relations
with holders of such securities and in complying with the continuous reporting and other
requirements of governmental bodies or agencies, including, without limitation, all costs
of preparing and filing required reports with the SEC, the costs payable by us to any
transfer agent and registrar in connection with the listing and/or trading of our stock on
any exchange, the fees payable by us to any such exchange in connection with its listing,
costs of preparing, printing and mailing our annual report to our stockholders and proxy
materials with respect to any meeting of our stockholders; |
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costs associated with any computer software or hardware, electronic equipment or
purchased information technology services from third-party vendors that is used for us; |
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expenses incurred by managers, officers, personnel and agents of our Manager for travel
on our behalf and other out-of-pocket expenses incurred by managers, officers, personnel
and agents of our Manager in connection with the purchase, financing, refinancing, sale or
other disposition of an investment or establishment and maintenance of any of our
repurchase agreements or any of our securities offerings; |
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costs and expenses incurred with respect to market information systems and publications,
research publications and materials, and settlement, clearing and custodial fees and
expenses; |
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compensation and expenses of our custodian and transfer agent, if any; |
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the costs of maintaining compliance with all federal, state and local rules and
regulations or any other regulatory agency; |
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all taxes and license fees; |
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all insurance costs incurred in connection with the operation of our business except for
the costs attributable to the insurance that our Manager elects to carry for itself and its
personnel; |
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costs and expenses incurred in contracting with third parties, including affiliates of
our Manager, for the servicing and special servicing of our assets; |
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all other costs and expenses relating to our business and investment operations,
including, without limitation, the costs and expenses of acquiring, owning, protecting,
maintaining, developing and disposing of investments, including appraisal, reporting, audit
and legal fees; |
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expenses relating to any office(s) or office facilities, including but not limited to
disaster backup recovery sites and facilities, maintained for us or our investments
separate from the office or offices of our Manager; |
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expenses connected with the payments of interest, dividends or distributions in cash or
any other form authorized or caused to be made by the board of directors to or on account
of holders of our securities or of our subsidiaries, including, without limitation, in
connection with any dividend reinvestment plan; |
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any judgment or settlement of pending or threatened proceedings (whether civil, criminal
or otherwise) against us or any subsidiary, or against any trustee, director, partner,
member or officer of us or of any subsidiary in his capacity as such for which we or any
subsidiary is required to indemnify such trustee, director, partner, member or officer by
any court or governmental agency; and |
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all other expenses actually incurred by our Manager (except as described below) which
are reasonably necessary for the performance by our Manager of its duties and functions
under the management agreement. |
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We will not reimburse our Manager for the salaries and other compensation of its personnel,
except, we will reimburse our Manager for our allocable share of our Chief Financial Officers
compensation based on the percentage of his or her working time spent on our affairs as compared to
his or her working time spent on other matters for our Manager. The compensation of our Chief
Financial Officer is competitive with other similarly situated public REITs. See
ManagementExecutive and Director CompensationExecutive Compensation. The fees charged by
Invesco Aim Advisors for the performance of sub-advisory services to our Manager shall be paid by
our Manager and shall not constitute a reimbursable expense by our Manager under the management
agreement.
In addition, we may be required to pay our pro rata portion of rent, telephone, utilities,
office furniture, equipment, machinery and other office, internal and overhead expenses of our
Manager and its affiliates required for our operations.
Grants of Equity Compensation to Our Manager, Its Personnel and Its Affiliates
Under our equity incentive plan, our compensation committee (or our board of directors, if no
such committee is designated by the board) is authorized to approve grants of equity-based awards
to our Manager, its personnel.
Future equity awards may be made to our officers or directors and to our Manager and its
personnel and affiliates under our equity incentive plan. See ManagementEquity Incentive Plan.
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PRINCIPAL STOCKHOLDERS
Immediately prior to the completion of this offering, there will be 100 shares of common stock
outstanding and one stockholder of record. At that time, we will have no other shares of capital
stock outstanding. The following table sets forth certain information, prior to and after this
offering, regarding the ownership of each class of our capital stock by:
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each of our directors and director nominees; |
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each of our executive officers; |
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each holder of 5% or more of each class of our capital stock; and |
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all of our directors, director nominees and executive officers as a group. |
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In accordance with SEC rules, each listed persons beneficial ownership includes:
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all shares the investor actually owns beneficially or of record; |
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all shares over which the investor has or shares voting or dispositive control (such as
in the capacity as a general partner of an investment fund); and |
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all shares the investor has the right to acquire within 60 days (such as shares of
restricted common stock that are currently vested or which are scheduled to vest within 60
days). |
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Unless otherwise indicated, all shares are owned directly, and the indicated person has sole
voting and investment power. Except as indicated in the footnotes to the table below, the business
address of the stockholders listed below is the address of our principal executive office, 1555
Peachtree Street, NE, Atlanta, Georgia 30309.
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Percentage of Common Stock Outstanding |
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Immediately Prior to this Offering |
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Immediately After this Offering(2) |
Name and Address |
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Shares Owned |
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Percentage |
Invesco Ltd. (1) |
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100 |
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% |
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0.50 |
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G. Mark Armour |
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Karen Dunn Kelley |
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James S. Balloun |
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John S. Day |
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Neil Williams |
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Richard J. King |
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John Anzalone |
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Donald R. Ramon |
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All directors, director
nominees and executive
officers as a group |
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Represents less than 1% of the common shares outstanding upon the closing of this offering. |
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(1) |
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Invesco is the indirect 100% stockholder of Invesco Institutional (N.A.), Inc.
which purchased 100 shares of common stock in connection with our initial capitalization and
will purchase shares of common stock in the concurrent private offering. |
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(2) |
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Does not reflect (i) shares of common stock reserved for issuance upon exercise
of the underwriters over-allotment, and (ii) shares of our common stock that
may be issued by us upon a redemption of all of the OP units to be owned by Invesco,
through Invesco Investments (Bermuda) Ltd., upon completion of this offering. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the completion of this offering, we will enter into a management agreement with
Invesco Institutional (N.A.), Inc, our Manager, pursuant to which our Manager will provide the
day-to-day management of our operations. The management agreement requires our Manager to manage
our business affairs in conformity with the policies and the investment guidelines that are
approved and monitored by our board of directors. The management agreement has an initial two-year
term and will be renewed for one-year terms thereafter unless terminated by either us or our
Manager. Our Manager is entitled to receive a termination fee from us, under certain
circumstances. We are also obligated to reimburse certain expenses incurred by our Manager. Our
Manager is entitled to receive from us a management fee. See Our Manager and The Management
AgreementManagement Agreement.
Our executive officers also are employees of Invesco. As a result, the management agreement
between us and our Manager and the terms of the limited partner interest were negotiated between
related parties, and the terms, including fees and other amounts payable, may not be as favorable
to us as if it had been negotiated with an unaffiliated third party. See ManagementConflicts of
Interest and Risk FactorsRisks Related to Our Relationship With Our ManagerThere are
conflicts of interest in our relationship with our Manager and Invesco, which could result in
decisions that are not in the best interests of our stockholders.
Our management agreement is intended to provide us with access to our Managers pipeline of
assets and its personnel and its experience in capital markets, credit analysis, debt structuring
and risk and asset management, as well as assistance with corporate operations, legal and
compliance functions and governance. However, our Chief Executive Officer, Chief Investment
Officer, Chief Financial Officer and Secretary also serve as officers and employees of Invesco. As
a result, the management agreement between us and our Manager was negotiated between related
parties, and the terms, including fees and other payments payable, may not be as favorable to us as
if it had been negotiated with an unaffiliated third party. See ManagementConflicts of
Interest and Risk FactorsRisks Related to Our Relationship With Our ManagerThere are
conflicts of interest in our relationship with our Manager and Invesco, which could result in
decisions that are not in the best interests of our stockholders.
Related Party Transaction Policies
To avoid any actual or perceived conflicts of interest with our Manager, we expect our board
of directors to adopt a policy providing that an investment in any security structured or managed
by our Manager, and any sale of our assets to our Manager and its affiliates or any entity managed
by our Manager and its affiliates, will require the proper approval of our independent directors.
Our independent directors expect to establish in advance parameters within which our Manager and
its affiliates may act as our counterparty and provide broker, dealer and lending services to us in
order to enable transactions to occur in an orderly and timely manner.
We also expect our board of directors to adopt a policy regarding the approval of any related
person transaction, which is any transaction or series of transactions in which we or any of our
subsidiaries is or are to be a participant, the amount involved exceeds $120,000, and a related
person (as defined under SEC rules) has a direct or indirect material interest. Under the policy,
a related person would need to promptly disclose to our Secretary any related person transaction
and all material facts about the transaction. Our Secretary would then assess and promptly
communicate that information to the Compensation Committee of our board of directors. Based on its
consideration of all of the relevant facts and circumstances, this committee will decide whether or
not to approve such transaction and will generally approve only those transactions that do not
create a conflict of interest. If we become aware of an existing related person transaction that
has not been pre-approved under this policy, the transaction will be referred to this committee
which will evaluate all options available, including ratification, revision or termination of such
transaction. Our policy requires any director who may be interested in a related person
transaction to recuse himself or herself from any consideration of
such related person transaction. See Management
Conflicts of Interest.
Restricted Common Stock and Other Equity-Based Awards
Our equity incentive plan provides for grants of restricted common stock and other
equity-based awards up to an aggregate of 6% of the issued and outstanding shares of our common
stock (on a fully diluted basis) at the time of the award, subject to a ceiling of 40 million
shares of our common stock.
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Purchases of Common Stock by Affiliates
Concurrently with the completion of this offering, we will complete a private placement in
which we will sell shares of our common stock to Invesco, through our Manager, at $ per
share and OP units to Invesco, through Invesco Investments (Bermuda) Ltd., at $ per
unit for an aggregate investment equal to % of the gross proceeds raised in this offering, up to
$ million. Upon completion of this offering and the concurrent private placement, Invesco,
through our Manager, will beneficially own % of our outstanding common stock (or % if the
underwriters fully exercise their option to purchase additional shares). Assuming that all OP
units are redeemed for an equivalent number of shares of our common stock, Invesco, through
the Invesco Purchaser, would beneficially own % of our outstanding common stock upon completion
of this offering and the concurrent private placement (or % if the underwriters fully exercise
their option to purchase additional shares). We plan to invest the net proceeds of this offering
and the concurrent private offering in accordance with our investment objectives and the strategies
described in this prospectus.
Indemnification and Limitation of Directors and Officers Liability
Maryland law permits a Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (1) actual receipt of an improper benefit or profit in money,
property or services or (2) active and deliberate dishonesty established by a final judgment as
being material to the cause of action. Our charter contains such a provision that limits such
liability to the maximum extent permitted by Maryland law.
The MGCL permits a corporation to indemnify its present and former directors and officers,
among others, against judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made or threatened to be
made a party by reason of their service in those or other capacities unless it is established that:
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the act or omission of the director or officer was material to the matter giving rise to
the proceeding and (1) was committed in bad faith or (2) was the result of active and
deliberate dishonesty; |
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the director or officer actually received an improper personal benefit in money,
property or services; or |
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in the case of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. |
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However, under the MGCL, a Maryland corporation may not indemnify a director or officer in a
suit by or in the right of the corporation in which the director or officer was adjudged liable on
the basis that personal benefit was improperly received. A court may order indemnification if it
determines that the director or officer is fairly and reasonably entitled to indemnification, even
though the director or officer did not meet the prescribed standard of conduct or was adjudged
liable on the basis that personal benefit was improperly received. However, indemnification for an
adverse judgment in a suit by us or in our right, or for a judgment of liability on the basis that
personal benefit was improperly received, is limited to expenses.
In addition, the MGCL permits a corporation to advance reasonable expenses to a director or
officer upon the corporations receipt of:
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a written affirmation by the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for indemnification by the corporation;
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a written undertaking by the director or officer or on the directors or officers
behalf to repay the amount paid or reimbursed by the corporation if it is ultimately
determined that the director or officer did not meet the standard of conduct. |
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Our charter authorizes us to obligate ourselves and our Bylaws obligate us, to the maximum
extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a
preliminary determination of the
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ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to:
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any present or former director or officer of our company who is made or threatened to be
made a party to the proceeding by reason of his or her service in that capacity; or |
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any individual who, while a director or officer of our company and at our request,
serves or has served another corporation, REIT, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or trustee of such
corporation, REIT, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made or threatened to be made a party to the proceeding by reason of
his or her service in that capacity. |
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Our charter and Bylaws also permit us to indemnify and advance expenses to any person who
served a predecessor of ours in any of the capacities described above and to any personnel or agent
of our company or a predecessor of our company.
Following completion of this offering, we may enter into indemnification agreements with each
of our directors and executive officers that would provide for indemnification to the maximum
extent permitted by Maryland law. In addition, the partnership agreement provides that we, as
general partner, and our officers and directors are indemnified to the fullest extent permitted by
law.
Insofar as the foregoing provisions permit indemnification of directors, officers or persons
controlling us for liability arising under the Securities Act, we have been informed that, in the
opinion of the SEC, this indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Registration Rights
We will enter into a registration rights agreement with regard to the common stock and OP
units owned by our Manager and Invesco Investments (Bermuda) Ltd., respectively upon completion of
this offering and any shares of common stock that our Manager may elect to receive under the
management agreement or otherwise. Pursuant to the registration rights agreement, we will grant to
our Manager and Invesco Investments (Bermuda) Ltd., respectively (1) unlimited demand registration
rights to have the shares purchased by our Manager or granted to them in the future and the shares
that we may issue upon redemption of the OP units purchased by Invesco Investments (Bermuda) Ltd.
registered for resale, and (2) in certain circumstances, the right to piggy-back these shares in
registration statements we might file in connection with any future public offering so long as we
retain our Manager as the manager under the management agreement. The registration rights of our
Manager and Invesco Investments (Bermuda) Ltd., respectively with respect to the common stock and
OP units that they will purchase simultaneously with this offering will only begin to apply one
year after the date of this prospectus. Notwithstanding the foregoing, any registration will be
subject to cutback provisions, and we will be permitted to suspend the use, from time to time, of
the prospectus that is part of the registration statement (and therefore suspend sales under the
registration statement) for certain periods, referred to as blackout periods.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary of the rights and preferences of our capital stock . While we
believe that the following description covers the material terms of our capital stock, the
description may not contain all of the information that is important to you. We encourage you to
read carefully this entire prospectus, our charter and Bylaws and the other documents we refer to
for a more complete understanding of our capital stock. Copies of our charter and Bylaws are filed
as exhibits to the registration statement of which this prospectus is a part. See Where You Can
Find More Information.
General
Our charter provides that we may issue up to 450,000,000 shares of common stock, $0.01 par
value per share, and 50,000,000 shares of preferred stock, $.01 par value per share. Our charter
authorizes our board of directors to amend our charter to increase or decrease the aggregate number
of authorized shares of stock or the number of shares of stock of any class or series without
stockholder approval. After giving effect to this offering and the other transactions described in
this prospectus, shares of common stock will be issued and outstanding on a fully diluted basis
( shares if the underwriters over-allotment option is exercised in full), and no preferred
shares will be issued and outstanding. Under Maryland law, stockholders are not generally liable
for our debts or obligations.
Shares of Common Stock
All shares of common stock offered by this prospectus will be duly authorized, validly issued,
fully paid and nonassessable. Subject to the preferential rights of any other class or series of
shares of stock and to the provisions of our charter regarding the restrictions on transfer of
shares of stock, holders of shares of common stock are entitled to receive dividends on such shares
of common stock out of assets legally available therefor if, as and when authorized by our board of
directors and declared by us, and the holders of our shares of common stock are entitled to share
ratably in our assets legally available for distribution to our stockholders in the event of our
liquidation, dissolution or winding up after payment of or adequate provision for all our known
debts and liabilities.
The shares of common stock that we are offering will be issued by us and do not represent any
interest in or obligation of Invesco or any of its affiliates. Further, the shares are not a
deposit or other obligation of any bank, are not an insurance policy of any insurance company and
are not insured or guaranteed by the FDIC, any other governmental agency or any insurance company.
The shares of common stock will not benefit from any insurance guarantee association coverage or
any similar protection.
Subject to the provisions of our charter regarding the restrictions on transfer of shares of
stock and except as may otherwise be specified in the terms of any class or series of shares of
common stock, each outstanding share of common stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors, and, except as provided
with respect to any other class or series of shares of stock, the holders of such shares of common
stock will possess the exclusive voting power. There is no cumulative voting in the election of
our board of directors, which means that the holders of a majority of the outstanding shares of
common stock can elect all of the directors then standing for election, and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of common stock have no preference, conversion, exchange, sinking fund or
redemption rights, have no preemptive rights to subscribe for any securities of our company and
generally have no appraisal rights. Subject to the provisions of our charter regarding the
restrictions on transfer of shares of stock, shares of common stock will have equal dividend,
liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge
with another entity or engage in similar transactions outside the ordinary course of business
unless approved by the affirmative vote of stockholders holding at least two-thirds of the votes
entitled to be cast on the matter unless a lesser percentage (but not less than a majority of all
of the votes entitled to be cast on the matter) is set forth in the corporations charter. Our
charter provides that these matters (other than certain amendments to the provisions of our charter
related to the removal of directors and the restrictions on ownership and transfer of our shares of
stock)
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may be approved by a majority of all of the votes entitled to be cast on the matter. Our
charter also provides that we may sell or transfer all or substantially all of our assets if
approved by our board of directors and by the affirmative vote of not less than a majority of all
the votes entitled to be cast on the matter.
Power to Reclassify Our Unissued Shares of Stock
Our charter authorizes our board of directors to classify and reclassify any unissued shares
of common or preferred stock into other classes or series of shares of stock. Prior to issuance of
shares of each class or series, our board of directors is required by Maryland law and by our
charter to set, subject to our charter restrictions on transfer of shares of stock, the terms,
preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions of redemption for each class or
series. Therefore, our board of directors could authorize the issuance of shares of common or
preferred stock with terms and conditions that could have the effect of delaying, deferring or
preventing a change in control or other transaction that might involve a premium price for our
shares of common stock or otherwise be in the best interest of our stockholders. No shares of
preferred stock are presently outstanding, and we have no present plans to issue any shares of
preferred stock.
Power to Increase or Decrease Authorized Shares of Common Stock and Issue Additional Shares of
Common and Preferred Stock
We believe that the power of our board of directors to amend our charter to increase or
decrease the number of authorized shares of stock, to issue additional authorized but unissued
shares of common or preferred stock and to classify or reclassify unissued shares of common or
preferred stock and thereafter to issue such classified or reclassified shares of stock will
provide us with increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs that might arise. The additional classes or series, as well as the
shares of common stock, will be available for issuance without further action by our stockholders,
unless such action is required by applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or traded. Although our board of directors
does not intend to do so, it could authorize us to issue a class or series that could, depending
upon the terms of the particular class or series, delay, defer or prevent a change in control or
other transaction that might involve a premium price for our shares of common stock or otherwise be
in the best interest of our stockholders.
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT under the Internal Revenue Code, our shares of stock must
be owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than
the first year for which an election to be a REIT has been made) or during a proportionate part of
a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of stock
may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities) during the last half of a taxable year (other than the
first year for which an election to be a REIT has been made).
Our charter contains restrictions on the ownership and transfer of our shares of common stock
and other outstanding shares of stock. The relevant sections of our charter provide that, subject
to the exceptions described below, no person or entity may own, or be deemed to own, by virtue of
the applicable constructive ownership provisions of the Internal Revenue Code, more than 9.8% by
value or number of shares, whichever is more restrictive, of our outstanding shares of common stock
(the common share ownership limit), or 9.8% by value or number of shares, whichever is more
restrictive, of our outstanding capital stock (the aggregate share ownership limit). We refer to
the common share ownership limit and the aggregate share ownership limit collectively as the
ownership limits. In addition, different ownership limits will apply to Invesco. These ownership
limits, which our board of directors has determined will not jeopardize our REIT qualification,
will allow Invesco to hold up to 25% (by value or by number of shares, whichever is more
restrictive) of our common stock or up to 25% (by value or by number of shares, whichever is more
restrictive) of our outstanding capital stock. A person or entity that becomes subject to the
ownership limits by virtue of a violative transfer that results in a transfer to a trust, as set
forth below, is referred to as a purported beneficial transferee if, had the violative transfer
been effective, the person or entity would have been a record owner and beneficial owner or solely
a beneficial owner of our shares of stock, or is
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referred to as a purported record transferee if, had the violative transfer been effective,
the person or entity would have been solely a record owner of our shares of stock.
The constructive ownership rules under the Internal Revenue Code are complex and may cause
shares of stock owned actually or constructively by a group of related individuals and/or entities
to be owned constructively by one individual or entity. As a result, the acquisition of less than
9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of
common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our
outstanding capital stock (or the acquisition of an interest in an entity that owns, actually or
constructively, our shares of stock by an individual or entity), could, nevertheless, cause that
individual or entity, or another individual or entity, to own constructively in excess of 9.8% by
value or number of shares, whichever is more restrictive, of our outstanding shares of common
stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding
capital stock and thereby subject the shares of common stock or total shares of stock to the
applicable ownership limits.
Our board of directors may, in its sole discretion, exempt a person from the above-referenced
ownership limits. However, the board of directors may not exempt any person whose ownership of our
outstanding stock would result in our being closely held within the meaning of Section 856(h) of
the Internal Revenue Code or otherwise would result in our failing to qualify as a REIT. In order
to be considered by the board of directors for exemption, a person also must not own, directly or
indirectly, an interest in one of our tenants (or a tenant of any entity which we own or control)
that would cause us to own, directly or indirectly, more than a 9.9% interest in the tenant. The
person seeking an exemption must represent to the satisfaction of our board of directors that it
will not violate these two restrictions. The person also must agree that any violation or
attempted violation of these restrictions will result in the automatic transfer to a trust of the
shares of stock causing the violation. As a condition of its waiver, our board of directors may
require an opinion of counsel or IRS ruling satisfactory to our board of directors with respect to
our qualification as a REIT.
In connection with the waiver of the ownership limits or at any other time, our board of
directors may from time to time increase or decrease the ownership limits for all other persons and
entities; provided, however, that any decrease may be made only prospectively as to existing
holders (other than a decrease as a result of a retroactive change in existing law, in which case
the decrease will be effective immediately); and provided further that the ownership limits may not
be increased if, after giving effect to such increase, five or fewer individuals could own or
constructively own in the aggregate, more than 49.9% in value of the shares then outstanding.
Prior to the modification of the ownership limits, our board of directors may require such opinions
of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order
to determine or ensure our qualification as a REIT. Reduced ownership limits will not apply to any
person or entity whose percentage ownership in our shares of common stock or total shares of stock,
as applicable, is in excess of such decreased ownership limits until such time as such persons or
entitys percentage of our shares of common stock or total shares of stock, as applicable, equals
or falls below the decreased ownership limits, but any further acquisition of our shares of common
stock or total shares of stock, as applicable, in excess of such percentage ownership of our shares
of common stock or total shares of stock will be in violation of the ownership limits.
Our charter provisions further prohibit:
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any person from beneficially or constructively owning, applying certain attribution
rules of the Internal Revenue Code, our shares of stock that would result in our being
closely held under Section 856(h) of the Internal Revenue Code or otherwise cause us to
fail to qualify as a REIT; and |
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any person from transferring our shares of stock if such transfer would result in our
shares of stock being owned by fewer than 100 persons (determined without reference to any
rules of attribution). |
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Any person who acquires or attempts or intends to acquire beneficial or constructive ownership
of our shares of stock that will or may violate any of the foregoing restrictions on
transferability and ownership will be required to give at least 15 days prior written notice to us
and provide us with such other information as we may request in order to determine the effect of
such transfer on our qualification as a REIT. The foregoing provisions on transferability
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and ownership will not apply if our board of directors determines that it is no longer in our
best interests to attempt to qualify, or to continue to qualify, as a REIT.
Pursuant to our charter, if any transfer of our shares of stock would result in our shares of
stock being owned by fewer than 100 persons, such transfer will be null and void and the intended
transferee will acquire no rights in such shares. In addition, if any purported transfer of our
shares of stock or any other event would otherwise result in any person violating the ownership
limits or such other limit established by our board of directors or in our being closely held
under Section 856(h) of the Internal Revenue Code or otherwise failing to qualify as a REIT, then
that number of shares (rounded up to the nearest whole share) that would cause us to violate such
restrictions will be automatically transferred to, and held by, a trust for the exclusive benefit
of one or more charitable organizations selected by us and the intended transferee will acquire no
rights in such shares. The automatic transfer will be effective as of the close of business on the
business day prior to the date of the violative transfer or other event that results in a transfer
to the trust. Any dividend or other distribution paid to the purported record transferee, prior to
our discovery that the shares had been automatically transferred to a trust as described above,
must be repaid to the trustee upon demand for distribution to the beneficiary by the trust. If the
transfer to the trust as described above is not automatically effective, for any reason, to prevent
violation of the applicable ownership limits or our being closely held under Section 856(h) of
the Internal Revenue Code or otherwise failing to qualify as a REIT, then our charter provides that
the transfer of the shares will be void.
Shares of stock transferred to the trustee are deemed offered for sale to us, or our designee,
at a price per share equal to the lesser of (1) the price paid by the purported record transferee
for the shares (or, if the event that resulted in the transfer to the trust did not involve a
purchase of such shares of stock at market price, the last reported sales price reported on the
NYSE (or other applicable exchange) on the day of the event which resulted in the transfer of such
shares of stock to the trust) and (2) the market price on the date we, or our designee, accepts
such offer. We have the right to accept such offer until the trustee has sold the shares of stock
held in the trust pursuant to the clauses discussed below. Upon a sale to us, the interest of the
charitable beneficiary in the shares sold terminates, the trustee must distribute the net proceeds
of the sale to the purported record transferee and any dividends or other distributions held by the
trustee with respect to such shares of stock will be paid to the charitable beneficiary.
If we do not buy the shares, the trustee must, within 20 days of receiving notice from us of
the transfer of shares to the trust, sell the shares to a person or entity designated by the
trustee who could own the shares without violating the ownership limits or such other limit as
established by our board of directors. After that, the trustee must distribute to the purported
record transferee an amount equal to the lesser of (1) the price paid by the purported record
transferee for the shares (or, if the event which resulted in the transfer to the trust did not
involve a purchase of such shares at market price, the last reported sales price reported on the
NYSE (or other applicable exchange) on the day of the event which resulted in the transfer of such
shares of stock to the trust) and (2) the sales proceeds (net of commissions and other expenses of
sale) received by the trust for the shares. Any net sales proceeds in excess of the amount payable
to the purported record transferee will be immediately paid to the beneficiary, together with any
dividends or other distributions thereon. In addition, if prior to discovery by us that shares of
stock have been transferred to a trust, such shares of stock are sold by a purported record
transferee, then such shares will be deemed to have been sold on behalf of the trust and to the
extent that the purported record transferee received an amount for or in respect of such shares
that exceeds the amount that such purported record transferee was entitled to receive, such excess
amount will be paid to the trustee upon demand. The purported beneficial transferee or purported
record transferee has no rights in the shares held by the trustee.
The trustee will be designated by us and will be unaffiliated with us and with any purported
record transferee or purported beneficial transferee. Prior to the sale of any shares by the
trust, the trustee will receive, in trust for the beneficiary, all dividends and other
distributions paid by us with respect to the shares held in trust and may also exercise all voting
rights with respect to the shares held in trust. These rights will be exercised for the exclusive
benefit of the charitable beneficiary. Any dividend or other distribution paid prior to our
discovery that shares of stock have been transferred to the trust will be paid by the recipient to
the trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid
when due to the trustee.
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Subject to Maryland law, effective as of the date that the shares have been transferred to the
trust, the trustee will have the authority, at the trustees sole discretion:
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to rescind as void any vote cast by a purported record transferee prior to our discovery
that the shares have been transferred to the trust; and |
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to recast the vote in accordance with the desires of the trustee acting for the benefit
of the beneficiary of the trust. |
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However, if we have already taken irreversible action, then the trustee may not rescind and
recast the vote.
In addition, if our board of directors or other permitted designees determine in good faith
that a proposed transfer would violate the restrictions on ownership and transfer of our shares of
stock set forth in our charter, our board of directors or other permitted designees will take such
action as it deems or they deem advisable to refuse to give effect to or to prevent such transfer,
including, but not limited to, causing us to redeem the shares of stock, refusing to give effect to
the transfer on our books or instituting proceedings to enjoin the transfer.
Every owner of more than 5% (or such lower percentage as required by the Internal Revenue Code
or the regulations promulgated thereunder) of our stock, within 30 days after the end of each
taxable year, is required to give us written notice, stating his name and address, the number of
shares of each class and series of our stock which he beneficially owns and a description of the
manner in which the shares are held. Each such owner shall provide us with such additional
information as we may request in order to determine the effect, if any, of his beneficial ownership
on our status as a REIT and to ensure compliance with the ownership limits. In addition, each
stockholder shall upon demand be required to provide us with such information as we may request in
good faith in order to determine our status as a REIT and to comply with the requirements of any
taxing authority or governmental authority or to determine such compliance.
These ownership limits could delay, defer or prevent a transaction or a change in control that
might involve a premium price for the common stock or otherwise be in the best interest of the
stockholders.
Transfer Agent and Registrar
We expect the transfer agent and registrar for our shares of common stock to be BNY Mellon
Shareowner Services.
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SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to this offering and the other transactions described in this prospectus,
we will have shares of common stock outstanding on a fully diluted basis. Our shares of common
stock are newly-issued securities for which there is no established trading market. No assurance
can be given as to (1) the likelihood that an active market for our shares of common stock will
develop, (2) the liquidity of any such market, (3) the ability of the stockholders to sell the
shares or (4) the prices that stockholders may obtain for any of the shares. No prediction can be
made as to the effect, if any, that future sales of shares or the availability of shares for future
sale will have on the market price prevailing from time to time. Sales of substantial amounts of
shares of common stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the shares of common stock. See Risk FactorsRisks Related to Our
Common Stock.
For a description of certain restrictions on transfers of our shares of common stock held by
certain of our stockholders, see Description of Capital StockRestrictions on Ownership and
Transfer.
Securities Convertible into Shares of Common Stock
Upon completion of this offering, we will have (1) OP units outstanding (excluding OP
units that we own in the operating partnership) exchangeable, on a one-for-one basis, by Invesco
Investments (Bermuda) Ltd. for cash equal to the market value of an equivalent number of shares of
our common stock or, at our option, shares of our common stock and (2) reserved for issuance up to
an aggregate of 6% of the issued and outstanding shares of our common stock (on a fully diluted
basis) at the time of the award, subject to a ceiling of 40 million shares of our common stock.
Rule 144
of our shares of common stock that will be outstanding after giving effect to this
offering and the transactions described in this prospectus on a fully-diluted basis will be
restricted securities under the meaning of Rule 144 under the Securities Act, and may not be sold
in the absence of registration under the Securities Act unless an exemption from registration is
available, including the exemption provided by Rule 144.
In general, under Rule 144 under the Securities Act, a person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of ours at any time during the three months
preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule
144 for at least six months (including any period of consecutive ownership of preceding
non-affiliated holders) would be entitled to sell those shares, subject only to the availability of
current public information about us. A non-affiliated person who has beneficially owned restricted
securities within the meaning of Rule 144 for at least one year would be entitled to sell those
shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and
who has beneficially owned restricted securities within the meaning of Rule 144 for at least six
months would be entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of our common stock or the average weekly
trading volume of our common stock during the four calendar weeks preceding such sale. Such sales
are also subject to certain manner of sale provisions, notice requirements and the availability of
current public information about us (which requires that we are current in our periodic reports
under the Exchange Act).
Lock-Up Agreements
We, each of our directors and executive officers, our Manager and each executive officer of
our Manager and the Invesco Investments (Bermuda) Ltd. have agreed not to offer, sell, contract to
sell or otherwise dispose of or hedge, or enter into any transaction that is designed to, or could
be expected to, result in the disposition of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock or derivatives of
our common stock owned by us or any of these persons prior to this offering or common stock
issuable upon exercise of options or warrants held by these persons for a period of 180 days after
the
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date of this prospectus without the prior written consent of Credit Suisse Securities (USA)
LLC and Morgan Stanley & Co. Incorporated. However, each of our directors and executive officers
and each officer of our Manager may transfer or dispose of our shares during this 180-day lock-up
period in the case of gifts or for estate planning purposes where the donee agrees to a similar
lock-up agreement for the remainder of the this 180-day lock-up period.
Each of our Manager and Invesco Investments (Bermuda) Ltd. has agreed that, for a period of
one year after the date of this prospectus, without the consent of Credit Suisse Securities (USA)
LLC and Morgan Stanley & Co. Incorporated, it will not dispose of or hedge any of the shares of our
common stock or OP units, respectively, that it purchases in the private placement concurrently
with the closing of this offering. Additionally, each of our Manager and Invesco Investments
(Bermuda) Ltd. has agreed with us to a further lock-up period that will expire at the earlier of
(1) the date which is one year following the date of this prospectus or (2) the termination of the
management agreement.
In the event that either (1) during the last 17 days of the 180-day or one-year lock-up
period described in the two preceding paragraphs, we release earnings results or material news or a
material event relating to us occurs, or (2) prior to the expiration of the 180-day or one-year
lock-up period, we announce that we will release earnings results during the 16-day period
beginning on the last day of the 180-day or one-year lock-up period, as applicable, then, in
either case, the expiration of the 180-day or one-year lock-up period, as applicable, will be
extended to the expiration of the 18-day period beginning on the date of the release of the
earnings results or the occurrence of the material news or event, as applicable, unless Credit
Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated waive, in writing, such an
extension.
There are no agreements between Credit Suisse Securities (USA) LLC or Morgan Stanley & Co.
Incorporated and any of our stockholders or affiliates releasing them from these lock-up agreements
prior to the expiration of the 180-day or one-year lock-up period, as applicable.
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CERTAIN PROVISIONS OF THE MARYLAND GENERAL
CORPORATION LAW AND OUR CHARTER AND BYLAWS
The following description of the terms of our stock and of certain provisions of Maryland law
is only a summary. For a complete description, we refer you to the MGCL, our charter and our
Bylaws, copies of which will be available before the closing of this offering from us upon request.
Our Board of Directors
Our Bylaws and charter provide that the number of directors we have may be established by our
board of directors but may not be more than 15. Our charter and Bylaws currently provide that
except as may be provided by the board of directors in setting the terms of any class or series of
preferred stock, any vacancy may be filled only by a majority of the remaining directors, even if
the remaining directors do not constitute a quorum. Any individual elected to fill such vacancy
will serve for the remainder of the full term of the directorship in which the vacancy occurred and
until a successor is duly elected and qualifies.
Pursuant to our charter, each of our directors is elected by our common stockholders to serve
until the next annual meeting and until his or her successor is duly elected and qualifies.
Holders of shares of common stock will have no right to cumulative voting in the election of
directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the
shares of common stock entitled to vote will be able to elect all of our directors.
Removal of Directors
Our charter provides that subject to the rights of holders of one or more classes or series of
preferred stock to elect or remove one or more directors, a director may be removed with cause and
only by the affirmative vote of at least two-thirds of the votes of common stockholders entitled to
be cast generally in the election of directors. Cause means, with respect to any particular
director, a conviction of a felony or a final judgment of a court of competent jurisdiction holding
that such director caused demonstrable, material harm to us through bad faith or active and
deliberate dishonesty. This provision, when coupled with the exclusive power of our board of
directors to fill vacancies on our board of directors, precludes stockholders from (1) removing
incumbent directors except upon a substantial affirmative vote and with cause and (2) filling the
vacancies created by such removal with their own nominees.
Business Combinations
Under the MGCL, certain business combinations (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an interested stockholder (defined generally as any
person who beneficially owns, directly or indirectly, 10% or more of the voting power of the
corporations voting stock or an affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding stock of the corporation) or an affiliate of
such an interested stockholder are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding
voting shares of stock of the corporation and (2) two-thirds of the votes entitled to be cast by
holders of voting shares of stock of the corporation other than shares held by the interested
stockholder with whom (or with whose affiliate) the business combination is to be effected or held
by an affiliate or associate of the interested stockholder, unless, among other conditions, the
corporations common stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid by the interested
stockholder for its shares. A person is not an interested stockholder under the statute if the
board of directors approved in advance the transaction by which the person otherwise would have
become an interested stockholder. Our board of directors may provide that its approval is subject
to compliance with any terms and conditions determined by it.
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These provisions of the MGCL do not apply, however, to business combinations that are approved
or exempted by a board of directors prior to the time that the interested stockholder becomes an
interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted
business combinations between us and any person, provided that such business combination is first
approved by our board of directors (including a majority of our directors who are not affiliates or
associates of such person). Consequently, the five-year prohibition and the supermajority vote
requirements will not apply to business combinations between us and any person described above. As
a result, any person described above may be able to enter into business combinations with us that
may not be in the best interest of our stockholders without compliance by our company with the
supermajority vote requirements and other provisions of the statute.
Should our board of directors opt back into the statute or otherwise fail to approve a
business combination, the business combination statute may discourage others from trying to acquire
control of us and increase the difficulty of consummating any offer.
Control Share Acquisitions
The MGCL provides that control shares of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved at a special meeting of
stockholders by the affirmative vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock in a corporation in respect of which any of the following persons is
entitled to exercise or direct the exercise of the voting power of such shares in the election of
directors: (1) a person who makes or proposes to make a control share acquisition, (2) an officer
of the corporation or (3) an employee of the corporation who is also a director of the corporation.
Control shares are voting shares of stock which, if aggregated with all other such shares of
stock previously acquired by the acquirer, or in respect of which the acquirer is able to exercise
or direct the exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquirer to exercise voting power in electing directors within one of the following
ranges of voting power: (A) one-tenth or more but less than one-third; (B) one-third or more but
less than a majority; or (C) a majority or more of all voting power. Control shares do not include
shares that the acquiring person is then entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of
certain conditions (including an undertaking to pay expenses and making an acquiring person
statement as described in the MGCL), may compel our board of directors to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the question at any
stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver
an acquiring person statement as required by the statute, then, subject to certain conditions and
limitations, the corporation may redeem any or all of the control shares (except those for which
voting rights have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are approved at a
stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to
vote, all other stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the highest price per share
paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to (1) shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the transaction or (2)
acquisitions approved or exempted by the charter or Bylaws of the corporation.
Our Bylaws contain a provision exempting from the control share acquisition statute any and
all acquisitions by any person of our shares of stock. There is no assurance that such provision
will not be amended or eliminated at any time in the future.
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Subtitle 8
Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity
securities registered under the Exchange Act and at least three independent directors to elect to
be subject, by provision in its charter or Bylaws or a resolution of its board of directors and
notwithstanding any contrary provision in the charter or Bylaws, to any or all of five provisions:
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a classified board; |
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a two-thirds vote requirement for removing a director; |
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a requirement that the number of directors be fixed only by vote of the directors; |
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a requirement that a vacancy on the board be filled only by the remaining directors in
office and for the remainder of the full term of the class of directors in which the
vacancy occurred; and |
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a majority requirement for the calling of a special meeting of stockholders. |
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Through provisions in our charter and Bylaws unrelated to Subtitle 8, we already (1) require
the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be
cast on the matter for the removal of any director from the board, which removal will be allowed
only for cause, (2) vest in the board the exclusive power to fix the number of directorships and
(3) require, unless called by our chairman of the board, Chief Executive Officer or president or
the board of directors, the written request of stockholders of not less than a majority of all
votes entitled to be cast at such a meeting to call a special meeting.
Meetings of Stockholders
Pursuant to our Bylaws, a meeting of our stockholders for the election of directors and the
transaction of any business will be held annually on a date and at the time set by our board of
directors beginning with 2010. In addition, the chairman of our board of directors, Chief
Executive Officer, president or board of directors may call a special meeting of our stockholders.
Subject to the provisions of our Bylaws, a special meeting of our stockholders will also be called
by our Secretary upon the written request of the stockholders entitled to cast not less than a
majority of all the votes entitled to be cast at the meeting.
Amendment to Our Charter and Bylaws
Except for amendments related to removal of directors and the restrictions on ownership and
transfer of our shares of stock (each of which must be declared advisable by our board of directors
and approved by the affirmative vote of the holders of not less than two-thirds of all the votes
entitled to be cast on the matter), our charter may be amended only if the amendment is declared
advisable by our board of directors and approved by the affirmative vote of the holders of not less
than a majority of all of the votes entitled to be cast on the matter.
Our board of directors has the exclusive power to adopt, alter or repeal any provision of our
Bylaws and to make new Bylaws.
Dissolution of Our Company
The dissolution of our company must be declared advisable by a majority of our entire board of
directors and approved by the affirmative vote of the holders of not less than a majority of all of
the votes entitled to be cast on the matter.
Advance Notice of Director Nominations and New Business
Our Bylaws provide that, with respect to an annual meeting of stockholders, nominations of
individuals for election to our board of directors and the proposal of business to be considered by
stockholders may be made only
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(1) pursuant to our notice of the meeting, (2) by or at the direction of our board of
directors or (3) by a stockholder who is a stockholder of record both at the time of giving the notice required by our Bylaws and at the time of the meeting, who is entitled to vote at the
meeting and who has complied with the
advance notice provisions set forth in our Bylaws.
With respect to special meetings of stockholders, only the business specified in our notice of
meeting may be brought before the meeting. Nominations of individuals for election to our board of
directors may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of
our board of directors or (3) provided that our board of directors has determined that directors
will be elected at such meeting, by a stockholder who is a
stockholder of record both at the time of giving the notice required
by our Bylaws and at the time of the meeting, who is entitled to vote at the meeting and who has
complied with the advance notice provisions set forth in our Bylaws.
Anti-takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws
Our charter and Bylaws and Maryland law contain provisions that may delay, defer or prevent a
change in control or other transaction that might involve a premium price for our shares of common
stock or otherwise be in the best interests of our stockholders, including business combination
provisions, restrictions on transfer and ownership of our stock and advance notice requirements for
director nominations and stockholder proposals. Likewise, if the provision in the Bylaws opting
out of the control share acquisition provisions of the MGCL were rescinded or if we were to opt in
to the classified board or other provisions of Subtitle 8, these provisions of the MGCL could have
similar anti-takeover effects.
Indemnification and Limitation of Directors and Officers Liability
Maryland law permits a Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Our charter contains such a provision that eliminates such
liability to the maximum extent permitted by Maryland law.
The MGCL requires us (unless our charter provides otherwise, which our charter does not) to
indemnify a director or officer who has been successful, on the merits or otherwise, in the defense
of any proceeding to which he is made or threatened to be made a party by reason of his service in
that capacity. The MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be made or threatened
to be made a party by reason of their service in those or other capacities unless it is established
that:
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the act or omission of the director or officer was material to the matter giving rise to
the proceeding and (1) was committed in bad faith or (2) was the result of active and
deliberate dishonesty; |
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the director or officer actually received an improper personal benefit in money,
property or services; or |
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in the case of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. |
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However, under the MGCL, a Maryland corporation may not indemnify a director or officer in a
suit by or in the right of the corporation in which the director or officer was adjudged liable on
the basis that personal benefit was improperly received. A court may order indemnification if it
determines that the director or officer is fairly and reasonably entitled to indemnification, even
though the director or officer did not meet the prescribed standard of conduct or was adjudged
liable on the basis that personal benefit was improperly received. However, indemnification for an
adverse judgment in a suit by us or in our right, or for a judgment of liability on the basis that
personal benefit was improperly received, is limited to expenses.
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In addition, the MGCL permits a corporation to advance reasonable expenses to a director or
officer upon the corporations receipt of:
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a written affirmation by the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for indemnification by the corporation;
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a written undertaking by the director or officer or on the directors or officers
behalf to repay the amount paid or reimbursed by the corporation if it is ultimately
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Our charter authorizes us to obligate ourselves and our Bylaws obligate us, to the fullest
extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a
preliminary determination of the ultimate entitlement to indemnification, pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to:
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any present or former director or officer who is made or threatened to be made a party
to the proceeding by reason of his or her service in that capacity; or |
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any individual who, while a director or officer of our company and at our request,
serves or has served another corporation, REIT, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or trustee of such
corporation, REIT, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made or threatened to be made a party to the proceeding by reason of
his or her service in that capacity. |
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Our charter and Bylaws also permit us to indemnify and advance expenses to any person who
served a predecessor of ours in any of the capacities described above and to any personnel or agent
of our company or a predecessor of our company.
Following completion of this offering, we may enter into indemnification agreements with each
of our directors and executive officers that would provide for indemnification to the maximum
extent permitted by Maryland law. In addition, the operating partnerships partnership agreement
provides that we, as general partner through our wholly-owned subsidiary, and our officers and
directors are indemnified to the maximum extent permitted by law.
Insofar as the foregoing provisions permit indemnification of directors, officers or persons
controlling us for liability arising under the Securities Act, we have been informed that, in the
opinion of the SEC, this indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
REIT Qualification
Our charter provides that our board of directors may revoke or otherwise terminate our REIT
election, without approval of our stockholders, if it determines that it is no longer in our best
interests to continue to qualify as a REIT.
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THE OPERATING PARTNERSHIP AGREEMENT
The following is a summary of material provisions in the partnership agreement of our
operating partnership. For more detail, you should refer to the partnership agreement itself, a
copy of which is filed as an exhibit to the registration statement of which this prospectus is a
part.
General
IAS Operating Partnership LP, our operating partnership, was formed on September 8, 2008 to
acquire and own our assets. We are considered to be an umbrella partnership real estate investment
trust, or an UPREIT, in which all of our assets are owned in a limited partnership, the operating
partnership, of which we are the sole general partner. For purposes of satisfying the asset and
income tests for qualification as a REIT for U.S. federal income tax purposes, our proportionate
share of the assets and income of our operating partnership will be deemed to be our assets and
income.
Our operating partnership will be structured to make distributions with respect to OP units
that will be equivalent to the distributions made to our common stockholders. Finally, the
operating partnership will be structured to permit limited partners in the operating partnership to
redeem their OP units for cash or, at our election, shares of our common stock on a one-for-one
basis (in a taxable transaction) and, if our shares are then listed, achieve liquidity for their
investment.
We are the sole general partner of the operating partnership and are liable for its
obligations. As the sole general partner of the operating partnership, we have the exclusive power
to manage and conduct the business of the operating partnership.
Although initially all of our assets will be held through the UPREIT structure, we may in the
future elect for various reasons to hold certain of our assets directly rather than through the
operating partnership. In the event we elect to hold assets directly, the income of the operating
partnership will be allocated as between us and limited partners so as to take into account the
performance of such assets.
Capital Contributions
We will transfer substantially all of the net proceeds of this offering to the operating
partnership as a capital contribution in the amount of the gross offering proceeds received from
investors and receive a number of OP units equal to the number of shares of common stock issued to
investors. The operating partnership will be deemed to have simultaneously paid the selling
commissions and other costs associated with the offering. If the operating partnership requires
additional funds at any time in excess of capital contributions made by us or from borrowing, we
may borrow funds from a financial institution or other lender and lend such funds to the operating
partnership on the same terms and conditions as are applicable to our borrowing of such funds. In
addition, we are authorized to cause the operating partnership to issue partner interests for less
than fair market value if we conclude in good faith that such issuance is in the best interest of
the operating partnership and our stockholders.
Operations
The partnership agreement of the operating partnership will provide that the operating
partnership is to be operated in a manner that will (1) enable us to satisfy the requirements for
classification as a REIT for U.S. federal income tax purposes, (2) avoid any federal income or
excise tax liability and (3) ensure that the operating partnership will not be classified as a
publicly traded partnership for purposes of Section 7704 of the Internal Revenue Code, which
classification could result in the operating partnership being taxed as a corporation, rather than
as a disregarded entity or a partnership.
The partnership agreement will provide that the operating partnership will distribute cash
flow from operations to the partners of the operating partnership in accordance with its relative
percentage interests on at least a quarterly basis in amounts determined by us as the general
partner such that a holder of one OP unit will receive the same
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amount of annual cash flow distributions from the operating partnership as the amount of
annual distributions paid to the holder of one share of our common stock.
Similarly, the partnership agreement of the operating partnership will provide that taxable
income is allocated to the partners of the operating partnership in accordance with their relative
percentage interests such that a holder of one OP unit will be allocated taxable income for each
taxable year in an amount equal to the amount of taxable income to be recognized by a holder of one
of our shares of common stock, subject to compliance with the provisions of Sections 704(b) and
704(c) of the Internal Revenue Code and corresponding Treasury Regulations. Losses, if any, will
generally be allocated among the partners in accordance with their respective percentage interests
in the operating partnership.
Upon the liquidation of the operating partnership, after payment of debts and obligations, any
remaining assets of the operating partnership will be distributed to partners with positive capital
accounts in accordance with their respective positive capital account balances.
In addition to the administrative and operating costs and expenses incurred by the operating
partnership in acquiring and holding our assets, the operating partnership will pay all of our
administrative costs and expenses and such expenses will be treated as expenses of the operating
partnership. Such expenses will include:
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all expenses relating to our formation and continuity of existence; |
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all expenses relating to any offerings and registrations of securities; |
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all expenses associated with our preparation and filing of any periodic reports under
federal, state or local laws or regulations; |
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all expenses associated with our compliance with applicable laws, rules and regulations;
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all other operating or administrative costs of ours incurred in the ordinary course of
its business. |
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Redemption Rights
Subject to certain limitations and exceptions, the limited partners of the operating
partnership, other than us or our subsidiaries, will have the right to cause the operating
partnership to redeem their OP units for cash equal to the market value of an equivalent number of
our shares of common stock, or, at our option, we may purchase their OP units by issuing one share
of common stock for each OP unit redeemed. The market value of the OP units for this purpose will
be equal to the average of the closing trading price of a share of our common stock on the NYSE for
the ten trading days before the day on which the redemption notice was given to the operating
partnership of exercise of the redemption rights. These redemption rights may not be exercised,
however, if and to the extent that the delivery of shares upon such exercise would (1) result in
any person owning shares in excess of our ownership limits, (2) result in shares being owned by
fewer than 100 persons or (3) result in us being closely held within the meaning of Section
856(h) of the Internal Revenue Code.
Transferability of Interests
We will not be able to (1) voluntarily withdraw as the general partner of the operating
partnership, or (2) transfer our general partner interest in the operating partnership (except to a
wholly-owned subsidiary), unless the transaction in which such withdrawal or transfer occurs
results in the limited partners receiving or having the right to receive an amount of cash,
securities or other property equal in value to the amount they would have received if they had
exercised their redemption rights immediately prior to such transaction. The limited partners will
not be able to transfer their OP units, in whole or in part, without our written consent as the
general partner of the partnership except where the limited partner becomes incapacitated.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax considerations relating to
our qualification and taxation as a REIT and the acquisition, holding, and disposition of our
common stock. For purposes of this section, references to we, our, us or our company mean
only Invesco Mortgage Capital Inc. and not our subsidiaries or other lower-tier entities, except as otherwise indicated.
This summary is based upon the Internal Revenue Code, the regulations promulgated by the U.S.
Treasury Department (or the Treasury regulations), current administrative interpretations and
practices of the IRS (including administrative interpretations and practices expressed in private
letter rulings which are binding on the IRS only with respect to the particular taxpayers who
requested and received those rulings) and judicial decisions, all as currently in effect and all of
which are subject to differing interpretations or to change, possibly with retroactive effect. No
assurance can be given that the IRS would not assert, or that a court would not sustain, a position
contrary to any of the tax consequences described below. No advance ruling has been or will be
sought from the IRS regarding any matter discussed in this summary. The summary is also based upon
the assumption that the operation of our company, and of its subsidiaries and other lower-tier and
affiliated entities, including the operating partnership, will, in each case, be in accordance with
its applicable organizational documents. This summary is for general information only, and does
not purport to discuss all aspects of U.S. federal income taxation that may be important to a
particular stockholder in light of its investment or tax circumstances or to stockholders subject
to special tax rules, such as:
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U.S. expatriates; |
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persons who mark-to-market our common stock; |
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subchapter S corporations; |
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U.S. stockholders (as defined below) whose functional currency is not the U.S. dollar; |
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financial institutions; |
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insurance companies; |
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broker-dealers; |
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regulated investment companies (or RICs); |
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trusts and estates; |
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holders who receive our common stock through the exercise of employee stock options or
otherwise as compensation; |
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persons holding our common stock as part of a straddle, hedge, conversion
transaction, synthetic security or other integrated investment; |
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persons subject to the alternative minimum tax provisions of the Internal Revenue Code; |
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persons holding their interest through a partnership or similar pass-through entity; |
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persons holding a 10% or more (by vote or value) beneficial interest in us; and, except
to the extent discussed below; |
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tax-exempt organizations; and |
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non-U.S. stockholders (as defined below). |
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This summary assumes that stockholders will hold our common stock as capital assets, which
generally means as property held for investment.
THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR COMMON STOCK DEPENDS IN SOME INSTANCES
ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW
FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF
HOLDING OUR COMMON STOCK TO ANY PARTICULAR STOCKHOLDER WILL DEPEND ON THE STOCKHOLDERS PARTICULAR
TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE,
LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR INVESTMENT
OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSING OF OUR COMMON STOCK.
Taxation of Our Company in General
We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code, commencing with our taxable year ending December 31, 2009. We believe that we have
been organized and we intend to operate in a manner that allows us to qualify for taxation as a
REIT under the Internal Revenue Code.
The law firm of Clifford Chance US LLP has acted as our counsel in connection with this
offering. We have received an opinion of Clifford Chance US LLP to the effect that, commencing
with our taxable year ending December 31, 2009, we have been organized in conformity with the
requirements for qualification and taxation as a REIT under the Internal Revenue Code, and our
proposed method of operation will enable us to meet the requirements for qualification and taxation
as a REIT under the Internal Revenue Code. It must be emphasized that the opinion of Clifford
Chance US LLP is based on various assumptions relating to our organization and operation, including
that all factual representations and statements set forth in all relevant documents, records and
instruments are true and correct, all actions described in this prospectus are completed in a
timely fashion and that we will at all times operate in accordance with the method of operation
described in our organizational documents and this prospectus. Additionally, the opinion of
Clifford Chance US LLP is conditioned upon factual representations and covenants made by our
management and affiliated entities, regarding our organization, assets, present and future conduct
of our business operations and other items regarding our ability to meet the various requirements
for qualification as a REIT, and assumes that such representations and covenants are accurate and
complete and that we will take no action inconsistent with our qualification as a REIT. While we
believe that we are organized and intend to operate so that we will qualify as a REIT, given the
highly complex nature of the rules governing REITs, the ongoing importance of factual
determinations and the possibility of future changes in our circumstances or applicable law, no
assurance can be given by Clifford Chance US LLP or us that we will so qualify for any particular
year. Clifford Chance US LLP will have no obligation to advise us or the holders of our shares of
common stock of any subsequent change in the matters stated, represented or assumed or of any
subsequent change in the applicable law. You should be aware that opinions of counsel are not
binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions
set forth in such opinions.
Qualification and taxation as a REIT depends on our ability to meet, on a continuing basis,
through actual results of operations, distribution levels, diversity of share ownership and various
qualification requirements imposed upon REITs by the Internal Revenue Code, the compliance with
which will not be reviewed by Clifford Chance US LLP. Our ability to qualify as a REIT also
requires that we satisfy certain asset and income tests, some of which depend upon the fair market
values of assets directly or indirectly owned by us or which serve as security for loans made by
us. Such values may not be susceptible to a precise determination. Accordingly, no assurance can
be given that the actual results of our operations for any taxable year will satisfy the
requirements for qualification and taxation as a REIT.
Taxation of REITs in General
As indicated above, qualification and taxation as a REIT depends upon our ability to meet, on
a continuing basis, various qualification requirements imposed upon REITs by the Internal Revenue
Code. The material qualification requirements are summarized below, under Requirements for
Qualification as a REIT. While we believe that we will operate so that we qualify as a REIT, no
assurance can be given that the IRS will not challenge our
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qualification as a REIT or that we will be able to operate in accordance with the REIT
requirements in the future. See Failure to Qualify.
Provided that we qualify as a REIT, we will generally be entitled to a deduction for dividends
that we pay and, therefore, will not be subject to U.S. federal corporate income tax on our net
taxable income that is currently distributed to our stockholders. This treatment substantially
eliminates the double taxation at the corporate and stockholder levels that results generally
from investment in a corporation. Rather, income generated by a REIT generally is taxed only at
the stockholder level, upon a distribution of dividends by the REIT.
For tax years through 2010, stockholders who are individual U.S. stockholders (as defined
below) are generally taxed on corporate dividends at a maximum rate of 15% (the same as long-term
capital gains), thereby substantially reducing, though not completely eliminating, the double
taxation that has historically applied to corporate dividends.
With limited exceptions, however, dividends received by individual U.S. stockholders from us
or from other entities that are taxed as REITs will continue to be taxed at rates applicable to
ordinary income, which will be as high as 35% through 2010. Net operating losses, foreign tax
credits and other tax attributes of a REIT generally do not pass through to the stockholders of the
REIT, subject to special rules for certain items, such as capital gains, recognized by REITs. See
Taxation of Taxable U.S. Stockholders.
Even if we qualify for taxation as a REIT, however, we will be subject to U.S. federal income
taxation as follows:
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We will be taxed at regular corporate rates on any undistributed income, including
undistributed net capital gains. |
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We may be subject to the alternative minimum tax on our items of tax preference, if
any. |
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If we have net income from prohibited transactions, which are, in general, sales or
other dispositions of property held primarily for sale to customers in the ordinary course
of business, other than foreclosure property, such income will be subject to a 100% tax.
See Prohibited Transactions and Foreclosure Property below. |
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If we elect to treat property that we acquire in connection with a foreclosure of a
mortgage loan or from certain leasehold terminations as foreclosure property, we may
thereby avoid (1) the 100% tax on gain from a resale of that property (if the sale would
otherwise constitute a prohibited transaction) and (2) the inclusion of any income from
such property not qualifying for purposes of the REIT gross income tests discussed below,
but the income from the sale or operation of the property may be subject to corporate
income tax at the highest applicable rate (currently 35%). |
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If we fail to satisfy the 75% gross income test or the 95% gross income test, as
discussed below, but nonetheless maintain our qualification as a REIT because other
requirements are met, we will be subject to a 100% tax on an amount equal to (1) the
greater of (A) the amount by which we fail the 75% gross income test or (B) the amount by
which we fail the 95% gross income test, as the case may be, multiplied by (2) a fraction
intended to reflect our profitability. |
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If we fail to satisfy any of the REIT asset tests, as described below, other than a
failure of the 5% or 10% REIT asset tests that do not exceed a statutory de minimis amount
as described more fully below, but our failure is due to reasonable cause and not due to
willful neglect and we nonetheless maintain our REIT qualification because of specified
cure provisions, we will be required to pay a tax equal to the greater of $50,000 or the
highest corporate tax rate (currently 35%) of the net income generated by the nonqualifying
assets during the period in which we failed to satisfy the asset tests. |
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If we fail to satisfy any provision of the Internal Revenue Code that would result in
our failure to qualify as a REIT (other than a gross income or asset test requirement) and
the violation is due to reasonable cause, |
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we may retain our REIT qualification but we will be required to pay a penalty of $50,000 for
each such failure. |
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If we fail to distribute during each calendar year at least the sum of (1) 85% of our
REIT ordinary income for such year, (2) 95% of our REIT capital gain net income for such
year and (3) any undistributed taxable income from prior periods (or the required
distribution), we will be subject to a 4% excise tax on the excess of the required
distribution over the sum of (A) the amounts actually distributed (taking into account
excess distributions from prior years), plus (B) retained amounts on which income tax is
paid at the corporate level. |
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We may be required to pay monetary penalties to the IRS in certain circumstances,
including if we fail to meet record-keeping requirements intended to monitor our compliance
with rules relating to the composition of our stockholders, as described below in
Requirements for Qualification as a REIT. |
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A 100% excise tax may be imposed on some items of income and expense that are directly
or constructively paid between us and any TRSs we may own if and to the extent that the IRS
successfully adjusts the reported amounts of these items. |
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If we acquire appreciated assets from a corporation that is not a REIT in a transaction
in which the adjusted tax basis of the assets in our hands is determined by reference to
the adjusted tax basis of the assets in the hands of the non-REIT corporation, we will be
subject to tax on such appreciation at the highest corporate income tax rate then
applicable if we subsequently recognize gain on a disposition of any such assets during the
10-year period following their acquisition from the non-REIT corporation. The results
described in this paragraph assume that the non-REIT corporation will not elect, in lieu of
this treatment, to be subject to an immediate tax when the asset is acquired by us. |
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We will generally be subject to tax on the portion of any excess inclusion income
derived from an investment in residual interests in real estate mortgage investment
conduits or REMICs to the extent our stock is held by specified tax-exempt organizations
not subject to tax on unrelated business taxable income. Similar rules will apply if we
own an equity interest in a taxable mortgage pool through a subsidiary REIT of our
operating partnership. To the extent that we own a REMIC residual interest or a taxable
mortgage pool through a TRS, we will not be subject to this tax. |
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We may elect to retain and pay income tax on our net long-term capital gain. In that
case, a stockholder would include its proportionate share of our undistributed long-term
capital gain (to the extent we make a timely designation of such gain to the stockholder)
in its income, would be deemed to have paid the tax that we paid on such gain, and would be
allowed a credit for its proportionate share of the tax deemed to have been paid, and an
adjustment would be made to increase the stockholders basis in our common stock. |
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We may have subsidiaries or own interests in other lower-tier entities that are
subchapter C corporations, the earnings of which could be subject to U.S. federal corporate
income tax. |
In addition, we may be subject to a variety of taxes other than U.S. federal income tax,
including payroll taxes and state, local, and foreign income, franchise property and other taxes.
We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification as a REIT
The Internal Revenue Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest;
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(3) that would be taxable as a domestic corporation but for the special Internal Revenue Code
provisions applicable to REITs;
(4) that is neither a financial institution nor an insurance company subject to specific
provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12
months;
(6) in which, during the last half of each taxable year, not more than 50% in value of the
outstanding stock is owned, directly or indirectly, by five or fewer individuals (as defined in
the Internal Revenue Code to include specified entities);
(7) which meets other tests described below, including with respect to the nature of its
income and assets and the amount of its distributions; and
(8) that makes an election to be a REIT for the current taxable year or has made such an
election for a previous taxable year that has not been terminated or revoked.
The Internal Revenue Code provides that conditions (1) through (4) must be met during the
entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year
of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do
not need to be satisfied for the first taxable year for which an election to become a REIT has been
made. Our charter provides restrictions regarding the ownership and transfer of its shares, which
are intended to assist in satisfying the share ownership requirements described in conditions (5)
and (6) above. For purposes of condition (6), an individual generally includes a supplemental
unemployment compensation benefit plan, a private foundation or a portion of a trust permanently
set aside or used exclusively for charitable purposes, but does not include a qualified pension
plan or profit sharing trust.
To monitor compliance with the share ownership requirements, we are generally required to
maintain records regarding the actual ownership of our shares. To do so, we must demand written
statements each year from the record holders of significant percentages of our shares of stock, in
which the record holders are to disclose the actual owners of the shares (i.e., the persons
required to include in gross income the dividends paid by us). A list of those persons failing or
refusing to comply with this demand must be maintained as part of our records. Failure by us to
comply with these record-keeping requirements could subject us to monetary penalties. If we
satisfy these requirements and after exercising reasonable diligence would not have known that
condition (6) is not satisfied, we will be deemed to have satisfied such condition. A stockholder
that fails or refuses to comply with the demand is required by Treasury Regulations to submit a
statement with its tax return disclosing the actual ownership of the shares and other information.
In addition, a corporation generally may not elect to become a REIT unless its taxable year is
the calendar year. We satisfy this requirement.
Effect of Subsidiary Entities
Ownership of Partner Interests
In the case of a REIT that is a partner in an entity that is treated as a partnership for U.S.
federal income tax purposes, Treasury regulations provide that the REIT is deemed to own its
proportionate share of the partnerships assets and to earn its proportionate share of the
partnerships gross income based on its pro rata share of capital interests in the partnership for
purposes of the asset and gross income tests applicable to REITs, as described below. However,
solely for purposes of the 10% value test, described below, the determination of a REITs interest
in partnership assets will be based on the REITs proportionate interest in any securities issued
by the partnership, excluding for these purposes, certain securities as described in the Internal
Revenue Code. In addition, the assets and gross income of the partnership generally are deemed to
retain the same character in the hands of the REIT. Thus, our proportionate share of the assets
and items of income of partnerships in which we own an equity interest
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(including our interest in our operating partnership and its equity interests in lower-tier
partnerships) is treated as assets and items of income of our company for purposes of applying the
REIT requirements described below. Consequently, to the extent that we directly or indirectly hold
a preferred or other equity interest in a partnership, the partnerships assets and operations may
affect our ability to qualify as a REIT, even though we may have no control or only limited
influence over the partnership. A summary of certain rules governing the U.S. federal income
taxation of partnerships and their partners is provided below in Tax Aspects of Ownership of
Equity Interests in Partnerships.
Disregarded Subsidiaries
If a REIT owns a corporate subsidiary that is a qualified REIT subsidiary, that subsidiary
is disregarded for U.S. federal income tax purposes, and all assets, liabilities and items of
income, deduction and credit of the subsidiary are treated as assets, liabilities and items of
income, deduction and credit of the REIT itself, including for purposes of the gross income and
asset tests applicable to REITs, as summarized below. A qualified REIT subsidiary is any
corporation, other than a TRS, that is wholly-owned by a REIT, by other disregarded subsidiaries or
by a combination of the two. Single member limited liability companies that are wholly-owned by a
REIT are also generally disregarded as separate entities for U.S. federal income tax purposes,
including for purposes of the REIT gross income and asset tests. Disregarded subsidiaries, along
with partnerships in which we hold an equity interest, are sometimes referred to herein as
pass-through subsidiaries.
In the event that a disregarded subsidiary ceases to be wholly-owned by us (for example, if
any equity interest in the subsidiary is acquired by a person other than us or another disregarded
subsidiary of us), the subsidiarys separate existence would no longer be disregarded for U.S.
federal income tax purposes. Instead, it would have multiple owners and would be treated as either
a partnership or a taxable corporation. Such an event could, depending on the circumstances,
adversely affect our ability to satisfy the various asset and gross income tests applicable to
REITs, including the requirement that REITs generally may not own, directly or indirectly, more
than 10% of the value or voting power of the outstanding securities of another corporation. See
Asset Tests and Gross Income Tests.
Taxable REIT Subsidiaries
A REIT, in general, may jointly elect with a subsidiary corporation, whether or not
wholly-owned, to treat the subsidiary corporation as a TRS. We generally may not own more than 10%
of the securities of a taxable corporation, as measured by voting power or value, unless we and
such corporation elect to treat such corporation as a TRS. The separate existence of a TRS or
other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for
U.S. federal income tax purposes. Accordingly, such an entity would generally be subject to
corporate income tax on its earnings, which may reduce the cash flow generated by us and our
subsidiaries in the aggregate and our ability to make distributions to our stockholders.
A REIT is not treated as holding the assets of a TRS or other taxable subsidiary corporation
or as receiving any income that the subsidiary earns. Rather, the stock issued by the subsidiary
is an asset in the hands of the REIT, and the REIT generally recognizes as income the dividends, if
any, that it receives from the subsidiary. This treatment can affect the gross income and asset
test calculations that apply to the REIT, as described below.
Because a parent REIT does not include the assets and income of such subsidiary corporations
in determining the parents compliance with the REIT requirements, such entities may be used by the
parent REIT to undertake indirectly activities that the REIT rules might otherwise preclude it from
doing directly or through pass-through subsidiaries or render commercially unfeasible (for example,
activities that give rise to certain categories of income such as non-qualifying hedging income or
inventory sales). If dividends are paid to us by one or more TRSs we may own, then a portion of
the dividends that we distribute to stockholders who are taxed at individual rates generally will
be eligible for taxation at preferential qualified dividend income tax rates rather than at
ordinary income rates. See Taxation of Taxable U.S. Stockholders and Annual Distribution
Requirements.
Certain restrictions imposed on TRSs are intended to ensure that such entities will be subject
to appropriate levels of U.S. federal income taxation. First, a TRS may not deduct interest
payments made in any year to an affiliated REIT to the extent that such payments exceed, generally,
50% of the TRSs adjusted taxable income for
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that year (although the TRS may carry forward to, and deduct in, a succeeding year the
disallowed interest amount if the 50% test is satisfied in that year). In addition, if amounts are
paid to a REIT or deducted by a TRS due to transactions between a REIT, its tenants and/or the TRS,
that exceed the amount that would be paid to or deducted by a party in an arms-length transaction,
the REIT generally will be subject to an excise tax equal to 100% of such excess. Rents we receive
that include amounts for services furnished by one of our TRSs to any of our tenants will not be
subject to the excise tax if such amounts qualify for the safe harbor provisions contained in the
Internal Revenue Code. Safe harbor provisions are provided where: (1) amounts are excluded from
the definition of impermissible tenant service income as a result of satisfying the 1% de minimis
exception; (2) a TRS renders a significant amount of similar services to unrelated parties and the
charges for such services are substantially comparable; (3) rents paid to us by tenants that are
not receiving services from the TRS are substantially comparable to the rents paid by our tenants
leasing comparable space that are receiving such services from the TRS and the charge for the
services is separately stated; or (4) the TRSs gross income from the service is not less than 150%
of the TRSs direct cost of furnishing the service.
Gross Income Tests
In order to maintain our qualification as a REIT, we annually must satisfy two gross income
tests. First, at least 75% of our gross income for each taxable year, excluding gross income from
sales of inventory or dealer property in prohibited transactions and certain hedging
transactions, must be derived from investments relating to real property or mortgages on real
property, including rents from real property, dividends received from and gains from the
disposition of other shares of REITs, interest income derived from mortgage loans secured by real
property (including certain types of RMBS and CMBS), and gains from the sale of real estate assets, as well
as income from certain kinds of temporary investments. Second, at least 95% of our gross income in
each taxable year, excluding gross income from prohibited transactions and certain hedging
transactions, must be derived from some combination of income that qualifies under the 75% income
test described above, as well as other dividends, interest, and gain from the sale or disposition
of stock or securities, which need not have any relation to real property.
For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a
proportionate share of the income earned by any partnership, or any limited liability company
treated as a partnership for U.S. federal income tax purposes, in which it owns an interest, which
share is determined by reference to its capital interest in such entity, and is deemed to have
earned the income earned by any qualified REIT subsidiary.
Interest Income
Interest income constitutes qualifying mortgage interest for purposes of the 75% gross income
test to the extent that the obligation upon which such interest is paid is secured by a mortgage on
real property. If we receive interest income with respect to a mortgage loan that is secured by
both real property and other property and the highest principal amount of the loan outstanding
during a taxable year exceeds the fair market value of the real property on the date that we
acquired the mortgage loan, the interest income will be apportioned between the real property and
the other property, and our income from the arrangement will qualify for purposes of the 75% gross
income test only to the extent that the interest is allocable to the real property. Even if a loan
is not secured by real property or is undersecured, the income that it generates may nonetheless
qualify for purposes of the 95% gross income test.
We intend to invest in RMBS and CMBS that are either pass-through certificates or CMOs as well
as mortgage loans and mezzanine loans. We expect that the RMBS and CMBS will be treated either as
interests in a grantor trust or as interests in a REMIC for U.S. federal income tax purposes and
that all interest income from our RMBS and CMBS will be qualifying income for the 95% gross income
test. In the case of mortgage-backed securities treated as interests in grantor trusts, we would
be treated as owning an undivided beneficial ownership interest in the mortgage loans held by the
grantor trust. The interest on such mortgage loans would be qualifying income for purposes of the
75% gross income test to the extent that the obligation is secured by real property, as discussed
above. In the case of RMBS or CMBS treated as interests in a REMIC, income derived from REMIC
interests will generally be treated as qualifying income for purposes of the 75% and 95% gross
income tests. If less than 95% of the assets of the REMIC are real estate assets, however, then
only a proportionate part of our interest in the REMIC and income derived from the interest will
qualify for purposes of the 75% gross income test. In addition, some REMIC securitizations include
imbedded interest swap or cap contracts or other derivative instruments that potentially could
produce non-qualifying income for the holder of the related REMIC securities. Among the assets
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we may hold are certain mezzanine loans secured by equity interests in a pass-through entity that
directly or indirectly owns real property, rather than a direct mortgage on the real property. Revenue Procedure 2003-65 provides a safe harbor pursuant to which a mezzanine
loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by
the IRS as a real estate asset for purposes of the REIT asset tests
(described below), and interest derived from it
will be treated as qualifying mortgage interest for purposes of the 75% gross income test
(described above). Although the Revenue Procedure provides a safe harbor on which taxpayers may
rely, it does not prescribe rules of substantive tax law. The mezzanine loans that we acquire may
not meet all of the requirements for reliance on this safe harbor. Hence, there can be no
assurance that the IRS will not challenge the qualification of such
assets as real estate assets for purposes of the REIT asset tests
(described below) or
the interest generated by these loans as qualifying income under the 75% gross income test
(described above). To the extent we make corporate mezzanine loans, such loans will not qualify as
real estate assets and interest income with respect to such loans will not be qualifying income for
the 75% gross income test (described above).
We believe that substantially all of our income from our mortgage related securities generally
will be qualifying income for purposes of the REIT gross income tests. However, to the extent that
we own non-REMIC CMOs or other debt instruments secured by mortgage loans (rather than by real
property), the interest income received with respect to such securities generally will be
qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. In
addition, the loan amount of a mortgage loan that we own may exceed the value of the real property
securing the loan. In that case, income from the loan will be qualifying income for purposes of the
95% gross income test, but the interest attributable to the amount of the loan that exceeds the
value of the real property securing the loan will not be qualifying income for purposes of the 75%
gross income test.
As described in BusinessInvestment Methods, we may purchase Agency RMBS through TBAs and
may recognize income or gains from the disposition of those TBAs through dollar roll transactions.
See BusinessOur Financing Strategy. There is no direct authority with respect to the
qualifications of income or gains from dispositions of TBAs as gains from the sale of real property
(including interests in real property and interests in mortgages on real property) or other
qualifying income for purposes of the 75% gross income test. We will not treat these items as
qualifying for purposes of the 75% gross income test unless we receive advice of our counsel that
such income and gains should be treated as qualifying for purposes of the 75% gross income test.
As a result, our ability to enter into TBAs could be limited. Moreover, even if we were to receive
advice of counsel as described in the preceding sentence, it is possible that the IRS could assert
that such income is not qualifying income. In the event that such income were determined not to be
qualifying for the 75% gross income test, we could be subject to a penalty tax or we could fail to
qualify as a REIT if such income when added to any other non-qualifying income exceeded 25% of our
gross income.
Dividend Income
We may receive distributions from TRSs or other corporations that are not REITs or qualified
REIT subsidiaries. These distributions are generally classified as dividend income to the extent
of the earnings and profits of the distributing corporation. Such distributions generally
constitute qualifying income for purposes of the 95% gross income test, but not the 75% gross
income test. Any dividends received by us from a REIT is qualifying income in our hands for
purposes of both the 95% and 75% gross income tests.
Hedging Transactions
We may enter into hedging transactions with respect to one or more of our assets or
liabilities. Hedging transactions could take a variety of forms, including interest rate swap
agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or
similar financial instruments. Except to the extent provided by Treasury regulations, any income
from a hedging transaction we enter into (1) in the normal course of our business primarily to
manage risk of interest rate or price changes or currency fluctuations with respect to borrowings
made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real
estate assets, which is clearly identified as specified in Treasury regulations before the close of
the day on which it was acquired, originated, or entered into, including gain from the sale or
disposition of such a transaction, and (2) primarily to manage risk of currency fluctuations with
respect to any item of income or gain that would be
qualifying income under the 75% or
95% income tests which is clearly identified as such before
the close of the day on which it was acquired, originated, or entered into, will not constitute
gross income for purposes of the 75% or
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95% gross income test. To the extent that we enter into
other types of hedging transactions, the income from those transactions is likely to be treated as
non-qualifying income for purposes of both of the 75% and 95% gross income tests. We intend to
structure any hedging transactions in a manner that does not jeopardize our qualification as a
REIT.
Rents from Real Property
We currently do not intend to acquire real property with the proceeds of this offering.
However, to the extent that we own real property or interests therein, rents we receive qualify as
rents from real property in satisfying the gross income tests described above, only if several
conditions are met, including the following. If rent attributable to personal property leased in
connection with real property is greater than 15% of the total rent received under any particular
lease, then all of the rent attributable to such personal property will not qualify as rents from
real property. The determination of whether an item of personal property constitutes real or
personal property under the REIT provisions of the Internal Revenue Code is subject to both legal
and factual considerations and is therefore subject to different interpretations.
In addition, in order for rents received by us to qualify as rents from real property, the
rent must not be based in whole or in part on the income or profits of any person. However, an
amount will not be excluded from rents from real property solely by being based on a fixed
percentage or percentages of sales or if it is based on the net income of a tenant which derives
substantially all of its income with respect to such property from subleasing of substantially all
of such property, to the extent that the rents paid by the subtenants would qualify as rents from
real property, if earned directly by us. Moreover, for rents received to qualify as rents from
real property, we generally must not operate or manage the property or furnish or render certain
services to the tenants of such property, other than through an independent contractor who is
adequately compensated and from which we derive no income or through a TRS. We are permitted,
however, to perform services that are usually or customarily rendered in connection with the
rental of space for occupancy only and are not otherwise considered rendered to the occupant of the
property. In addition, we may directly or indirectly provide non-customary services to tenants of
our properties without disqualifying all of the rent from the property if the payment for such
services does not exceed 1% of the total gross income from the property. In such a case, only the
amounts for non-customary services are not treated as rents from real property and the provision of
the services does not disqualify the related rent.
Rental income will qualify as rents from real property only to the extent that we do not
directly or constructively own, (1) in the case of any tenant which is a corporation, stock
possessing 10% or more of the total combined voting power of all classes of stock entitled to vote,
or 10% or more of the total value of shares of all classes of stock of such tenant, or (2) in the
case of any tenant which is not a corporation, an interest of 10% or more in the assets or net
profits of such tenant.
Failure to Satisfy the Gross Income Tests
We intend to monitor our sources of income, including any non-qualifying income received by
us, so as to ensure our compliance with the gross income tests. If we fail to satisfy one or both
of the 75% or 95% gross income tests for any taxable year, including as a result of income and
gains from the disposition of TBAs, we may still qualify as a REIT for the year if we are entitled
to relief under applicable provisions of the Internal Revenue Code. These relief provisions will
generally be available if the failure of our company to meet these tests was due to reasonable
cause and not due to willful neglect and, following the identification of such failure, we set
forth a description of each item of our gross income that satisfies the gross income tests in a
schedule for the taxable year filed in accordance with the Treasury regulation. It is not possible
to state whether we would be entitled to the benefit of these relief provisions in all
circumstances. If these relief provisions are inapplicable to a particular set of circumstances
involving us, we will not qualify as a REIT. As discussed above under Taxation of REITs in
General, even where these relief provisions apply, a tax would be imposed upon the profit
attributable to the amount by which we fail to satisfy the particular gross income test.
Asset Tests
We, at the close of each calendar quarter, must also satisfy four tests relating to the nature
of our assets. First, at least 75% of the value of our total assets must be represented by some
combination of real estate assets, cash, cash
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items, U.S. Government securities and, under some
circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate
assets include interests in real property, such as land, buildings, leasehold interests in real
property, stock of other corporations that qualify as REITs and certain kinds of RMBS, CMBS and mortgage
loans. Regular or residual interest in REMICs are generally treated as a real estate asset. If,
however, less than 95% of the assets of a REMIC consists of real estate assets (determined as if we
held such assets), we will be treated as owning our proportionate share of the assets of the REMIC.
In the case of interests in grant or trusts, we will be treated as owning an undivided beneficial
interest in the mortgage loans held by the grantor trust. Assets that do not qualify for purposes
of the 75% test are subject to the additional asset tests described below. Second, the value of
any one issuers securities owned by us may not exceed 5% of the value of our gross assets. Third,
we may not own more than 10% of any one issuers outstanding securities, as measured by either
voting power or value. Fourth, the aggregate value of all securities of TRSs held by us may not
exceed 25% of the value of our gross assets.
The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT subsidiaries.
The 10% value test does not apply to certain straight debt and other excluded securities, as
described in the Internal Revenue Code, including but not limited to any loan to an individual or
an estate, any obligation to pay rents from real property and any security issued by a REIT. In
addition, (1) a REITs interest as a partner in a partnership is not considered a security for
purposes of applying the 10% value test; (2) any debt instrument issued by a partnership (other
than straight debt or other excluded security) will not be considered a security issued by the
partnership if at least 75% of the partnerships gross income is derived from sources that would
qualify for the 75% REIT gross income test; and (3) any debt instrument issued by a partnership
(other than straight debt or other excluded security) will not be considered a security issued by
the partnership to the extent of the REITs interest as a partner in the partnership.
For purposes of the 10% value test, straight debt means a written unconditional promise to
pay on demand on a specified date a sum certain in money if (1) the debt is not convertible,
directly or indirectly, into stock, (2) the interest rate and interest payment dates are not
contingent on profits, the borrowers discretion, or similar factors other than certain
contingencies relating to the timing and amount of principal and interest payments, as described in
the Internal Revenue Code and (3) in the case of an issuer which is a corporation or a partnership,
securities that otherwise would be considered straight debt will not be so considered if we, and
any of our controlled taxable REIT subsidiaries as defined in the Internal Revenue Code, hold any
securities of the corporate or partnership issuer which (A) are not straight debt or other excluded
securities (prior to the application of this rule), and (B) have an aggregate value greater than 1%
of the issuers outstanding securities (including, for the purposes of a partnership issuer, our
interest as a partner in the partnership).
We
may hold certain mezzanine loans that do not qualify for the safe
harbor in Revenue Procedure 2003-65 discussed above pursuant to which
certain loans secured by a first priority security interest in
equity interests in a pass-through entity that directly or indirectly own real property
will be treated as qualifying assets for purposes of the 75% real
estate asset test and therefore not be subject to the 10% vote or value
test. In addition such mezzanine loans may not qualify as straight
debt securities or for one of the other exclusions from the
definition of securities for purposes of the 10% value
test. We intend to make any such investments in such a manner as not
to fail the asset tests described above.
We
may hold certain participation interests, including B Notes, in
mortgage loans and mezzanine loans originated by other lenders.
B Notes are interests in underlying loans created by virtue of
participations or similar agreements to which the originators of the
loans are parties, along with one or more participants. The borrower
on the underlying loan is typically not a party to the participation
agreement. The performance of this investment depends upon the
performance of the underlying loan and, if the underlying borrower
defaults, the participant typically has no recourse against the
originator of the loan. The originator often retains a senior
position in the underlying loan and grants junior participations
which absorb losses first in the event of a default by the borrower.
We generally expect to treat our participation interests as
qualifying real estate assets for purposes of the REIT asset tests
and interest that we derive from such investments as qualifying
mortgage interest for purposes of the 75% gross income test discussed
above. The appropriate treatment of participation interests for
U.S. federal income tax purposes is not entirely certain,
however, and no assurance can be given that the IRS will not
challenge our treatment of our participation interests. In the event
of a determination that such participation interests do not qualify
as real estate assets, or that the income that we derive from such
participation interests does not qualify as mortgage interest for
purposes of the REIT asset and income tests, we could be subject to a
penalty tax, or could fail to qualify as a REIT.
After initially meeting the asset tests at the close of any quarter, we will not lose our
qualification as a REIT for failure to satisfy the asset tests at the end of a later quarter solely
by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire
securities during a quarter, we can cure this failure by disposing of sufficient non-qualifying
assets within 30 days after the close of that quarter. If we fail the 5% asset test, or the 10%
vote or value asset tests at the end of any quarter and such failure is not cured within 30 days
thereafter, we may dispose of sufficient assets (generally within six months after the last day of
the quarter in which our identification of the failure to satisfy these asset tests occurred) to
cure such a violation that does not exceed the lesser of 1% of our assets at the end of the
relevant quarter or $10,000,000. If we fail any of the other asset tests or our failure of the 5%
and 10% asset tests is in excess of the de minimis amount described above, as long as such failure
was due to reasonable cause and not willful neglect, we are permitted to avoid disqualification as
a REIT, after the 30 day cure period, by taking steps including the disposition of sufficient
assets to meet the asset test (generally within six months after the last day of the quarter in
which our identification of the failure to satisfy the REIT asset test occurred) and paying a tax
equal to the greater of $50,000 or the highest corporate income tax rate (currently 35%) of the net
income generated by the non-qualifying assets during the period in which we failed to satisfy the
asset test.
We expect that the assets and mortgage-related securities that we own generally will be
qualifying assets for purposes of the 75% asset test. However, to the extent that we own non-REMIC
CMOs or other debt instruments secured by mortgage loans (rather than by real property) or secured
by non-real estate assets, or debt securities
issued by C corporations that are not secured by mortgages on real property, those securities
may not be qualifying assets for purposes of the 75% asset test. In addition, as described in
BusinessOur Financing Strategy, we may purchase Agency RMBS through TBAs. There is no direct
authority with respect to the qualification of TBAs as real estate assets or Government securities
for purposes of the 75% asset test and we will not treat TBAs as such
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unless we receive advice of
our counsel that TBAs should be treated as qualifying assets for purposes of the 75% asset test.
As a result, our ability to purchase TBAs could be limited. Moreover, even if we were to receive
advice of counsel as described in the preceding sentence, it is possible that the IRS could assert
that TBAs are not qualifying assets in which case we could be subject to a penalty tax or fail to
qualify as a REIT if such assets, when combined with other non-real estate assets exceeds 25% of
our gross assets.
We believe that our holdings of securities and other assets will be structured in a manner
that will comply with the foregoing REIT asset requirements and intend to monitor compliance on an
ongoing basis. Moreover, values of some assets may not be susceptible to a precise determination
and are subject to change in the future. Furthermore, the proper classification of an instrument
as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances,
which could affect the application of the REIT asset tests. Accordingly, there can
be no assurance that the IRS will not contend that our interests in subsidiaries or in the
securities of other issuers (including REIT issuers) cause a violation of the REIT asset tests.
In addition, we intend to enter into repurchase agreements under which we will nominally sell
certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase
the sold assets. We believe that we will be treated for U.S. federal income tax purposes as the
owner of the assets that are the subject of any such agreement notwithstanding that we may transfer
record ownership of the assets to the counterparty during the term of the agreement. It is
possible, however, that the IRS could assert that we did not own the assets during the term of the
repurchase agreement, in which case we could fail to qualify as a REIT.
Annual Distribution Requirements
In order to qualify as a REIT, we are required to distribute dividends, other than capital
gain dividends, to our stockholders in an amount at least equal to:
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These distributions must be paid in the taxable year to which they relate or in the following
taxable year if such distributions are declared in October, November or December of the taxable
year, are payable to stockholders of record on a specified date in any such month and are actually
paid before the end of January of the following year. Such distributions are treated as both paid
by us and received by each stockholder on December 31 of the year in which they are declared. In
addition, at our election, a distribution for a taxable year may be declared before we timely file
our tax return for the year and be paid with or before the first regular dividend payment after
such declaration, provided that such payment is made during the 12-month period following the close
of such taxable year. These distributions are taxable to our stockholders in the year in which
paid, even though the distributions relate to our prior taxable year for purposes of the 90%
distribution requirement.
In order for distributions to be counted towards our distribution requirement and to give rise
to a tax deduction by us, they must not be preferential dividends. A dividend is not a
preferential dividend if it is pro rata among all
outstanding shares of stock within a particular class and is in accordance with the
preferences among different classes of stock as set forth in the organizational documents.
To the extent that we distribute at least 90%, but less than 100%, of our REIT taxable
income, as adjusted, we will be subject to tax at ordinary corporate tax rates on the retained
portion. In addition, we may elect to retain,
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rather than distribute, our net long-term capital
gains and pay tax on such gains. In this case, we could elect to have our stockholders include
their proportionate share of such undistributed long-term capital gains in income and receive a
corresponding credit for their proportionate share of the tax paid by us. Our stockholders would
then increase the adjusted basis of their stock in us by the difference between the designated
amounts included in their long-term capital gains and the tax deemed paid with respect to their
proportionate shares.
If we fail to distribute during each calendar year at least the sum of (1) 85% of our REIT
ordinary income for such year, (2) 95% of our REIT capital gain net income for such year and
(3) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on
the excess of such required distribution over the sum of (x) the amounts actually distributed
(taking into account excess distributions from prior periods) and (y) the amounts of income
retained on which we have paid corporate income tax. We intend to make timely distributions so
that we are not subject to the 4% excise tax.
It is possible that we, from time to time, may not have sufficient cash to meet the
distribution requirements due to timing differences between (1) the actual receipt of cash,
including receipt of distributions from our subsidiaries and (2) the inclusion of items in income
by us for U.S. federal income tax purposes. For example, we may acquire debt instruments or notes
whose face value may exceed its issue price as determined for U.S. federal income tax purposes
(such excess, original issue discount, or OID), such that we will be required to include in our
income a portion of the OID each year that the instrument is held before we receive any
corresponding cash. Furthermore, we may invest in assets where we elect to accrue market discount
or are otherwise required to defer a portion of the interest deduction for interest paid on debt
incurred to acquire or carry such assets. In the event that such timing differences occur, in
order to meet the distribution requirements, it might be necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable in-kind distributions of
property. We may be able to rectify a failure to meet the distribution requirements for a year by
paying deficiency dividends to stockholders in a later year, which may be included in our
deduction for dividends paid for the earlier year. In this case, we may be able to avoid losing
our qualification as a REIT or being taxed on amounts distributed as deficiency dividends.
However, we will be required to pay interest and a penalty based on the amount of any deduction
taken for deficiency dividends.
Recordkeeping Requirements
We are required to maintain records and request on an annual basis information from specified
stockholders. These requirements are designed to assist us in determining the actual ownership of
our outstanding stock and maintaining our qualifications as a REIT.
Prohibited Transactions
Net income we derive from a prohibited transaction (including any foreign currency gain, as
defined in Section 988(b)(1) of the Internal Revenue Code, minus any foreign currency loss, as
defined in Section 988(b)(2) of the Internal Revenue Code) is subject to a 100% tax. The term
prohibited transaction generally includes a sale or other disposition of property (other than
foreclosure property) that is held as inventory or primarily for sale to customers, in the ordinary
course of a trade or business by a REIT, by a lower-tier partnership in which the REIT holds an
equity interest or by a borrower that has issued a shared appreciation mortgage or similar debt
instrument to the REIT. We intend to conduct our operations so that no asset owned by us or our
pass-through subsidiaries will be held as inventory or primarily for sale to customers, and that a
sale of any assets owned by us directly or through a pass-through subsidiary will not be in the
ordinary course of business. However, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business depends on the particular facts and
circumstances. No assurance can be given that any particular asset in which we hold a direct or
indirect interest will not be treated as property held as inventory or primarily for sale to
customers or that certain safe harbor provisions of the Internal Revenue Code that prevent such
treatment will apply. The 100% tax will not apply to
gains from the sale of property that is held through a TRS or other taxable corporation,
although such income will be subject to tax in the hands of the corporation at regular corporate
income tax rates.
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Foreclosure Property
Foreclosure property is real property and any personal property incident to such real property
(1) that is acquired by a REIT as a result of the REIT having bid on the property at foreclosure or
having otherwise reduced the property to ownership or possession by agreement or process of law
after there was a default (or default was imminent) on a lease of the property or a mortgage loan
held by the REIT and secured by the property, (2) for which the related loan or lease was acquired
by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT
makes a proper election to treat the property as foreclosure property. REITs generally are subject
to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property,
including any gain from the disposition of the foreclosure property, other than income that would
otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale
of property for which a foreclosure property election has been made will not be subject to the 100%
tax on gains from prohibited transactions described above, even if the property would otherwise
constitute inventory or dealer property in the hands of the selling REIT. We do not anticipate
that we will receive any income from foreclosure property that is not qualifying income for
purposes of the 75% gross income test, but, if we do receive any such income, we intend to elect to
treat the related property as foreclosure property.
Failure to Qualify
In the event that we violate a provision of the Internal Revenue Code that would result in our
failure to qualify as a REIT, we may nevertheless continue to qualify as a REIT under specified
relief provisions available to us to avoid such disqualification if (1) the violation is due to
reasonable cause and not due to willful neglect, (2) we pay a penalty of $50,000 for each failure
to satisfy a requirement for qualification as a REIT and (3) the violation does not include a
violation under the gross income or asset tests described above (for which other specified relief
provisions are available). This cure provision reduces the instances that could lead to our
disqualification as a REIT for violations due to reasonable cause. If we fail to qualify for
taxation as a REIT in any taxable year and none of the relief provisions of the Internal Revenue
Code apply, we will be subject to tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates. Distributions to our stockholders in any year in which
we are not a REIT will not be deductible by us, nor will they be required to be made. In this
situation, to the extent of current and accumulated earnings and profits, and, subject to
limitations of the Internal Revenue Code, distributions to our stockholders will generally be
taxable in the case of our stockholders who are individual U.S. stockholders (as defined below), at
a maximum rate of 15%, and dividends in the hands of our corporate U.S. stockholders may be
eligible for the dividends received deduction. Unless we are entitled to relief under the specific
statutory provisions, we will also be disqualified from re-electing to be taxed as a REIT for the
four taxable years following a year during which qualification was lost. It is not possible to
state whether, in all circumstances, we will be entitled to statutory relief.
Tax Aspects of Ownership of Equity Interests in Partnerships
General
We may hold assets through entities that are classified as partnerships for U.S. federal
income tax purposes, including our interest in our operating partnership and any equity interests
in lower-tier partnerships. In addition, it is generally expected that Legacy Loan PPIFs or Legacy Securities PPIFs will be
structured as limited partnerships or limited liability companies that are taxable as partnerships
for U.S. federal income tax purposes. Assuming this is the case, it is anticipated that the rules
described in Effect of Subsidiary Entities and the following paragraph will apply to any
investments we make in such entities. As described above, however, the terms and conditions of the
PPIP have not been finalized. See Risk FactorsRisks Relating to the PPIP and TALF.
Accordingly, it is possible that Legacy Loan PPIFs or Legacy Securities PPIFs will not be treated
as partnerships for U.S. federal income tax purposes, in which case different rules will apply to
our investments in such entities. See generally Effect of Subsidiary Entities.
In general, partnerships are pass-through entities that are not
subject to U.S. federal income tax. Rather, partners are allocated their proportionate shares of
the items of income, gain, loss, deduction and credit of a partnership, and are subject to tax on
these items without regard to whether the partners receive a distribution from the partnership. We
will include in our income our proportionate share of these partnership items for purposes of the
various REIT income tests, based on our capital interest in such partnership, and in the
computation of our REIT taxable income. Moreover, for purposes of the REIT asset tests, we will
include our proportionate share of assets held by subsidiary partnerships, based on our capital
interest in such partnerships (other than for purposes of the 10% value test, for which the
determination of our interest in partnership assets will be based on our proportionate interest in
any securities issued by the partnership excluding, for these purposes, certain excluded securities
as described in the Internal Revenue Code). Consequently, to the extent that we hold an equity
interest in a partnership, the
partnerships assets and operations may affect our ability to qualify as a REIT, even though
we may have no control, or only limited influence, over the partnership.
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Entity Classification
The ownership by us of equity interests in partnerships, including our operating partnership,
involves special tax considerations, including the possibility of a challenge by the IRS of the
status of any of our subsidiary partnerships as a partnership, as opposed to an association taxable
as a corporation, for U.S. federal income tax purposes. Because it is likely that at least half of
our operating partnerships investments will be mortgage loans and the operating partnership
intends to use leverage to finance the investments, the taxable mortgage pool rules potentially
could apply to the operating partnership. However, the operating partnership does not intend on
incurring any indebtedness, the payments on which bear a relationship to payments (including
payments at maturity) received by the operating partnership from its investments. Accordingly, the
operating partnership does not believe it will be an obligor under debt obligations with two or
more maturities, the payments on which bear a relationship to payments on the operating
partnerships debt investments, and, therefore, the operating partnership does not believe that it
will be classified as a taxable mortgage pool. If our operating partnership or any subsidiary
partnership were treated as an association for U.S. federal income tax purposes, it would be
taxable as a corporation and, therefore, could be subject to an entity-level tax on its income. In
such a situation, the character of our assets and items of our gross income would change and would
preclude us from satisfying the REIT asset tests (particularly the tests generally preventing a
REIT from owning more than 10% of the voting securities, or more than 10% of the value of the
securities, of a corporation) or the gross income tests as discussed in Asset Tests and Gross
Income Tests above, and in turn would prevent us from qualifying as a REIT. See Failure to
Qualify, above, for a discussion of the effect of our failure to meet these tests for a taxable
year.
In addition, any change in the status of any of our subsidiary partnerships for tax purposes
might be treated as a taxable event, in which case we could have taxable income that is subject to
the REIT distribution requirements without receiving any cash.
Tax Allocations with Respect to Partnership Properties
The partnership agreement of our operating partnership generally provides that items of
operating income and loss will be allocated to the holders of units in proportion to the number of
units held by each holder. If an allocation of partnership income or loss does not comply with the
requirements of Section 704(b) of the Internal Revenue Code and the Treasury regulations
thereunder, the item subject to the allocation will be reallocated in accordance with the partners
interests in the partnership. This reallocation will be determined by taking into account all of
the facts and circumstances relating to the economic arrangement of the partners with respect to
such item. Our operating partnerships allocations of income and loss are intended to comply with
the requirements of Section 704(b) of the Internal Revenue Code and the Treasury regulations
promulgated under this section of the Internal Revenue Code. Under the Internal Revenue Code and
the Treasury regulations, income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for tax purposes in a manner such that the contributing partner is
charged with, or benefits from, the unrealized gain or unrealized loss associated with the property
at the time of the contribution. The amount of the unrealized gain or unrealized loss is generally
equal to the difference between the fair market value of the contributed property and the adjusted
tax basis of such property at the time of the contribution (a book-tax difference). Such
allocations are solely for U.S. federal income tax purposes and do not affect partnership capital
accounts or other economic or legal arrangements among the partners. To the extent that any of our
subsidiary partnerships acquires appreciated (or depreciated) properties by way of capital
contributions from its partners, allocations would need to be made in a manner consistent with
these requirements.
Taxation of Taxable U.S. Stockholders
This section summarizes the taxation of U.S. stockholders that are not tax-exempt
organizations. For these purposes, a U.S. stockholder is a beneficial owner of our common stock
that for U.S. federal income tax purposes is:
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a corporation (including an entity treated as a corporation for U.S. federal income tax
purposes) created or organized in or under the laws of the U.S. or of a political
subdivision thereof (including the District of Columbia); |
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an estate whose income is subject to U.S. federal income taxation regardless of its
source; or |
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any trust if (1) a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) it has a valid election in place to be treated as
a U.S. person. |
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes
holds our stock, the U.S. federal income tax treatment of a partner generally will depend upon the
status of the partner and the activities of the partnership. A partner of a partnership holding
our common stock should consult its own tax advisor regarding the U.S. federal income tax
consequences to the partner of the acquisition, ownership and disposition of our stock by the
partnership.
Distributions
Provided that we qualify as a REIT, distributions made to our taxable U.S. stockholders out of
our current and accumulated earnings and profits, and not designated as capital gain dividends,
will generally be taken into account by them as ordinary dividend income and will not be eligible
for the dividends received deduction for corporations. In determining the extent to which a
distribution with respect to our common stock constitutes a dividend for U.S. federal income tax
purposes, our earnings and profits will be allocated first to distributions with respect to our
preferred stock, if any, and then to our common stock. Dividends received from REITs are generally
not eligible to be taxed at the preferential qualified dividend income rates applicable to
individual U.S. stockholders who receive dividends from taxable subchapter C corporations.
In addition, distributions from us that are designated as capital gain dividends will be taxed
to U.S. stockholders as long-term capital gains, to the extent that they do not exceed the actual
net capital gain of our company for the taxable year, without regard to the period for which the
U.S. stockholder has held its stock. To the extent that we elect under the applicable provisions
of the Internal Revenue Code to retain our net capital gains, U.S. stockholders will be treated as
having received, for U.S. federal income tax purposes, our undistributed capital gains as well as a
corresponding credit for taxes paid by us on such retained capital gains. U.S. stockholders will
increase their adjusted tax basis in our common stock by the difference between their allocable
share of such retained capital gain and their share of the tax paid by us. Corporate
U.S. stockholders may be required to treat up to 20% of some capital gain dividends as ordinary
income. Long-term capital gains are generally taxable at maximum federal rates of 15% (through
2010) in the case of U.S. stockholders who are individuals, and 35% for corporations. Capital
gains attributable to the sale of depreciable real property held for more than 12 months are
subject to a 25% maximum U.S. federal income tax rate for individual U.S. stockholders who are
individuals, to the extent of previously claimed depreciation deductions.
Distributions in excess of our current and accumulated earnings and profits will not be
taxable to a U.S. stockholder to the extent that they do not exceed the adjusted tax basis of the
U.S. stockholders shares in respect of which the distributions were made, but rather will reduce
the adjusted tax basis of these shares. To the extent that such distributions exceed the adjusted
tax basis of an individual U.S. stockholders shares, they will be included in income as long-term
capital gain, or short-term capital gain if the shares have been held for one year or less. In
addition, any dividend declared by us in October, November or December of any year and payable to a
U.S. stockholder of record on a specified date in any such month will be treated as both paid by us
and received by the U.S. stockholder on December 31 of such year, provided that the dividend is
actually paid by us before the end of January of the following calendar year.
With respect to U.S. stockholders who are taxed at the rates applicable to individuals, we may
elect to designate a portion of our distributions paid to such U.S. stockholders as qualified
dividend income. A portion of a distribution that is properly designated as qualified dividend
income is taxable to non-corporate U.S. stockholders as capital gain, provided that the
U.S. stockholder has held the common stock with respect to which the distribution is
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made for more than 60 days during the 121-day period beginning on the date that is 60 days
before the date on which such common stock became ex-dividend with respect to the relevant
distribution. The maximum amount of our distributions eligible to be designated as qualified
dividend income for a taxable year is equal to the sum of:
(a) the qualified dividend income received by us during such taxable year from non-REIT C
corporations (including any TRS in which we may own an interest);
(b) the excess of any undistributed REIT taxable income recognized during the immediately
preceding year over the U.S. federal income tax paid by us with respect to such undistributed REIT
taxable income; and
(c) the excess of any income recognized during the immediately preceding year attributable to
the sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a
non-REIT C corporation over the U.S. federal income tax paid by us with respect to such built-in
gain.
Generally, dividends that we receive will be treated as qualified dividend income for purposes
of (a) above if the dividends are received from a domestic C corporation (other than a REIT or a
RIC), any TRS we may form, or a qualifying foreign corporation and specified holding period
requirements and other requirements are met.
To the extent that we have available net operating losses and capital losses carried forward
from prior tax years, such losses may reduce the amount of distributions that must be made in order
to comply with the REIT distribution requirements. See Taxation of Our Company in General and
Annual Distribution Requirements. Such losses, however, are not passed through to
U.S. stockholders and do not offset income of U.S. stockholders from other sources, nor do they
affect the character of any distributions that are actually made by us, which are generally subject
to tax in the hands of U.S. stockholders to the extent that we have current or accumulated earnings
and profits.
Dispositions of Our Common Stock
In general, a U.S. stockholder will realize gain or loss upon the sale, redemption or other
taxable disposition of our common stock in an amount equal to the difference between the sum of the
fair market value of any property and the amount of cash received in such disposition and the
U.S. stockholders adjusted tax basis in the common stock at the time of the disposition. In
general, a U.S. stockholders adjusted tax basis will equal the U.S. stockholders acquisition
cost, increased by the excess of net capital gains deemed distributed to the U.S. stockholder
(discussed above) less tax deemed paid on it and reduced by returns of capital. In general,
capital gains recognized by individuals and other non-corporate U.S. stockholders upon the sale or
disposition of shares of our common stock will be subject to a maximum U.S. federal income tax rate
of 15% for taxable years through 2010, if our common stock is held for more than 12 months, and
will be taxed at ordinary income rates (of up to 35% through 2010) if our common stock is held for
12 months or less. Gains recognized by U.S. stockholders that are corporations are subject to
U.S. federal income tax at a maximum rate of 35%, whether or not classified as long-term capital
gains. The IRS has the authority to prescribe, but has not yet prescribed, regulations that would
apply a capital gain tax rate of 25% (which is generally higher than the long-term capital gain tax
rates for non-corporate holders) to a portion of capital gain realized by a non-corporate holder on
the sale of REIT stock or depositary shares that would correspond to the REITs unrecaptured
Section 1250 gain.
Holders are advised to consult with their tax advisors with respect to their capital gain tax
liability. Capital losses recognized by a U.S. stockholder upon the disposition of our common
stock held for more than one year at the time of disposition will be considered long-term capital
losses, and are generally available only to offset capital gain income of the U.S. stockholder but
not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary
income each year). In addition, any loss upon a sale or exchange of shares of our common stock by
a U.S. stockholder who has held the shares for six months or less, after applying holding period
rules, will be treated as a long-term capital loss to the extent of distributions received from us
that were required to be treated by the U.S. stockholder as long-term capital gain.
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Passive Activity Losses and Investment Interest Limitations
Distributions made by us and gain arising from the sale or exchange by a U.S. stockholder of
our common stock will not be treated as passive activity income. As a result, U.S. stockholders
will not be able to apply any passive losses against income or gain relating to our common stock.
Distributions made by us, to the extent they do not constitute a return of capital, generally will
be treated as investment income for purposes of computing the investment interest limitation. A
U.S. stockholder that elects to treat capital gain dividends, capital gains from the disposition of
stock or qualified dividend income as investment income for purposes of the investment interest
limitation will be taxed at ordinary income rates on such amounts.
Taxation of Tax-Exempt U.S. Stockholders
U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts, generally are exempt from U.S. federal income taxation. However,
they are subject to taxation on their unrelated business taxable income, which we refer to in this
prospectus as UBTI. While many investments in real estate may generate UBTI, the IRS has ruled
that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on
that ruling, and provided that (1) a tax-exempt U.S. stockholder has not held our common stock as
debt financed property within the meaning of the Internal Revenue Code (i.e., where the
acquisition or holding of the property is financed through a borrowing by the tax-exempt
stockholder), (2) our common stock is not otherwise used in an unrelated trade or business and
(3) we do not hold an asset that gives rise to excess inclusion income distributions from us and
income from the sale of our common stock generally should not give rise to UBTI to a tax-exempt
U.S. stockholder. As previously noted, we expect to engage in transactions that would result in a
portion of our dividend income being considered excess inclusion income, and accordingly, it is
likely that a portion of our dividends received by a tax-exempt stockholder will be treated as
UBTI.
Tax-exempt U.S. stockholders that are social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services plans exempt from
U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal
Revenue Code, respectively, are subject to different UBTI rules, which generally will require them
to characterize distributions from us as UBTI.
In certain circumstances, a pension trust (1) that is described in Section 401(a) of the
Internal Revenue Code, (2) is tax exempt under Section 501(a) of the Internal Revenue Code, and
(3) that owns more than 10% of our stock could be required to treat a percentage of the dividends
from us as UBTI if we are a pension-held REIT. We will not be a pension-held REIT unless
(1) either (A) one pension trust owns more than 25% of the value of our stock, or (B) a group of
pension trusts, each individually holding more than 10% of the value of our stock, collectively
owns more than 50% of such stock; and (2) we would not have qualified as a REIT but for the fact
that Section 856(h)(3) of the Internal Revenue Code provides that stock owned by such trusts shall
be treated, for purposes of the requirement that not more than 50% of the value of the outstanding
stock of a REIT is owned, directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities), as owned by the beneficiaries of such trusts.
Certain restrictions on ownership and transfer of our stock should generally prevent a tax-exempt
entity from owning more than 10% of the value of our stock, or us from becoming a pension-held
REIT.
Tax-exempt U.S. stockholders are urged to consult their tax advisors regarding the
U.S. federal, state, local and foreign tax consequences of owning our stock.
Taxation of Non-U.S. Stockholders
The following is a summary of certain U.S. federal income tax consequences of the acquisition,
ownership and disposition of our common stock applicable to non-U.S. stockholders of our common
stock. For purposes of this summary, a non-U.S. stockholder is a beneficial owner of our common
stock that is not a U.S. stockholder or an entity that is treated as a partnership for U.S. federal
income tax purposes. The discussion is based on current law and is for general information only.
It addresses only selective and not all aspects of U.S. federal income taxation.
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Ordinary Dividends
The portion of dividends received by non-U.S. stockholders payable out of our earnings and
profits that are not attributable to gains from sales or exchanges of U.S. real property interests
and which are not effectively connected with a U.S. trade or business of the non-U.S. stockholder
will generally be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or
eliminated by an applicable income tax treaty. Under some treaties, however, lower rates generally
applicable to dividends do not apply to dividends from REITs. In addition, any portion of the
dividends paid to non-U.S. stockholders that are treated as excess inclusion income will not be
eligible for exemption from the 30% withholding tax or a reduced treaty rate. As previously noted,
we expect to engage in transactions that result in a portion of our dividends being considered
excess inclusion income, and accordingly, it is likely that a portion of our dividend income will
not be eligible for exemption from the 30% withholding rate or a reduced treaty rate.
In general, non-U.S. stockholders will not be considered to be engaged in a U.S. trade or
business solely as a result of their ownership of our stock. In cases where the dividend income
from a non-U.S. stockholders investment in our common stock is, or is treated as, effectively
connected with the non-U.S. stockholders conduct of a U.S. trade or business, the
non-U.S. stockholder generally will be subject to U.S. federal income tax at graduated rates, in
the same manner as U.S. stockholders are taxed with respect to such dividends, and may also be
subject to the 30% branch profits tax on the income after the application of the income tax in the
case of a non-U.S. stockholder that is a corporation.
Non-Dividend Distributions
Unless (1) our common stock constitutes a U.S. real property interest (or USRPI) or (2) either
(A) the non-U.S. stockholders investment in our common stock is effectively connected with a U.S.
trade or business conducted by such non-U.S. stockholder (in which case the non-U.S. stockholder
will be subject to the same treatment as U.S. stockholders with respect to such gain) or (B) the
non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or
more during the taxable year and has a tax home in the U.S. (in which case the
non-U.S. stockholder will be subject to a 30% tax on the individuals net capital gain for the
year), distributions by us which are not dividends out of our earnings and profits will not be
subject to U.S. federal income tax. If it cannot be determined at the time at which a distribution
is made whether or not the distribution will exceed current and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to dividends. However, the
non-U.S. stockholder may seek a refund from the IRS of any amounts withheld if it is subsequently
determined that the distribution was, in fact, in excess of our current and accumulated earnings
and profits. If our common stock constitutes a USRPI, as described below, distributions by us in
excess of the sum of our earnings and profits plus the non-U.S. stockholders adjusted tax basis in
our common stock will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (or
FIRPTA) at the rate of tax, including any applicable capital gains rates, that would apply to a
U.S. stockholder of the same type (e.g., an individual or a corporation, as the case may be), and
the collection of the tax will be enforced by a refundable withholding at a rate of 10% of the
amount by which the distribution exceeds the stockholders share of our earnings and profits.
Capital Gain Dividends
Under FIRPTA, a distribution made by us to a non-U.S. stockholder, to the extent attributable
to gains from dispositions of USRPIs held by us directly or through pass-through subsidiaries (or
USRPI capital gains), will be considered effectively connected with a U.S. trade or business of the
non-U.S. stockholder and will be subject to U.S. federal income tax at the rates applicable to
U.S. stockholders, without regard to whether the distribution is designated as a capital gain
dividend. In addition, we will be required to withhold tax equal to 35% of the amount of capital
gain dividends to the extent the dividends constitute USRPI capital gains. Distributions subject
to FIRPTA may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder that is
a corporation. However, the 35% withholding tax will not apply to any capital gain dividend with
respect to any class of our stock which is regularly traded on an established securities market
located in the U.S. if the non-U.S. stockholder did not own more than 5% of such class of stock at
any time during the taxable year. Instead any capital gain dividend will be treated as a
distribution subject to the rules discussed above under Taxation of
Non-U.S. StockholdersOrdinary Dividends. Also, the branch profits tax will not apply to such a
distribution. A distribution is not a USRPI capital gain if we held the underlying asset solely as
a creditor, although the holding of a shared appreciation mortgage loan
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