sv11
As filed with the Securities and Exchange Commission on
April 15, 2010
Registration Statement No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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)
Robert H. Rigsby, Esq.
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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Mark C. Kanaly, Esq.
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David J. Goldschmidt, Esq. |
Alston & Bird LLP
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Skadden, Arps, Slate, Meagher & Flom LLP |
1201 W. Peachtree Street
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Four Times Square |
Atlanta, Georgia 30309-3424
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New York, New York 10036-6522 |
Tel (404) 881-7975
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Tel (212) 735-3574 |
Fax (404) 253-8390
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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):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) |
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 $0.01 per share |
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$ |
200,000,000 |
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$ |
14,260 |
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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. |
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 APRIL 15, 2010
Shares
Invesco Mortgage Capital Inc.
Common Stock
Invesco Mortgage Capital Inc. is a Maryland corporation focused on investing in,
financing and managing residential and commercial mortgage-backed securities and mortgage loans. We
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 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. We generally finance
our agency and non-agency residential mortgage-backed securities through repurchase agreement
financing. We have financed our investments in commercial mortgage-backed securities with
financings under the U.S. governments Term Asset-Backed Securities Loan Facility. We have also
financed, and may do so again in the future, our investments in commercial mortgage-backed
securities with private financing sources. We have also financed our investments in certain
non-agency residential mortgage-backed securities, commercial mortgage-backed securities and
residential and commercial mortgage loans by contributing capital to one or more of the legacy
securities public-private investment funds that receive financing under the U.S. governments
Public-Private Investment Program. We are externally managed and advised by Invesco Advisers, Inc.
(formerly 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).
We are offering shares of our common stock as described in this prospectus. Our
common stock is traded on the New York Stock Exchange under the symbol IVR. The last reported
sale price of our common stock on the NYSE was $23.31 on April 15, 2010.
We intend to elect and qualify to be taxed as a real estate investment trust for U.S. federal
income tax purposes, commencing with our taxable year ended December 31, 2009. To assist us in
qualifying as a real estate investment trust, among other purposes, shareholders are generally
restricted from owning more than 9.8% by value or number of shares, whichever is more restrictive,
of our outstanding shares of common stock. Different ownership limits apply to Invesco Ltd. and its
direct and indirect subsidiaries, including but not limited to Invesco Advisers, Inc. and Invesco
Investments (Bermuda) Ltd. In addition, our charter contains various other restrictions on the
ownership and transfer of our common stock. See Description of Capital Stock Restrictions on
Ownership and Transfer.
Investing
in our common stock involves risks. See Risk Factors
beginning on page 16 of
this prospectus for a discussion of these risks.
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Per Share |
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Total |
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Public offering price |
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$ |
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Underwriting discounts and commissions |
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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 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 , 2010.
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Credit Suisse
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Morgan Stanley |
Keefe, Bruyette & Woods
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Stifel Nicolaus
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JMP Securities |
The date of this prospectus is , 2010.
TABLE OF CONTENTS
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1 |
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15 |
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16 |
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44 |
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46 |
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47 |
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48 |
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49 |
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50 |
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51 |
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70 |
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81 |
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90 |
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99 |
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100 |
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102 |
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107 |
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109 |
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114 |
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116 |
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136 |
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139 |
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139 |
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139 |
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EX-23.3 |
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.
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
Advisers, Inc. (formerly 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.
Our Company
We are a 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. Our objective is to provide attractive risk-adjusted returns to our investors,
primarily through dividends and secondarily through capital appreciation. To achieve this
objective, we selectively acquire assets to construct a diversified investment portfolio designed
to produce attractive returns across a variety of market conditions and economic cycles.
Our target assets consist of 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. Our Agency RMBS
investments include mortgage pass-through securities and may include collateralized mortgage
obligations, or CMOs. We also 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 generally finance our Agency RMBS investments and our non-Agency RMBS investments through
traditional repurchase agreement financing. In addition, we have financed our investments in CMBS
with financings under the U.S. governments Term Asset-Backed Securities Loan Facility, or TALF.
We have also financed, and may do so again in the future, our investments in CMBS with private
financing sources. We have also financed our investments in certain non-Agency RMBS, CMBS and
residential and commercial mortgage loans by contributing capital to one or more of the legacy
securities public-private investment funds, or PPIFs, that receive financing under the U.S.
governments Public-Private Investment Program, or PPIP, established and managed by our Manager or
one of its affiliates, or the Invesco PPIP Fund, which, in turn, invests in our target assets.
We were incorporated in Maryland on June 5, 2008, and commenced operations in July 2009. On
July 1, 2009, we successfully completed our initial public offering, or IPO, generating net
proceeds of $164.8 million. Concurrent with our IPO, we completed a private placement in which we
sold $1.5 million of our common stock to our Manager and $28.5 million of units of limited
partnership interests in our operating partnership, or OP units, to Invesco Investments (Bermuda)
Ltd. On July 27, 2009, the underwriters of our IPO exercised their over-allotment option for net
proceeds of $6.1 million. Collectively, we received net proceeds from our IPO and the related
private placement of approximately $200.9 million. On January 15, 2010, we completed a follow-on
public offering of 7,000,000 shares of common stock, and an issuance of an additional 1,050,000
shares of common stock pursuant to the underwriters full exercise of their over-allotment option,
at $21.25 per share. The net proceeds to us were $162.7 million.
We have invested the net proceeds from our IPO, related private placement and follow-on
offering, as well as monies that we borrowed under repurchase agreements and TALF, in accordance
with our investment strategy. By mid-February 2010, we had substantially invested the equity
proceeds of our follow-on offering. As of March 31, 2010,
approximately 27% of our equity was
invested in Agency RMBS, 57% in non-Agency RMBS, 12% in CMBS and 4% in the Invesco PPIP Fund.
We intend to elect to be taxed as a real estate investment trust, or REIT, for U.S. federal
income tax purposes, commencing with our taxable year ended December 31, 2009. Accordingly, we
generally will not be subject to U.S. federal income taxes on our taxable income to the extent that
we distribute all of our net taxable income to our shareholders and maintain our qualification as a
REIT. We operate our business in a manner that permits us to maintain our exclusion from the
definition of investment company under the Investment Company Act of 1940, as amended, or the
1940 Act.
1
Our Manager
We are externally managed and advised by our Manager, an SEC-registered investment adviser and
indirect, wholly-owned subsidiary of Invesco Ltd. (NYSE: IVZ), a leading independent global
investment management company. 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.
Pursuant to the terms of the management agreement, our Manager provides 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 have any employees. With the exception of our Chief Financial
Officer, our Manager does not 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 our board of directors delegates to it.
Our Strategies
Investments
We invest in a diversified pool of mortgage assets that generate attractive risk adjusted
returns. Our target assets include Agency RMBS, non-Agency RMBS, CMBS and residential and
commercial mortgage loans. See Our InvestmentsOur Target Assets below. In addition to direct
purchases of our target assets, we have also invested in the Invesco PPIP Fund, which, in turn,
invests in our target assets. Our Managers investment committee makes investment decisions for the
Invesco PPIP Fund.
Leverage
We use leverage on our target assets to achieve our return objectives. For our investments in
Agency RMBS (including CMOs), we focus on securities we believe provide attractive returns when
levered approximately 6 to 8 times. For our investments in non-Agency RMBS through December 31,
2009, we primarily focused on securities we believed would provide attractive unlevered returns.
More recently, the unlevered returns attainable on investments in non-Agency RMBS have decreased.
In the future we will employ leverage on our investments in non-Agency RMBS of approximately 1 to 2
times in order to achieve our risk-adjusted return target. We leverage our CMBS 3 to 5 times.
For the year ended December 31, 2009 and the first quarter ended March 31, 2010, the leverage
we employed on our investments in non-Agency RMBS was within the level we previously established
for this asset class (up to 1 times). For these same periods, the leverage we employed on our
investments in our other targeted asset classes was consistent with the ranges of leverage we have
established for these asset classes.
Financing
We finance our investments in Agency RMBS and non-Agency RMBS primarily through short-term
borrowings structured as repurchase agreements. In addition, we have financed our investments in
CMBS with financing under the TALF. We have also financed, and may do so again in the future, our
investments in CMBS with private financing sources. We have financed our investments in certain
non-Agency RMBS, CMBS and residential and commercial mortgage loans by investing in the Invesco
PPIP Fund, which receives financing from the U.S. Treasury and from the Federal Deposit Insurance
Corporation, or the FDIC.
As of December 31, 2009, we had entered into master repurchase agreements with eighteen
counterparties and had borrowed $546.0 million under five of those master repurchase agreements to
finance our purchases of Agency RMBS. In addition, as of December 31, 2009, we had entered into
three interest rate swap agreements, for a notional amount of $375.0 million, designed to mitigate
the effects of increases in interest rates under a portion of our repurchase agreements. At
December 31, 2009, we had secured borrowings of $80.4 million under the TALF. As of December 31,
2009, we had a commitment to invest up to $25.0 million in the Invesco PPIP Fund, of which $4.1
million has been called. The commitment to the Invesco PPIP Fund was increased to $100.0 million
in March 2010.
2
Risk Management Strategy
Market Risk Management
Risk management is an integral component of our strategy to deliver returns to our
shareholders. Because we invest in mortgage-backed securities, or MBS, investment losses from
principal prepayments, interest rate volatility and other risks can meaningfully reduce or
eliminate our distributions to shareholders. In addition, because we employ financial leverage in
funding our investment portfolio, mismatches in the maturities of our assets and liabilities can
create the need to continually renew or otherwise refinance our liabilities. Our net interest
margins are 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 actively employ portfolio-wide
and security-specific risk measurements 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 is
no guarantee that these tools will protect us from market risks.
Interest Rate Hedging
Subject to maintaining our qualification as a REIT, we may engage in a variety of interest
rate management techniques that seek on one hand to mitigate the influence of interest rate changes
on the costs of liabilities and on the other hand help us achieve our risk management objective.
Specifically, we 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, we seek 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 rely on our Managers expertise to manage these
risks on our behalf. We utilize derivative financial instruments, which may include 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.
Credit Risk
We believe our investment strategy generally keeps 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 the 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.
Our Investments
Our Target Assets
Our target asset classes and the principal assets in which we invest are as follows:
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Asset Classes |
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Principal Assets |
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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 Ginnie Mae,
Fannie Mae or Freddie Mac. |
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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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Asset Classes |
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Principal Assets |
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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 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 the U.S. government
agency underwriting guidelines. |
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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 mortgage loans allow
homeowners to qualify for a mortgage loan with
reduced or alternative 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. |
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Commercial Mortgage Loans
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First or second lien loans on commercial real
estate, subordinate interests in first
mortgages on commercial real estate, or B-Notes
on commercial real estate, bridge loans to be
used in the acquisition, construction or
redevelopment of a property and mezzanine
financings. |
Our Investment Activities
As of December 31, 2009, 19.1% of our equity was invested in Agency RMBS, 54.8% in non-Agency
RMBS, 9.9% in CMBS, 2.0% in the Invesco PPIP Fund and 14.2% in other assets (including cash and
restricted cash). We use leverage on our target assets to achieve our return objectives. For our
investments in Agency RMBS, we focus on securities we believe provide attractive returns when
levered approximately 6 to 8 times. For our investments in non-Agency RMBS through December 31,
2009, we primarily focused on securities we believed would provide attractive unlevered returns.
More recently, the unlevered returns attainable on investments in non-Agency RMBS have decreased.
In the future we will employ leverage on our investments in non-Agency RMBS of approximately 1 to 2
times in order to achieve our risk-adjusted return target. We leverage our CMBS 3 to 5 times. We
have also financed our investments in certain non-Agency RMBS, CMBS and residential and commercial
mortgage loans by investing in the Invesco PPIP Fund, which receives financing from the U.S.
Treasury and the FDIC. As of March 31, 2010, the Invesco PPIP Fund no longer accepts investment
subscriptions and the fund is now deemed closed.
As of December 31, 2009, we had approximately $161.1 million in 30-year fixed rate securities
that offered higher coupons and call protection based on the collateral attributes. We balanced
this with approximately $261.8 million in 15-year fixed rate securities, approximately $123.5
million in hybrid adjustable-rate mortgages, or ARMs, and approximately $10.0 million in ARMs we
believe to have similar durations based on prepayment speeds. As of December 31, 2009, we had
purchased approximately $115.3 million non-Agency RMBS.
Our investments in CMBS were previously limited to securities for which we were able to obtain
financing under the TALF. Our primary focus is on investing in AAA-rated securities issued prior to
2008. As of December 31, 2009, we had purchased approximately $101.1 million in CMBS and financed
such purchases with $80.4 million in TALF loans. We have also financed, and may do so again in the
future, our investments in CMBS with private financing sources. In addition, as of December 31,
2009, we had purchased approximately $29.7 million in CMOs.
4
Our Investment Portfolio
The following table summarizes certain characteristics of our investment portfolio as of
December 31, 2009:
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Net |
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Unamortized |
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Unrealized |
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Weighted |
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Principal |
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Premium |
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Amortized |
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Gain/ |
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Fair |
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Average |
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Average |
$ in thousands |
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Balance |
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(Discount) |
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Cost |
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(Loss) |
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Value |
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Coupon(1) |
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Yield(2) |
Agency RMBS: |
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15 year fixed-rate |
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251,752 |
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9,041 |
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260,793 |
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1,023 |
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261,816 |
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4.82 |
% |
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3.80 |
% |
30 year fixed-rate |
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149,911 |
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10,164 |
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160,075 |
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990 |
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161,065 |
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6.45 |
% |
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5.02 |
% |
ARM |
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10,034 |
|
|
|
223 |
|
|
|
10,257 |
|
|
|
(281 |
) |
|
|
9,976 |
|
|
|
2.52 |
% |
|
|
1.99 |
% |
Hybrid ARM |
|
|
117,163 |
|
|
|
5,767 |
|
|
|
122,930 |
|
|
|
597 |
|
|
|
123,527 |
|
|
|
5.14 |
% |
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Agency RMBS |
|
|
528,860 |
|
|
|
25,195 |
|
|
|
554,055 |
|
|
|
2,329 |
|
|
|
556,384 |
|
|
|
5.31 |
% |
|
|
4.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS-CMO |
|
|
27,819 |
|
|
|
978 |
|
|
|
28,797 |
|
|
|
936 |
|
|
|
29,733 |
|
|
|
6.34 |
% |
|
|
4.83 |
% |
Non-Agency RMBS |
|
|
186,682 |
|
|
|
(79,341 |
) |
|
|
107,341 |
|
|
|
7,992 |
|
|
|
115,333 |
|
|
|
4.11 |
% |
|
|
17.10 |
% |
CMBS |
|
|
104,512 |
|
|
|
(4,854 |
) |
|
|
99,658 |
|
|
|
1,484 |
|
|
|
101,142 |
|
|
|
4.93 |
% |
|
|
5.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
847,873 |
|
|
|
(58,022 |
) |
|
|
789,851 |
|
|
|
12,741 |
|
|
|
802,592 |
|
|
|
5.03 |
% |
|
|
6.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average coupon is presented net of servicing and other fees. |
|
(2) |
|
Average yield incorporates future prepayment assumptions. |
The following table summarizes certain characteristics of our investment portfolio, at fair
value, according to their estimated weighted average life classifications as of December 31, 2009:
|
|
|
|
|
$ in thousands |
|
|
|
|
Less than one year |
|
|
|
|
Greater than one year and less than five years |
|
|
483,540 |
|
Greater than or equal to five years |
|
|
319,052 |
|
|
|
|
|
|
Total |
|
|
802,592 |
|
|
|
|
|
|
The following table presents certain information about the carrying value of our available for
sale MBS as of December 31, 2009:
|
|
|
|
|
$ in thousands |
|
|
|
|
Principal balance |
|
|
847,873 |
|
Unamortized premium |
|
|
26,174 |
|
Unamortized discount |
|
|
(84,196 |
) |
Gross unrealized gains |
|
|
14,595 |
|
Gross unrealized losses |
|
|
(1,854 |
) |
|
|
|
|
|
Carrying value/estimated fair value |
|
|
802,592 |
|
|
|
|
|
|
Financing and Other Liabilities. Following the closing of our IPO, we entered into repurchase
agreements to finance the majority of our Agency RMBS. These agreements are secured by our Agency
RMBS and bear interest at rates that have historically moved in close relationship to the London
Interbank Offer Rate, or LIBOR. As of December 31, 2009, we had entered into repurchase agreements
totaling $546.0 million. In addition, we funded our CMBS portfolio with borrowings of $80.4 million
under the TALF. The TALF loans are non-recourse and mature in July, August and December, 2014. As
of December 31, 2009, we had a commitment to invest up to $25.0 million in the Invesco PPIP Fund,
of which $4.1 million has been called. The commitment to the Invesco PPIP Fund was increased to
$100.0 million in March 2010.
Hedging Instruments. We generally hedge as much of our interest rate risk as we deem prudent
in light of market conditions. No assurance can be given that our hedging activities will have the
desired beneficial impact on our results of operations or financial condition. Our investment
policies do not contain specific requirements as to the percentages or amount of interest rate risk
that we are required to hedge.
As of December 31, 2009, we had entered into three interest rate swap agreements designed to
mitigate the effects of increases in interest rates under a portion of our repurchase agreements.
These swap agreements provide for fixed interest rates indexed off of one-
5
month LIBOR and effectively fix the floating interest rates on $375.0 million of borrowings
under our repurchase agreements. We intend to continue to add interest rate hedge positions
according to our hedging strategy.
Investment Guidelines
Our board of directors has adopted the following investment guidelines:
|
|
|
no investment shall be made that would cause us to fail to qualify as a REIT for federal
income tax purposes; |
|
|
|
|
no investment shall be made that would cause us to be regulated as an investment company
under the 1940 Act; |
|
|
|
|
our investments will be in our target assets; and |
|
|
|
|
until appropriate investments can be identified, our Manager may pay off short-term debt
or invest the proceeds of this and any future offerings in interest-bearing, short-term
investments, including funds that are consistent with our intention to qualify as a REIT. |
These investment guidelines may be changed from time to time by our board of directors without
the approval of our shareholders.
Dividend Policy
We intend to continue to make regular quarterly distributions to holders of our common stock
in an amount equal to at least 90% of our taxable income. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, determined
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
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 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.
On October 13, 2009, we declared a dividend of $0.61 per share of common stock and paid the
dividend on November 12, 2009. On December 17, 2009, we declared a dividend of $1.05 per share of
common stock and paid the dividend on January 27, 2010. On March 18, 2010, we declared a dividend
of $0.78 per share of common stock to shareholders of record as of March 31, 2010 and will pay such
dividend on April 22, 2010. Investors in this offering will not be entitled to receive this
dividend.
Our Competitive Advantages
We believe that our competitive advantages include the following:
Significant Experience of Our Manager
Our Managers senior management team 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. In addition, our Manager benefits from the insight and
capabilities of Invescos distressed investment subsidiary, WL Ross & Co. LLC, or WL Ross, and
Invescos real estate team. Through Invescos WL Ross subsidiary and real estate team, we have
access to broad and deep teams of experienced investment professionals in real estate and
distressed investing. Through these teams, we have real time access to research and data on the
mortgage and real estate industries. Access to these in- house resources and expertise provides us
with a competitive advantage over other companies investing in our target assets who have less
internal resources and expertise.
Extensive Strategic Relationships and Experience of our Manager
Our Manager maintains 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 enhance our ability to source, finance and
hedge investment opportunities and, thus, will enable us to grow in various credit and interest
rate environments.
6
Disciplined Investment Approach
We seek to maximize our risk-adjusted returns through our Managers disciplined investment
approach, which relies on rigorous quantitative and qualitative analysis. Our Manager monitors our
overall portfolio risk and evaluates the characteristics of our investments in our target assets
including, but not limited to, loan balance distribution, geographic concentration, property type,
occupancy, and periodic interest rate caps (which limit the amount an interest rate can increase
during any given period), 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. We believe this strategy and our commitment to capital
preservation 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 utilize our Managers proprietary and third-party mortgage-related security and portfolio
management tools to generate an attractive net interest margin from our portfolio. We focus on in
an in-depth analysis of the numerous factors that influence our target assets, including:
|
|
|
fundamental market and sector review; |
|
|
|
|
rigorous cash flow analysis; |
|
|
|
|
disciplined security selection; |
|
|
|
|
controlled risk exposure; and |
|
|
|
|
prudent balance sheet management. |
We 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. We use our Managers
proprietary technology management platform called QTech(SM) to monitor investment risk.
QTech(SM) collects and stores real-time market data and integrates market performance with
portfolio holdings and proprietary risk models to measure portfolio risk positions. This
measurement system portrays overall portfolio risk and its sources. Through the use of these tools,
we 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 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 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 also benefit from our Managers comprehensive financial 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
Invesco,
through our Manager, beneficially owns 0.44% of the outstanding shares of our common stock and, through
Invesco Investments (Bermuda) Ltd., beneficially owns 1,425,000 units of partnership interests in
our operating partnership, which are redeemable for cash or, at our election, shares of our common
stock on a one-for-one basis. 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 Invesco Investments (Bermuda) Ltd. and our Manager) approximately
% of our common stock after giving effect to the sale of shares in this offering.
We believe that Invescos ownership of our common stock and partnership interests in our operating
partnership aligns 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
7
corporate income tax on our taxable income that is distributed currently to our shareholders.
This treatment substantially eliminates the double taxation at the corporate and shareholder
levels that generally results 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 16 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.
|
|
|
We are dependent on our Manager and its key personnel for our success. In addition, we
rely on our financing opportunities relating to our repurchase agreement financings that
have been and will be facilitated and/or provided by our Manager. |
|
|
|
|
Invesco and our Manager have limited 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. |
|
|
|
|
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 shareholders. |
|
|
|
|
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 board of directors approved very broad investment guidelines for our Manager and does
not approve each investment and financing decision made by our Manager. |
|
|
|
|
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 U.S. governments
Public-Private Investment Program, or PPIP, or market responses to those actions, will
achieve the intended effect, and our business may not benefit from these actions and further
government actions, or the cessation or curtailment of current U.S. government programs
and/or participation in the mortgage and securities markets, or market developments could
adversely impact us. |
|
|
|
|
We may change any of our strategies, policies or procedures without shareholder consent. |
|
|
|
|
We have a limited operating history and may not be able to successfully operate our
business or generate sufficient revenue or sustain distributions to our shareholders. |
|
|
|
|
Maintenance of our 1940 Act exclusion from the definition of investment company imposes
limits on our operations. |
|
|
|
|
We 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 shareholders, as well as
increase losses when economic or financial conditions are unfavorable. |
|
|
|
|
Our inability to access repurchase agreement or other sources of non-governmental sources
of financing would have a material adverse affect on our business. |
|
|
|
|
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. |
|
|
|
|
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 shareholders. |
|
|
|
|
Hedging against interest rate exposure may adversely affect our earnings, which could
reduce our cash available for distribution to our shareholders. |
|
|
|
|
We may allocate the net proceeds from this offering to investments with which you may not
agree. |
8
|
|
|
Our investments may be concentrated and will be subject to risk of default. |
|
|
|
|
Continued adverse developments in the residential and commercial mortgage markets,
including 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. |
|
|
|
|
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 target assets. |
|
|
|
|
We acquire non-Agency RMBS collateralized by Alt-A and subprime mortgage loans, which
are subject to increased risks. |
|
|
|
|
The mortgage loans that we acquire, and the mortgage and other loans underlying the
non-Agency RMBS that we acquire, are subject to defaults, foreclosure timeline extension,
fraud and residential and commercial price depreciation, and unfavorable modification of
loan principal amount, interest rate and amortization of principal, which could result in
losses to us. |
|
|
|
|
If our Manager underestimates collateral loss on our CMBS investments, we may experience
losses. |
|
|
|
|
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. |
|
|
|
|
Prepayment rates may adversely affect the value of our investment portfolio. |
|
|
|
|
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 shareholders. |
|
|
|
|
Complying with REIT requirements may cause us to forego otherwise attractive investment
opportunities or financing or hedging strategies. |
Our Structure
We were organized as a Maryland corporation on June 5, 2008 and commenced operations in July
2009. On July 1, 2009, we successfully completed our IPO, generating net proceeds of $164.8
million. Concurrent with our IPO, we completed a private placement in which we sold 75,000 shares
of our common stock to our Manager and our Operating Partnership sold 1,425,000 OP Units to Invesco
Investments (Bermuda) Ltd., a wholly-owned subsidiary of Invesco, generating net proceeds of $30.0
million. On July 27, 2009, the underwriters of our IPO exercised their over-allotment option for
net proceeds of $6.1 million. Collectively, we received net proceeds from our IPO and the related
private placement of approximately $200.9 million. On January 15, 2010, we completed a follow-on
public offering of 7,000,000 shares of common stock, and an issuance of an additional 1,050,000
shares of common stock pursuant to the underwriters full exercise of their over-allotment option,
generating net proceeds of $162.7 million.
We conduct 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, 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.
We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes
commencing with our taxable year ended December 31, 2009. Accordingly, 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 our shareholders and maintain our qualification as a
REIT. We operate our business in a manner that permits us to maintain our exclusion from the
definition of investment company under the 1940 Act.
9
The following chart shows our structure after giving effect to the sale of shares
in this offering:
|
|
|
(1) |
|
Assuming redemption of all OP units owned by Invesco Investments
(Bermuda) Ltd. for the equivalent number of shares of our common
stock, Invesco would beneficially own (through the holdings of Invesco
Investments (Bermuda) Ltd. and our Manager) approximately % of
our common stock after giving effect to the sale of shares
in this offering and public shareholders would own the remaining
approximately %. |
|
(2) |
|
We, through IAS Asset I LLC, have a commitment to invest up to $100.0
million in the Invesco PPIP Fund, of which $4.1 million has been
called as of December 31, 2009. IAS Asset I LLC relies on the
exclusion from the definition of investment company under the 1940
Act provided by Section 3(c)(5)(C) of the 1940 Act. |
|
(3) |
|
IMC Investments I LLC was organized as a special purpose subsidiary of
IAS Operating Partnership LP that borrowed under the TALF and relies
on Section 3(c)(7) for its 1940 Act exclusion. |
Management Agreement
On July 1, 2009, we entered into a management agreement with Invesco Advisers, Inc. (formerly
Invesco Institutional (N.A.), Inc.) pursuant to which we are externally managed and advised by our
Manager. The management agreement provides that our Manager must implement our business strategy
and perform certain services for us, subject to oversight by our board of directors. Our Manager
10
is responsible for, among other duties, performing all of our day-to-day functions,
determining investment criteria in conjunction with our board of directors, sourcing, analyzing and
executing investments, selling and financing assets and performing asset management duties.
The initial term of the management agreement expires on July 1, 2011 and will be automatically
renewed for a one-year term on such date and on each anniversary date thereafter unless terminated
under certain circumstances. See Our Manager and the Management Agreement Management
Agreement.
The following summarizes the fees and expense reimbursements that we pay to our Manager:
|
|
|
Management fee. 1.50% of our shareholders equity per annum, calculated and payable
quarterly in arrears. For purposes of calculating the management fee, our shareholders
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 US GAAP, and certain non-cash items after discussions between our Manager
and our independent directors and approval by a majority of our independent directors. We
treat outstanding limited partner interests (not held by us) as outstanding shares of
capital stock for purposes of calculating the management fee. Pursuant to the terms of the
management agreement, we pay our Manager a management fee. As a result, we do not pay any
management or investment fees with respect to our investment in the Invesco PPIP Fund
managed by our Manager. Our Manager waives all such fees. |
|
|
|
|
Expense reimbursement. Reimbursement of operating expenses incurred by our Manager,
including certain salary expenses and other expenses relating to legal, accounting, due
diligence and other services, to be paid monthly in cash. Our reimbursement obligation is
not subject to any dollar limitation. |
|
|
|
|
Termination fee. 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. |
|
|
|
|
Incentive plan. Our equity incentive plan includes provisions for grants of restricted
common stock and other equity based awards to our directors, officers and employees of our
Manager. We make grants to our non-executive directors as
compensation. We also have granted, and may in the future grant,
awards under our equity incentive plan to our Managers officers and employees as
compensation and for which our Manager reimburses us. See Management Director
Compensation. |
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 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, other than our Chief
Financial Officer, who is obligated to dedicate himself exclusively to us, our Manager and its
officers and personnel are permitted to engage in other business activities, including activities
for Invesco, which may reduce the time our Manager and its officers and personnel spend managing
us.
We compete for investment opportunities directly with other clients of our Manager or Invesco
and its subsidiaries. In addition, 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 remain 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 has 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
invest in securities in our target asset classes for which our Manager is responsible for 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
11
our Managers other accounts from receiving favorable treatment in accessing investment
opportunities. The investment allocation policy may be amended by our Manager at any time without
our consent. To the extent that a conflict arises with respect to the business of our Manager or us
in such a way as to give rise to conflicts not currently addressed by the investment allocation
policy, our Manager may need to refine its policy to address such situation. Our independent
directors periodically review our Managers compliance with the investment allocation policy. In
addition, to avoid any actual or perceived conflicts of interest with our Manager, a majority of
our independent directors are required to approve an investment in any security structured or
issued by an entity managed by our Manager, or any of its affiliates, or any purchase or sale of
our assets by or to our Manager, or its affiliates or an entity managed by our Manager or its
affiliates.
We have financed investments in certain non-Agency RMBS, CMBS and residential and commercial
mortgage loans by contributing equity capital to the Invesco PPIP Fund. Our investment is on terms
that are no less favorable to us than those made available to other third party institutional
investors in the Invesco PPIP Fund. Pursuant to the terms of the management agreement, we pay our
Manager a management fee. As a result, we do not pay any management or investment fees with respect
to our investment in the Invesco PPIP Fund managed by our Manager. Our Manager waives all such
fees. Our Manager has a conflict of interest in recommending our participation in any PPIF it
manages because the fees payable to it by the 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 PPIF be approved by our audit committee.
We do not have a policy that expressly prohibits our directors, officers, shareholders 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 and qualify to be taxed as a REIT under Sections 856 through 859 of the
Internal Revenue Code, commencing with our taxable year ended 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 that we distribute currently to our shareholders. 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.
Exclusion from the 1940 Act
We conduct our operations so as not to become regulated as an investment company under the
1940 Act. Because we are a holding company that conducts our business through the operating
partnership and the wholly-owned or majority owned subsidiaries of the operating partnership, 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 (exclusive of U.S. government
securities and cash) on an unconsolidated basis, which we refer to as the 40% test. This
requirement limits the types of businesses in which we may engage through our subsidiaries. In
addition, we believe neither the company nor the operating partnership are considered an investment
company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold
themselves 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 are primarily engaged in the non-investment
company businesses of these subsidiaries. IAS Asset I LLC and certain of the operating
partnerships other subsidiaries that we may form in the future intend to rely upon the exclusion
from the definition of investment company under the 1940 Act provided by Section 3(c)(5)(C) of
the 1940 Act, which is available for entities primarily engaged in the business of
12
purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
This exclusion generally requires that at least 55% of each of our subsidiaries portfolios be
comprised of qualifying assets and at least 80% of each of their portfolios be comprised of
qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous
assets). Qualifying assets for this purpose include mortgage loans fully secured by real estate and
other assets, such as whole pool Agency and non-Agency RMBS, that the Securities and Exchange
Commission, or SEC, or its staff in various no-action letters has determined are the functional
equivalent of mortgage loans fully secured by real estate. We treat as real estate-related assets
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. IAS Asset I LLC
invests in the Invesco PPIP Fund. We treat IAS Asset I LLCs investment in the Invesco PPIP Fund as
a real estate-related asset for purposes of the Section 3(c)(5)(C) analysis. As a result, IAS
Asset I LLC can invest no more than 45% of its assets in the Invesco PPIP and other real
estate-related assets. We note that the SEC has not provided any guidance on the treatment of
interests in PPIFs as real estate-related assets and any such guidance may require us to change our
strategy. We may need to adjust IAS Asset I LLCs assets and strategy in order for it to continue
to rely on Section 3(c)(5)(C) for its 1940 Act exclusion. Any such adjustment in IAS Asset I LLCs
assets or strategy is not expected to have a material adverse effect on our business or strategy.
Although we monitor our portfolio periodically and prior to each investment acquisition, there can
be no assurance that we will be able to maintain this exclusion from the definition of investment
company under the 1940 Act for each of these subsidiaries. The legacy securities PPIF formed and
managed by our Manager or one of its affiliates relies on Section 3(c)(7) for its 1940 Act
exclusion.
IMC Investments I LLC was organized as a special purpose subsidiary of the operating
partnership that borrowed under the TALF. This subsidiary relies on Section 3(c)(7) for its 1940
Act exclusion and, therefore, the operating partnerships interest in this TALF subsidiary would
constitute an investment security for purposes of determining whether the operating partnership
passes the 40% test.
Qualification for exclusion from the definition of investment company 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 Asset Based Securities 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 REIT limitations on the concentration of ownership imposed
by the Internal Revenue Code, among other purposes, our charter prohibits, with certain exceptions,
any shareholder 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 shareholder if it is
presented with certain representations and undertakings required by our charter and other 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% of our outstanding common stock or up to 25% of our outstanding capital
stock. Our charter also prohibits any person from, among other things: (1) 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 (2) transferring shares of our capital stock if such transfer would result in our capital
stock being beneficially owned by fewer than 100 persons.
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 www.invescomortgagecapital.com. 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.
13
SUMMARY SELECTED FINANCIAL DATA
The selected historical financial information as of December 31, 2009 and December 31, 2008,
for the year ended December 31, 2009 and for the period from June 5, 2008 (date of inception) to
December 31, 2008 presented in the tables below have 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
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
$ in thousands |
|
2009 |
|
2008 |
Mortgage-backed securities, at fair value |
|
$ |
802,592 |
|
|
$ |
|
|
Total assets |
|
|
853,400 |
|
|
|
979 |
|
Repurchase agreements |
|
|
545,975 |
|
|
|
|
|
TALF financing |
|
|
80,377 |
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
180,515 |
|
|
|
(21 |
) |
Non-controlling interest |
|
|
29,795 |
|
|
|
|
|
Total equity (deficit) |
|
$ |
210,310 |
|
|
$ |
(21 |
) |
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from June 5, |
|
|
|
|
|
|
|
2008 (Date of |
|
|
|
For the Year Ended |
|
|
Inception) to |
|
$ in thousands, except per share data |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Interest income |
|
$ |
23,529 |
|
|
$ |
|
|
Interest expense |
|
|
4,627 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,902 |
|
|
|
|
|
Other income |
|
|
2,073 |
|
|
|
|
|
Operating expenses |
|
|
3,464 |
|
|
|
22 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
17,511 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Net income attributable to non-controlling interest |
|
|
2,417 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
$ |
15,094 |
|
|
$ |
(22 |
) |
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders (basic/diluted) |
|
|
3.37 |
|
|
|
|
|
Dividends declared per common share |
|
|
1.66 |
|
|
|
|
|
Weighted average number of shares of common stock: |
|
|
|
|
|
|
|
|
Basic |
|
|
4,480 |
|
|
|
NM |
|
Diluted |
|
|
5,198 |
|
|
|
NM |
|
14
THE OFFERING
|
|
|
Common stock offered by us
|
|
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). |
|
|
|
Common stock to be outstanding
after this offering
|
|
shares.(1) |
|
|
|
Use of proceeds
|
|
We plan to use all of the net proceeds
from this offering as described above
to acquire our target assets in
accordance with our objectives and
strategies described in this
prospectus. See Business Our
Investment Strategy. Our focus will
be on purchasing Agency RMBS,
non-Agency RMBS, CMBS and certain
residential and commercial mortgage
loans and investing in the Invesco
PPIP Fund, in each case 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 equity that will be
invested in each of our target assets.
Its determinations 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
decide to use the net proceeds to pay
off our short-term debt or invest the
net proceeds in interest-bearing
short-term investments, including
funds which are consistent with our
intention to qualify as a REIT. These
investments are expected to provide a
lower net return than we seek to
achieve from our target assets. Prior
to the time we have fully used the net
proceeds of this offering to acquire
our target assets, we may fund our
quarterly distributions out of such
net proceeds. |
|
|
|
Distribution policy
|
|
We intend to continue to make regular
quarterly distributions to holders of
our common stock in an amount equal to
at least 90% of our taxable income.
U.S. federal income tax law generally
requires that a REIT distribute
annually at least 90% of its REIT
taxable income, determined without
regard to the deduction for dividends
paid and excluding net capital gains,
and that it pay tax at regular
corporate rates on its undistributed
taxable income. On October 13, 2009,
we declared a dividend of $0.61 per
share of common stock and paid the
dividend on November 12, 2009. On
December 17, 2009, we declared a
dividend of $1.05 per share of common
stock and paid the dividend on January
27, 2010. On March 18, 2010, we
declared a dividend of $0.78 per share
of common stock to shareholders of
record as of March 31, 2010 and will
pay such dividend on April 22, 2010.
Investors in this offering will not be
entitled to receive this dividend. |
|
|
|
|
|
Any distributions we make are at the
discretion of our board of directors
and depend upon, among other things,
our actual results of operations.
These results and our ability to
continue 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. |
|
|
|
NYSE symbol
|
|
IVR. |
|
|
|
Risk factors
|
|
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 16 of this prospectus and all
other information in this prospectus
before investing in our common stock. |
|
|
|
(1) |
|
Includes, in addition to the shares offered by us in this
offering: (a) 100 shares issued in connection with our
incorporation and capitalization; (b) 8,886,200 shares issued in
our IPO and concurrent private placement; (c) 912 shares issued
under our equity incentive plan in December 2009 for quarterly
director compensation; (d) 8,050,000 shares issued in our
follow-on offering (including 1,050,000 shares issued upon
exercise of the underwriters over-allotment option); and (e) 834
shares issued under our equity incentive plan in February 2010 for
quarterly director compensation. Excludes: (a) shares
of our common stock that we may issue and sell upon the exercise
of the underwriters over-allotment option in full; and (b) 5,725
restricted shares issued under our equity incentive plan in March
2010 to certain officers of our Manager. |
15
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.
We have no separate facilities and are completely reliant on our Manager. We do not 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 depends 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 evaluate, negotiate, close and monitor our
investments; therefore, our success depends 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 our IPO, or July 1, 2011, 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, with the exception of our Chief Financial Officer, 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.
As of December 31, 2009, we had entered into master repurchase agreements with eighteen
counterparties, including with affiliates of Morgan Stanley & Co. Incorporated and Credit Suisse
Securities (USA) LLC, in order to finance our acquisitions of Agency RMBS and non-Agency RMBS. Our
Manager has obtained commitments on our behalf from a number of the counterparties. 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.
Invesco and our Manager have limited 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.
Prior to our inception, our Manager had 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,
our Manager has limited 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 shareholders.
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. We 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 have 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 remain 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 has 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 is responsible in
the selection of brokers, dealers and other trading counterparties. Therefore, although Invesco has
indicated to us that it expects that we will remain 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, we may compete with our
16
Manager for investment or financing opportunities sourced by our Manager and, as a result, we
may either not be presented with the opportunity or have to compete with our Manager 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 Management Conflicts of
Interest, will be adequate to address all of the conflicts that may arise.
We 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 shareholders and the market price of our common stock.
Concurrently with the completion of our IPO, we completed a private placement in which we sold
75,000 shares of our common stock to Invesco, through our Manager, at $20.00 per share and
1,425,000 OP units to Invesco, through Invesco Investments (Bermuda) Ltd., a wholly owned
subsidiary of Invesco, at $20.00 per unit. As of April 6, 2010, Invesco, through our Manager,
beneficially owned 0.44% of our common stock. Assuming that all OP units are redeemed for an
equivalent number of shares of our common stock and after giving effect to this offering, Invesco
would beneficially own approximately % of our outstanding common stock. Each of our Manager
and Invesco Investments (Bermuda) Ltd. agreed that, for a period of one year after June 25, 2009,
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 purchased in the 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 has a conflict in recommending our participation in any legacy security or legacy loan
PPIFs it manages.
We have financed investments in non-Agency RMBS and CMBS by contributing capital to the
Invesco PPIP Fund, which qualified to obtain financing under the legacy securities program under
the PPIP. We committed to invest up to $100.0 million in the Invesco PPIP Fund, which, in turn,
invests in our target assets. Our Managers investment committee makes investment decisions for the
Invesco PPIP Fund. As of December 31, 2009, $4.1 million of the commitment has been called.
Pursuant to the terms of the management agreement, we pay our Manager a management fee. As a
result, we do not pay any management or investment fees with respect to our investment in the
Invesco PPIP Fund managed by our Manager. Our Manager waives all such fees. Our Manager has a
conflict of interest in recommending our participation in any PPIF it manages because the fees
payable to it by the 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 PPIF be approved by our audit committee consisting of our independent directors;
however, there can be no assurance that our audit committees approval of investments in any such
PPIF will eliminate the conflict of interest.
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 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
17
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 our IPO, or July 1, 2011. 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 does not assume any responsibility other
than to render the services called for thereunder and is not 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, shareholders, members, managers, partners,
directors and 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 shareholders or any subsidiarys shareholders 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, shareholders,
members, managers, directors and 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. See Our Manager and the
Management Agreement Management Agreement.
Our board of directors approved very broad investment guidelines for our Manager and does not
approve each investment and financing decision made by our Manager.
Our Manager is authorized to follow very broad investment guidelines. Our board of directors
will periodically review our investment guidelines and our investment portfolio but does not, and
is not 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 has 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 shareholders.
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; further
government actions or the cessation or curtailment of current U.S. government programs and/or
participation in the mortgage and securities markets 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 the Troubled
Asset Relief Program, or 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
18
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 continue to be eligible to participate in programs established by the U.S. government or,
if we remain 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. However, there can be no assurance that the U.S. government, the Federal
Reserve, the U.S. Treasury and other governmental and regulatory bodies will not eliminate or
curtail current U.S. government programs and/or participation in the mortgage and securities
markets. In March 2010, the Federal Reserve completed its agency securities purchase programs. As
a result of the Federal Reserves completion of its agency securities purchase program, spreads for
mortgage backed securities may widen, negatively impacting the carrying values of our investment
portfolio. 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.
We may change any of our strategies, policies or procedures without shareholder 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 shareholders, 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
shareholders.
We have a limited operating history and may not be able to successfully operate our business or
generate sufficient revenue to make or sustain distributions to our shareholders.
We were organized in June 2008 and commenced operations upon completion of our IPO on July 1,
2009. We cannot assure you that we will be able to operate our business successfully or execute 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
shareholders.
Maintenance of exclusion from the definition of investment company under the 1940 Act imposes
limits on our operations.
The company conducts its operations so as not to become regulated as an investment company
under the 1940 Act. Because the company is a holding company that conducts its businesses through
the operating partnership and its wholly owned or majority-owned subsidiaries, the securities
issued by those 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 (exclusive of U.S. government securities and cash) on an
unconsolidated basis which we refer to as the 40% test. This requirement limits the types of
businesses in which we may engage through our subsidiaries. IAS Asset I LLC and certain of the
operating partnerships other subsidiaries that we may form in the future intend to rely upon the
exclusion from the definition of investment company under the 1940 Act provided by 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
exclusion generally requires that at least 55% of each of our subsidiaries portfolios be comprised
of qualifying assets and at least 80% of each of their portfolios be comprised of qualifying real
estate-related assets (and no more than 20% comprised of miscellaneous assets). Qualifying assets
for this purpose include mortgage loans fully secured by real estate and other assets, such as
whole pool Agency and non-Agency RMBS, that the SEC staff in various no-action letters has
determined are the functional equivalent of mortgage loans fully secured by real estate. We treat
as real estate-related assets 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
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estate-related assets. IAS Asset I LLC invests in the Invesco PPIP Fund. We treat IAS Asset I
LLCs investment in the Invesco PPIP Fund as a real estate-related asset for purposes of the
Section 3(c)(5)(C) analysis. As a result, IAS Asset I LLC can invest no more than 45% of its assets
in the Invesco PPIP and other real estate-related assets. We note that the SEC has not provided any
guidance on the treatment of interests in PPIFs as real estate-related assets and any such guidance
may require us to change our strategy. We may need to adjust IAS Asset I LLCs assets and strategy
in order for it to continue to rely on Section 3(c)(5)(C) for its 1940 Act exclusion. Any such
adjustment in IAS Asset I LLCs assets or strategy is not expected to have a material adverse
effect on our business or strategy. Although we monitor our portfolio periodically and prior to
each investment acquisition, there can be no assurance that we will be able to maintain this
exclusion from the definition of investment company under the 1940 Act for each of these
subsidiaries. The legacy securities PPIF formed and managed by our Manager or one of its affiliates
relies on Section 3(c)(7) for its 1940 Act exclusion.
IMC Investments I LLC was organized as a special purpose subsidiary of the operating
partnership that borrowed under the TALF. This subsidiary relies on Section 3(c)(7) for its 1940
Act exemption and, therefore, the operating partnerships interest in this TALF subsidiary would
constitute an investment security for purposes of determining whether the operating partnership
passes the 40% test.
In addition, in certain circumstances, compliance with Rule 3a-7 may also require, among other
things 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.
The determination of whether an entity is a majority-owned subsidiary of our company is made
by us. The 1940 Act defines a majority-owned subsidiary of a person as a company 50% or more of the
outstanding voting securities of which are owned by such person, or by another company which is a
majority-owned subsidiary of such person. The 1940 Act further defines voting securities as any
security presently entitling the owner or holder thereof to vote for the election of directors of a
company. We treat companies in which we own at least a majority of the outstanding voting
securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the
SEC to approve our treatment of any company as a majority-owned subsidiary and the SEC has not done
so. If the SEC were to disagree with our treatment of one or more companies as majority-owned
subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the
40% test. Any such adjustment in our strategy could have a material adverse effect on us.
Qualification for exclusion from the definition of investment company 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 asset-backed securities and real estate companies or in assets not related to real
estate.
There can be no assurance that the laws and regulations affecting the 1940 Act status of
REITs, including the SEC or its staff providing more specific or different guidance regarding these
exclusions, will not change in a manner that adversely affects our operations. To the extent that
the SEC staff provides more specific guidance regarding any of the matters bearing upon such
exclusions, we may be required to adjust our strategy accordingly. Any additional guidance from the
SEC staff could provide additional flexibility to us, or it could further inhibit our ability to
pursue the strategies we have chosen. 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 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 shareholders, as well as increase
losses when economic conditions are unfavorable.
We use leverage to finance our assets through borrowings from repurchase agreements and other
secured and unsecured forms of borrowing. In addition, we have used borrowings under programs
established by the U.S. government such as the TALF, and we have
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contributed capital to funds that
receive financing under the PPIP. Although we are not required to maintain any particular debt-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. As of December 31,
2009, our total leverage, on a debt-to-equity basis, was 3.0 times, which consisted of 13.6 times
on our Agency RMBS assets and 3.9 times on our CMBS. As of December 31, 2009, our non-Agency RMBS
had no leverage. We consider these 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 the last year, 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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general market conditions; |
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the markets view of the quality of our assets; |
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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
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our current and potential future earnings and cash distributions; and |
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the market price of the shares of our capital stock. |
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 shareholders 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 shareholders. 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 leverage our
Agency RMBS, and may leverage our non-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
shareholders. Any reduction in distributions to our shareholders may cause the value of our common
stock to decline.
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, and in some cases CMBS, on a leveraged
basis. Although we use U.S. government financing to acquire certain target assets, we also seek
private funding sources to acquire these assets as well.
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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. Some of our repurchase agreements 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 shareholders.
Our use or future use of repurchase agreements to finance our Agency RMBS and non-Agency RMBS may
give our lenders greater rights in the event that either we or a lender files for bankruptcy.
Our borrowings or future borrowings under repurchase agreements for our Agency RMBS and
non-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.
We depend, and may in the future depend, on repurchase agreement financing to acquire Agency RMBS
and non-Agency RMBS and our inability to access this funding for our Agency RMBS and non-Agency
RMBS could have a material adverse effect on our results of operations, financial condition and
business.
We 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
rates; |
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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
we may be unable to do; or |
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we determine that the leverage would expose us to excessive risk. |
Our ability to fund our Agency RMBS and non-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 and non-Agency
RMBS could be negatively impacted, thus reducing net shareholder equity, or book value.
Furthermore, if
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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, non-Agency RMBS and 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 receive, or may in the future receive, under our repurchase agreements is
directly related to the lenders valuation of the Agency RMBS and non-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 shareholders, 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.
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, 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.
The repurchase agreements that we 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 use repurchase agreements to finance our acquisition of Agency RMBS and non-Agency RMBS. If
the market value of the Agency RMBS or non-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.
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 shareholders.
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 shareholders.
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We 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 involves
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 shareholders.
Subject to maintaining our qualification as a REIT, we pursue various hedging strategies to
seek to reduce our exposure to adverse changes in interest rates. Our hedging activity varies in
scope based on the level 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
volatile interest rates; |
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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 related
liability; |
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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 taxable REIT subsidiary, or TRS) to offset interest rate losses is limited by U.S.
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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. |
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 shareholders.
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 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.
Risks Relating to the PPIP and TALF
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. 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.
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There is no assurance that we will be able to invest additional funds in the PPIF or, if we are
able to participate, that funding will be available.
Investors in the legacy loan PPIP must be pre-qualified by the FDIC. The FDIC has complete
discretion regarding the qualification of investors in the legacy loan PPIP 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 PPIP, 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 PPIP 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 have sufficient capital to fund our commitment in the PPIF.
We committed to invest up to $100.0 million in the Invesco PPIP Fund, which, in turn, invests
in our target assets. As of December 31, 2009, $4.1 million of the commitment has been called. A
call on our commitment would require us to pay up to the remaining amount of our $100.0 million
commitment in the Invesco Mortgage Recovery Feeder Fund, L.P. If we do not have sufficient capital
to meet such a call, we may be forced to sell assets at significantly depressed prices to meet the
call and to maintain adequate liquidity, which could have a material adverse effect on our results
of operations, financial condition, business, liquidity and ability to make distributions to our
shareholders, and could cause the value of our common stock to decline. 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.
We are no longer able to obtain additional TALF loans.
The TALF facility ceased making loans collateralized by newly issued and legacy asset-backed
securities on March 31, 2010. As a result, we are no longer able to obtain additional TALF loans
as a source of financing investments in our target assets.
It may be difficult to acquire sufficient amounts of eligible assets to qualify to participate in
the PPIP consistent with our investment strategy.
Assets to be used as collateral for PPIP 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 consistent with our investment strategy. In the legacy loan PPIP,
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 PPIP.
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 PPIP consistent with
our investment strategy.
It may be difficult to transfer any assets purchased using PPIP and TALF funding.
Any assets purchased using TALF funding were pledged to the FRBNY as collateral for the TALF
loans. Transfer or sale of any of these assets requires repayment of the related TALF loans. In
addition, the FRBNY will not consent to any assignments after the termination date for making new
loans, which was March 31, 2010 for TALF loans against newly issued asset-backed securities
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backed by consumer and business loans and legacy CMBS, and is June 30, 2010 for TALF loans
against newly issued CMBS, 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 shareholders.
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 invested in CMBS that do not
mature within the terms of the TALF loans. If we do not have sufficient funds to repay interest and
principal on the related TALF loans 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 TALF loans, we may not be able to
obtain a favorable price, which could result in losses. If we default on our obligation to pay TALF
loans and the FRBNY elects to liquidate the assets used as collateral to secure such TALF loans,
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.
Our ability to receive the interest earnings may be limited.
We make interest payments on TALF loans from the interest paid to us on the assets used as
collateral for the TALF loans. To the extent that we receive distributions from pledged assets in
excess of our required interest payments on TALF loans 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 executed customer agreements with primary dealers authorizing
them, 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 the agreements, we are 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 has full recourse to us for repayment of the loan for
any breach of these representations. Further, the FRBNY has full recourse to us for repayment of
TALF loans 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 are
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 shareholders, including any proceeds of our IPO, follow-on
offering or this offering that we have not yet invested in CMBS or distributed to our shareholders.
Risks Related to Accounting
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
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financing of these securities through repurchase agreements with the same counterparty. If we
fail to meet the criteria under 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 exclusion from the definition of
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 fail to qualify for hedge accounting treatment.
We enter into derivative transactions to reduce the impact changes in interest rates will have
on our net interest margin. According to our accounting policy, we record these derivatives, known
as cash flow hedges, on the balance sheet at fair market value with the changes in value recorded
in equity as other comprehensive income. This hedge accounting is complex and requires
documentation and testing to ensure the hedges are effective. If we fail to qualify for hedge
accounting treatment, our operating results may suffer because losses on hedges will be recorded in
current period earnings rather than through other comprehensive income.
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 Accounting Principles Generally Accepted in
the United States of America, or US 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 determining the fair value of investment securities. These estimates, judgments and
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 Operations Critical 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.
Risks Related to Our Investments
We may allocate the net proceeds from this offering to investments with which you may not agree.
You will be unable to evaluate the manner in which the net proceeds of this offering will be
invested or the economic merit of our expected investments and, as a result, we may use the net
proceeds from this offering 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 shareholders, and could cause the value of our common
stock to decline.
Because assets we 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
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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.
The assets that comprise our investment portfolio and that we acquire are not 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 diversify and intend to continue 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 shareholders.
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. 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 shareholders.
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
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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. 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 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 subject
to the operating constraints associated with REIT tax compliance or maintenance of a 1940 Act
exclusion. 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 purchase.
We invest in non-Agency RMBS collateralized by Alt A and subprime mortgage loans, which are
subject to increased risks.
We invest in 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 acquire, and the mortgage and other loans underlying the non-Agency
RMBS that we acquire, are subject to defaults, foreclosure timeline extension, fraud and
residential and commercial 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
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disturbances, may impair borrowers abilities to repay their loans. In addition, we 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.
In the event of any default under a mortgage loan held directly by us, we 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 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 are 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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the potential for uninsured or under-insured property losses. |
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 acquire and the commercial mortgage loans underlying the CMBS we
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.
CMBS are secured by a single commercial mortgage loan or a pool of commercial mortgage loans.
Accordingly, the CMBS we invest in are 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 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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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. |
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 shareholders. 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 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 CMBS. 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.
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 is 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 predominantly focus on acquiring classes of existing series of
CMBS originally rated AAA, we may 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.
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If our Manager underestimates the collateral loss on our CMBS investments, we may experience
losses.
Our Manager values 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 may adjust the pool composition accordingly through loan removals and other
credit enhancement mechanisms or leaves loans in place and negotiates 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 underestimates 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 acquire are 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 shareholders.
Our mezzanine loan assets 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 shareholders.
Bridge loans 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.
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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 shareholders.
We invest in Agency RMBS, non-Agency RMBS, CMBS and mortgage loans. The relationship between
short-term and longer-term interest rates is often referred to as the yield curve. 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 shareholders.
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 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 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.
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 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
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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 are typically 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 are not 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 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 are 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 are required to evaluate our assets on a quarterly
basis to determine their fair value by using third party bid price indications provided by 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 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
shareholders equity would be correspondingly reduced. Reductions in shareholders 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 US 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 are recorded at fair value and, as a result, there is
uncertainty as to the value of these investments.
Some of our portfolio investments are 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 value these investments quarterly at fair value, 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.
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Prepayment rates may adversely affect the value of our investment portfolio.
Pools of residential mortgage loans underlie the RMBS that we acquire. In the case of
residential mortgage loans, there are seldom any restrictions on borrowers abilities to prepay
their loans. We 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 US 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 was prepaid at the time of the
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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 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 loans, or FRMs, and ARMs. |
On February 10, 2010, Fannie Mae and Freddie Mac announced their intention to purchase
delinquent loans from certain mortgage pools guaranteed by them. For purposes of these purchases,
delinquent loans are those that are 120 days or greater delinquent as of the measurement date.
Freddie Mac stated that it will purchase substantially all of the delinquent loans. Fannie Mae
purchased 220,000 delinquent loans in March 2010 and expects to purchase a significant portion of
their current delinquent population within a few month period, subject to market, servicer capacity
and other constraints. These purchases may increase prepayment rates on our Agency RMBS, which
could negatively impact our results of operations and financial condition.
While we 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 analyze interest rate changes and prepayment trends separately and collectively to
assess their effects on our investment portfolio. In conducting our analysis, we 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 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
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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 invest.
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile following this offering.
The market price of our common stock may be highly volatile and be subject to wide
fluctuations. In addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur. If the market price of our common stock declines
significantly, you may be unable to resell your shares at or above the public offering price. We
cannot assure you that the market price of our common stock will not fluctuate or decline
significantly in the future. Some of the factors that could negatively affect our share price or
result in fluctuations in the price or trading volume of our common stock include:
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actual or anticipated variations in our quarterly operating results or distributions; |
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changes in our earnings estimates or publication of research reports about us or the real
estate or specialty finance industry; |
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decrease in the market valuations of our target assets; |
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increased difficulty in maintaining or obtaining financing or attractive terms, or at
all; |
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increases in market interest rates that lead purchasers of our shares of common stock to
demand a higher yield; |
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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 or departures of key management personnel; |
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actions by institutional shareholders; |
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speculation in the press or investment community; and |
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general market and economic conditions. |
Common stock eligible for future sale may have adverse effects on our share price.
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, certain officers of our Manager
and Invesco Investments (Bermuda) Ltd. have agreed with the underwriters to a 90 day lock-up period
(subject to extension in certain circumstances), meaning that, until the end of the 90 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 of this offering. In addition, each of our
Manager and Invesco Investments (Bermuda) Ltd. agreed that, for a period of one year after the date
of our IPO prospectus dated June 25, 2009, 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 purchased in the private placement
completed on July 1, 2009, subject to extension in certain circumstances. Credit Suisse Securities
(USA) LLC or Morgan Stanley & Co. Incorporated 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
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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 our IPO
prospectus dated June 25, 2009 or (ii) the termination of the management agreement. Approximately
% of our shares of common stock after giving effect to the sale of shares in this offering and 1,425,000 OP units 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 shareholders
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 shareholders on a preemptive basis. Therefore, it may not be possible for existing
shareholders to participate in such future share issuances, which may dilute the existing
shareholders 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 pay quarterly distributions and make other distributions to our shareholders 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, applicable provisions of Maryland law 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 shareholders:
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the profitability of the investment of the net proceeds of our IPO and concurrent private
placement, our follow-on offering and 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
results may vary from estimates. |
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 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 shareholders, 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
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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. Under
the MGCL, 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 shareholder (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 are prohibited for five years after the most recent date on which the shareholder becomes
an interested shareholder. After the five-year prohibition, any business combination between us and
an interested shareholder 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 shareholder
with whom or with whose affiliate the business combination is to be effected or held by an
affiliate or associate of the interested shareholder. These super-majority vote requirements do not
apply if our common shareholders 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 shareholder for its shares. The provisions of the MGCL
discussed in this paragraph do not apply to
business combinations that are approved or exempted by a board of directors prior to the time that
the interested shareholder becomes an interested shareholder. 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
shareholder (except solely by virtue of a revocable proxy), entitle the shareholder 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 shareholders 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 employees 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
shareholder approval and regardless of what is provided in our charter or bylaws, to
implement certain provisions, some of 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
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 Bylaws Business Combinations and Certain
Provisions of The Maryland General Corporation Law and Our Charter and Bylaws Control 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 shareholder 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
shareholders.
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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 shareholders.
Ownership limitations may restrict change of control of business combination opportunities in
which our shareholders might receive a premium for their shares.
In order for us to qualify as a REIT for each taxable year after 2009, 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, among other purposes, 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% of our outstanding common stock or up to 25% 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 shareholders.
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 shareholders.
We intend to elect to be taxed as a REIT for U.S. federal income tax purposes commencing with
our taxable year ended 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 shareholders 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 shareholders. Furthermore, if we fail to maintain our qualification as a REIT, we no longer
would be required to distribute substantially all of our taxable income to our
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shareholders. 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, and the
amounts we distribute to our shareholders. To meet these tests, we may be required to forego
investments we might otherwise make. We may be required to make distributions to shareholders 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
qualifying 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 Considerations Asset 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 portfolio otherwise attractive investments. These actions could have the effect of
reducing our income and amounts available for distribution to our shareholders.
REIT distribution requirements could adversely affect our ability to execute our business plan and
may require us to incur debt, sell assets or take other actions to make such distributions.
To qualify as a REIT, we must distribute to our shareholders 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 a minimum amount specified under U.S. federal income tax laws. We
intend to make sufficient distributions to our shareholders to satisfy the 90% distribution
requirement and to avoid the 4% nondeductible excise tax.
Our taxable income may substantially exceed our net income as determined based on US GAAP. In
addition, differences in timing between the recognition of taxable income and the actual receipt of
cash may occur. For example, we may invest in assets, including debt instruments requiring us to
accrue original issue discount, or OID, or recognize market discount income that generates taxable
income in excess of economic income or in advance of the corresponding cash flow from the assets,
referred to as phantom income. We may also acquire distressed debt investments that are
subsequently modified by agreement with the borrower either directly or pursuant to our involvement
in programs recently announced by the federal government. If amendments to the outstanding debt are
significant modifications under applicable Treasury Regulations, the modified debt may be
considered to have been reissued to us in a debt-for-debt exchange with the borrower, with gain
recognized by us to the extent that the principal amount of the modified debt exceeds our cost of
purchasing it prior to modification. Finally, we may be required under the terms of the
indebtedness that we incur, whether to private lenders or pursuant to government programs, to use
cash received from interest payments to make principal payment on that indebtedness, with the
effect that we will recognize income but will not have a corresponding amount of cash available for
distribution to our shareholders.
As a result of the foregoing, we may generate less cash flow than taxable income in a
particular year and find it difficult or impossible to meet the REIT distribution requirements in
certain circumstances. In such circumstances, we may be required to (1) sell assets in adverse
market conditions, (2) borrow on unfavorable terms, (3) distribute amounts that would otherwise be
invested in future acquisitions, capital expenditures or repayment of debt, or (4) make a taxable
distribution of our shares of common stock as part of a distribution in which shareholders may
elect to receive shares of common stock or (subject to a limit measured as a percentage of
40
the total distribution) cash, in order to comply with the REIT distribution requirements.
Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which
could adversely affect the value of our common stock.
We may choose to pay dividends in our own stock, in which case our shareholders 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 shareholder. Under IRS Revenue Procedure 2010-12, up to 90% of any such
taxable dividend for 2010 or 2011 could be payable in our stock. Taxable shareholders 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. shareholder may be required to pay income taxes with respect to such dividends in
excess of the cash dividends received. If a U.S. shareholder 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. shareholders, we may be required to withhold U.S. tax
with respect to such dividends, including in respect of all or a portion of such dividend that is
payable in stock. In addition, if a significant number of our shareholders 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 at the end of any calendar
quarter. 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. 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 may enter into repurchase agreements with a variety of counterparties to achieve our
desired amount of leverage for the assets in which we 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.
41
In addition, we 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 75% gross income test,
discussed below. See U.S. Federal Income Tax Considerations Gross Income Tests. 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.
The taxable mortgage pool rules may limit our financing options.
Securitizations and certain other financing structures could result in the creation of taxable
mortgage pools for federal income tax purposes. A taxable mortgage pool owned by our operating
partnership would be treated as a corporation for U.S. federal income tax purposes and may cause us
to fail the asset tests, discussed below. See U.S. Federal Income Tax Considerations Asset
Tests. These rules may limit our financing options.
The tax on prohibited transactions will limit our ability to engage in transactions, including
certain methods of securitizing mortgage loans, which would be treated as sales for federal income
tax purposes.
A REITs net income from prohibited transactions is subject to a 100% tax. In general,
prohibited transactions are sales or other dispositions of property, other than foreclosure
property, but including mortgage loans, held primarily for sale to customers in the ordinary course
of business. We might be subject to this tax if we were to dispose of or securitize loans in a
manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order
to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at
the REIT level, and may limit the structures we utilize for our securitization transactions, even
though the sales or structures might otherwise be beneficial to us.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code limit our ability to enter into hedging
transactions. 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 Considerations
Taxation 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
shareholders.
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. Any such law, regulation or interpretation may take
effect retroactively. We and our shareholders could be adversely affected by any such change in, or
any new, federal income tax law, regulation or administrative interpretation.
42
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 shareholders that are individuals, trusts and estates 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.
43
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus and other filings we make with the SEC
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and such statements are intended to be covered by the
safe harbor provided by the same. Forward-looking statements are subject to substantial risks and
uncertainties, many of which are difficult to predict and are generally beyond our control. 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 investment portfolio; |
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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 additional 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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modifications to whole loans or loans underlying securities; |
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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 qualify as a REIT for U.S. federal income tax purposes; |
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our ability to maintain our exclusion from the definition of investment company 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 continue to make distributions to our shareholders
in the future; |
44
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our understanding of our competition; and |
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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.
45
USE OF PROCEEDS
Based
on our last reported share price on the NYSE on April , 2010, we estimate that our net
proceeds from selling common stock in this offering will be approximately $ , after deducting
underwriting discounts and commissions and estimated offering expenses of approximately $ (or, if
the underwriters exercise their over-allotment option in full, approximately $ , after deducting
underwriting discounts and commissions and estimated offering expenses of approximately $ ).
We plan to use all of the net proceeds from this offering as described above to acquire our
target assets in accordance with our objectives and strategies described in this prospectus. See
Business Our Investment Strategy. Our focus will be on purchasing Agency RMBS, non-Agency
RMBS, CMBS and certain residential and commercial mortgage loans and investing in the Invesco PPIP
Fund, in each case 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 equity that will be invested in each of our target assets. Its determinations 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 decide to use the net proceeds to pay off our short-term debt or invest
the net proceeds in interest-bearing short-term investments, including funds which are consistent
with our intention to qualify as a REIT. These investments are expected to provide a lower net
return than we seek to achieve from our target assets. Prior to the time we have fully used the net
proceeds of this offering to acquire our target assets, we may fund our quarterly distributions out
of such net proceeds.
46
PUBLIC MARKET FOR OUR COMMON STOCK
Our
common stock is traded on the NYSE under the symbol IVR.
As of April 9, 2010, there were
16,938,046 shares of common stock outstanding and approximately 8,338
shareholders. On April 15,
2010, the closing price of our common stock, as reported on the NYSE,
was $23.31. The following
tables set forth, for the periods indicated, the high and low sale price of our common stock as
reported on the NYSE and the dividends declared per share of our common stock.
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High |
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Low |
2010 |
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First quarter |
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$ |
23.99 |
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$ |
21.35 |
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2009 |
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Second quarter |
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$ |
19.80 |
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$ |
18.73 |
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Third quarter |
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$ |
22.18 |
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$ |
19.25 |
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Fourth quarter |
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$ |
24.92 |
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$ |
19.34 |
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Common Dividends Declared per Share |
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Amount |
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Date of Payment |
October 13, 2009 |
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$ |
0.61 |
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11/12/09 |
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December 17, 2009 |
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$ |
1.05 |
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01/27/10 |
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March 18, 2010 |
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$ |
0.78 |
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04/22/10 |
* |
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* |
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On March 18, 2010, we declared a dividend of $0.78 per share of common stock to shareholders
of record as of March 31, 2010 and will pay such dividend on April 22, 2010. |
47
DISTRIBUTION POLICY
We intend to continue to make regular quarterly distributions to holders of our common stock
in an amount equal to at least 90% of our taxable income. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, determined
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
taxable income. On October 13, 2009, we declared a dividend of $0.61 per share of common stock and
paid the dividend on November 12, 2009. On December 17, 2009, we declared a dividend of $1.05 per
share of common stock and paid the dividend on January 27, 2010. On March 18, 2010, we declared a
dividend of $0.78 per share of common stock to shareholders of record as of March 31, 2010 and will
pay such dividend on April 22, 2010. Investors in this offering will not be entitled to receive
this dividend.
To the extent that in respect of any calendar year, cash available for distribution is less
than our 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. For more information, see U.S. Federal Income Tax Considerations
Taxation of Our Company in General.
Any future 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
shareholders, 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 shareholders 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 Considerations Taxation of Taxable U.S.
Shareholders.
48
CAPITALIZATION
The following table sets forth (1) our actual capitalization at December 31, 2009, and (2) our
capitalization as adjusted to reflect the effect of the sale of our common stock in this offering
at the assumed offering price of $ per share (based on the last reported sales price of our shares
on April , 2010), after deducting the underwriting discount and estimated offering expenses. You
should read this table together with Managements Discussion and Analysis of Financial Condition
and Results of Operations and Use of Proceeds included elsewhere in this prospectus.
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As of December 31, 2009 |
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As |
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Actual |
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Adjusted(1) |
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(Dollars in thousands) |
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Shareholders equity: |
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Common stock, par value $0.01 per
share; 450,000,000 shares authorized,
and 8,887,212 shares issued and
outstanding, actual and
shares outstanding, as adjusted |
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$ |
89 |
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$ |
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Preferred Stock, par value $0.01 per
share; 50,000,000 shares authorized
and 0 shares issued and outstanding,
actual and 0 shares outstanding, as
adjusted |
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Additional paid in capital |
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|
172,385 |
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Accumulated other comprehensive income |
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|
7,721 |
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Retained Earnings |
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|
320 |
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Total shareholders equity |
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$ |
180,515 |
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$ |
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Noncontrolling interests |
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|
29,795 |
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Total capitalization |
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$ |
210,310 |
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$ |
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(1) |
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Does not include the underwriters option to purchase up to
additional shares. |
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(2) |
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Represents additional paid in capital net of issuance costs. |
49
SELECTED FINANCIAL INFORMATION
The selected historical financial information as of December 31, 2009 and December 31, 2008,
for the year ended December 31, 2009 and for the period from June 5, 2008 (date of inception) to
December 31, 2008 presented in the tables below have 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
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December 31, |
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December 31, |
$ in thousands |
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2009 |
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2008 |
Mortgage-backed securities, at fair value |
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$ |
802,592 |
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$ |
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Total assets |
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853,400 |
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979 |
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Repurchase agreements |
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545,975 |
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TALF financing |
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80,377 |
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Total shareholders equity (deficit) |
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180,515 |
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|
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(21 |
) |
Non-controlling interest |
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29,795 |
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Total equity (deficit) |
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$ |
210,310 |
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|
$ |
(21 |
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Statement of Income Data
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Period from June 5, |
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2008 (Date of |
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|
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For the Year Ended |
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|
Inception) to |
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$ in thousands, except per share data |
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December 31, 2009 |
|
|
December 31, 2008 |
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Interest income |
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$ |
23,529 |
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|
$ |
|
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Interest expense |
|
|
4,627 |
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|
|
|
|
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|
|
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|
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Net interest income |
|
|
18,902 |
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|
|
|
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Other income |
|
|
2,073 |
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|
|
|
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Operating expenses |
|
|
3,464 |
|
|
|
22 |
|
|
|
|
|
|
|
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Net income (loss) |
|
|
17,511 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Net income attributable to non-controlling interest |
|
|
2,417 |
|
|
|
|
|
|
|
|
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|
|
|
Net income (loss) attributable to common shareholders |
|
$ |
15,094 |
|
|
$ |
(22 |
) |
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders (basic/diluted) |
|
|
3.37 |
|
|
|
|
|
Dividends declared per common share |
|
|
1.66 |
|
|
|
|
|
Weighted average number of shares of common stock: |
|
|
|
|
|
|
|
|
Basic |
|
|
4,480 |
|
|
NM |
|
Diluted |
|
|
5,198 |
|
|
NM |
|
NM = not meaningful
50
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial
statements and the accompanying notes to our consolidated financial statements, which are included
in this prospectus.
Overview
We are a Maryland corporation focused on investing in, financing and managing residential and
commercial mortgage-backed securities and mortgage loans. We are externally managed and advised by
our Manager, Invesco Advisers, Inc. (formerly Invesco Institutional (N.A.), Inc.), which is an
indirect, wholly-owned subsidiary of Invesco Ltd., or Invesco (NYSE:IVZ). We intend to elect and
qualify to be taxed as a REIT commencing with our taxable year ended December 31, 2009.
Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income
that we distribute currently to our shareholders as long as we maintain our qualification as a
REIT. We operate our business in a manner that will permit us to maintain our exclusion from the
definition of investment company under the Investment Company Act of 1940, as amended, or the
1940 Act.
Our objective is to provide attractive risk-adjusted returns to our investors, primarily
through dividends and secondarily through capital appreciation. To achieve this objective, we
invest in the following securities:
|
|
|
Agency RMBS, which are residential mortgage-backed securities, 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; |
|
|
|
|
Non-Agency RMBS, which are RMBS that are not issued or guaranteed by a U.S. government
agency; |
|
|
|
|
CMBS, which are commercial mortgage-backed securities; and |
|
|
|
|
Residential and commercial mortgage loans. |
We finance our investments in Agency RMBS and non-Agency RMBS primarily through short-term
borrowings structured as repurchase agreements. In addition, we have financed our investments in
CMBS with financing under the Term Asset-Backed Securities Loan Facility, or TALF. We have also
financed, and may do so again in the future, our investments in CMBS with private financing
sources. We have financed our investments in certain non-Agency RMBS, CMBS and residential and
commercial mortgage loans by investing in a public-private investment fund, or PPIF, managed by our
Manager, or the Invesco PPIP Fund, which, in turn, invests in our target assets, and which receives
financing from the U.S. Treasury and from the FDIC. On September 30, 2009, the Invesco PPIP Fund
qualified to obtain financing under the legacy securities program under the U.S. governments
Public-Private Investment Program, or PPIP. As of March 31, 2010, the Invesco PPIP Fund no longer
accepts investment subscriptions and the fund is now deemed closed. In addition, we may use other
sources of financing including investments in committed borrowing facilities and other private
financing.
Public Offerings and Private Placement
On July 1, 2009, we successfully completed our initial public offering, or IPO, pursuant to
which we sold 8,500,000 shares of our common stock to the public at a price of $20.00 per share,
for net proceeds of $164.8 million. Concurrent with our IPO, we completed a private offering in
which we sold 75,000 shares of our common stock to our Manager at a price of $20.00 per share and
our operating partnership sold 1,425,000 units of limited partnership interests to Invesco
Investments (Bermuda) Ltd., a wholly-owned subsidiary of Invesco, at a price of $20.00 per unit.
The net proceeds to us from this private offering was $30.0 million. We did not pay any
underwriting discounts or commissions in connection with the private offering.
On July 27, 2009, the underwriters in our IPO exercised their over-allotment option to
purchase an additional 311,200 shares of our common stock at a price of $20.00 per share, for net
proceeds of $6.1 million. Collectively, we received net proceeds from our IPO and the concurrent
private offering of approximately $200.9 million.
51
On January 15, 2010, we completed a follow-on public offering of 7,000,000 shares of common
stock and an issuance of an additional 1,050,000 shares of common stock pursuant to the
underwriters full exercise of their over-allotment option at $21.25 per share. The net proceeds to
us were $162.7 million, net of issuance costs of approximately $8.4 million.
Portfolio
We have actively worked to deploy the proceeds from our IPO, related private placement and
follow-on offering and have completed the following transactions:
|
|
|
We invested the net proceeds from our IPO and concurrent private offering, as well as
monies that we borrowed under repurchase agreements and TALF, to purchase a $802.6 million
investment portfolio as of December 31, 2009, which consisted of $556.4 million in Agency
RMBS, $115.3 million in non-Agency RMBS, $101.1 million in CMBS and $29.7 million in CMOs. |
|
|
|
|
We entered into master repurchase agreements. As of December 31, 2009, we had borrowed
$546.0 million under those master repurchase agreements at a weighted average rate of 0.26%
to finance our purchases of Agency RMBS and non-Agency RMBS. |
|
|
|
|
We entered into three interest rate swap agreements, for a notional amount of $375.0
million as of December 31, 2009, designed to mitigate the effects of increases in interest
rates under a portion of our repurchase agreements. |
|
|
|
|
We secured borrowings of $80.4 million under TALF at a weighted average interest rate of
3.82% as of December 31, 2009. |
|
|
|
|
As of December 31, 2009, we had a commitment to invest up to $25.0 million in the
Invesco PPIP Fund, which, in turn, invests in our target assets. Of this commitment, $4.1
million has been called. The commitment to the Invesco PPIP Fund was increased to $100.0
million in March 2010. |
|
|
|
|
Approximately 27% of our equity was invested in Agency RMBS,
57% in non-Agency RMBS, 12% in CMBS and 4% in the Invesco PPIP Fund as of March 31, 2010. |
Factors Impacting Our Operating Results
Our operating results can 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 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.
Market Conditions
Beginning in the summer of 2007, significant adverse changes in financial market conditions
resulted in a deleveraging of the entire global financial system. As part of this process,
residential and commercial mortgage markets in the United States experienced a variety of
difficulties, including loan defaults, credit losses and reduced liquidity. As a result, many
lenders tightened their lending standards, reduced lending capacity, liquidated significant
portfolios or exited the market altogether, and therefore, financing with attractive terms was
generally unavailable. In response to these unprecedented events, the U.S. government has taken a
number of actions to stabilize the financial markets and encourage lending. Significant measures
include the enactment of the Emergency Economic Stabilization Act of 2008 to, among other things,
establish the Troubled Asset Relief Program, or TARP, the enactment of the Housing and Economic
Recovery Act of 2008, which established a new regulator for Fannie Mae and Freddie Mac and the
establishment of the TALF and the PPIP. Some of these programs are beginning to expire and the
impact of the wind-down of these programs on the financial sector and on the economic recovery is
unknown.
The Federal Reserve initiated a program to purchase agency securities issued or guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae on January 5, 2009, and completed the purchase program in
March 2010. The termination of the purchase program may cause a decrease in demand for agency
securities, which could reduce their market price.
52
We have elected to participate in programs established by the U.S. government, including the
TALF and the PPIP, in order to increase our ability to acquire our target assets and to provide a
source of financing for such acquisitions. The TALF was intended to make credit available to
consumers and businesses on more favorable terms by facilitating the issuance of asset-backed
securities and improving the market conditions for asset-backed securities generally. The Federal
Reserve Bank of New York, or FRBNY, made up to $200 billion of loans under the TALF. The facility
will cease making loans collateralized by newly issued CMBS on June 30, 2010 and ceased making
loans collateralized by newly issued asset-backed securities backed by consumer and business loans
and legacy CMBS on March 31, 2010. As a result, we are no longer able to obtain additional TALF
loans as a source of financing for investments in legacy CMBS.
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. As of March 31, 2010,
the Invesco PPIP Fund no longer accepts investment subscriptions and the fund is now deemed closed.
See Business Our Competitive Advantages Financing Strategy The Term-Asset Backed
Securities Loan Facility and Business Our Competitive Advantages Financing Strategy The
Public-Private Investment Program for a detailed description of the TALF and the PPIP.
Investment Activities
As of December 31, 2009, 19.1% of our equity was invested in Agency RMBS, 54.8% in non-Agency
RMBS, 9.9% in CMBS, 2.0% in the Invesco PPIP Fund and 14.2% in other assets (including cash and
restricted cash). We use leverage on our target assets to achieve our return objectives. As of
March 31, 2010, approximately 27% of our equity was invested in
Agency RMBS, 57% in non-Agency
RMBS, 12% in CMBS and 4% in the Invesco PPIP Fund.
For our investments in Agency RMBS, we focus on securities we believe provide attractive
returns when levered approximately 6 to 8 times. For our investments in non-Agency RMBS through
December 31, 2009, we primarily focused on securities we believed would provide attractive
unlevered returns. More recently, the unlevered returns attainable on investments in non-Agency
RMBS have decreased. In the future we will employ leverage on our investments in non-Agency RMBS
of approximately 1 to 2 times in order to achieve our risk-adjusted return target. We leverage our
CMBS 3 to 5 times. In addition, we may use other financing, including private financing.
As of December 31, 2009, we had approximately $161.1 million in 30-year fixed rate securities
that offered higher coupons and call protection based on the collateral attributes. We balanced
this with approximately $261.8 million in 15-year fixed rate securities, approximately $123.5
million in hybrid adjustable-rate mortgages, or ARMs, and approximately $10.0 million in ARMs we
believe to have similar durations based on prepayment speeds. As of December 31, 2009, we had
purchased approximately $115.3 million non-Agency RMBS.
Our investments in CMBS are currently limited to securities for which we were able to obtain
financing under the TALF. Our primary focus is on investing in AAA-rated securities issued prior to
2008. As of December 31, 2009, we had purchased approximately $101.1 million in CMBS and financed
such purchases with $80.4 million in TALF loans. We have also financed, and may do so again in the
future, our investments in CMBS with private financing sources. In addition, as of December 31,
2009, we had purchased approximately $29.7 million in CMOs.
53
Investment Portfolio
The following table summarizes certain characteristics of our investment portfolio as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Net Weighted |
|
|
|
|
Principal |
|
Premium |
|
Amortized |
|
Gain/ |
|
Fair |
|
Average |
|
Average |
$ in thousands |
|
Balance |
|
(Discount) |
|
Cost |
|
(Loss) |
|
Value |
|
Coupon (1) |
|
Yield (2) |
Agency RMBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 year fixed-rate |
|
|
251,752 |
|
|
|
9,041 |
|
|
|
260,793 |
|
|
|
1,023 |
|
|
|
261,816 |
|
|
|
4.82 |
% |
|
|
3.80 |
% |
30 year fixed-rate |
|
|
149,911 |
|
|
|
10,164 |
|
|
|
160,075 |
|
|
|
990 |
|
|
|
161,065 |
|
|
|
6.45 |
% |
|
|
5.02 |
% |
ARM |
|
|
10,034 |
|
|
|
223 |
|
|
|
10,257 |
|
|
|
(281 |
) |
|
|
9,976 |
|
|
|
2.52 |
% |
|
|
1.99 |
% |
Hybrid ARM |
|
|
117,163 |
|
|
|
5,767 |
|
|
|
122,930 |
|
|
|
597 |
|
|
|
123,527 |
|
|
|
5.14 |
% |
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Agency RMBS |
|
|
528,860 |
|
|
|
25,195 |
|
|
|
554,055 |
|
|
|
2,329 |
|
|
|
556,384 |
|
|
|
5.31 |
% |
|
|
4.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
MBS-CMO |
|
|
27,819 |
|
|
|
978 |
|
|
|
28,797 |
|
|
|
936 |
|
|
|
29,733 |
|
|
|
6.34 |
% |
|
|
4.83 |
% |
Non-Agency RMBS |
|
|
186,682 |
|
|
|
(79,341 |
) |
|
|
107,341 |
|
|
|
7,992 |
|
|
|
115,333 |
|
|
|
4.11 |
% |
|
|
17.10 |
% |
CMBS |
|
|
104,512 |
|
|
|
(4,854 |
) |
|
|
99,658 |
|
|
|
1,484 |
|
|
|
101,142 |
|
|
|
4.93 |
% |
|
|
5.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
847,873 |
|
|
|
(58,022 |
) |
|
|
789,851 |
|
|
|
12,741 |
|
|
|
802,592 |
|
|
|
5.03 |
% |
|
|
6.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average coupon is presented net of servicing and other fees. |
|
(2) |
|
Average yield incorporates future prepayment assumptions. |
The following table summarizes certain characteristics of our investment portfolio, at
fair value, according to their estimated weighted average life classifications as of December 31,
2009:
|
|
|
|
|
$ in thousands |
|
|
|
|
Less than one year |
|
|
|
|
Greater than one year and less than five years |
|
|
483,540 |
|
Greater than or equal to five years |
|
|
319,052 |
|
|
|
|
|
|
Total |
|
|
802,592 |
|
|
|
|
|
|
The following table presents certain information about the carrying value of our
available for sale mortgage-backed securities, or MBS, as of December 31, 2009:
|
|
|
|
|
$ in thousands |
|
|
|
|
Principal balance |
|
|
847,873 |
|
Unamortized premium |
|
|
26,174 |
|
Unamortized discount |
|
|
(84,196 |
) |
Gross unrealized gains |
|
|
14,595 |
|
Gross unrealized losses |
|
|
(1,854 |
) |
|
|
|
|
|
Carrying value/estimated fair value |
|
|
802,592 |
|
|
|
|
|
|
Financing and Other Liabilities. Following the closing of our IPO, we entered into repurchase
agreements to finance the majority of our Agency RMBS. These agreements are secured by our Agency
RMBS and bear interest at rates that have historically moved in close relationship to the London
Interbank Offer Rate, or LIBOR. As of December 31, 2009, we had entered into repurchase agreements
totaling $546.0 million. In addition, we funded our CMBS portfolio with borrowings of $80.4 million
under the TALF. The TALF loans are non-recourse and mature in July, August and December, 2014. As
of December 31, 2009, we had a commitment to invest up to $25.0 million in the Invesco PPIP Fund,
of which $4.1 million has been called. The commitment to the Invesco PPIP Fund was increased to
$100.0 million in March 2010.
Hedging Instruments. We generally hedge as much of our interest rate risk as we deem prudent
in light of market conditions. No assurance can be given that our hedging activities will have the
desired beneficial impact on our results of operations or financial condition. Our investment
policies do not contain specific requirements as to the percentages or amount of interest rate risk
that we are required to hedge.
Interest rate hedging may fail to protect or could adversely affect us because, among other
things:
|
|
|
available interest rate hedging may not correspond directly with the interest rate risk
for which protection is sought; |
|
|
|
|
the duration of the hedge may not match the duration of the related liability; |
54
|
|
|
the party owing money in the hedging transaction may default on its obligation to pay; |
|
|
|
|
the credit quality of the party 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 |
|
|
|
|
the value of derivatives used for hedging may be adjusted from time to time in
accordance with accounting rules to reflect changes in fair value. Downward adjustments, or
mark-to-market losses would reduce our shareholders equity. |
As of December 31, 2009, we had entered into three interest rate swap agreements designed to
mitigate the effects of increases in interest rates under a portion of our repurchase agreements.
These swap agreements provide for fixed interest rates indexed off of one-month LIBOR and
effectively fix the floating interest rates on $375.0 million of borrowings under our repurchase
agreements. We intend to continue to add interest rate hedge positions according to our hedging
strategy.
The following table summarizes our hedging activity as of December 31, 2009:
Swap Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
|
|
|
Fixed Interest Rate |
Counterparty |
|
$ in thousands |
|
Maturity Date |
|
in Contract |
The Bank of New York Mellon |
|
|
175,000 |
|
|
|
08/05/2012 |
|
|
|
2.07 |
% |
SunTrust Bank |
|
|
100,000 |
|
|
|
07/15/2014 |
|
|
|
2.79 |
% |
Credit Suisse International |
|
|
100,000 |
|
|
|
02/24/2015 |
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average |
|
|
375,000 |
|
|
|
|
|
|
|
2.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value per Share
As of December 31, 2009, our book value per common share was $20.31 and on a fully diluted
basis, after giving effect to our units of limited partnership interest in our operating
partnership (which may be converted to common shares at the sole election of the Company) the book
value per common share was $20.39.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with US GAAP, which requires
the use of estimates and assumptions that involve the exercise of judgment and use of assumptions
as to future uncertainties. Our most critical accounting policies 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 consolidated
financial statements are based are reasonable at the time made and based upon information available
to us at that time. We rely upon 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:
Basis of Quarterly Presentation
In July 2009, the Financial Accounting Standards Board, or FASB, issued Statement No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles A Replacement of FASB Statement No. 162, or FASB Statement No. 168. FASB Statement
No. 168 replaces the existing hierarchy of U.S. Generally Accepted Accounting Principles with the
FASB Accounting Standards Codification(TM), or the Codification as the single source of
authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities,
with the exception of guidance issued by the SEC and its staff.
FASB Statement No. 168 is now encompassed in ASC Topic 105, Generally Accepted Accounting
Principles, and was effective July 1, 2009. We have replaced references to U.S. Generally Accepted
Accounting Principles with ASC references, where applicable and relevant in this prospectus.
We will no longer refer to the specific location of applicable accounting guidance in the
Codification as had been past practice under pre-Codification GAAP, unless its use is necessary to
clarify transitional issues.
55
Principles of Consolidation
The consolidated financial statements include our accounts and the accounts of our
subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
Our accounting and reporting policies conform to US GAAP. The preparation of consolidated
financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair
values of financial instruments and interest income on MBS. Actual results may differ from those
estimates.
Cash and Cash Equivalents
We consider all highly liquid investments that have original or remaining maturity dates of
three months or less when purchased to be cash equivalents. At December 31, 2009, we had cash and
cash equivalents, including amounts restricted, in excess of the Federal Deposit Insurance
Corporation deposit insurance limit of $250,000 per institution. We mitigate our risk by placing
cash and cash equivalents with major financial institutions.
Repurchase Agreements
We finance our Agency RMBS investment portfolio, and may finance our non-Agency RMBS
investment portfolio, through the use of repurchase agreements. Repurchase agreements are treated
as collateralized financing transactions and are carried at 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 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 for gross presentation.
All of the following criteria must be met for gross presentation in the circumstance where the
repurchase assets are financed with the same counterparty as follows:
|
|
|
the initial transfer of and repurchase financing cannot be contractually contingent; |
|
|
|
|
the repurchase financing entered into between the parties provides full recourse
to the transferee and the repurchase price is fixed; |
|
|
|
|
the financial asset has an active market and the transfer is executed at market rates; and |
|
|
|
|
the repurchase agreement and financial asset do not mature simultaneously. |
For assets representing available-for-sale investment securities, which is the case with
respect to our portfolio of investments, any change in fair value is reported through consolidated
other comprehensive income (loss) with the exception of impairment losses, which are recorded in
the consolidated statement of operations.
If the transaction complies with the criteria for gross presentation, we record the assets and
the related financing on a gross basis on our balance sheet, and the corresponding interest income
and interest expense in its statements of operations. Such forward commitments are recorded at fair
value with subsequent changes in fair value recognized in income. Additionally, we record the cash
portion of our investment in Agency RMBS and non-Agency RMBS as a mortgage related receivable from
the counterparty on our balance sheet.
Fair Value Measurements
We disclose the fair value of our financial instruments according to a fair value hierarchy
(levels 1, 2, and 3, as defined). In accordance with US GAAP, we are required to provide enhanced
disclosures regarding instruments in the level 3 category (which require significant management
judgment), including a separate reconciliation of the beginning and ending balances for each major
category of assets and liabilities.
56
Additionally, US GAAP permits entities to choose to measure many financial instruments and
certain other items at fair value, or the fair value option. Unrealized gains and losses on items
for which the fair value option has been elected are irrevocably recognized in earnings at each
subsequent reporting date.
Securities
We designate securities as held-to-maturity, available-for-sale, or trading depending on our
ability and intent to hold such securities to maturity. Trading and securities, available-for-sale,
are reported at fair value, while securities held-to-maturity are reported at amortized cost.
Although we generally intend to hold most of its RMBS and CMBS until maturity, we may, from time to
time, sell any of our RMBS or CMBS as part of our overall management of our investment portfolio
and as such will classify our RMBS and CMBS as available-for-sale securities.
All securities classified as available-for-sale are reported at fair value, based on market
prices from third-party sources, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders equity.
We 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 involves judgments and assumptions based on
subjective and objective factors. Consideration is given to (i) the length of time and the extent
to which the fair value has been less than cost, (ii) the financial condition and near-term
prospects of recovery, in fair value of the security, and (iii) our intent and ability to retain
its investment in the security for a period of time sufficient to allow for any anticipated
recovery in fair value. For debt securities, the amount of the other-than-temporary impairment
related to a credit loss or impairments on securities that we have the intent or for which it is
more likely than not that we will need to sell before recovery are recognized in earnings and
reflected as a reduction in the cost basis of the security. The amount of the other-than-temporary
impairment on debt securities related to other factors is recorded consistent with changes in the
fair value of all other available-for-sale securities as a component of consolidated shareholders
equity in other comprehensive income or loss with no change to the cost basis of the security.
Interest Income Recognition
Interest income on available-for-sale MBS, which includes accretion of discounts and
amortization of premiums on such MBS, is recognized over the life of the investment using the
effective interest method. Management estimates, at the time of purchase, the future expected cash
flows and determines the effective interest rate based on these estimated cash flows and our
purchase price. As needed, these estimated cash flows are updated and a revised yield is computed
based on the current amortized cost of the investment. In estimating these cash flows, there are a
number of assumptions subject to uncertainties and contingencies, including the rate and timing of
principal payments (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 its interest income. Security transactions are recorded on the
trade date. Realized gains and losses from security transactions are determined based upon the
specific identification method and recorded as gain (loss) on sale of available-for-sale securities
in the consolidated statement of operations.
Earnings per Share
We calculate basic earnings per share by dividing net income for the period by
weighted-average shares of our common stock outstanding for that period. Diluted income per share
takes into account the effect of dilutive instruments, such as units of limited partnership
interests in the operating partnership, or the OP Units, stock options and unvested restricted
stock, but uses the average share price for the period in determining the number of incremental
shares that are to be added to the weighted-average number of shares outstanding. For the period
from June 5, 2008 (date of inception) to December 31, 2008, earnings per share is not presented
because it is not a meaningful measure of our performance.
Comprehensive Income
Comprehensive income is comprised of net income, as presented in the consolidated statements
of operations, adjusted for changes in unrealized gains or losses on available for sale securities
and changes in the fair value of derivatives accounted for as cash flow hedges.
57
Accounting for Derivative Financial Instruments
US GAAP provides disclosure requirements for derivatives and hedging activities with the
intent to provide users of financial statements with an enhanced understanding of: (i) how and why
an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are
accounted for; and (iii) how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. US GAAP requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures about the fair
value of and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.
We record all derivatives on the balance sheet at fair value. The accounting for changes in
the fair value of derivatives depends on the intended use of the derivative, whether we have
elected to designate a derivative in a hedging relationship and apply hedge accounting and whether
the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure
to variability in expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency
exposure of a net investment in a foreign operation. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging instrument with the recognition
of the changes in the fair value of the hedged asset or liability that are attributable to the
hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a
cash flow hedge. We may enter into derivative contracts that are intended to economically hedge
certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge
accounting under US GAAP.
Income Taxes
We intend to elect to be taxed as a REIT, commencing with our current taxable year ended
December 31, 2009. Accordingly, we will generally not be subject to U.S. federal and applicable
state and local corporate income tax to the extent that we make qualifying distributions to our
shareholders, and provided 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 shareholders.
A REITs dividend paid deduction for qualifying dividends to our shareholders is computed
using our taxable income as opposed to net income reported on the consolidated financial
statements. Taxable income, generally, will differ from net income reported on the consolidated
financial statements because the determination of taxable income is based on tax regulations and
not financial accounting principles.
We may elect to treat certain of our future subsidiaries as taxable REIT subsidiaries, or
TRSs. In general, a TRS 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 shareholders. Conversely, if we retain
earnings at a TRS level, no distribution is required and we can increase book equity of the
consolidated entity. We have no adjustments regarding our tax accounting treatment of any
uncertainties. We expect to recognize interest and penalties related to uncertain tax positions, if
any, as income tax expense, which will be included in general and administrative expense.
Share-Based Compensation
We follow US GAAP with regard to our equity incentive plan. Share-based compensation
arrangements include share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. US GAAP requires that compensation cost
relating to share-based payment transactions be recognized in consolidated financial statements.
The cost is measured based on the fair value of the equity or liability instruments issued on the
date of grant.
58
On July 1, 2009, we adopted an equity incentive plan under which our independent directors, as
part of their compensation for serving as directors, are eligible to receive quarterly restricted
stock awards. In addition, we may compensate our officers under this plan pursuant to the
management agreement.
Recent Accounting Pronouncements
In January 2009, the FASB issued an accounting pronouncement which amends previously issued
impairment guidance to achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The pronouncement also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure requirements in other related
guidance. The pronouncement is effective and should be applied prospectively for financial
statements issued for fiscal years and interim periods ending after December 15, 2008. Our adoption
of the pronouncement did not have a material effect on our consolidated financial statements.
In April 2009, the FASB issued an accounting pronouncement which is intended to provide
greater clarity to investors about the credit and noncredit component of an other-than-temporary
event and to more effectively communicate when an other-than-temporary event has occurred. The
pronouncement applies to debt securities and requires that the total other-than-temporary
impairment be presented in the statement of income with an offset for the amount of impairment that
is recognized in other comprehensive income, which is the noncredit component. Noncredit component
losses are to be recorded in other comprehensive income if an investor can assess that (a) it does
not have the intent to sell or (b) it is not more likely than not that it will have to sell the
security prior to its anticipated recovery. The pronouncement is effective for interim and annual
periods ending after June 15, 2009. The pronouncement will be applied prospectively with a
cumulative effect transition adjustment as of the beginning of the period in which it is adopted.
Our adoption of the pronouncement did not have a material effect on our consolidated financial
statements.
In April 2009, the FASB issued an accounting pronouncement which provides additional guidance
on determining whether a market for a financial asset is not active and a transaction is not
distressed for fair value measurements. The pronouncement will be applied prospectively and
retrospective application is not permitted. The pronouncement is effective for interim and annual
periods ending after June 15, 2009. Our adoption of the pronouncement did not have a material
effect on our consolidated financial statements.
In April 2009, the FASB issued an accounting pronouncement which will require an entity to
provide disclosures about the fair value of financial instruments in interim financial information.
The pronouncement would apply to certain financial instruments and will require entities to
disclose the method(s) and significant assumptions used to estimate the fair value of financial
instruments, in both interim financial statements as well as annual financial statements. The
pronouncement is effective for interim and annual periods ending after June 15, 2009. Our adoption
of the pronouncement did not have a material effect on our consolidated financial statements
In March 2008, the FASB issued an accounting pronouncement which 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 became applicable to us beginning
in the first quarter of 2009. Our adoption of the pronouncement did not have a material effect on
the Companys consolidated financial statements, but did require additional disclosures in Note 6,
Derivatives and Hedging Activities.
In May 2009, the FASB issued an accounting pronouncement which establishes general standards
of accounting for, and requires disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The Company adopted the
pronouncement for the quarter ended June 30, 2009. The Companys adoption of the pronouncement did
not have a material effect on its financial condition, results of operations, or cash flows. In
February 2010, the SEC rescinded the disclosure requirement for public companies. In June 2009, the
FASB issued an accounting pronouncement which requires additional information regarding transfers
of financial assets, including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. The pronouncement eliminates the
concept of a qualifying special-purpose entity, changes the requirements for derecognizing
financial assets, and requires additional disclosures. The pronouncement is effective for fiscal
years beginning after November 15, 2009. The Company will adopt the pronouncement in fiscal 2010
and is evaluating the impact it will have on the results of operations and financial position of
the Company.
In June 2009, the FASB amended the guidance for determining whether an entity is a variable
interest entity. The amendments include: (i) the elimination of the exemption for qualifying
special purpose entities; (ii) a new approach for determining who should consolidate a
variable-interest entity; and (iii) changes to when it is necessary to reassess who should
consolidate a variable-interest entity. The guidance is effective for the first annual reporting
period beginning after November 15, 2009 and for interim periods
59
within that first annual reporting period. The Company will adopt the pronouncement in fiscal
2010 and is evaluating the impact it will have on the results of operations and financial position
of the Company.
In June 2009, the FASB issued an accounting pronouncement which approved the Accounting
Standards Codification (the Codification) as the single source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with US GAAP. The Codification does not change current US GAAP,
but is intended to simplify user access to all authoritative U.S. US GAAP by providing all the
authoritative literature related to a particular topic in one place. All existing accounting
standard documents are superseded and all other accounting literature not included in the
Codification is considered nonauthoritative. The pronouncement is effective for interim and annual
periods ending after September 15, 2009. The Company began to use the Codification when referring
to US GAAP in the Companys Quarterly Report on Form 10-Q for the interim period ended September
30, 2009. The adoption of these provisions did not have a material effect on the Companys
consolidated financial statements.
In September 2009, the FASB issued guidance on Fair Value Measurements and Disclosures.
Overall, for the fair value measurement of investments in certain entities that calculates net
asset value per share (or its equivalent). The amendments in this update permit, as a practical
expedient, a reporting entity to measure the fair value of an investment that is within the scope
of the amendments in this update on the basis of the net asset value per share of the investment
(or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles as of the reporting entitys measurement date,
including measurement of all or substantially all of the underlying investments of the. The
amendments in this update also require disclosures by major category of investment about the
attributes of investments within the scope of the amendments in this update, such as the nature of
any restrictions on the investors ability to redeem its investments at the measurement date, any
unfunded commitments (for example, a contractual commitment by the investor to invest a specified
amount of additional capital at a future date to fund investments that will be made by the
investee), and the investment strategies of the investees. The major category of investment is
required to be determined on the basis of the nature and risks of the investment in a manner
consistent with the guidance for major security types in US GAAP on investments in debt and equity
securities. The disclosures are required for all investments within the scope of the amendments in
this update regardless of whether the fair value of the investment is measured using the practical
expedient. The amendments in this update apply to all reporting entities that hold an investment
that is required or permitted to be measured or disclosed at fair value on a recurring or non
recurring basis and, as of the reporting entitys measurement date, if the investment meets certain
criteria The amendments in this update are effective for the interim and annual periods ending
after December 15, 2009.
In January 2010, the FASB updated guidance on, Improving Disclosures about Fair Value
Measurements. The guidance required a number of additional disclosures regarding fair value
measurements. Specifically, entities should disclose: (1) the amount of significant transfers
between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2)
the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of
recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.
Except for the requirement to disclose information about purchases, sales, issuances, and
settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all the
amendments are effective for interim and annual reporting periods beginning after December 15,
2009. As such, for the company, the new disclosures will be required in the Form 10-Q for the
quarter ended March 31, 2010.
60
Results of Operations
The table below presents certain information from our Consolidated Statement of Operations for
the year ended December 31, 2009 and for the period from June 5, 2008 (date of inception) to
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from June 5, |
|
|
|
|
|
|
2008 (Date of |
|
|
Year Ended |
|
Inception) to |
$ in thousands, except per share data |
|
December 31, 2009 |
|
December 31, 2008 |
|
Revenues |
|
|
|
|
|
|
|
|
Interest income |
|
|
23,529 |
|
|
|
|
|
Interest expense |
|
|
4,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
|
|
|
|
|
|
Gain on sale of investments |
|
|
2,002 |
|
|
|
|
|
Equity in earnings and fair value
change in unconsolidated limited
partnerships |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
2,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Management fee related party |
|
|
1,513 |
|
|
|
|
|
General and administrative |
|
|
499 |
|
|
|
22 |
|
Insurance |
|
|
723 |
|
|
|
|
|
Professional Fees |
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
3,464 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
17,511 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
Net income attributable to
non-controlling interest |
|
|
2,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common shareholders |
|
|
15,094 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Net income attributable to common
shareholders (basic/diluted) |
|
|
3.37 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
|
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of
common stock: |
|
|
|
|
|
|
|
|
Basic |
|
|
4,480 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
5,198 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
Net Income Summary
For the year ended December 31, 2009, our net income was $15.1 million, or $3.37 basic and
diluted net income per average share available to common shareholders.
61
Interest Income and Average Earning Asset Yield
We had average earning assets of $866.4 million for the year ended December 31, 2009. Our
primary source of income is interest income. Our interest income was $23.5 million for the year
ended December 31, 2009. The yield on our average investment portfolio was 6.10%. The CPR of our
portfolio impacts the amount of premium and discount on the purchase of securities that is
recognized into income. At December 31, 2009, our 15-year Agency RMBS had a 3-month CPR of 15.0,
the 30-year Agency RMBS portfolio had a 3-month CPR of 22.7, and our Agency hybrid ARMs portfolio
prepaid at a 19.5 CPR. Our non-Agency RMBS portfolio paid at a 3-month CPR of 16.0 and our CMBS had
no prepayment of principal. Overall, the weighted average 3-month CPR on our investment portfolio
was 15.7.
Interest Expense and the Cost of Funds
Our largest expense is the interest expense on borrowed funds. We had average borrowed funds
of $626.0 million and total interest expense of $4.6 million for the year ended December 31, 2009.
Our average cost of funds was 1.45% for the year ended December 31, 2009. Since a substantial
portion of our repurchase agreements are short term, changes in market rates are directly reflected
in our interest expense. Interest expense includes borrowing costs under repurchase agreements, the
TALF borrowings, as well as hedging costs for our interest rate hedges.
Net Interest Income
Our net interest income, which equals interest income less interest expense, totaled $18.9
million for the year ended December 31, 2009. Our net interest rate margin, which equals the yield
on our average assets for the period less the average cost of funds for the period, was 4.65% for
the year ended December 31, 2009.
Gain on Sale of Investments
For the year ended December 31, 2009, we realized a gain on sale of investments of $2.0
million. The gain was primarily due to the rebalancing of the portfolio during the fourth quarter
of 2009 as we acquired more non-Agency RMBS and CMBS and sold a portion of our Agency RMBS.
Equity in Earnings and Change in Fair Value of Unconsolidated Limited Partnerships
For the year ended December 31, 2009, we recognized equity in earnings and unrealized
appreciation on the change in fair value of our investment in the Invesco PPIP Fund of
approximately $63,000 and $8,000, respectively.
Expenses
We incurred management fees of $1.5 million for the year ended December 31, 2009, which are
payable to our Manager under our management agreement. See Certain Relationships and Related
Transactions for a discussion of the management fee and our relationship with our Manager.
Our general and administrative expense of $499,000 for the year ended December 31, 2009,
includes the salary and the bonus of our Chief Financial Officer, amortization of equity based
compensation related to anticipated quarterly grants of our stock to our independent directors,
payable subsequent to each calendar quarter, cash-based payments to our independent directors,
derivative transaction fees, software licensing, industry memberships, filing fees, travel and
entertainment and other miscellaneous general and administrative costs. Our insurance expense of
$723,000 for the year ended December 31, 2009, represents the cost of liability insurance to
indemnify our directors and officers.
Our professional fees of $729,000 for the year ended December 31, 2009 represents the cost of
legal, accounting, auditing and consulting services provided to us by third party service
providers.
Net Income and Return on Average Equity
Our net income was $17.5 million for the year ended December 31, 2009. Our annualized return
on average equity was 16.46% for the year ended December 31, 2009.
62
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including
ongoing commitments to pay dividends, fund investments, repayment of borrowings and other general
business needs. Our primary sources of funds for liquidity consists of the net proceeds from our
common equity offerings, net cash provided by operating activities, cash from repurchase agreements
and other financing arrangements and future issuances of common equity, preferred equity,
convertible securities and/or equity or debt securities. We also have sought, and may continue to
finance our assets under, and may otherwise participate in, programs established by the U.S.
government.
We currently believe that we have sufficient liquidity and capital resources available for the
acquisition of additional investments, repayments on borrowings and the payment of cash dividends
as required for continued qualification as a REIT. We generally maintain liquidity to pay down
borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage
our long-term investment capital. Because the level of these borrowings can be adjusted on a daily
basis, the level of cash and cash equivalents carried on our balance sheet is significantly less
important than our potential liquidity available under borrowing arrangements.
As of December 31, 2009, we had entered into repurchase agreements with various counterparties
for total borrowings of $546.0 million at a weighted average interest rate of 0.26% to finance our
purchases of Agency RMBS. We generally target a debt-to-equity ratio with respect to our Agency
RMBS of 6 to 8 times. As of December 31, 2009, we had a ratio of 13.6 times which was related to
the timing of cash received and the maturity of the repurchase agreements. The counterparty with
the highest percentage of repurchase agreement balance had 32.1%. The repurchase obligations mature
and reinvest every thirty to ninety days. See Contractual Obligations below. Additionally, as
of December 31, 2009, we had secured borrowings of $80.4 million under the TALF at a weighted
average interest rate of 3.82% to finance our purchase of CMBS. We generally seek to borrow (on a
non-recourse basis) between 3 and 5 times the amount of our shareholders equity and as of December
31, 2009, had a ratio of 3.9 times, which is consistent with funding limits under the TALF. The
TALF loans are non-recourse and mature in July, August and December 2014.
As of December 31, 2009, the weighted average margin requirement, or the percentage amount by
which the collateral value must exceed the loan amount, which we also refer to as the haircut,
under all of our repurchase agreements was approximately 5.6%. Across all of our repurchase
facilities, the haircuts range from a low of 5.0% to a high of 8.0%. Declines in the value of our
securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An
event of default or termination event would give some of our counterparties the option to terminate
all repurchase transactions existing with us and require any amount due by us to the counterparties
to be payable immediately.
As discussed above under Market Conditions, the residential mortgage market in the United
States has experienced difficult economic conditions including:
|
|
|
increased volatility of many financial assets, including agency securities and other
high-quality RMBS assets, due to potential security liquidations; |
|
|
|
|
increased volatility and deterioration in the broader residential mortgage and RMBS
markets; and |
|
|
|
|
significant disruption in financing of RMBS. |
If these conditions persist, then our lenders may be forced to exit the repurchase market,
become insolvent or further tighten lending standards or increase the amount of required equity
capital or haircut, any of which could make it more difficult or costly for us to obtain financing.
Effects of Margin Requirements, Leverage and Credit Spreads
Our securities have values that fluctuate according to market conditions and, as discussed
above, the market value of our securities will decrease as prevailing interest rates or credit
spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to
the point where the positive difference between the collateral value and the loan amount is less
than the haircut, our lenders may issue a margin call, which means that the lender will require
us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under
our repurchase facilities, our lenders have full discretion to determine the value of the
securities we pledge to them. Most of our lenders will value securities based on recent trades in
the market. Lenders also issue margin
63
calls as the published current principal balance factors change on the pool of mortgages
underlying the securities pledged as collateral when scheduled and unscheduled paydowns are
announced monthly.
We experience margin calls in the ordinary course of our business. In seeking to manage
effectively the margin requirements established by our lenders, we maintain a position of cash and
unpledged securities. We refer to this position as our liquidity. The level of liquidity we have
available to meet margin calls is directly affected by our leverage levels, our haircuts and the
price changes on our securities. If interest rates increase as a result of a yield curve shift or
for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged
assets that constitute our liquidity) will decline, we will experience margin calls, and we will
use our liquidity to meet the margin calls. There can be no assurance that we will maintain
sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity
will proportionately decrease. In addition, if we increase our borrowings, our liquidity will
decrease by the amount of additional haircut on the increased level of indebtedness.
We intend to maintain a level of liquidity in relation to our assets that enables us to meet
reasonably anticipated margin calls but that also allows us to be substantially invested in
securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive
liquidity, which would lower our investment returns, or by maintaining insufficient liquidity,
which would force us to liquidate assets into unfavorable market conditions and harm our results of
operations and financial condition.
Forward-Looking Statements Regarding Liquidity
Based upon our current portfolio, leverage rate and available borrowing arrangements, we
believe that the net proceeds of our common equity offerings, combined with cash flow from
operations and available borrowing capacity, are sufficient to enable us to meet anticipated
short-term (one year or less) liquidity requirements to fund our investment activities, pay fees
under our management agreement, fund our distributions to shareholders and for other general
corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital resource
requirements will be subject to obtaining additional debt financing and equity capital. We may
increase our capital resources by obtaining long-term credit facilities or making additional public
or private offerings of equity or debt securities, possibly including classes of preferred stock,
common stock, and senior or subordinated notes. Such financing will depend on market conditions for
capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand
our sources of financing on substantially similar terms, it may have an adverse effect on our
business and results of operations.
Contractual Obligations
On July 1, 2009, we entered into an agreement with our Manager pursuant to which our Manager
is 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
shareholders 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 those individuals are also our officers, will receive no cash
compensation directly from us. We are required to reimburse our Manager for operating expenses
incurred by our Manager, including certain salary expenses and other expenses relating to legal,
accounting, due diligence and other services. 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.
As of March 31, 2010, we committed to contribute up to $100.0 million to the Invesco PPIP
Fund, which, in turn, invests in our target assets, and may seek additional investments in this or
a similar PPIP managed by our Manager. As of December 31, 2009, $4.1 million of the commitment has
been called. Pursuant to the terms of the management agreement, we pay our Manager a management
fee. As a result, we do not pay any management or investment fees with respect to our investment in
the Invesco PPIP Fund managed by our Manager. Our Manager waives all such fees.
64
Contractual Commitments
As of December 31, 2009, we had the following contractual commitments and commercial
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
$ in thousands |
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
After 5 years |
Repurchase agreements |
|
|
545,975 |
|
|
|
545,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TALF financing |
|
|
80,377 |
|
|
|
|
|
|
|
|
|
|
|
80,377 |
|
|
|
|
|
Invesco PPIP Fund investment |
|
|
20,943 |
|
|
|
|
|
|
|
20,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
|
647,295 |
|
|
|
545,975 |
|
|
|
20,943 |
|
|
|
80,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, we had approximately $91,000 and $14.3 million in contractual
interest payments related to our repurchase agreements and TALF financing respectively.
Off-Balance Sheet Arrangements
As of December 31, 2009, we had a commitment to invest up to $25.0 million in the Invesco PPIP
Fund, of which $4.1 million has been called. The commitment to the Invesco PPIP Fund was increased
to $100.0 million in March 2010.
Shareholders Equity
On July 1, 2009, we successfully completed our IPO, pursuant to which we sold 8,500,000 shares
of our common stock to the public at a price of $20.00 per share for net proceeds of $164.8
million. Concurrent with our IPO, we completed a private placement in which we sold 75,000 shares
of our common stock to our Manager at a price of $20.00 per share and our operating partnership
sold 1,425,000 units of limited partnership interests in our operating partnership to Invesco
Investments (Bermuda) Ltd., a wholly-owned subsidiary of Invesco, at a price of $20.00 per unit.
The net proceeds to us from this private offering was $30.0 million. We did not pay any
underwriting discounts or commissions in connection with the private placement.
On July 27, 2009, the underwriters of our IPO exercised their over-allotment option to
purchase an additional 311,200 shares of our common stock at a price of $20.00 per share for net
proceeds of $6.1 million. Collectively, we received net proceeds from our IPO and the concurrent
private offerings of approximately $200.9 million.
On January 15, 2010, we completed a follow-on public offering of 7,000,000 shares of common
stock and an issuance of an additional 1,050,000 shares of common stock pursuant to the
underwriters full exercise of their over-allotment option at $21.25 per share. The net proceeds to
us were $162.7 million, net of issuance costs of approximately $8.4 million.
Unrealized Gains and Losses
Unrealized fluctuations in market values of assets do not impact our US GAAP income but rather
are reflected on our balance sheet by changing the carrying value of the asset and shareholders
equity under Accumulated Other Comprehensive Income (Loss). We account for our investment
securities as available-for-sale. In addition, unrealized fluctuations in market values of our
cash flow hedges that qualify for hedge accounting, are also reflected in Accumulated Other
Comprehensive Income (Loss).
As a result of this mark-to-market accounting treatment, our book value and book value per
share are likely to fluctuate far more than if we used historical amortized cost accounting. As a
result, comparisons with companies that use historical cost accounting for some or all of their
balance sheet may not be meaningful.
Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of restricted common stock and other
equity based awards to our independent, non-executive directors, and to the officers and employees
of the Manager, or the Incentive Plan. Under the Incentive Plan a total of 1,000,000 shares are
currently reserved for issuance. Unless terminated earlier, the Incentive Plan will terminate in
65
2019, but will continue to govern the unexpired awards. Our three independent, non-executive
directors are each eligible to receive $25,000 in restricted common stock annually. We recognized
compensation expense of approximately $38,000 for the year ended December 31, 2009 and issued 912
shares of restricted stock to our independent, non-executive directors pursuant to the Incentive
Plan in 2009 related to shares earned for the third quarter of 2009.
On February 19, 2010, we issued 834 shares of restricted stock to our
independent, non-executive directors pursuant to the Incentive Plan. The number of shares issued
was determined based on the closing price on the NYSE on the actual date of grant.
Dividends
We intend to continue 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, determined 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 taxable income. We intend to continue to pay regular quarterly
dividends to our shareholders in an amount equal at least 90% of our 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 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.
On October 13, 2009, we declared a dividend of $0.61 per share of common stock and paid the
dividend on November 12, 2009. On December 17, 2009, we declared a dividend of $1.05 per share of
common stock and paid the dividend on January 27, 2010. On March 18, 2010, we declared a dividend
of $0.78 per share of common stock to shareholders of record as of March 31, 2010 and will pay such
dividend on April 22, 2010. Investors in this offering will not be entitled to receive this
dividend.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a
result, interest rates and other factors influence our performance far more than inflation. Changes
in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Other Matters
We believe that at least 75% of our assets were qualified REIT assets, as defined in the
Internal Revenue Code of 1986, as amended, or the Code, for the year ended December 31, 2009. We
also believe that our revenue qualifies for the 75% source of income test and for the 95% source of
income test rules for the year ended December 31, 2009. Consequently, we met the REIT income and
asset test. We also met all REIT requirements regarding the ownership of our common stock.
Therefore, as of December 31, 2009, we believe that we were in a position to qualify as a REIT
under the Code.
Quantitative and Qualitative Disclosures about Market Risk
The primary components of our market risk are related to interest rate, prepayment and market
value. While we do not seek to avoid risk completely, we believe the risk can be quantified from
historical experience and we 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 are subject to interest rate risk in connection with our investments
and our repurchase agreements. Our repurchase agreements are typically of limited duration and will
be periodically refinanced at current market rates. We 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 depend in large part upon differences between the yields earned on
our investments and our costs of borrowing and interest rate hedging activities. Most of our
repurchase agreements 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 are match-funded utilizing our
66
expected sources of short-term financing, while our fixed interest rate assets are not
match-funded. During periods of rising interest rates, the borrowing costs associated with our
investments tend to increase while the income earned on our fixed interest rate investments may
remain substantially unchanged. This increase in borrowing costs results in the narrowing of the
net interest spread between the related assets and borrowings and may 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 that changes in interest rates will
have on the market value of the assets that we acquire. We 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 primarily assess our interest rate risk by estimating the duration of our assets and
the duration of our liabilities. Duration 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 be
significant 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 our investments, premiums paid on these
investments are 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
We compute the projected weighted-average life of our investments based upon 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, then 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 could 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 could be forced to sell assets to
maintain adequate liquidity, which could cause us to incur losses.
67
Market Risk
Market Value Risk
Our available-for-sale securities are reflected at their estimated fair value with
unrealized gains and losses excluded from earnings and reported in other comprehensive income. 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.
The sensitivity analysis table presented below shows the estimated impact of an
instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market
value of our interest rate-sensitive investments and net interest income, at December 31, 2009,
assuming a static portfolio. When evaluating the impact of changes in interest rates, prepayment
assumptions and principal reinvestment rates are adjusted based on our Managers expectations. The
analysis presented utilized assumptions, models and estimates of our Manager based on our Managers
judgment and experience.
|
|
|
|
|
|
|
|
|
|
|
Percentage Change in |
|
Percentage Change in |
|
|
Projected Net |
|
Projected Portfolio |
Change in Interest Rates |
|
Interest Income |
|
Value |
+1.00% |
|
|
7.79 |
% |
|
|
(1.71 |
)% |
+0.50% |
|
|
5.76 |
% |
|
|
(0.73 |
)% |
-0.50% |
|
|
(4.25 |
)% |
|
|
0.32 |
% |
-1.00% |
|
|
(14.67 |
)% |
|
|
0.12 |
% |
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 the housing supply); 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 that 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 in our portfolio. We seek to manage this risk through our pre-acquisition due diligence
process and through the 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 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 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:
|
|
|
monitoring and adjusting, if necessary, the reset index and interest rate related to our
target assets and our financings; |
|
|
|
|
structuring our financing agreements to have a range of maturity terms, amortizations
and interest rate adjustment periods; |
|
|
|
|
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 |
68
|
|
|
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. |
69
BUSINESS
Our Company
We are a 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. Our objective is to provide attractive risk-adjusted returns to our investors,
primarily through dividends and secondarily through capital appreciation. To achieve this
objective, we selectively acquire target assets to construct a diversified investment portfolio
designed to produce attractive returns across a variety of market conditions and economic cycles.
Our target assets consist of 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. Our Agency RMBS
investments include mortgage pass-through securities and may include collateralized mortgage
obligations, or CMOs. We also 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 generally finance our Agency RMBS investments and our non-Agency RMBS investments through
traditional repurchase agreement financing. In addition, we have financed our investments in CMBS
with financings under the Term Asset-Backed Securities Loan Facility, or TALF. We have also
financed, and may do so again in the future, our investments in CMBS with private financing
sources. We have financed our investments in certain non-Agency RMBS, CMBS and residential and
commercial mortgage loans by contributing capital to one or more of the legacy securities
public-private investment funds, or PPIFs, that receive financing under the U.S. governments
Public-Private Investment Program, or PPIP, established and managed by our Manager or one of its
affiliates, or the Invesco PPIP Fund.
We have invested the net proceeds from our IPO, related private placement and follow-on
offering, as well as monies that we borrowed under repurchase agreements and TALF, in accordance
with our investment strategy. By mid-February 2010, we had substantially invested the equity
proceeds of our follow-on offering. As of March 31, 2010,
approximately 27% of our equity was invested in Agency RMBS, 57% in
non-Agency RMBS, 12% in CMBS and 4% in the
Invesco PPIP Fund.
We are externally managed and advised by Invesco Advisers, Inc. (formerly 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, a leading independent global
investment management company.
We finance our investments in Agency RMBS and non-Agency RMBS primarily through short-term
borrowings structured as repurchase agreements. As of December 31, 2009, we had entered into master
repurchase agreements with eighteen counterparties and had borrowed $546.0 million under five of
those master repurchase agreements at a weighted average rate of 0.26% to finance our purchases of
Agency RMBS. In addition, as of December 31, 2009, we had entered into three interest rate swap
agreements for a notional amount of $375.0 million, designed to mitigate the effects of increases
in interest rates under a portion of our repurchase agreements. At December 31, 2009, we had
secured borrowings of $80.4 million under the TALF at a weighted average interest rate of 3.82%.
Finally, as of March 31, 2010, we had a commitment to invest up to $100.0 million in the Invesco
PPIP Fund, of which, $4.1 million has been called as of December 31, 2009. Our Managers investment
committee makes investment decisions for the Invesco PPIP Fund.
We intend to elect to be taxed as a real estate investment trust, or REIT, for U.S. federal
income tax purposes, commencing with our current taxable year ended December 31, 2009. Accordingly,
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 our shareholders and maintain our
qualification as a REIT. We operate our business in a manner that permits us to maintain our
exclusion from the definition of investment company under the Investment Company Act of 1940, as
amended, or the 1940 Act.
Public Offerings and Private Placement
On July 1, 2009, we successfully completed our IPO pursuant to which we sold 8,500,000 shares
of our common stock to the public at a price of $20.00 per share for net proceeds of $164.8
million. Concurrent with our IPO, we completed a private placement in which
70
we sold 75,000 shares of our common stock to our Manager at a price of $20.00 per share. In
addition, IAS Operating Partnership LP, or our Operating Partnership. sold 1,425,000 limited
partnership units, or OP Units, to Invesco Investments (Bermuda) Ltd., a wholly-owned subsidiary of
Invesco, at a purchase price of $20.00 per unit. The net proceeds from the private placement
totaled $30.0 million.
On July 27, 2009, the underwriters of our IPO exercised their over-allotment option to
purchase an additional 311,200 shares of our common stock at a price of $20.00 per share for net
proceeds of $6.1 million. Collectively, we received net proceeds from our IPO and the related
private placement of approximately $200.9 million.
On January 15, 2010, we completed a follow-on public offering of 7,000,000 shares of common
stock, and an issuance of an additional 1,050,000 shares of common stock pursuant to the
underwriters full exercise of their over-allotment option, at $21.25 per share. The net proceeds
to us were $162.7 million.
Our Manager
We are externally managed and advised by our Manager. Pursuant to the terms of the management
agreement, our Manager provides 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 have any
employees. With the exception of our Chief Financial Officer, our Manager does not 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
our board of directors delegates to it.
Our Competitive Advantages
We believe that our competitive advantages include the following:
Significant Experience of Our Manager
Our Managers senior management team 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. In addition, our Manager benefits from the insight and
capabilities of WL Ross & Co. LLC, or WL Ross, and Invescos real estate team. Through WL Ross and
Invescos real estate team, we have access to broad and deep teams of experienced investment
professionals in real estate and distressed investing. Through these teams, we have real time
access to research and data on the mortgage and real estate industries. We believe 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.
Extensive Strategic Relationships and Experience of our Manager
Our Manager maintains 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 enhance our ability to source, finance and
hedge investment opportunities and, thus, will enable us to grow in various credit and interest
rate environments.
Disciplined Investment Approach
We seek to maximize our risk-adjusted returns through our Managers disciplined investment
approach, which relies on rigorous quantitative and qualitative analysis. Our Manager monitors our
overall portfolio risk and evaluates the characteristics of our investments in our target assets
including, but not limited to (loan balance distribution, geographic concentration, property type,
occupancy), 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. We believe this strategy and our commitment to capital
preservation provide us with a competitive advantage when operating in a variety of market
conditions.
71
Access to Our Managers Sophisticated Analytical Tools, Infrastructure and Expertise
We utilize our Managers proprietary and third-party mortgage-related security and portfolio
management tools to generate an attractive net interest margin from our portfolio. We focus on
in-depth analysis of the numerous factors that influence our target assets, including:
|
|
|
fundamental market and sector review; |
|
|
|
|
rigorous cash flow analysis; |
|
|
|
|
disciplined security selection; |
|
|
|
|
controlled risk exposure; and |
|
|
|
|
prudent balance sheet management. |
We 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 use our
Managers proprietary technology management platform called QTech(SM) to monitor
investment risk. QTech(SM) collects and stores real-time market data, and integrates
markets performance with portfolio holdings and proprietary risk models to measure portfolio risk
positions. This measurement system portrays overall portfolio risk and its sources. Through the use
of these tools, we 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 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 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 also benefit from our Managers comprehensive financial 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
Invesco, through our Manager, beneficially owns 75,100 shares of our common stock and, through
Invesco Investments (Bermuda) Ltd., beneficially owns 1,425,000 units of partnership interests in
our operating partnership, which are redeemable for cash or, at our election, shares of our common
stock on a one-for-one basis. 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 Invesco Investments (Bermuda) Ltd. and our Manager) approximately
% of our common stock after giving effect to the sale of shares in this offering.
We believe that Invescos ownership of our common stock and partnership interests in our operating
partnership aligns 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 taxable
income that is distributed currently to our shareholders. This treatment substantially eliminates
the double taxation at the corporate and shareholder levels that generally results from
investments in a corporation.
Our Strategies
Investment Strategy
We invest in a diversified pool of mortgage assets that generate attractive risk adjusted
returns. Our target assets include Agency RMBS, non-Agency RMBS, CMBS and residential and
commercial mortgage loans. In addition to direct purchases of our target assets, we have also
invested in the Invesco PPIP Fund, which, in turn, invests in our target assets. Our Managers
investment committee makes investment decisions for the Invesco PPIP Fund.
72
Leverage
We use leverage on our target assets to achieve our return objectives. For our investments in
Agency RMBS (including CMOs), we focus on securities we believe provide attractive returns when
levered approximately 6 to 8 times. For our investments in non-Agency RMBS through December 31,
2009, we primarily focused on securities we believed would provide attractive unlevered returns.
More recently, the unlevered returns attainable on investments in non-Agency RMBS have decreased.
In the future we will employ leverage on our investments in non-Agency RMBS of approximately 1 to 2
times in order to achieve our risk-adjusted return target. We leverage our CMBS 3 to 5 times.
For the year ended December 31, 2009 and the first quarter ended March 31, 2010, the leverage
we employed on our investments in non-Agency RMBS was within the level we previously established
for this asset class (up to 1 times). For these same periods, the leverage we employed on our
investments in our other targeted asset classes was consistent with the ranges of leverage we have
established for these asset classes.
Financing Strategy
We finance our investments in Agency RMBS and non-Agency RMBS primarily through short-term
borrowings structured as repurchase agreements. In addition, we have financed our investments in
CMBS with financing under the TALF. We have also financed, and may do so again in the future, our
investments in CMBS with private financing sources. We have financed our investments in certain
non-Agency RMBS, CMBS and residential and commercial mortgage loans by investing in the Invesco
PPIP Fund, which receives financing from the U.S. Treasury and from the FDIC.
Repurchase Agreements
Repurchase agreements are financings pursuant to which we 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 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, certain
buyers, or lenders, 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. As of December 31,
2009, we had entered into master repurchase agreements with eighteen counterparties and had
borrowed $546.0 million under five of those master repurchase agreements to finance our purchases
of Agency RMBS. In addition, as of December 31, 2009, we had entered into three interest rate swap
agreements, for a notional amount of $375 million, designed to mitigate the effects of increases in
interest rates under a portion of our repurchase agreements.
The Term Asset-Backed Securities Loan Facility
On November 25, 2008, the U.S. Treasury and the Federal Reserve announced the creation of the
TALF. The TALF was intended to make credit available to consumers and businesses on more favorable
terms by facilitating the issuance of asset-backed securities and improving the market conditions
for asset-backed securities generally. The FRBNY made up to $200 billion of loans under the TALF.
The TALF loans have a term of three years or, in certain cases, five years, are non-recourse to the
borrower, and are fully secured by eligible asset-backed securities. Eligible collateral will
include asset-backed securities that are issued on or after January 1, 2009 except for SBA Pool
Certificates or Development Company Participation Certificates, which must have been issued before
January 1, 2009, or legacy CMBS. Any asset-backed securities that are not legacy CMBS are
considered newly issued asset-backed securities.
At December 31, 2009, we had secured borrowings of $80.4 million under the TALF.
The facility will cease making loans collateralized by newly issued CMBS on June 30, 2010 and
ceased making loans collateralized by newly issued asset-backed securities backed by consumer and
business loans and legacy CMBS on March 31, 2010. As a result, we are no longer able to obtain
additional TALF loans as a source of financing for investments in legacy CMBS.
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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 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 established under the legacy loan program will purchase troubled loans
from insured depository institutions and PPIP funds established under the legacy securities program
will purchase from financial institutions legacy non-Agency RMBS and newly issued and legacy CMBS
that were originally AAA rated. 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. As of March 31, 2010, we had
a commitment to invest up to $100.0 million in the Invesco PPIP Fund, of which $4.1 million has
been called as of December 31, 2009.
Risk Management Strategy
Market Risk Management
Risk management is an integral component of our strategy to deliver returns to our
shareholders. Because we invest in MBS, investment losses from principal prepayments, interest rate
volatility and other risks can meaningfully reduce or eliminate our distributions to shareholders.
In addition, because we employ financial leverage in funding our investment portfolio, mismatches
in the maturities of our assets and liabilities can create the need to continually renew or
otherwise refinance our liabilities. Our net interest margins are 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 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.
Interest Rate Hedging
Subject to maintaining our qualification as a REIT, we may engage in a variety of interest
rate management techniques that seek on one hand to mitigate the influence of interest rate changes
on the costs of liabilities and on the other hand help us achieve our risk management objective.
Specifically, we 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, we seek 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 rely on our Managers expertise to manage these
risks on our behalf. We utilize derivative financial instruments, which may include 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.
Credit Risk
We believe our investment strategy generally keeps 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 the 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.
Our Investments
We invest in the following assets:
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. Agency RMBS differ from
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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,
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 payments 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.
Mortgage pass-through certificates, CMOs, Freddie Mac Gold Certificates, Fannie Mae
Certificates and Ginnie Mae Certificates are types of Agency RMBS that are collateralized by either
fixed-rate mortgage loans, or FRMs, adjustable rate mortgage loans, or 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.
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. We have financed our non-Agency RMBS portfolio
with financings under the TALF. We have financed certain non-Agency RMBS by investing in the
Invesco PPIP Fund, which, in turn, invests in our target assets. 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.
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. We have financed certain of our CMBS portfolio with financings under the TALF and by
investing in the Invesco PPIP Fund, which, in turn, invests in our target assets. See 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
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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.
Residential Mortgage Loans
Residential mortgage loans are loans secured by residential real properties. To date, we have
generally focused our attention in residential mortgage loan acquisitions on the purchase of loan
portfolios made available to us under the legacy loan program by investing in the Invesco PPIP
Fund, which, in turn, invests in our target assets. See Financing Strategy above. 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 alternative forms of documentation. The credit quality of Alt-A
borrowers generally exceeds the credit quality of subprime borrowers.
Subprime Mortgage Loans
Subprime mortgage loans are loans that do not conform to U.S. government agency underwriting
guidelines.
Commercial Mortgage 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.
We have generally focused our commercial mortgage loan acquisitions on the purchase of loan
portfolios made available to us through our investment in the Invesco PPIP Fund. See Financing
Strategy below.
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.
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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 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 Sourcing
Our Manager takes advantage of the broad network of relationships it and Invesco have
established to identify investment opportunities. Our Manager and its affiliates 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
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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 pay off short-term debt
or invest the proceeds of this and any future offerings in interest-bearing, short-term
investments, including funds that are consistent with our intention to qualify as a REIT. |
These investment guidelines may be changed from time to time by our board of directors without
the approval of our shareholders.
Investment Committee
We have an investment committee comprised of certain of our officers and certain of our
Managers investment professionals. The investment committee periodically reviews our investment
portfolio and its compliance with our investment policies and procedures, including our investment
guidelines, and provides our board of directors an investment report at the end of each quarter in
conjunction with its review of our quarterly results. In addition, our Manager has a separate
investment committee that makes investment decisions for the Invesco PPIP Fund. From time to time,
as it deems appropriate or necessary, our board of directors also reviews our investment portfolio
and its compliance with our investment policies and procedures, including our investment
guidelines. For a description of the members comprising the investment committee, see Our Manager
and The Management Agreement Investment Committee and Management.
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Investment Process
Our investment process benefits from our Managers resources and professionals. Moreover, our
Managers investment committee oversees our investment guidelines and meets 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 utilizes this expertise to build a
diversified portfolio of Agency RMBS, non-Agency RMBS, CMBS and residential and commercial mortgage
loans. Our Manager incorporates 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,
delinquencies, default rates, recovery of various sectors and vintage of collateral.
Our investment process includes sourcing and screening 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 ensure 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
maintaining our exclusion from the definition of investment company under the 1940 Act. We 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 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 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 gross domestic product, interest
rates, unemployment rates and availability of credit, among other factors. 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(SM) 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.
Operating and Regulatory Structure
REIT Qualification
We intend to elect to be taxed as a REIT under Sections 856 through 859 of the Internal
Revenue Code commencing with our taxable year ended 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 shareholders. 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.
Exclusion from the 1940 Act
We conduct our operations so as not to become regulated as an investment company under the
1940 Act. Because we are a holding company that conducts our business through the operating
partnership and the wholly-owned or majority owned subsidiaries of the operating partnership, 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,
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may not have a combined value in excess of 40% of the value of the operating partnerships
total assets (exclusive of U.S. government securities) on an unconsolidated basis, which we refer
to as the 40% test. This requirement limits the types of businesses in which we may engage through
our subsidiaries. In addition, we believe neither the company nor the operating partnership are
considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not
engage primarily or hold themselves 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 are primarily engaged in the
non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the
operating partnerships other subsidiaries that we may form in the future intend to rely upon the
exclusion from the definition of investment company under the 1940 Act provided by 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
exclusion generally requires that at least 55% of each of our subsidiaries portfolios be comprised
of qualifying assets and at least 80% of each of their portfolios be comprised of qualifying assets
and real estate-related assets (and no more than 20% comprised of miscellaneous assets). Qualifying
assets for this purpose include mortgage loans fully secured by real estate and other assets, such
as whole pool Agency and non-Agency RMBS, that the SEC, or its staff in various no-action letters
has determined are the functional equivalent of mortgage loans fully secured by real estate. We
treat as real estate-related assets 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. IAS Asset I LLC invests in the Invesco PPIP Fund. We treat IAS Asset I LLCs
investment in the Invesco PPIP Fund as a real estate-related asset for purposes of the Section
3(c)(5)(C) analysis. As a result, IAS Asset I LLC can invest no more than 45% of its assets in the
Invesco PPIP and other real estate-related assets. We note that the SEC has not provided any
guidance on the treatment of interests in PPIFs as real estate-related assets and any such guidance
may require us to change our strategy. We may need to adjust IAS Asset I LLCs assets and strategy
in order for it to continue to rely on Section 3(c)(5)(C) for its 1940 Act exclusion. Any such
adjustment in IAS Asset I LLCs assets or strategy is not expected to have a material adverse
effect on our business or strategy. Although we monitor our portfolio periodically and prior to
each investment acquisition, there can be no assurance that we will be able to maintain this
exclusion from the definition of investment company for each of these subsidiaries. The legacy
securities PPIF formed and managed by our Manager or one of its affiliates relies on Section
3(c)(7) for its 1940 Act exclusion.
IMC Investments I LLC was organized as a special purpose subsidiary of the operating
partnership that borrowed under the TALF. This subsidiary relies on Section 3(c)(7) for its 1940
Act exclusion and, therefore, the operating partnerships interest in this TALF subsidiary would
constitute an investment security for purposes of determining whether the operating partnership
passes the 40% test.
Qualification for exclusion from the definition of investment company 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 Asset Based Securities and real estate companies or in assets not related to real
estate.
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 shareholder 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.
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 shareholders 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.
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Our board of directors may change any of these policies without prior notice to you or a vote
of our shareholders.
Competition
Our net income depends, in large part, on our ability to acquire assets at favorable spreads
over our borrowing costs. In acquiring our investments, we compete with other REITs, specialty
finance companies, savings and loan associations, 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 Operations Market 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 increase competition for the available supply of
mortgage assets suitable for purchase. Many of our 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 financing could
adversely affect the availability and cost of financing, and thereby adversely affect the market
price of our common stock.
In the face of this competition, we have access to our Managers professionals and their
industry expertise, which provides us with a competitive advantage. These professionals help us
assess investment risks and determine appropriate pricing for certain potential investments. These
relationships enable us to compete more effectively for attractive investment opportunities.
Despite certain competitive advantages, 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 Factors Risks Related to 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.
Staffing
We are managed by our Manager pursuant to the management agreement between our Manager
and us. All of our officers are employees of Invesco. We do not have any employees. See Our
Manager and The Management Agreement Management Agreement.
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
www.invescomortgagecapital.com. 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.
Legal Proceedings
From time to time, we may be involved in various claims and legal actions arising in the
ordinary course of business. As of the date of this prospectus, we were not involved in any such
legal proceedings.
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MANAGEMENT
Our Directors and Executive Officers
Our board of directors is comprised of five members. Our directors are each elected to serve a
term of one year. Our board of directors has determined that each of Messrs. Balloun, Day and
Williams satisfy the listing standards for independence of the NYSE. Our bylaws provide that a
majority of the 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, executive officers
and other key personnel:
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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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71 |
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Director |
John S. Day
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61 |
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Director |
Neil Williams
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73 |
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Director |
Richard J. King
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51 |
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President and Chief Executive Officer |
John Anzalone
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45 |
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Chief Investment Officer |
Donald R. Ramon
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46 |
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Chief Financial Officer |
Robson J. Kuster*
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36 |
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Head of Research |
Jason Marshall*
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35 |
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|
Portfolio Manager |
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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, executive officers and other
key personnel.
Directors
G. Mark Armour, Director since June 5, 2008. Mr. Armour is the Co-President, Co-Chief
Executive Officer 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 since June 5, 2008. Ms. Dunn Kelley is the Chief Executive Officer
of Invesco 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 since July 1, 2009. Mr. Balloun serves 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, 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, Unisen/StarTrac and the Georgia Port Authority. Mr. Balloun received a Bachelor
of Science from Iowa State University and a Master of Business Administration from Harvard Business
School.
81
John S. Day, Director since July 1, 2009. Mr. Day serves 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 since July 1, 2009. Mr. Williams serves as the Non-Executive Chairman
of the Board of Directors 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 Lead Director and 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 has served as our
President and Chief Executive Officer since June 16, 2008. He is also a member of the Invesco Fixed
Income senior management team, and is the Head of US Investment Grade Fixed Income Investment,
contributing 25 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 has served as our Chief
Investment Officer since June 25, 2009. 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, CPA, Chief Financial Officer. Mr. Ramon is our Chief Financial Officer and
joined Invesco in 2009. Mr. Ramon has 23 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 mortgage REIT. 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 has served as our Head of Research since
July 1, 2009. He is also the Head of Structured Securities Research for Invesco 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. 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.
82
Jason Marshall, Portfolio Manager. Mr. Marshall has served as our Portfolio Manager since July
28, 2009. 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
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 Business Investment
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.
Board of Directors
Director Qualifications to Serve on our Board
The board of directors believes that there are certain minimum qualifications that each
director must satisfy in order to be suitable for a position as a director. The board of directors
believes that, consistent with these requirements, each member of our board of directors displays a
high degree of personal and professional integrity, an ability to exercise sound business judgment
on a broad range of issues, sufficient experience and background to have an appreciation of the
issues facing our company, a willingness to devote the necessary time to board of directors duties,
a commitment to representing the best interests of our company and a dedication to enhancing
shareholder value. The board of directors does not consider individual directors to be responsible
for particular areas of the board of directors focus or specific categories of issues that may
come before it. Rather, the board of directors seeks to assemble a group of directors that, as a
whole, represents a mix of experiences and skills that allows appropriate deliberation on all
issues that the board of directors might be likely to consider. Set forth below is a brief
description of the particular experience or skills of each director that led the board of directors
to conclude that such person should serve as a director in light of our business and structure.
G. Mark Armour Mr. Armour has spent over 25 years in the investment management industry,
including as an investment professional, and in a series of executive management positions, such as
managing investment professionals, risk committee oversight and as a former director of publicly
listed companies. Through his decades of involvement in all aspects of investment management, he
has gained an extensive understanding of many different facets of our organization, which give his
participation in our board of directors deliberations significant weight.
James S. Balloun Mr. Balloun has extensive experience as both a chairman and chief executive
officer of public companies in a variety of industries. Prior to fulfilling these senior
leadership roles, Mr. Balloun had counseled management at some of the worlds largest companies
during his over thirty-year career at one of the worlds most respected business consulting firms.
Mr. Ballouns broad appreciation for international business issues garnered over this extraordinary
career has made him a particularly valuable addition to our directors mix of skills.
John S. Day Mr. Day has amassed extensive experience in finance and accounting, having
served for nearly three decades at two of the worlds largest accounting firms. In keeping with his
experience, Mr. Day chairs our Audit Committee, where he is additionally recognized by the board of
directors as our audit committee financial expert under SEC rules.
Karen Dunn Kelley Ms. Kelley has in-depth experience of the investment aspects of our
operations, having served since 1982 in capacities of increasing responsibility within our
Managers fixed income and cash management business. Due to her varied roles within Invesco over
the past 21 years, Ms. Kelley has gained a broad understanding of the types of business and
investment issues that are faced by companies similar to ours, and this experience has enabled her
to provide effective counsel to our board of directors on many issues of concern to our management.
Neil Williams Mr. Williams brings to the board of directors more than twelve years of
experience leading one of the largest law firms in Atlanta, Georgia, where Invesco was founded and
grew to prominence. He also has extensive knowledge of our Manager and its business, having served
as Invescos first general counsel from 1999 to 2002. His prior career as one of the regions
premier
83
corporate and business lawyers has given Mr. Williams broad experience of the types of issues
that are regularly faced by financial service providers such as our company.
Committees of our Board of Directors
Our
board of directors has appointed an audit committee, a compensation committee and a
nominating and corporate governance committee and has adopted charters for each of these
committees. Each of these committees has three directors and is composed exclusively of independent
directors, as defined by the listing standards of the NYSE. Moreover, the compensation committee is
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 is comprised of Messrs. Balloun, Day and Williams, each of whom is an
independent director and financially literate under the rules of the NYSE. Mr. Day chairs our
audit committee and serves 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. |
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 is comprised of Messrs. Balloun, Day and Williams, each of whom is
an independent director. Mr. Balloun chairs our compensation committee.
The principal functions of the compensation committee are 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, 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). |
84
Nominating and Corporate Governance Committee
The nominating and corporate governance committee is comprised of Messrs. Balloun, Day and
Williams, each of whom is an independent director. Mr. Williams chairs our nominating and corporate
governance committee.
The nominating and corporate governance committee is 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. |
Director Compensation
Compensation of Executive Directors
A member of our Board of Directors who is also an employee of Invesco is referred to as an
executive director. Executive directors do not receive compensation for serving on our Board of
Directors. We reimburse each of our executive directors for his or her travel expenses incurred in
connection with his or her attendance at Board of Directors meetings.
Compensation of Non-executive Directors
A member of our Board of Directors who is not an employee of Invesco is referred to as a
non-executive director. Each non-executive director received an upfront fee of $5,000 upon
completion of our initial public offering (IPO). In addition, each non-executive director
receives an annual base fee for his or her services of $25,000, payable in cash, and an annual
deferred director fee of $25,000, payable in shares of our common stock under our equity incentive
plan. Such shares of our common stock may not be sold or transferred during the non-executive
directors service on our Board of Directors. Both base and deferred director fees are paid on a
quarterly basis. We also reimburse each of our non-executive directors for his or her travel
expenses incurred in connection with his or her attendance at Board of Directors and committee
meetings.
Director Compensation Table for 2009
The table below sets forth the compensation paid to our non-executive directors for services
during 2009. We compensated only those directors who are independent under the NYSE listing
standards.
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Fees Earned or Paid |
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|
Name |
|
in Cash ($)(1) |
|
Stock Awards ($)(2) |
|
Total |
James. S. Balloun |
|
|
11,250 |
|
|
|
6,238 |
|
|
|
17,488 |
|
John S. Day |
|
|
11,250 |
|
|
|
6,238 |
|
|
|
17,488 |
|
Neil Williams |
|
|
11,250 |
|
|
|
6,238 |
|
|
|
17,488 |
|
|
|
|
(1) |
|
Represents an initial one-time cash fee of $5,000 and a quarterly cash award of $6,250. |
|
(2) |
|
Reflects the full grant date fair value of such stock awards, determined in
accordance with Financial Accounting Standards Board ASC Topic 718 Stock Compensation,
as granted to each of our non-executive directors in payment of his or her quarterly
deferred director fee. The grant date fair value of the stock awards is based on the
fair market value of the underlying shares on the date of grant. The stock awards were
fully-vested as of the date of grant. |
85
The following table presents the grant date fair value for each stock award made to each
non-executive director during 2009.
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|
Total Grant Date |
Name |
|
Date of Grant |
|
Number of Shares (#) |
|
Fair Value ($) |
James. S. Balloun |
|
|
12/28/2009 |
|
|
|
304 |
|
|
|
6,238 |
|
John S. Day |
|
|
12/28/2009 |
|
|
|
304 |
|
|
|
6,238 |
|
Neil Williams |
|
|
12/28/2009 |
|
|
|
304 |
|
|
|
6,238 |
|
The aggregate number of share awards outstanding at December 31, 2009 for each of our
non-executive directors was as follows:
|
|
|
|
|
|
|
|
|
Name |
|
Shares Outstanding |
|
Total Stock Awards Outstanding |
James. S. Balloun |
|
|
304 |
|
|
|
304 |
|
John S. Day |
|
|
304 |
|
|
|
304 |
|
Neil Williams |
|
|
304 |
|
|
|
304 |
|
Executive Compensation
On July 1, 2009, we entered into a management agreement with Invesco Advisers, Inc. (formerly
Invesco Institutional (N.A.), Inc.), our Manager, pursuant to which our Manager provides the
day-to-day management of our operations. 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, 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. 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 Chief Financial Officer
is dedicated exclusively to us and, as a result, we are responsible for his total compensation. Our
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. For 2009, our Chief Financial Officer
received an actual cash bonus of $100,000. In their capacities as officers or personnel of Invesco,
persons other than our Chief Financial Officer devote such portion of their time to our affairs as
is necessary to enable us to operate our business. We have granted, and may in the future grant,
equity to our executive officers for which our Manager reimburses us or for which there is an
offset against the management fee we otherwise owe our Manager under the management agreement.
Compensation Committee Interlocks and Insider Participation
During 2009, the following directors served as members of the Compensation Committee: Mr.
Balloun (Chairman) and Messrs. Day and Williams. No member of the Compensation Committee was an
officer or employee of the company or any of its subsidiaries during 2009, and no member of the
Compensation Committee was formerly an officer of the company or any of its subsidiaries or was a
party to any disclosable related person transaction involving the company. During 2009, none of the
executive officers of the company has served on the board of directors or on the compensation
committee of any other entity that has or had executive officers serving as a member of the Board
of Directors or Compensation Committee of the company.
2009 Equity Incentive Plan
We adopted the 2009 Equity Incentive Plan to provide incentive compensation to attract and
retain qualified directors, officers, advisors, consultants and other personnel, including our
Manager and its 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. The maximum
number of shares with respect to which any options may be granted in any one year to any grantee
may not exceed 700,000. The maximum number of shares underlying grants, other than grants of
options, in any one year to any grantee may not exceed 700,000. Notwithstanding the foregoing,
except in the case of grants intended to qualify as a performance-based award under Section 162(m)
of the Internal Revenue Code, there is no limit on the number of phantom shares or dividend
equivalent rights to the extent they are paid out in cash that may be granted under the equity
incentive plan. We have granted equity awards to our executive officers and non-executive
directors. See Management Director Compensation Compensation of Non-executive Directors
for a detailed
86
explanation of our non-executive director compensation. We did not grant any equity awards to
our executive officers during 2009. On March 17, 2010, we granted restricted stock units to each
of our executive officers in the following amounts: Richard J. King, 1,762; Donald R. Ramon, 1,321
and John Anzalone, 660. Each restricted stock unit represents a contingent right to receive one
share of our common stock. The restricted stock units vest in four equal annual installments
beginning on March 17, 2011. See Management Director Compensation Compensation of
Non-executive Directors for a detailed explanation of our non-executive director compensation.
The equity incentive plan is administered by the compensation committee of our board of
directors. The compensation committee 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 its
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 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.
The compensation committee may, in its discretion, designate awards granted under the equity
incentive plan as a qualified performance-based award in order to make the award fully deductible
without regard to the $1,000,000 deduction limit imposed by Internal Revenue Code Section 162(m),
at such times as we are subject to Section 162(m). If an award is so designated, the compensation
committee must establish objectively determinable performance goals for the award based on one or
more of the following business criteria: (1) pre-tax income, (2) after-tax income, (3) net income
(meaning net income as reflected in our financial reports for the applicable period, on an
aggregate, diluted and/or per share basis), (4) operating income, (5) cash flow, (6) earnings per
share, (7) return on equity, (8) return on invested capital or assets, (9) cash and/or funds
available for distribution, (10) appreciation in the fair market value of the common stock, (11)
return on investment, (12) total shareholder return (meaning the aggregate common stock price
appreciation and dividends paid, assuming full reinvestment of dividends during the applicable
period, (13) net earnings growth, (14) stock appreciation (meaning an increase in the price or
value of the common stock after the date of grant of an award and during the applicable period),
(15) related return ratios, (16) increase in revenues, (17) the Companys published rankings
against its peer group of REITs based on total shareholder return, (18) net earnings, (19) changes
(or the absence of changes) in the per share or aggregate market price of our common stock, (20)
number of securities sold, (21) earnings before any one or more of the following items: interest,
taxes, depreciation or amortization for the applicable period, and (22) total revenue growth
(meaning the increase in total revenues after the date of grant of an award and during the
applicable period).
The equity incentive plan contains provisions regarding the treatment of awards granted under
the plan in the event of a participants termination of service, including his or her death,
disability or retirement, or upon the occurrence of a change in our control. Unless otherwise
provided by the committee in the applicable award agreement, upon the occurrence of a change of
control (as defined in the equity incentive plan), all awards granted under the equity incentive
plan will become fully-vested. Unless otherwise provided by the compensation committee in the
applicable award agreement, upon the termination of a participants service by us without cause or
due to his or her death, disability or retirement (as such terms are defined in the equity
incentive plan), all restrictions on such participants outstanding awards of restricted stock and
phantom shares will lapse as of the date of termination.
Code of Conduct
Our board of directors has established a code of ethics, or code of conduct, 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 conduct 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 codes; and |
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accountability for adherence to the codes. |
87
Any
amendment of the code of conduct or waiver of it 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.
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 has an investment and financing 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 is
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 at anytime
without our consent. To the extent that a conflict arises with respect to the business of our
Manager or us in such a way as to give rise to conflicts not currently addressed by the investment
allocation policy, our Manager may need to refine its policy to address such situation. Our
independent directors will review our Managers compliance with the investment allocation policy.
In addition, to avoid any actual or perceived conflicts of interest with our Manager, 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, or any of its affiliates, or any purchase or sale of
our assets by or to our Manager or its affiliates or an entity managed by our Manager 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 we may also seek to acquire residential
and commercial mortgage loans with financing under the legacy loan program. One of the ways we
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. On
September 30, 2009, U.S. Treasury announced that the Invesco PPIP Fund had acquired the requisite
private capital to obtain funding from U.S. Treasurys legacy securities program. Pursuant to the
terms of the management agreement, we pay our Manager a management fee. As a result, we do not pay
any management or investment fees with respect to our investment in the Invesco PPIP Fund managed
by our Manager. Our Manager waives all such fees. 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 the audit committee.
We do not have a policy that expressly prohibits our directors, officers, shareholders 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 shareholders 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.
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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. |
However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders indemnification and
then only for 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; and |
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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. |
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 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, limited liability company or any other enterprise as a director, officer, partner or
trustee of such corporation, REIT, partnership, joint venture, trust, employee benefit plan,
limited liability company 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. |
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 employee or agent
of our company or a predecessor of our company.
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.
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OUR MANAGER AND THE MANAGEMENT AGREEMENT
General
We are externally managed and advised by our Manager. Each of our officers is an employee of
Invesco. Our Manager is 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:
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Executive Officer |
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Position Held with our Manager |
G. Mark Armour
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56 |
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Co-President, Co-Chief Executive Officer and Director |
Philip A. Taylor
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54 |
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Co-President, Co-Chief Executive Officer and Director |
David A. Hartley
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48 |
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Treasurer and Chief Accounting Officer |
Kevin M. Carome
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53 |
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Secretary and Director |
Todd L. Spillane
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51 |
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Chief Compliance Officer and Senior Vice President |
Set forth below is biographical information for the executive officers and certain other key
personnel of our Manager.
G. Mark Armour. See Management Our Directors and Executive Officers Directors for his
biographical information.
Philip A. Taylor, Co-President, Co-Chief Executive Officer and Director. Mr. Taylor is the
Co-President, Co-Chief Executive Officer and a Director of our Manager. He is also the head of
Invescos North American Retail business and previously served as head of Invesco Trimark. Mr.
Taylor joined Invesco Trimark in 1999 as senior vice president of operations and client services
and later became executive vice president and chief operating officer. Mr. Taylor was president of
Canadian retail broker Investors Group Securities from 1994 to 1997 and managing partner of
Meridian Securities, an execution and clearing broker, from 1989 to 1994. He held various
management positions with Royal Trust, now part of Royal Bank of Canada, from 1982 to 1989. Mr.
Taylor began his career in consumer brand management in the U.S. and Canada with Richardson-Vicks,
now part of Procter & Gamble. He received a Bachelor of Commerce (honors) degree from Carleton
University and an MBA from the Schulich School of Business at York University. Mr. Taylor is a
member of the Deans Advisory council of the Schulich School of Business.
David A. Hartley, Treasurer and Chief Accounting Officer. Mr. Hartley is the Treasurer and
Chief Accounting Officer 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.
Kevin M. Carome, Secretary and Director. Mr. Carome is the Secretary and a Director of our
Manager. He has served as general counsel of Invesco since January 2006. Previously, he was senior
vice president and general counsel of Invesco Aim from 2003 to 2005. Prior to joining Invesco, Mr.
Carome worked with Liberty Financial Companies, Inc. (LFC) in Boston where he was senior vice
president and general counsel from August 2000 through December 2001. He joined LFC in 1993 as
associate general counsel and, from 1998 through 2000, was general counsel of certain of its
investment management subsidiaries. Mr. Carome began his career as an associate at Ropes & Gray in
Boston. He received a B.S. in political science and a J.D. from Boston College.
Todd Spillane, Chief Compliance Officer and Senior Vice President. Mr. Spillane is the Chief
Compliance Officer and Senior Vice President 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
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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.
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 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 analyzing residential mortgage-backed
securities and evaluating issuers, originators, servicers, insurance providers and other associated
parties. 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 degree 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 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 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. 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.
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Thomas Gerhardt, Portfolio Manager, Cash Management. Mr. Gerhardt is a Portfolio Manager for
Invesco 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.
Aaron D. Kemp, Analyst, Structured Securities. Mr. Kemp joined our Manager in August 2009 as a
Structured Securities Analyst. He is responsible for evaluating and forming credit opinions on
residential mortgage investments and related collateral for Invesco Fixed Income. Prior to joining
Invesco, Mr. Kemp spent three years at American Capital Ltd. where he was a Manager in the Debt
Capital Markets group. From 2005 to 2006, Mr. Kemp was an Analyst in the Investment Banking ABS
group at Friedman Billings Ramsey. Mr. Kemp graduated cum laude with a Bachelor of Science in
Finance from Virginia Polytechnic Institute and State University and magna cum laude with a Master
of Business Administration from the University of Maryland. He is currently a Level III candidate
in the Chartered Financial Analyst program.
Daniel J. Saylor, Analyst, Structured Securities. Mr. Saylor joined our Manager in January
2010 as a Structured Securities Analyst. 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. Prior to joining Invesco, Mr. Saylor spent two-and-a-half years at Fort
Washington Investment Advisors where he was an Analyst on the Residential Mortgage-Backed
Securities Team. Mr. Saylor graduated magna cum laude from Xavier University, holding a Bachelor of
Science in Business Administration with a major in Finance and minor in Mathematics. He
consecutively passed Level I, Level II, and Level III in the Chartered Financial Analyst program.
Investment Committee
We have an investment committee comprised of our professionals, namely: Messrs. King,
Anzalone, Kuster, Marshall and Missimer. For biographical information on the members of the
investment committee, see Management Our Directors and Executive Officers Executive
Officers, Management Our Directors and Executive Officers Other Key Personnel and Our
Manager and the Management Agreement Executive 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. In addition, our Manager has a
separate investment committee that makes investment decisions for the Invesco PPIP Fund. The
investment committee meets as frequently as it believes is necessary.
Management Agreement
We entered 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 requires 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 is under the
supervision and direction of our board of directors.
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Management Services
Our Manager is 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 is responsible for our day-to-day operations and performs (or causes 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;
(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 exclusion from the definition of an
investment company required to register under the 1940 Act, monitoring compliance with the
requirements for maintaining such exclusion and using commercially reasonable efforts to cause us
to maintain such exclusion from such status;
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(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 shareholders 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;
(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 shareholders 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;
(xxix) 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
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(xxxi) using commercially reasonable efforts to cause us to comply with all applicable laws.
Liability and Indemnification
Pursuant to the management agreement, our Manager does not assume any responsibility other
than to render the services called for thereunder and is not 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, shareholders, members, managers, partners,
directors and 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 shareholders or any subsidiarys shareholders 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, shareholders,
members, managers, directors and 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, officers, personnel and 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 carries errors and omissions and other customary
insurance.
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, a Chief Financial Officer, a Chief
Investment Officer, a Head of Research and a Portfolio Manager and appropriate support personnel,
to provide the management services to be provided by our Manager to us. With the exception of the
Chief Financial Officer, none of the officers or employees of our Manager are 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, shareholders, managers, personnel and 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 or our shareholders, partners or members, for any act or
omission by our Manager or its directors, officers, shareholders 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
our IPO, or July 1, 2011, 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
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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.
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. |
Our Manager may assign the agreement in its entirety or delegate certain of its duties under
the management agreement to any of Invescos affiliates without the approval of our independent
directors if such assignment or delegation does not require our approval under the 1940 Act.
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 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 pay our Manager a management fee in an amount equal to 1.50% of our shareholders equity,
per annum, calculated and payable quarterly in arrears. For purposes of calculating the management
fee, our shareholders 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 is adjusted to exclude one-time events pursuant to changes in
US 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 shareholders equity, for
purposes of calculating the management fee, could be greater or less than the amount of
shareholders equity shown on our financial statements. We treat outstanding limited partner
interests (not held by us) as outstanding shares of capital stock for purposes of
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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 to reduce 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. However, our Managers management fee will not be reduced in respect of 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. Because we pay our Manager a management fee
pursuant to the management agreement, we do not pay any management or investment fees with respect
to our investment in the Invesco PPIP Fund managed by our Manager. Our Manager waives all such
fees.
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.
As a component of our Managers compensation,
we have granted, and may in the future grant, equity to our executive
officers for which our Manager reimburses us or for which there is an
offset against the management fee we otherwise owe our Manager under
the management agreement.
We paid fees to our Manager in an aggregate amount of approximately $1.5 million in 2009.
Reimbursement of Expenses
We are required to reimburse our Manager for the expenses described below. Expense
reimbursements to our Manager are made in cash on a quarterly basis following the end of each
quarter. 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 shareholders and proxy materials
with respect to any meeting of our shareholders; |
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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, |
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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 other 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 the securities 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. |
We do not reimburse our Manager for the salaries and other compensation of its personnel,
except, we reimburse our Manager for our Chief Financial Officers compensation. The compensation
of our Chief Financial Officer is competitive with other similarly situated public REITs. See
Management Executive and Director Compensation Executive Compensation.
In addition, we are 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 is authorized to approve
grants of equity-based awards to, among others, directors, officers, our Manager and personnel of
our Manager and its affiliates. See Equity Incentive Plan for a detailed description of our
equity incentive plan. We grant shares of restricted stock to each non-executive director as part
of his compensation. See ManagementDirector CompensationCompensation of Non-executive
Directors for a detailed explanation of our non-executive
director compensation. We have granted, and may in the future grant, equity
awards to our officers and to our Manager and its personnel and affiliates under our
equity incentive plan. See ManagementEquity Incentive Plan. 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.
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PRINCIPAL SHAREHOLDERS
As of April 9, 2010, there were 16,938,046 shares of common stock outstanding and
approximately 8,338 shareholders. At that time, we had no other shares of capital stock
outstanding. The following table sets forth certain information, prior to this offering as of April
9, 2010 regarding the ownership of each class of our capital stock by: each of our directors; each
of our executive officers; each holder of 5% or more of each class of our capital stock; and all of
our directors and executive officers as a group.
In accordance with SEC rules, each listed persons beneficial ownership includes: all shares
the investor actually owns beneficially or of record; 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 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).
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 shareholders 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 |
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Outstanding |
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Immediately Prior to this Offering |
Name and Address |
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Shares Owned |
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Percentage |
Thornburg Investment Management Inc.(1) |
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1,331,729 |
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7.86 |
% |
Wells Fargo & Company and subsidiaries(2) |
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1,130,937 |
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6.68 |
% |
Invesco Ltd.(3) |
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75,100 |
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0.44 |
% |
John Anzalone |
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6,000 |
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* |
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G. Mark Armour |
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5,000 |
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* |
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James S. Balloun(4) |
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8,082 |
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* |
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John S. Day |
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3,082 |
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* |
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Karen Dunn Kelley |
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5,000 |
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* |
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Richard J. King |
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15,000 |
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* |
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Donald R. Ramon |
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5,100 |
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* |
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Neil Williams |
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5,582 |
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* |
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All directors and executive officers as a group |
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52,846 |
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* |
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Represents less than 1% of the shares of common stock outstanding. |
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Information obtained solely by reference to the Schedule 13G/A filed
with the SEC on January 8, 2010 by Thornburg Investment Management
Inc., or Thornburg. Of the reported shares, Thornburg reported that it
has sole power to vote or to direct the vote and sole power to dispose
or to direct the disposition of 1,331,729 shares. The address for
Thornburg is 2300 North Ridgetop Road, Santa Fe, New Mexico 87506. |
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(2) |
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Information obtained solely by reference to the Schedule 13G/A filed
with the SEC on January 26, 2010, by Wells Fargo & Company, or Wells
Fargo, on behalf of itself and subsidiaries. According to the
schedule, the shares are also beneficially owned by the following
subsidiaries of Wells Fargo: Wells Capital Management Inc., Wells
Fargo Funds Management, L.L.C., Wells Fargo Advisors, L.L.C. and
Evergreen Investment Management Company, L.L.C., collectively with
Wells Fargo referred to as the Wells Fargo Group. Of the reported
shares, the Wells Fargo Group reported that it has sole power to vote
or direct the vote of 1,122,112 shares and sole power to dispose or
direct the disposition of 1,130,937 shares. The address for the Wells
Fargo Group is 420 Montgomery Street, San Francisco, California 94104. |
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(3) |
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Invesco is the indirect 100% shareholder of Invesco Advisers, Inc.
which purchased 100 shares of common stock in connection with our
initial capitalization and purchased 75,000 shares of common stock in
the concurrent private offering with our IPO. The outstanding shares
excludes Invescos beneficial ownership of 1,425,000 OP units owned by
its wholly-owned subsidiary, Invesco Investments (Bermuda) Ltd. Each
such OP unit is redeemable for cash or, at our election, one share of
our common stock. |
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(4) |
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Includes 2,500 shares acquired by Mr. Ballouns spouse. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 2009 we entered into a management agreement with Invesco Advisers, Inc. (formerly
Invesco Institutional (N.A.), Inc.), our Manager, pursuant to which our Manager provides 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 Agreement
Management Agreement.
Our executive officers are also employees of Invesco. As a result, the management agreement
between us and our Manager and the terms of the limited partner interests provided therein 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. We paid
fees to our Manager in an aggregate amount of approximately $1.5 million in 2009. See Management
Conflicts of Interest and Risk Factors Risks Related to Our Relationship With Our Manager
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 shareholders.
Our management agreement provides us with access to our Managers pipeline of assets and its
personnel and 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 Management Conflicts of Interest and Risk
Factors Risks Related to Our Relationship With Our Manager 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 shareholders.
Related Party Transaction Policies
Our board of directors has adopted written Policies and Procedures with Respect to Related
Person Transactions to address the review, approval, disapproval or ratification of related person
transactions. Related persons include our executive officers, directors, director nominees,
holders of more than five percent (5%) of our voting securities, immediate family members of the
foregoing persons, and any entity in which any of the foregoing persons is employed, is a partner
or is in a similar position, or in which such person has a 5% or greater ownership interest. A
related person transaction means a transaction or series of transactions in which the company
participates, the amount involved exceeds $120,000, and a related person has a direct or indirect
interest (with certain exceptions permitted by SEC rules). Examples might include sales, purchases
and transfers of real or personal property, use of property and equipment by lease or otherwise,
services received or furnished and borrowings and lendings, including guarantees.
Management is required to present for the approval or ratification of the Audit Committee all
material information regarding an actual or potential related person transaction. The policy
requires that, after reviewing such information, the disinterested members of the Audit Committee
will approve or disapprove the transaction. Approval will be given only if the Audit Committee
determines that such transaction is in, or is not inconsistent with, the best interests of the
company and its stockholders. The policy further requires that in the event management becomes
aware of a related person transaction that has not been previously approved or ratified, it must be
submitted to the Audit Committee promptly. The policy also permits the chairman of the Audit
Committee to review and approve related person transactions in accordance with the terms of the
policy between scheduled committee meetings. Any determination made pursuant to this delegated
authority must be reported to the full Audit Committee at the next regularly-scheduled meeting.
Ownership of Common Stock by Affiliates
Invesco, through our Manager, beneficially owns 0.44% of our outstanding common stock.
Invesco, through the Invesco Investments (Bermuda) Ltd., beneficially owns 1,425,000 units of the
partnership interests of our operating partnership, which is convertible into our common stock.
Registration Rights
We have entered into a registration rights agreement with regard to the common stock and OP
units owned by our Manager and Invesco Investments (Bermuda) Ltd., respectively, 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 granted to our Manager and Invesco Investments
(Bermuda) Ltd., respectively (1) unlimited demand registration rights to have the shares purchased
by our Manager or
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granted to it 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 purchased in connection
with our IPO will only begin to apply on July 1, 2010. 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, $0.01 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
shareholder approval. After giving effect to this offering, shares of common stock will
be issued and outstanding ( shares if the underwriters over-allotment option is
exercised in full), and no shares of preferred stock will be issued and outstanding. Under Maryland
law, shareholders are not generally liable for our debts or obligations.
Additionally, 1.0 million shares of common stock are reserved for awards under our 2009 Equity
Incentive Plan.
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 ownership and
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 shareholders 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 ownership and 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 shareholders, 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 unless our board of directors determines that appraisal rights
apply, with respect to all or any classes or series of stock, to one or more transactions occurring
after the date of such determination in connection with which holders of such shares would
otherwise be entitled to exercise appraisal rights. Subject to the provisions of our charter
regarding the restrictions on ownership and 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, sell or transfer all or substantially all of its
assets or engage in similar transactions outside the ordinary course of business
unless approved by the affirmative vote of shareholders entitled to cast 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) may be approved by a majority of all of the votes entitled to be cast on the matter.
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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 ownership and 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 shareholders. 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 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 or the number of shares of stock of any class or
series that we have authority to issue, 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 shareholders, 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 shareholders.
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% of our outstanding common stock or up to 25% 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 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.
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Our board of directors may, in its sole discretion, exempt a person (prospectively or
retroactively) 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; 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 beneficially owned by fewer than 100 persons (determined without
reference to any rules of attribution). |
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 written notice immediately to us (or, in the
case of a proposed or attempted acquisition, 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 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 beneficially 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
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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 may
reduce the amount payable to the purported record transferee, however, by the amount of any
dividends or other distributions paid to the purported record transferee on the shares and owed by
the purported record transferee to the trustee. 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. The trustee may reduce the amount payable to the
purported record transferee by the amount of dividends and other distributions paid to the
purported record transferee and owed by the purported record transferee to the trustee. 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.
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. |
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 5% or more (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
shareholder 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.
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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
shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our shares of common stock is Mellon Investor Services
LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Our shares of common stock began trading on the NYSE under the symbol IVR on June 26, 2009.
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 Factors Risks
Related to Our Common Stock.
Securities Convertible into Shares of Common Stock
We have (1) 1,425,000 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) pursuant to our equity incentive plan, reserved 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
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 certain officers of our
Manager and 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 90 days after
the 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
certain officers of our Manager may transfer or dispose of our shares during this 90-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 90-day lock-up period.
In connection with our IPO, each of our Manager and Invesco Investments (Bermuda) Ltd. agreed
that, for a period of one year after June 25, 2009, 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 purchased in the private placement
consummated concurrent with the IPO. Additionally, each of our Manager and Invesco Investments
(Bermuda) Ltd. agreed to a further lock-up period that will expire at the earlier of (1) June 25,
2010 or (2) the termination of the management agreement. However, each of our Manager and Invesco
Investments (Bermuda) Ltd. may transfer these shares or OP units, respectively, to any of our
affiliates during this 365-day lock-up period, provided that (i) the transferee agrees to be
bound in writing by the restrictions set forth in this paragraph for the remainder of the 365-day
lock-up period prior to such transfer, (ii) such transfer shall not involve a disposition for
value and (iii) no filing by the transferor or transferee under the Exchange Act is required or
voluntarily made in connection with such transfer (other than a filing on a Form 5 made after the
expiration of the 365-day lock-up period).
In the event that either (1) during the last 17 days of the 90-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
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90-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 90-day or one-year lock-up period, as
applicable, then, in either case, the expiration of the 90-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 shareholders or affiliates releasing them from these lock-up agreements
prior to the expiration of the 90-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 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.
Our Board of Directors
Our
charter and bylaws provide that the number of directors we have may be established by our
board of directors but our current bylaws provide that such number may not be more than 15.
Pursuant to Title 3 of Subtitle 8 of the MGCL, 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.
Each of our directors is elected by our common shareholders 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 shareholders, 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 only for cause
and by the affirmative vote of at least two-thirds of the votes of shareholders 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 shareholders 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 shareholder (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 shareholder are prohibited for five years after the most recent date on which the
interested shareholder becomes an interested shareholder. 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 shareholder with
whom (or with whose affiliate) the business combination is to be effected or held by an affiliate
or associate of the interested shareholder, unless, among other conditions, the corporations
common shareholders 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
shareholder for its shares. A person is not an interested shareholder under the statute if the
board of directors approved in advance the transaction by which the person otherwise would have
become an interested shareholder. Our board of directors may provide that its approval is subject
to compliance with any terms and conditions determined by it.
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 shareholder becomes an
interested shareholder. 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
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may not be in the best interest of our shareholders 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
shareholders 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
shareholder 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 shareholders 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
shareholders 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 shareholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are approved at a
shareholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders 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.
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 shareholders. |
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Without
our having elected to be subject to Subtitle 8, our charter and bylaws 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 shareholders entitled to cast not less than a
majority of all votes entitled to be cast at such a meeting to call a special meeting.
Meetings of Shareholders
Pursuant to our bylaws, a meeting of our shareholders 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 our 2010 annual meeting of shareholders to be held on May 10, 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 shareholders. Subject to the provisions of our bylaws,
a special meeting of our shareholders will also be called by our Secretary upon the written request
of the shareholders 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 shareholders entitled to cast not less than two-thirds of
all the votes entitled to be cast on the matter) and those amendments permitted to be made without
shareholder approval under the MGCL, our charter may be amended only if the amendment is declared
advisable by our board of directors and approved by the affirmative vote of shareholders entitled
to cast 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 shareholders entitled to cast 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 shareholders, nominations of
individuals for election to our board of directors and the proposal of business to be considered by
shareholders 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) by a shareholder who is a shareholder 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 shareholders, 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 shareholder who is a shareholder 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 shareholders, including business combination
provisions, restrictions on transfer and ownership of our stock and advance notice requirements for
director nominations and shareholder 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.
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Limitation and Indemnification 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 shareholders 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. |
However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders indemnification and
then only for 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; and |
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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. |
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 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, limited liability company or any other enterprise as a director, officer, partner or
trustee of such corporation, REIT, partnership, joint venture, trust, employee benefit plan,
limited liability company 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. |
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 employee or agent
of our company or a predecessor of our company.
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.
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REIT Qualification
Our charter provides that our board of directors may revoke or otherwise terminate our REIT
election, without approval of our shareholders, 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.
General
IAS Operating Partnership LP, our operating partnership, was formed on September 4, 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 is structured to make distributions with respect to OP units that
will be equivalent to the distributions made to our common shareholders. Finally, the operating
partnership is 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 partnership 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 shareholders.
Operations
The partnership agreement of the operating partnership provides 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 provides 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 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 provides 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.
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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 pays 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 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. |
Redemption Rights
Subject to certain limitations and exceptions, the limited partners of the operating
partnership, other than us or our subsidiaries, 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, as adjusted. 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
general partner 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 are unable 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 are unable 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 or the transfer is to an
affiliate.
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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 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
shareholder in light of its investment or tax circumstances or to shareholders 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. shareholders (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. shareholders (as defined below). |
This summary assumes that shareholders 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 SHAREHOLDER WILL DEPEND ON THE SHAREHOLDERS PARTICULAR
TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX
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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 ended 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 Alston & Bird LLP has acted as our counsel in connection with this offering.
We have received an opinion of Alston & Bird LLP to the effect that, commencing with our taxable
year ended 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 Alston & Bird 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 Alston & Bird 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 Alston & Bird LLP or
us that we will so qualify for any particular year. Alston & Bird 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 Alston & Bird 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 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 shareholders. This treatment substantially
eliminates the double taxation at the corporate and shareholder levels that results generally
from investment in a corporation. Rather, income generated by a REIT generally is taxed only at the
shareholder level, upon a distribution of dividends by the REIT.
For tax years through 2010, U.S. shareholders (as defined below) who are individuals 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.
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With limited exceptions, however, dividends received by individual U.S. shareholders 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 shareholders of the
REIT, subject to special rules for certain items, such as capital gains, recognized by REITs. See
Taxation of Taxable U.S. Shareholders.
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% 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, 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 shareholders, 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 shareholder 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 shareholder) 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 shareholders 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;
(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.
Our charter contains restrictions on ownership or transfer of our stock that are designed to
ensure that we satisfy the share ownership requirements. In addition, 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
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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 shareholder 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 (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 of
the REIT 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 shareholders.
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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). We may hold certain assets in one or more TRSs, subject to the limitation that
securities in TRSs may not represent more than 25% of our assets. In general, we intend that loans
that we acquire with an intention of selling in a manner that might expose us to a 100% tax on
prohibited transactions will be acquired by a TRS. If dividends are paid to us by one or more
TRSs we may own, then a portion of the dividends that we distribute to shareholders 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.
Shareholders 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 the TRSs net interest expense
exceeds, generally, 50% of the TRSs adjusted taxable income for 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.
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%
gross 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
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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 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 Business Investment 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 also Business Our 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, or (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 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.
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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 either 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, 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 Regulations.
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.
Phantom Income
Due to the nature of the assets in which we will invest, we may be required to recognize
taxable income from certain of our assets in advance of our receipt of cash flow on or proceeds
from disposition of such assets, and we may be required to report taxable income in early periods
that exceeds the economic income ultimately realized on such assets.
We may acquire debt instruments in the secondary market for less than their face amount. The
discount at which such debt instruments are acquired may reflect doubts about their ultimate
collectability rather than current market interest rates. The amount of such discount will
nevertheless generally be treated as market discount for U.S. federal income tax purposes. Market
discount on a debt instrument generally accrues on the basis of the constant yield to maturity of
the debt instrument, based generally on the assumption that all future payments on the debt
instrument will be made. Accrued market discount is reported as income when, and to the extent
that, any payment of principal on the debt instrument is made. In the case of residential mortgage
loans, principal payments are ordinarily made monthly, and consequently, accrued market discount
may have to be included in income each month as if the debt instrument were assured of ultimately
being collected in full. If we collect less on the debt instrument than our purchase price plus any
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market discount we had previously reported as income, we may not be able to benefit from any
offsetting loss deductions in a subsequent taxable year.
Some of the mortgage-backed securities that we purchase will likely have been issued with
original issue discount, or OID. We will be required to accrue OID based on a constant yield method
and income will accrue on the debt instrument based on the assumption that all future payments on
such mortgage-backed securities will be made. If such mortgage-backed securities turn out not to be
fully collectible, an offsetting loss deduction will only become available in a later year when
uncollectability is provable.
In addition, we may acquire distressed debt investments that are subsequently modified by
agreement with the borrower. If the amendments to the outstanding debt are significant
modifications under applicable Treasury Regulations, the modified debt may be considered to have
been reissued to us at a gain in a debt-for-debt exchange with the borrower. In that event, we may
be required to recognize income to the extent that principal amount of the modified debt exceeds
our adjusted tax basis in the unmodified debt, and we would hold the modified loan with a cost
basis equal to its principal amount for U.S. federal income tax purposes.
In the event that any mortgage-related assets acquired by us are delinquent as to mandatory
principal and interest payments, or in the event a borrower with respect to a particular debt
instrument acquired by us encounters financial difficulty rendering it unable to pay stated
interest as due, we may nonetheless be required to continue to recognize the unpaid interest as
taxable income.
Due to each of these potential differences between income recognition or expense deduction and
cash receipts or disbursements, there is a significant risk that we may have substantial taxable
income in excess of cash available for distribution. In that event, we may need to borrow funds or
take other action to satisfy the REIT distribution requirements for the taxable year in which this
phantom income is recognized. See Annual Distribution Requirements.
Asset Tests
At the close of each calendar quarter, we must 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 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).
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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 Business Our 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 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
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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 shareholders in an amount at least equal to:
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90% of our REIT taxable income (computed without regard to our deduction for
dividends paid and our net capital gains); and |
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90% of the net income (after tax), if any, from foreclosure property (as
described below); minus |
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the sum of specified items of non-cash income that exceeds a percentage of our income. |
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 shareholders 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 shareholder 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 shareholders 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
our 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, rather than distribute, our net long-term capital
gains and pay tax on such gains. In this case, we could elect to have our shareholders 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 shareholders 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 assets, including debt
instruments requiring us to accrue OID or recognize market discount income that generate taxable
income in excess of economic income or in advance of the receipt of corresponding cash flow. See
Gross Income Tests Phantom Income. In addition, we may be required under the terms of
certain indebtedness to use cash received from interest payments to make principal payments on such
indebtedness. 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 stock dividends. We may be able to rectify a failure to
meet the distribution requirements for a year by paying deficiency dividends to shareholders 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.
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Recordkeeping Requirements
We are required to maintain records and request on an annual basis information from specified
shareholders. 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.
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.
Taxable Mortgage Pools and Excess Inclusion Income
An entity, or a portion of an entity, may be classified as a taxable mortgage pool, or TMP,
under the Internal Revenue Code if:
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substantially all of its assets consist of debt obligations or interests in debt
obligations; |
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more than 50% of those debt obligations are real estate mortgages or interests in real
estate mortgages as of specified testing dates, |
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the entity has issued debt obligations (liabilities) that have two or more maturities;
and |
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the payments required to be made by the entity on its debt obligations (liabilities)
bear a relationship to the payments to be received by the entity on the debt obligations
that it holds as assets. |
Under regulations issued by the U.S. Treasury Department, if less than 80% of the assets of an
entity (or a portion of an entity) consist of debt obligations, these debt obligations are
considered not to comprise substantially all of its assets, and therefore the entity would not be
treated as a TMP. Our financing and securitization arrangements may give rise to TMPs, with the
consequences as described below.
Where an entity, or a portion of an entity, is classified as a TMP, it is generally treated as
a taxable corporation for federal income tax purposes. In the case of a REIT, or a portion of a
REIT, or a disregarded subsidiary of a REIT, that is a TMP, however, special rules apply. The TMP
is not treated as a corporation that is subject to corporate income tax, and the TMP classification
does not
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directly affect the tax status of the REIT. Rather, the consequences of the TMP classification
would, in general, except as described below, be limited to the shareholders of the REIT.
A portion of the REITs income from the TMP arrangement, which might be non-cash accrued
income, could be treated as excess inclusion income. Under recently issued IRS guidance, the
REITs excess inclusion income, including any excess inclusion income from a residual interest in a
REMIC, must be allocated among its shareholders in proportion to dividends paid. The REIT is
required to notify shareholders of the amount of excess inclusion income allocated to them. A
shareholders share of excess inclusion income:
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cannot be offset by any net operating losses otherwise available to the shareholder; |
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is subject to tax as unrelated business taxable income in the hands of most types of
shareholders that are otherwise generally exempt from federal income tax; and |
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results in the application of U.S. federal income tax withholding at the maximum rate
(30%), without reduction for any otherwise applicable income tax treaty or other exemption,
to the extent allocable to most types of foreign shareholders. |
Under recently issued IRS guidance, to the extent that excess inclusion income is allocated to
a tax-exempt shareholder of a REIT that is not subject to unrelated business income tax (such as a
government entity or charitable remainder trust), the REIT may be subject to tax on this income at
the highest applicable corporate tax rate (currently 35%). In that case, the REIT could reduce
distributions to such shareholders by the amount of such tax paid by the REIT attributable to such
shareholders ownership. Treasury regulations provide that such a reduction in distributions does
not give rise to a preferential dividend that could adversely affect the REITs compliance with its
distribution requirements. The manner in which excess inclusion income is calculated, or would be
allocated to shareholders, including allocations among shares of different classes of stock, is not
clear under current law. As required by IRS guidance, we intend to make such determinations using a
reasonable method. Tax-exempt investors, foreign investors and taxpayers with net operating losses
should carefully consider the tax consequences described above, and are urged to consult their tax
advisors.
If our operating partnership or another subsidiary partnership of ours that we do not wholly
own, directly or through one or more disregarded entities, were a TMP, the foregoing rules would
not apply. Rather, the partnership that is a TMP would be treated as a corporation for federal
income tax purposes. In addition, this characterization would alter our income and asset test
calculations, and could adversely affect our compliance with those requirements. We intend to
monitor the structure of any TMPs in which we have an interest to ensure that they will not
adversely affect our status as a REIT.
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, other than a violation under the gross income or asset tests
described above (for which other specified relief provisions are available), we may nevertheless
continue to qualify as a REIT under specified relief provisions available to us to avoid such
disqualification if the violation is due to reasonable cause and not due to willful neglect, and we
pay a penalty of $50,000 for each failure to satisfy a requirement for qualification as a REIT .
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 shareholders 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 shareholders will generally be taxable in the case of our shareholders who are
individual U.S. shareholders (as defined below), at a maximum rate of 15% through 2010, and
dividends in the hands of our corporate U.S. shareholders 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
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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 Factors Risks 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.
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 a partnership 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, or 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.
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Taxation of Taxable U.S. Shareholders
This section summarizes the taxation of U.S. shareholders that are not tax-exempt
organizations. For these purposes, a U.S. shareholder is a beneficial owner of our common stock
that for U.S. federal income tax purposes is:
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a citizen or resident of the U.S.; |
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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.
New Unearned Income Medicare Tax
Under the recently enacted Healthcare and Education Reconciliation Act of 2010, amending the
Patient Protection and Affordable Care Act, high-income U.S. individuals, estates, and trusts will
be subject to an additional 3.8% tax on net investment income in tax years beginning after December
31, 2012. For these purposes, net investment income includes dividends and gains from sales of
stock. In the case of an individual, the tax will be 3.8% of the lesser of the individuals net
investment income or the excess of the individuals modified adjusted gross income over $250,000 in
the case of a married individual filing a joint return or a surviving spouse, $125,000 in the case
of a married individual filing a separate return, or $200,000 in the case of a single individual.
Distributions
Provided that we qualify as a REIT, distributions made to U.S. shareholders out of our current
and accumulated earnings and profits that are not designated as capital gain dividends will
generally be taken into account by U.S. shareholders 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. shareholders who receive dividends from taxable subchapter C corporations.
Distributions from us that we designate as capital gain dividends will be taxed to U.S.
shareholders as long-term capital gains to the extent that they do not exceed our actual net
capital gain for the taxable year, without regard to the period for which the U.S. shareholder 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. shareholders 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. shareholders 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. shareholders 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. shareholders
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. shareholders, 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. shareholder to the extent that they do not exceed the adjusted tax basis of the
U.S. shareholders 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. shareholders shares, they will be included in income as long-term
capital gain, or short-term capital gain if the shares
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have been held for one year or less. Any dividend declared by us in October, November or
December of any year and payable to a U.S. shareholder of record on a specified date in any such
month will be treated as both paid by us and received by the U.S. shareholder 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. shareholders who are taxed at the rates applicable to individuals, we may
elect to designate a portion of our distributions paid to such U.S. shareholders as qualified
dividend income. A portion of a distribution that is properly designated as qualified dividend
income is taxable to non-corporate U.S. shareholders as capital gain, provided that the U.S.
shareholder has held the common stock with respect to which the distribution is 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. We do not anticipate that a substantial portion of our
dividends will be qualified dividends.
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.
shareholders and do not offset income of U.S. shareholders 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. shareholders to the extent that we have current or accumulated earnings and
profits.
Dispositions of Our Common Stock
In general, a U.S. shareholder 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.
shareholders adjusted tax basis in the common stock at the time of the disposition. In general, a
U.S. shareholders adjusted tax basis will equal the U.S. shareholders acquisition cost, increased
by the excess of net capital gains deemed distributed to the U.S. shareholder (discussed above)
less tax deemed paid on it and reduced by the amount of distributions that are treated as returns
of capital. In general, capital gains recognized by individuals and other non-corporate U.S.
shareholders 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. shareholders 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. shareholder 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. shareholder 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.
shareholder who has held the shares for six months or less, after applying holding
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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. shareholder as long-term capital
gain.
Passive Activity Losses and Investment Interest Limitations
Distributions made by us and gain arising from the sale or exchange by a U.S. shareholder of
our common stock will not be treated as passive activity income. As a result, U.S. shareholders
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. shareholder 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. Shareholders
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, or 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. shareholder 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
shareholder), (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. shareholder. 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 shareholder will be treated as
UBTI.
Tax-exempt U.S. shareholders 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. shareholders 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. Shareholders
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. shareholders of our common
stock. For purposes of this summary, a non-U.S. shareholder is a beneficial owner of our common
stock that is not a U.S. shareholder 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.
Ordinary Dividends
The portion of dividends received by non-U.S. shareholders 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
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non-U.S. shareholder 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. shareholders 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. shareholders 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. shareholders investment in our common stock is, or is treated as, effectively
connected with the non-U.S. shareholders conduct of a U.S. trade or business, the non-U.S.
shareholder generally will be subject to U.S. federal income tax at graduated rates, in the same
manner as U.S. shareholders 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. shareholder 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. shareholders investment in our common stock is effectively connected with a U.S.
trade or business conducted by such non-U.S. shareholder (in which case the non-U.S. shareholder
will be subject to the same treatment as U.S. shareholders with respect to such gain) or (B) the
non-U.S. shareholder 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.
shareholder 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. shareholder 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. shareholders 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.
shareholder 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 shareholders share of our earnings and profits.
Capital Gain Dividends
Under FIRPTA, a distribution made by us to a non-U.S. shareholder, 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. shareholder and will be subject to U.S. federal income tax at the rates applicable to U.S.
shareholders, 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. shareholder 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. Shareholders
Ordinary 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 would not be solely as a creditor.
Capital gain dividends received by a non-U.S. shareholder from a REIT that are not USRPI capital
gains are generally not subject to U.S. federal income or withholding tax, unless either (1) the
non-U.S. shareholders investment in our common stock is effectively connected with a U.S. trade or
business conducted by such non-U.S. shareholder (in which case the non-U.S. shareholder will be
subject to the same treatment as U.S. shareholders with respect to such gain) or (2) the non-U.S.
shareholder 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. shareholder
will be subject to a 30% tax on the individuals net capital gain for the year).
133
Dispositions of Our Common Stock
Unless our common stock constitutes a USRPI, a sale of the stock by a non-U.S. shareholder
generally will not be subject to U.S. federal income taxation under FIRPTA. The stock will not be
treated as a USRPI if less than 50% of our assets throughout a prescribed testing period consist of
interests in real property located within the U.S., excluding, for this purpose, interests in real
property solely in a capacity as a creditor. We do not expect that more than 50% of our assets will
consist of interests in real property located in the U.S.
Even if our shares of common stock otherwise would be a USRPI under the foregoing test, our
shares of common stock will not constitute a USRPI if we are a domestically controlled REIT. A
domestically controlled REIT is a REIT in which, at all times during a specified testing period
(generally the lesser of the five year period ending on the date of disposition of our shares of
common stock or the period of our existence), less than 50% in value of its outstanding shares of
common stock is held directly or indirectly by non-U.S. shareholders. We believe we will be a
domestically controlled REIT and, therefore, the sale of our common stock should not be subject to
taxation under FIRPTA. However, because our stock will be widely held, we cannot assure our
investors that we will be a domestically controlled REIT. Even if we do not qualify as a
domestically controlled REIT, a non-U.S. shareholders sale of our common stock nonetheless will
generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (1) our common
stock owned is of a class that is regularly traded, as defined by the applicable Treasury
Regulation, on an established securities market, and (2) the selling non-U.S. shareholder owned,
actually or constructively, 5% or less of our outstanding stock of that class at all times during a
specified testing period.
If gain on the sale of our common stock were subject to taxation under FIRPTA, the non-U.S.
shareholder would be subject to the same treatment as a U.S. shareholder with respect to such gain,
subject to applicable alternative minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals, and the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Gain from the sale of our common stock that would not otherwise be subject to FIRPTA will
nonetheless be taxable in the U.S. to a non-U.S. shareholder in two cases: (1) if the non-U.S.
shareholders investment in our common stock is effectively connected with a U.S. trade or business
conducted by such non-U.S. shareholder, the non-U.S. shareholder will be subject to the same
treatment as a U.S. shareholder with respect to such gain, or (2) if the non-U.S. shareholder 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., the nonresident alien individual will be subject to a 30%
tax on the individuals capital gain.
Backup Withholding and Information Reporting
We will report to our U.S. shareholders and the IRS the amount of dividends paid during each
calendar year and the amount of any tax withheld. Under the backup withholding rules, a U.S.
shareholder may be subject to backup withholding with respect to dividends paid unless the holder
is a corporation or comes within other exempt categories and, when required, demonstrates this fact
or provides a taxpayer identification number or social security number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. shareholder that does not provide his or her correct taxpayer
identification number or social security number may also be subject to penalties imposed by the
IRS. In addition, we may be required to withhold a portion of capital gain distribution to any U.S.
shareholder who fails to certify their non-foreign status.
We must report annually to the IRS and to each non-U.S. shareholder the amount of dividends
paid to such holder and the tax withheld with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in which the non-U.S.
shareholder resides under the provisions of an applicable income tax treaty. A non-U.S. shareholder
may be subject to backup withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of our common stock within the U.S. is subject to both
backup withholding and information reporting unless the beneficial owner certifies under penalties
of perjury that it is a non-U.S. shareholder (and the payor does not have actual knowledge or
reason to know that the beneficial owner is a U.S. person) or the holder otherwise establishes an
exemption. Payment of the proceeds of a sale of our common stock conducted through certain U.S.
related financial intermediaries is subject to information reporting (but not backup withholding)
unless the financial intermediary has documentary evidence in its records that the beneficial owner
is a non-U.S. shareholder and specified conditions are met or an exemption is otherwise
established.
134
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding
rules may be allowed as a refund or a credit against such holders U.S. federal income tax
liability provided the required information is furnished to the IRS.
State, Local and Foreign Taxes
We and our shareholders may be subject to state, local or foreign taxation in various
jurisdictions, including those in which we or they transact business, own property or reside. The
state, local or foreign tax treatment of our company and our shareholders may not conform to the
U.S. federal income tax treatment discussed above. Any foreign taxes incurred by us would not pass
through to shareholders as a credit against their U.S. federal income tax liability. Prospective
shareholders should consult their tax advisors regarding the application and effect of state, local
and foreign income and other tax laws on an investment in our companys common stock.
Legislative or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are constantly under review by persons
involved in the legislative process and by the IRS and the U.S. Treasury Department. No assurance
can be given as to whether, when, or in what form, U.S. federal income tax laws applicable to us
and our shareholders may be enacted, possibly with retroactive effect. Changes to the U.S. federal
income tax laws and interpretations of U.S. federal income tax laws could adversely affect an
investment in our shares of common stock.
135
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the underwriters named
below, through their representatives Credit Suisse Securities (USA) LLC and Morgan Stanley & Co.
Incorporated, have severally agreed to purchase from us the following respective number of shares
of common stock at a public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus:
|
|
|
|
|
|
|
Number of |
Underwriter |
|
Shares |
Credit Suisse Securities (USA) LLC |
|
|
|
|
Morgan Stanley & Co. Incorporated |
|
|
|
|
Keefe, Bruyette & Woods, Inc. |
|
|
|
|
Stifel, Nicolaus & Company, Incorporated |
|
|
|
|
JMP Securities LLC |
|
|
|
|
Total |
|
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the several underwriters to
purchase the shares of common stock offered hereby are subject to certain conditions precedent and
that the underwriters will purchase all of the shares of common stock offered by this prospectus,
other than those covered by the over-allotment option described below, if any of these shares are
purchased.
We have been advised by the representatives of the underwriters that the underwriters propose
to offer the shares of common stock to the public at the public offering price set forth on the
cover of this prospectus and to dealers at a price that represents a concession not in excess of $ per
share under the public offering price. After the initial public offering, the representatives
of the underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30 days after the
date of this prospectus, to purchase up to additional shares of common stock at the
public offering price less the underwriting discounts and commissions set forth on the cover page
of this prospectus. The underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the extent that the
underwriters exercise this option, each of the underwriters will become obligated, subject to
conditions, to purchase approximately the same percentage of these additional shares of common
stock as the number of shares of common stock to be purchased by it in the above table bears to the
total number of shares of common stock offered by this prospectus. We will be obligated to sell
these additional shares of common stock to the underwriters to the extent the option is exercised.
If any additional shares of common stock are purchased, the underwriters will offer the additional
shares on the same terms as those on which the shares are being offered.
The underwriting discounts and commissions per share are equal to the public offering price
per share of common stock less the amount paid by the underwriters to us per share of common stock.
We have agreed to pay the underwriters the following discounts and commissions, assuming either no
exercise or full exercise by the underwriters of the underwriters over-allotment option:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees |
|
|
|
|
|
|
Without Exercise of |
|
With Full Exercise of |
|
|
|
|
|
|
the Over-Allotment |
|
the Over-Allotment |
|
|
Fee per Share |
|
Option |
|
Option |
Discounts and commissions |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
In addition, we estimate that our share of the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $332,460.
We and our operating partnership have agreed to indemnify the underwriters against some
specified types of liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these liabilities.
We, each of our directors and executive officers, our Manager and certain officers of our
Manager and 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 90 days after
the date of this prospectus without the prior written consent of Credit Suisse Securities (USA) LLC
and Morgan Stanley & Co.
136
Incorporated. However, each of our directors and executive officers and certain officers of
our Manager may transfer or dispose of our shares during this 90-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 90-day lock-up period.
In connection with our initial public offering, each of our Manager and Invesco Investments
(Bermuda) Ltd. agreed that until one year after the pricing of our initial public offering on June
25, 2009, 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 completed concurrently with the closing of
this offering. However, each of our Manager and Invesco Investments (Bermuda) Ltd. may transfer
these shares or OP units, respectively, to any of our affiliates during this one-year lock-up
period, provided that (i) the transferee agrees to be bound in writing by the restrictions set
forth in this paragraph for the remainder of the one-year lock-up period prior to such transfer,
(ii) such transfer shall not involve a disposition for value and (iii) no filing by the transferor
or transferee under the Exchange Act is required or voluntarily made in connection with such
transfer (other than a filing on a Form 5 made after the expiration of the one-year lock-up
period).
In the event that either (1) during the last 17 days of the 90-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 90-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 90-day or one-year lock-up period, as applicable, then, in
either case, the expiration of the 90-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 shareholders or affiliates releasing them from these lock-up agreements
prior to the expiration of the 90-day or one-year lock-up period, as applicable.
In connection with the offering, the underwriters may purchase and sell shares of our common
stock in the open market. These transactions may include short sales, purchases to cover positions
created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. Covered short sales are sales made in an amount not greater
than the underwriters option to purchase additional shares of common stock from us in the
offering. The underwriters may close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as compared to the
price at which they may purchase shares through the over-allotment option.
Naked short sales are any sales in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A naked short position
is more likely to be created if underwriters are concerned that there may be downward pressure on
the price of the shares in the open market prior to the completion of the offering.
Stabilizing transactions consist of various bids for or purchases of our common stock made by
the underwriters in the open market prior to the completion of the offering.
The underwriters may impose a penalty bid. This occurs when a particular underwriter repays to
the other underwriters a portion of the underwriting discount received by it because the
representatives of the underwriters have repurchased shares sold by or for the account of that
underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions may have the effect of
preventing or slowing a decline in the market price of our common stock. Additionally, these
purchases, along with the imposition of the penalty bid, may stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open market. These transactions may be
effected on the NYSE or otherwise.
A prospectus in electronic format may be made available on web sites maintained by one or more
underwriters. Other than the prospectus in electronic format, the information on any underwriters
web site and any information contained in any other web site maintained by an underwriter is not
part of this prospectus or the registration statement of which this prospectus form a part.
137
In the ordinary course of their businesses, Credit Suisse Securities (USA) LLC, Morgan Stanley
& Co. Incorporated, Keefe, Bruyette & Woods, Inc., Stifel Nicolaus & Company, Incorporated, JMP
Securities LLC and/or their respective affiliates may engage in financial transactions with, and
perform investment banking, lending, asset management and/or financial advisory services for us
and/or our affiliates (including, but not limited to Invesco and our Manager). They receive
customary fees and reimbursements of expenses for these transactions and services.
We have entered into master repurchase agreements with affiliates of Credit Suisse Securities
(USA) LLC and Morgan Stanley & Co. Incorporated, in each case for the financing of our acquisitions
of Agency RMBS.
In October 2009, Invesco announced that it had entered into a definitive agreement to acquire
the retail asset management business of Morgan Stanley, the parent company of Morgan Stanley & Co.
Incorporated, by (i) acquiring Van Kampen Investments, Inc. and its subsidiaries and (ii)
purchasing certain assets and assuming certain liabilities associated with designated non-Van
Kampen retail investment products. The transaction was initially valued at $1.5 billion, including
$500.0 million in cash and 44.1 million common shares, which will result in Morgan Stanley
obtaining a 9.4% equity interest in Invesco. The transaction has been approved by the boards of
directors of both companies and is expected to close in mid-2010, subject to customary regulatory,
client and fund shareholder approvals.
138
LEGAL MATTERS
Certain legal matters relating to this offering will be passed upon for us by Alston & Bird
LLP, Atlanta, Georgia. In addition, the description of U.S. federal income tax consequences
contained in the section of the prospectus entitled U.S. Federal Income Tax Considerations is
based on the opinion of Alston & Bird LLP. Certain legal matters relating to this offering will be
passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
As to certain matters of Maryland law, Alston & Bird LLP may rely on the opinion of Venable LLP,
Baltimore, Maryland.
EXPERTS
The
financial statements included in this prospectus and elsewhere in the registration statement have
been so included in reliance upon the report of Grant Thornton LLP, independent registered public
accountants, upon the authority of said firm as experts in accounting and auditing in giving said
report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-11, including exhibits and
schedules filed with the registration statement of which this prospectus is a part, under the
Securities Act, with respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all of the information set forth in the registration statement and
exhibits and schedules to the registration statement. For further information with respect to us
and the shares of common stock to be sold in this offering, reference is made to the registration
statement, including the exhibits and schedules to the registration statement. Copies of the
registration statement, including the exhibits and schedules to the registration statement, may be
examined without charge at the public reference room of the Securities and Exchange Commission, 100
F Street, N.E., Room 1580, Washington, D.C. 20549. Information about the operation of the public
reference room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0300.
Copies of all or a portion of the registration statement may be obtained from the public reference
room of the Securities and Exchange Commission upon payment of prescribed fees. Our Securities and
Exchange Commission filings, including our registration statement, are also available to you, free
of charge, on the SECs website at www.sec.gov.
As a result of this offering, we will become subject to the information and reporting
requirements of the Exchange Act and will file periodic reports, proxy statements and will make
available to our shareholders annual reports containing audited financial information for each year
and quarterly reports for the first three quarters of each fiscal year containing unaudited interim
financial information.
139
INDEX TO FINANCIAL STATEMENTS
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Page |
|
|
|
|
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F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Invesco Mortgage Capital Inc.
We have audited the accompanying consolidated balance sheets
of Invesco Mortgage Capital Inc.
(a Maryland corporation) and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, equity (deficit) and cash flows for the year ended December
31, 2009 and for the period from June 5, 2008 (date of inception) to December 31, 2008. These
financial statements are the responsibility of Invesco Mortgage Capital Inc.s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Invesco Mortgage Capital Inc. and subsidiaries as of
December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for
the year ended December 31, 2009 and for the period from June 5, 2008 (date of inception) to
December 31, 2008 in conformity with accounting principles generally accepted in the United States
of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 23, 2010
F-2
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
$ in thousands, except per share amounts |
|
2009 |
|
2008 |
ASSETS |
|
|
|
|
|
|
|
|
Mortgage-backed securities, at fair value |
|
|
802,592 |
|
|
|
|
|
Cash |
|
|
24,041 |
|
|
|
1 |
|
Restricted cash |
|
|
14,432 |
|
|
|
|
|
Principal paydown receivable |
|
|
2,737 |
|
|
|
|
|
Investments in unconsolidated limited partnerships, at fair value |
|
|
4,128 |
|
|
|
|
|
Accrued interest receivable |
|
|
3,518 |
|
|
|
|
|
Prepaid insurance |
|
|
681 |
|
|
|
|
|
Deferred offering costs |
|
|
288 |
|
|
|
978 |
|
Other assets |
|
|
983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
853,400 |
|
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
545,975 |
|
|
|
|
|
TALF financing |
|
|
80,377 |
|
|
|
|
|
Derivative liability, at fair value |
|
|
3,782 |
|
|
|
|
|
Dividends and distributions payable |
|
|
10,828 |
|
|
|
|
|
Accrued interest payable |
|
|
598 |
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
665 |
|
|
|
|
|
Due to affiliate |
|
|
865 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
643,090 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (Deficit): |
|
|
|
|
|
|
|
|
Preferred Stock: par value $0.01 per share; 50,000,000 shares
authorized, 0 shares issued and outstanding |
|
|
|
|
|
|
|
|
Common Stock: par value $0.01 per share; 450,000,000 shares
authorized, 8,887,212 shares issued and outstanding |
|
|
89 |
|
|
|
|
|
Additional paid in capital |
|
|
172,385 |
|
|
|
1 |
|
Accumulated other comprehensive income |
|
|
7,721 |
|
|
|
|
|
Retained earnings (accumulated deficit) |
|
|
320 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
180,515 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
Non-controlling interest |
|
|
29,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (deficit) |
|
|
210,310 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
853,400 |
|
|
|
979 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
June 5, 2008 |
|
|
|
|
|
|
(Date of |
|