INVESCO MORTGAGE CAPITAL INC.
As filed with the Securities and Exchange Commission on
June 25, 2009
Registration Statement No. 333-151665
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 10
to
Form S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF
1933
OF CERTAIN REAL ESTATE
COMPANIES
Invesco Mortgage Capital
Inc.
(Exact name of registrant as
specified in its governing instruments)
1555 Peachtree Street,
NE
Atlanta, Georgia 30309
(404) 892-0896
(Address, including Zip Code,
and Telephone Number, including Area Code, of Registrants
Principal Executive Offices)
Jeffrey H. Kupor
c/o Invesco
Institutional (N.A.), Inc.
1555 Peachtree Street,
NE
Atlanta, Georgia 30309
(404) 892-0896
(Name, Address, including Zip
Code, and Telephone Number, including Area Code, of Agent for
Service)
Copies to:
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Jay L. Bernstein, Esq.
Andrew S. Epstein, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
Tel (212) 878-8000
Fax (212) 878-8375
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David J. Goldschmidt, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Tel (212) 735-3574
Fax (917) 777-3574
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the Securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller Reporting
Company o
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(Do not check if a smaller
reporting company)
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.
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SUBJECT TO COMPLETION, DATED
JUNE 25, 2009
8,500,000 Shares
Invesco Mortgage Capital
Inc.
Common Stock
Invesco Mortgage Capital Inc. is a newly organized Maryland
corporation focused on investing in, financing and managing
residential and commercial mortgage-backed securities and
mortgage loans. We will seek to invest in residential
mortgage-backed securities for which a U.S. Government
agency or a federally chartered corporation guarantees payments
of principal and interest on the securities. In addition, we
expect to invest in residential mortgage-backed securities that
are not issued or guaranteed by a U.S. Government agency,
commercial mortgage-backed securities and mortgage loans. To the
extent available to us, we may seek to finance our investments
in these asset classes with financings under the Term
Asset-Backed Securities Lending Facility or with private
financing sources and, if available, we may also make
investments in funds that receive financing under the
U.S. Governments Public-Private Investment Program.
We will be externally managed and advised by Invesco
Institutional (N.A.), Inc., a Delaware corporation and an
indirect wholly owned subsidiary of Invesco Ltd., an independent
global investment company listed on the New York Stock Exchange
(NYSE: IVZ). Invesco Institutional (N.A.), Inc. will draw upon
the expertise of Invesco Ltd.s Worldwide Fixed Income
investment team of 114 investment professionals operating in six
cities, across four countries, with approximately
$157 billion in securities under management and Invesco
Real Estates 219 employees operating in
13 cities across eight countries with over $20 billion
in private and public real estate assets under management. In
addition, our Manager will draw upon the mortgage market
insights of WL Ross & Co. LLC, Invesco Ltd.s
distressed investment unit.
This is our initial public offering and no public market
currently exists for our common stock. We are offering
8,500,000 shares of our common stock as described in this
prospectus. We expect the initial public offering price of our
common stock to be $20.00 per share. Our common stock has been
approved for listing on the New York Stock Exchange, subject to
official notice of issuance, under the symbol IVR.
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
75,000 shares of our common stock to Invesco Ltd., through
Invesco Institutional (N.A.), Inc., at $20.00 per share and
1,425,000 units of limited partnership interest in our
operating partnership to Invesco Ltd., through Invesco
Investments (Bermuda) Ltd., a wholly owned subsidiary of Invesco
Ltd., at $20.00 per unit.
We intend to elect and qualify to be taxed as a real estate
investment trust for U.S. federal income tax purposes,
commencing with our taxable year ending December 31, 2009.
To assist us in qualifying as a real estate investment trust,
stockholders are generally restricted from owning more than 9.8%
by value or number of shares, whichever is more restrictive, of
our outstanding shares of common or capital stock. Different
ownership limits will apply to Invesco Ltd. and its direct and
indirect subsidiaries, including but not limited to Invesco
Institutional (N.A.), Inc. and Invesco Investments (Bermuda)
Ltd. 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 22 of this prospectus for a
discussion of these risks.
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We have no operating history and may not be able to successfully
operate our business or generate sufficient revenue to make or
sustain distributions to our stockholders.
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We have not yet identified any specific investments in our
target asset classes.
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We may allocate the net proceeds from this offering and the
concurrent private placement to investments with which you may
not agree.
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We are dependent on Invesco Institutional (N.A.), Inc. and its
key personnel for our success.
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There are conflicts of interest in our relationship with Invesco
Institutional (N.A.), Inc. and Invesco Ltd., which could result
in decisions that are not in the best interests of our
stockholders.
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Our failure to qualify as a real estate investment trust would
subject us to U.S. federal income tax and potentially
increased state and local taxes, which would reduce the amount
of cash available for distribution to our stockholders.
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Maintenance of our exemption from registration under the
Investment Company Act of 1940 imposes limits on our operations.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting
discount(1)
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$
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$
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Proceeds to us, before
expenses(1)
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$
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$
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(1)
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Of the total underwriting discount,
Invesco Ltd. (or one of its affiliates other than us) has agreed
to pay
$ and
we have agreed to pay
$ .
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The underwriters may also purchase up to an additional
1,275,000 shares of our common stock from us at the initial
public offering price, less the underwriting discount, within
30 days after the date of this prospectus to cover
over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2009.
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Credit
Suisse |
Morgan Stanley |
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Barclays
Capital |
Keefe, Bruyette & Woods |
Stifel Nicolaus |
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Jackson
Securities |
Siebert Capital Markets |
The Williams Capital Group, L.P. |
The date of this prospectus
is ,
2009.
TABLE OF
CONTENTS
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1
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20
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22
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124
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125
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128
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133
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135
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140
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142
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164
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168
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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.
Until ,
2009 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
i
SUMMARY
This summary highlights some of the information in this
prospectus. It does not contain all of the information that you
should consider before investing in our common stock. You should
read carefully the more detailed information set forth under
Risk Factors and the other information included in
this prospectus. Except where the context suggests otherwise,
the terms company, we, us,
and our refer to Invesco Mortgage Capital Inc., a
Maryland corporation, together with its consolidated
subsidiaries, including IAS Operating Partnership LP, a Delaware
limited partnership, which we refer to as our operating
partnership; our Manager refers to Invesco
Institutional (N.A.), Inc., a Delaware corporation, our external
manager; Invesco refers to Invesco Ltd. together
with its consolidated subsidiaries (other than us), the indirect
parent company of our Manager; Invesco Purchaser
collectively refers to Invesco Institutional (N.A.), Inc. and
Invesco Investments (Bermuda) Ltd. and OP units
refers to units of limited partnership interest in our operating
partnership. Unless indicated otherwise, the information in this
prospectus assumes (1) the common stock to be sold in this
offering is sold at $20.00 per share, (2) a
$30 million investment will be made by the Invesco
Purchaser in a private placement to be made concurrently with
the completion of this offering, and (3) no exercise by the
underwriters of their over-allotment option to purchase up to an
additional 1,275,000 shares of our common stock.
Our
Company
We are a newly-formed Maryland corporation focused on investing
in, financing and managing residential and commercial
mortgage-backed securities and mortgage loans, which we
collectively refer to as our target assets. We will seek to
invest in residential mortgage-backed securities, or RMBS, for
which a U.S. Government agency such as the Government
National Mortgage Association, or Ginnie Mae, or a federally
chartered corporation such as the Federal National Mortgage
Association, or Fannie Mae, or the Federal Home Loan Mortgage
Corporation, or Freddie Mac, guarantees payments of principal
and interest on the securities. We refer to these securities as
Agency RMBS. We also expect to invest in RMBS that are not
issued or guaranteed by a U.S. Government agency, or
non-Agency RMBS, commercial mortgage-backed securities, or CMBS,
and residential and commercial mortgage loans.
We anticipate financing our Agency RMBS through traditional
repurchase agreement financing. In addition, to the extent
available to us, we may seek to finance our investments in CMBS
and non-Agency RMBS with financings under the Term Asset-Backed
Securities Lending Facility, or TALF, or with private financing
sources. If available, we may also finance our investments in
certain CMBS and non-Agency RMBS by contributing capital to one
or more of the legacy securities public-private investment
programs, or Legacy Securities PPIFs, that receive financing
under the U.S. Governments Public-Private Investment
Program, or PPIP, and our investments in certain legacy
commercial and residential mortgage loans by contributing
capital to one or more legacy loan public-private investment
programs, or Legacy Loan PPIFs, that receive such funding or
through private financing sources. Legacy Securities PPIFs and
Legacy Loan PPIFs, which we refer to collectively as PPIFs, may
be established and managed by our Manager or one of its
affiliates or by unaffiliated third parties; however, our
Manager or its affiliates may only establish a Legacy Securities
PPIF if their application to serve as an investment manager of
this type of PPIP fund is accepted by the U.S. Treasury. To
the extent we pay any fees to our Manager or any of its
affiliates in connection with any PPIF, our Manager has agreed
to reduce the management fee payable by us under the management
agreement (but not below zero) in respect of any equity
investment we may decide to make in any PPIF managed by our
Manager or any of its affiliates by the amount of the fees
payable to our Manager or its affiliates under the PPIF with
regard to our equity investment.
We will be externally managed and advised by Invesco
Institutional (N.A.), Inc., or our Manager, an SEC-registered
investment adviser and indirect wholly owned subsidiary of
Invesco Ltd. (NYSE: IVZ), or Invesco. Invesco is a leading
independent global investment management company with
$348.2 billion in assets under management as of
March 31, 2009. Our Manager will draw upon the expertise of
Invescos Worldwide Fixed Income investment team of 114
investment professionals operating in six cities, across four
countries, with approximately $157 billion in securities
under management and Invesco Real Estates
219 employees operating in 13 cities across eight
countries with over $20 billion in private and public real
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estate assets under management. With over 25 years of
experience, Invescos teams of dedicated professionals have
developed exceptional track records across multiple fixed income
sectors and asset classes, including structured securities, such
as RMBS, asset-backed securities, or ABS, CMBS, and leveraged
loan portfolios. In addition, the investment team will draw upon
the mortgage market insights of WL Ross & Co. LLC, or
WL Ross, Invescos distressed investment unit and an
indirect, wholly owned subsidiary of our Manager.
Our objective is to provide attractive risk adjusted returns to
our investors over the long term, primarily through dividends
and secondarily through capital appreciation. We intend to
achieve this objective by selectively acquiring target assets to
construct a diversified investment portfolio designed to produce
attractive returns across a variety of market conditions and
economic cycles. We intend to construct a diversified investment
portfolio by focusing on security selection and the relative
value of various sectors within the mortgage market. We intend
to finance our Agency RMBS investments primarily through
short-term borrowings structured as repurchase agreements. To
date, we have signed nine master repurchase agreements with nine
financial institutions, and we are in discussions with nine
additional financial institutions for repurchase facilities. As
described in more detail below, to the extent available to us,
we may seek to finance our non-Agency RMBS, CMBS and mortgage
loan portfolios with non-recourse term borrowing facilities and
equity financing under the TALF or with private financing
sources and, if available, we may make investments in funds that
receive financing under the PPIP that will be established and
managed by our Manager or one of its affiliates if their
application to serve as one of the investment managers for the
Legacy Securities Program is accepted by the U.S. Treasury.
We will commence operations upon completion of this offering. We
intend to elect and qualify to be taxed as a real estate
investment trust, or REIT, for U.S. federal income tax
purposes, commencing with our taxable year ending
December 31, 2009. We generally will not be subject to
U.S. federal income taxes on our taxable income to the
extent that we annually distribute all of our net taxable income
to stockholders and maintain our intended qualification as a
REIT. We also intend to operate our business in a manner that
will permit us to maintain our exemption from registration under
the Investment Company Act of 1940, or the 1940 Act.
Our
Manager
We will be externally managed and advised by our Manager.
Pursuant to the terms of the management agreement, our Manager
will provide us with our management team, including our
officers, along with appropriate support personnel. Each of our
officers is an employee of Invesco. We do not expect to have any
employees. Our Manager is not obligated to dedicate any of its
employees exclusively to us, nor is our Manager or its employees
obligated to dedicate any specific portion of its or their time
to our business. Our Manager is at all times subject to the
supervision and oversight of our board of directors and has only
such functions and authority as we delegate to it.
Our Managers Worldwide Fixed Income investment
professionals have extensive experience in performing advisory
services for funds, other investment vehicles, and other managed
and discretionary accounts that focus on investing in Agency and
other RMBS as well as CMBS. As of March 31, 2009, our
Manager managed approximately $177.0 billion of fixed
income and real estate investments, including approximately
$18.8 billion of structured securities, consisting of
approximately $11.0 billion of Agency RMBS,
$3.9 billion of ABS, $2.0 billion of non-Agency RMBS
and $1.9 billion of CMBS. We expect that our Manager will
continue to manage its existing portfolio and provide management
services to its other clients, including affiliates of Invesco.
Neither our Manager nor Invesco has previously managed or
advised a public REIT or managed RMBS or CMBS on a leveraged
basis.
The Invesco Worldwide Fixed Income investment professionals will
benefit from the insight and capabilities of Invescos
distressed investment subsidiary, WL Ross, and Invescos
real estate team.
Our Manager will draw upon the professional experience and
knowledge of the investment team of its WL Ross subsidiary. Over
the last 30 years, WL Ross has sponsored and managed more
than $8.0 billion of distressed equity investments. We will
benefit from WL Ross expertise in security selection,
portfolio management, and portfolio oversight. When combined
with our Managers investment teams experience in
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fixed income investing, WL Rosss deep and broad asset
management skills will allow us to draw upon extensive
investment expertise in order to benefit our shareholders.
In addition, WL Ross-sponsored funds have expanded its position
to include the mortgage market through its 2007 investment in
American Home Mortgage Servicing, Inc., or AHMSI, the largest
independent sub-prime mortgage loan servicer in the United
States with an approximate $108 billion servicing portfolio
and more than 547,000 mortgage loans across 50 states. As a
major loan servicer, AHMSI has tremendous insights regarding
mortgage market trends, including prepayment speeds, delinquency
rates, default and severity information, which we intend to
capitalize on when valuing our target assets. Furthermore, WL
Ross sponsored funds have made a strategic investment in Assured
Guaranty Ltd., or AGL, which provides credit enhancement
products on debt securities issued in the public finance,
structured finance and mortgage markets.
Additionally, our Manager will be able to draw upon the
experience and resources of Invescos real estate team,
comprised of approximately 124 investment professionals on the
ground in key investment markets, which has 25 years of
direct real estate investing experience. Our Managers real
estate team will provide us with valuable insights, through its
research and monitoring capabilities, on investments in
residential and commercial properties. With the properties under
management having an aggregate market value of approximately
$22.8 billion as of March 31, 2009, this team is a
leader in the real estate marketplace and will provide us with
residential and commercial property valuations and other
property based information that will be critical in supporting
our Managers assessment of RMBS and CMBS valuations.
Invesco Aim Advisors, Inc., or Invesco Aim Advisors, an
affiliate of our Manager, will serve as our sub adviser pursuant
to an agreement between our Manager and Invesco Aim Advisors.
Invesco Aim Advisors will provide input on overall trends in
short-term financing markets and make specific recommendations
regarding financing of our Agency RMBS. We do not expect our
Manager to provide these services to us directly. The fees
charged by Invesco Aim Advisors shall be paid by our Manager and
shall not constitute a reimbursable expense by our Manager under
the management agreement. We expect that the fees charged by
Invesco Aim Advisors to our Manager will be substantially
similar to the fees Invesco Aim Advisors charges to its other
clients for similar services.
We also expect to benefit from our Managers portfolio
management, finance and administration functions, which address
legal, compliance, investor relations and operational matters,
trade allocation and execution, securities valuation, risk
management and information technologies in connection with the
performance of its duties.
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
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., at $20.00 per unit.
Upon completion of this offering and the concurrent private
placement, Invesco, through our Manager, will beneficially own
0.87% of our outstanding common stock (or 0.76% if the
underwriters fully exercise their option to purchase additional
shares). Assuming that all OP units are redeemed for an
equivalent number of shares of our common stock, Invesco,
through the Invesco Purchaser, would beneficially own 15% of our
outstanding common stock upon completion of this offering and
the concurrent private placement (or 13.3% if the underwriters
fully exercise their option to purchase additional shares). The
Invesco Purchaser will agree that, for a period of one year
after the date of this prospectus, it will not, without the
prior written consent of Credit Suisse Securities (USA) LLC and
Morgan Stanley & Co. Incorporated, dispose of or hedge
any of the shares of our common stock or OP units that it
purchases in the concurrent private placement, subject to
certain exceptions and extension in certain circumstances as
described elsewhere in this prospectus.
About
Invesco
Invesco is one of the largest independent global investment
management firms with offices worldwide. As of March 31,
2009, Invesco had 5,122 employees, the majority of whom
were located in North America. Invesco operates under the
Invesco Aim Advisors, Invesco Trimark, Atlantic Trust, Invesco,
Invesco Perpetual, Invesco PowerShares, and WL Ross brands.
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Our
Investment Strategy
We will rely on our Managers expertise in identifying
assets within our target assets. Our Managers investment
team has a strong focus on security selection and the relative
value of various sectors within the mortgage markets. We expect
that the investment team will make investment decisions on our
behalf, which will incorporate their views on the economic
environment and the outlook for the mortgage markets, including
relative valuation, supply and demand trends, the level of
interest rates, the shape of the yield curve, prepayment rates,
financing and liquidity, commercial and residential real estate
prices, delinquencies, default rates, recovery of various
sectors and vintage of collateral, subject to maintaining our
REIT qualification and our exemption from registration under the
1940 Act.
Our
Target Assets
Our target asset classes and the principal assets we expect to
acquire in each are as follows:
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Asset Classes
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Principal Assets
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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 a U.S.
Government agency or federally chartered corporation.
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Collateralized Mortgage
Obligations. Collateralized mortgage obligations,
or CMOs, are securities which are structured from U.S.
Government agency, or federally chartered corporation-backed
mortgage pass-through certificates. CMOs receive monthly
payments of principal and interest. CMOs divide the cash flows
which come from the underlying mortgage pass-through
certificates into different classes of securities. CMOs can have
different maturities and different weighted average lives than
the underlying mortgage pass-through certificates. CMOs can
re-distribute the risk characteristics of mortgage pass-through
certificates to better satisfy the demands of various investor
types. These risk characteristics would include average life
variability, prepayments, volatility, floating versus fixed
interest rate and payment and interest rate risk.
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Non-Agency RMBS
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RMBS that are not issued or guaranteed by a U.S. Government
agency or federally charted corporation, with an emphasis on
securities that when originally issued were rated in the highest
rating category by one or more of the nationally recognized
statistical rating organizations.
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CMBS
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Fixed and floating rate commercial mortgage backed securities,
with an emphasis on securities that when originally issued were
rated in the highest rating category by one or more of the
nationally recognized statistical rating organizations.
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Asset Classes
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Principal Assets
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Residential Mortgage Loans
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Prime Mortgage Loans. Prime mortgage loans are
mortgage loans that conform to U.S. Government agency
underwriting guidelines. Jumbo prime mortgage loans are mortgage
loans that conform to U.S. Government agency underwriting
guidelines except that the mortgage balance exceeds the maximum
amount permitted by the guidelines.
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Alt-A Mortgage Loans. Alt-A mortgage loans are
mortgage loans made to borrowers whose qualifying mortgage
characteristics do not conform to U.S. Government agency
underwriting guidelines, but whose borrower characteristics may.
Generally, Alt-A loans allow homeowners to qualify for a
mortgage loan with reduced or alternate forms of documentation.
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Subprime Mortgage Loans. Subprime mortgage
loans are loans that do not conform to U.S. Government agency
underwriting guidelines.
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Commercial Mortgage Loans
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First or second lien loans, subordinate interests in first
mortgages, or
B-Notes,
bridge loans to be used in the acquisition, construction or
redevelopment of a property and mezzanine financings.
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We initially expect to finance our investments in Agency MBS
primarily through short-term borrowings structured as repurchase
agreements. To the extent available to us, we may seek to
finance our investments in non-Agency RMBS, CMBS and mortgage
loan portfolios with non-recourse term borrowing facilities and
equity financing under the TALF or with private financing
sources and, if available, we may make investments in funds that
receive financing under the PPIP.
Our board of directors has adopted a set of investment
guidelines that set out our target assets and other criteria to
be used by our Manager to evaluate specific assets as well as
our overall portfolio composition. Our Manager will make
determinations as to the percentage of our assets that will be
invested in each of our target assets. Based on prevailing
market conditions, our current expectation is that our initial
investment portfolio will consist of between 45% to 55%
non-Agency RMBS, 10% to 15% CMBS and the balance in Agency RMBS.
However, there is no assurance that upon the completion of this
offering we will not allocate the proceeds from this offering
and concurrent private placement in a different manner among our
target assets. Our decisions will depend on prevailing market
conditions and may change over time in response to opportunities
available in different interest rate, economic and credit
environments. As a result, we cannot predict the percentage of
our assets that will be invested in any of our target asset
classes at any given time. We may change our strategy and
policies without a vote of our stockholders. We believe that the
diversification of our portfolio of assets, our Managers
expertise among our target assets and flexibility of our
strategy, combined with our Managers and its
affiliates expertise, will enable us to achieve attractive
risk-adjusted returns under a variety of market conditions and
economic cycles.
Investment
Guidelines
Our board of directors has adopted the following investment
guidelines:
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no investment shall be made that would cause us to fail to
qualify as a REIT for federal income tax purposes;
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no investment shall be made that would cause us to be regulated
as an investment company under the 1940 Act;
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our investments will be in our target assets; and
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until appropriate investments can be identified, our Manager may
invest the proceeds of this and any future offerings in
interest-bearing, short-term investments, including money market
accounts
and/or
funds, that are consistent with our intention to qualify as a
REIT.
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These investment guidelines may be changed from time to time by
our board of directors without the approval of our stockholders.
Our Manager has an investment committee, or Investment
Committee, comprised of its officers and investment
professionals. The Investment Committee will periodically review
our investment portfolio and its compliance with our investment
policies and procedures, including these investment guidelines,
and provide to our board of directors an investment report at
the end of each quarter in conjunction with its review of our
quarterly results. From time to time, as it deems appropriate or
necessary, our board of directors also will review our
investment portfolio and its compliance with our investment
policies and procedures, including these investment guidelines.
Our
Financing Strategy
We intend to employ prudent leverage to increase potential
returns to our stockholders and to fund the acquisition of our
target assets. Our income will be generated primarily by the net
spread between the income we earn on our investments in our
target assets and the cost of our financing and hedging
activities. Although we are not required to maintain any
particular leverage ratio, the amount of leverage we will deploy
for particular investments in our target assets will depend upon
our Managers assessment of a variety of factors, which may
include, the anticipated liquidity and price volatility of the
assets in our investment portfolio, the gap between the duration
of our assets and liabilities including hedges, the availability
and cost of financing the assets, our opinion of the
creditworthiness of our financing counterparties, the health of
the U.S. economy and residential and commercial
mortgage-related markets, our outlook for the level, slope, and
volatility of interest rates, the credit quality of the loans we
acquire, the collateral underlying our Agency RMBS,
non-Agency
RMBS and CMBS, and our outlook for asset spreads relative to the
London Interbank Offered Rate, or LIBOR, curve.
We expect, initially, that we may deploy, on a debt-to-equity
basis, up to seven to eight times leverage on our Agency RMBS
assets. In addition, we do not expect under current market
conditions to deploy leverage on our non-Agency RMBS, CMBS and
mortgage loan assets, except in conjunction with financings that
may be available to us under programs established by the
U.S. Government. For these asset classes, we expect to use
approximately five to six times leverage. We consider these
initial leverage ratios to be prudent for these asset classes.
Subject to maintaining our qualification as a REIT for
U.S. federal income tax purposes, we expect to use a number
of sources to finance our investments. Initially, we expect our
primary financing sources to include repurchase agreements and,
to the extent available to us, financings under programs
established by the U.S. Government such as the TALF or
private financing sources, as described in more detail below,
and, if available, we may make investments in funds that receive
financing under the PPIP.
Repurchase
Agreements
Repurchase agreements are financings pursuant to which we will
sell our target assets to the repurchase agreement counterparty,
the buyer, for an agreed upon price with the obligation to
repurchase these assets from the buyer at a future date and at a
price higher than the original purchase price. The amount of
financing we will receive under a repurchase agreement is
limited to a specified percentage of the estimated market value
of the assets we sell to the buyer. The difference between the
sale price and repurchase price is the cost, or interest
expense, of financing under a repurchase agreement. Under
repurchase agreement financing arrangements, the buyer, or
lender, could require us to provide additional cash collateral,
or a margin call, to re-establish the ratio of value of the
collateral to the amount of borrowing.
The
Term Asset-Backed Securities Lending Facility
On November 25, 2008, the U.S. Treasury and the
Federal Reserve announced the creation of the TALF. Under the
TALF, The Federal Reserve Bank of New York, or the FRBNY,
provides non-recourse loans to borrowers to fund their purchase
of eligible assets, which initially included certain ABS, but
not RMBS or CMBS. On March 23, 2009, the U.S. Treasury
announced preliminary plans to expand the TALF to include
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non-Agency RMBS and CMBS. On May 1, 2009, the Federal
Reserve provided more of the details as to how TALF is to be
expanded to CMBS and explained that beginning on June 16,
2009, up to $100 billion of TALF loans will be available to
finance purchases of CMBS created on or after January 1,
2009. Additionally, on May 19, 2009, the Federal Reserve
announced that certain high quality legacy CMBS, including CMBS
issued before January 1, 2009, would become eligible
collateral under the TALF starting in July 2009. We believe that
the expansion of the TALF to include highly rated CMBS will
provide us with attractively priced
non-recourse
term borrowings that we could use to purchase newly created and
legacy CMBS that are eligible for funding under this program.
Many legacy CMBS have had their ratings downgraded by at least
one rating agency (or have been put on notice as being likely to
be downgraded in the near future) as property values have
declined during the current recession because a large amount of
legacy CMBS are backed by whole loans that were originated
during a period of time when property values were relatively
high and economic fundamentals were relatively strong. These
downgradings significantly reduce the quantity of legacy CMBS
that are TALF eligible. Accordingly, unless the criteria for
legacy CMBS eligibility change, we expect most of our TALF
eligible CMBS investments will be in newly issued CMBS. To date,
the TALF has also not yet been expanded to cover non-Agency
RMBS. We believe that once so expanded, the TALF may provide us
with attractively priced non-recourse term borrowing facilities
that we can use to purchase non-Agency RMBS. However, there can
be no assurance that the TALF will be expanded to include this
asset class and, if so expanded, that we will be able to utilize
it successfully or at all.
The
Public-Private Investment Program
On March 23, 2009, the U.S. Treasury, in conjunction
with the Federal Deposit Insurance Corporation, or the FDIC, and
the Federal Reserve, announced the creation of the PPIP. The
PPIP is designed to encourage the transfer of certain illiquid
legacy real estate-related assets off of the balance sheets of
financial institutions, restarting the market for these assets
and supporting the flow of credit and other capital into the
broader economy. PPIP funds under the Legacy Loan Program, or
Legacy Loan PPIFs, will be established to purchase troubled
loans from insured depository institutions and PPIP funds under
the Legacy Securities Program, or Legacy Securities PPIFs, will
be established to purchase from financial institutions legacy
non-Agency RMBS and newly issued and legacy CMBS that were
originally AAA rated. Legacy Loan PPIFs and Legacy Securities
PPIFs will have access to equity capital from the
U.S. Treasury as well as debt financing provided or
guaranteed by the U.S. Government. We anticipate being able
to benefit from the financing available under this program
primarily as an investor in one or more Legacy Securities PPIFs
that will be established and managed by our Manager or one of
its affiliates if their application to serve as one of the
investment managers for the Legacy Securities Program is
accepted by the U.S. Treasury, or in other Legacy
Securities PPIFs established and managed by third parties. Our
use of these programs and the amount of equity capital we may
contribute to take advantage of them could be substantial. We
also may be able to benefit from the financing available under
the Legacy Loan Program as an investor in one or more Legacy
Loan PPIFs that will be established and managed by our Manager
or one of its affiliates. However, in light of the announcement
by the FDIC that it is postponing the implementation of the
Legacy Loan Program, there is no assurance that this program
will ever be finalized or adopted in a way in which we would
elect to participate or that the final terms will enable us to
participate in the PPIP in a manner consistent with our
investment strategy.
Risk
Management
As part of our risk management strategy, our Manager will
actively manage the financing, interest rate, credit risk,
prepayment and convexity (the measure of the sensitivity of the
duration of a bond to changes in interest rates) risks
associated with holding a portfolio of our target assets.
Interest
Rate Hedging
Subject to maintaining our qualification as a REIT, we intend to
engage in a variety of interest rate management techniques that
seek on one hand to mitigate the influence of interest rate
changes on the values of some of our assets, and on the other
hand help us achieve our risk management objective. We intend to
utilize derivative financial instruments, including, among
others, puts and calls on securities or indices of securities,
interest rate swaps, interest rate caps, interest rate
swaptions, exchange-traded derivatives, U.S. Treasury
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securities and options on U.S. Treasury securities and
interest rate floors to hedge all or a portion of the interest
rate risk associated with the financing of our investment
portfolio. Specifically, we will seek to hedge our exposure to
potential interest rate mismatches between the interest we earn
on our investments and our borrowing costs caused by
fluctuations in short-term interest rates. In utilizing leverage
and interest rate hedges, our objectives will be to improve
risk-adjusted returns and, where possible, to lock in, on a
long-term basis, a favorable spread between the yield on our
assets and the cost of our financing. We will rely on our
Managers expertise to manage these risks on our behalf. We
may implement part of our hedging strategy through a domestic
taxable REIT subsidiary, or TRS, which will be subject to
U.S. federal, state and, if applicable, local income tax.
Market
Risk Management
Risk management is an integral component of our strategy to
deliver returns to our stockholders. Because we will invest in
MBS, investment losses from prepayment, interest rate volatility
or other risks can meaningfully reduce or eliminate our
distributions to stockholders. In addition, because we will
employ financial leverage in funding our portfolio, mismatches
in the maturities of our assets and liabilities can create risk
in the need to continually renew or otherwise refinance our
liabilities. Our net interest margins will be dependent upon a
positive spread between the returns on our asset portfolio and
our overall cost of funding. To minimize the risks to our
portfolio, we will actively employ portfolio-wide and
security-specific risk measurement and management processes in
our daily operations. Our Managers risk management tools
include software and services licensed or purchased from third
parties, in addition to proprietary software and analytical
methods developed by Invesco. There can be no guarantee that
these tools will protect us from market risks.
Credit
Risk
We believe our investment strategy will generally keep our
credit losses and financing costs low. However, we retain the
risk of potential credit losses on all of the residential and
commercial mortgage loans, as well as the loans underlying the
non-Agency RMBS and CMBS we hold. We seek to manage this risk
through our pre-acquisition due diligence process and through
use of non-recourse financing which limits our exposure to
credit losses to the specific pool of mortgages that are subject
to the non-recourse financing. In addition, with respect to any
particular target asset, our Managers investment team
evaluates, among other things, relative valuation, supply and
demand trends, shape of yield curves, prepayment rates,
delinquency and default rates, recovery of various sectors and
vintage of collateral.
Our
Competitive Advantages
We believe that our competitive advantages include the following:
Significant
Experience of Our Manager
The senior management team of our Manager has a long track
record and broad experience in managing residential and
commercial mortgage-related assets through a variety of credit
and interest rate environments and has demonstrated the ability
to generate attractive risk adjusted returns under different
market conditions and cycles. As of March 31, 2009, our
Manager managed approximately $177.0 billion of fixed
income and real estate investments, including $18.8 billion
of structured securities, consisting of approximately
$11.0 billion of Agency RMBS, $3.9 billion of ABS,
$2.0 billion of non-Agency RMBS and $1.9 billion of
CMBS. In addition, our Manager will benefit from the insight and
capabilities of Invescos distressed investment subsidiary,
WL Ross, and Invescos real estate team. Our Manager
will draw upon the professional experience and knowledge of the
investment team of its WL Ross subsidiary and benefit from WL
Ross expertise in security selection, portfolio
management, and portfolio oversight. Our Manager also will be
able to draw upon the experience and resources of Invescos
real estate team, comprised of approximately 124 investment
professionals on the ground in key investment markets, which has
25 years of direct real estate investing experience. Our
Managers real estate team will provide us with valuable
insights, through its research and monitoring capabilities, on
investments in residential and commercial properties. Through
our Managers WL Ross subsidiary and Invescos real
estate
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team we will also have access to broad and deep teams of
experienced investment professionals in real estate and
distressed investing. Through these teams, we will have real
time access to research and data on the mortgage and real estate
industries. Having in-house access to these resources and
expertise provides us with a competitive advantage over other
companies investing in our target assets who have less internal
resources and expertise.
Access
to Extensive Repurchase Agreement Financing and Other Strategic
Relationships
An affiliate of our Manager and a sub-adviser to us, Invesco Aim
Advisors, has been active in the repurchase agreement lending
market since 1980 and currently has master repurchase agreements
in place with a number of counterparties. At March 31,
2009, Invesco Aim Advisors had provided repurchase agreement
financing to these counterparties equal to approximately
$20.7 billion.
Invesco Aim Advisors has in place a documented process to
mitigate counterparty risk. Our Manager, together with a
dedicated team of professionals at Invesco Aim Advisors pursuant
to a sub-advisory agreement between our Manager and Invesco Aim
Advisors, follows this established process. During these
volatile times in which a number of repurchase agreement
counterparties have either defaulted or ceased to exist, we feel
that it is critical to have controls in place that address this
recent disruption in the markets. All repurchase agreement
counterparty approval requests must be submitted to the team of
nine professionals at Invesco Aim Advisors and undergo a
rigorous review and approval process to determine whether the
proposed counterparty meets established criteria. This process
involves a credit analysis of each prospective counterparty to
ensure that it meets Invesco Aim Advisors internal credit
risk requirements, a review of the counterpartys audited
financial statements, credit ratings and clearing arrangements,
and a regulatory background check. In addition, all approved
counterparties are monitored on an ongoing basis by Invesco Aim
Advisors credit team and, if they deem a credit situation
to be deteriorating, they have the ability to restrict or
terminate trading with this counterparty. We do not expect to
enter into any hedging transactions to mitigate any risks
associated with our repurchase agreement counterparties.
Extensive
Strategic Relationships and Experience of our Manager and its
Affiliates
Our Manager and its affiliates, including Invesco Aim Advisors,
maintain extensive long-term relationships with other financial
intermediaries, including primary dealers, leading investment
banks, brokerage firms, leading mortgage originators and
commercial banks. We believe these relationships will enhance
our ability to source, finance and hedge investment
opportunities and, thus, enable us to grow in various credit and
interest rate environments. In addition, we believe the contacts
our Manager and its affiliates (including Invesco Aim Advisors)
have with numerous investment grade derivative and lending
counterparties will assist us in implementing our financing and
hedging strategies.
Disciplined
Investment Approach
We will seek to maximize our risk-adjusted returns through our
Managers disciplined investment approach, which relies on
rigorous quantitative and qualitative analysis. Our Manager will
monitor our overall portfolio risk and evaluate the
characteristics of our investments in our target assets
including, but not limited to, loan balance distribution,
geographic concentration, property type, occupancy, periodic and
periodic interest rate caps, which limit the amount an interest
rate can increase during any given period, or lifetime interest
rate caps, weighted-average loan-to-value and weighted-average
credit score. In addition, with respect to any particular target
asset, our Managers investment team evaluates, among other
things, relative valuation, supply and demand trends, shape of
yield curves, prepayment rates, delinquency and default rates
recovery of various sectors and vintage of collateral. As a
newly organized company with no historical investments, we will
build an initial portfolio consisting of currently priced assets
and therefore we will likely not be negatively impacted by the
recent price declines experienced by many mortgage portfolios.
We believe this strategy and our commitment to capital
preservation will provide us with a competitive advantage when
operating in a variety of market conditions.
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Access
to Our Managers Sophisticated Analytical Tools,
Infrastructure and Expertise
We will utilize our Managers proprietary and third-party
mortgage-related security and portfolio management tools to seek
to generate an attractive net interest margin from our
portfolio. We intend to focus on in-depth analysis of the
numerous factors that influence our target assets, including:
(1) fundamental market and sector review; (2) rigorous
cash flow analysis; (3) disciplined security selection;
(4) controlled risk exposure; and (5) prudent balance
sheet management. We will utilize these tools to guide the
hedging strategies developed by our Manager to the extent
consistent with satisfying the requirements for qualification as
a REIT. In addition, we will use our proprietary technology
management platform called
QTechsm
to monitor investment risk.
QTechsm
collects and stores real-time market data, and integrates
markets performance with portfolio holdings and proprietary risk
models to measure the risk positions in portfolios. This
measurement system portrays overall portfolio risk and its
sources. Through the use of the tools described above, we will
analyze factors that affect the rate at which mortgage
prepayments occur, including changes in the level of interest
rates, directional trends in residential and commercial real
estate prices, general economic conditions, the locations of the
properties securing the mortgage loans and other social and
demographic conditions in order to acquire the target assets
that we believe are undervalued. We believe that sophisticated
analysis of both macro and micro economic factors will enable us
to manage cash flow and distributions while preserving capital.
Our Manager has created and maintains analytical and portfolio
management capabilities to aid in security selection and risk
management. We intend to capitalize on the market knowledge and
ready access to data across our target markets that our Manager
and its affiliates obtain through their established platform. We
will also benefit from our Managers comprehensive finance
and administrative infrastructure, including its risk management
and financial reporting operations, as well as its business
development, legal and compliance teams.
Alignment
of Invesco and Our Managers Interests
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
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., at $20.00 per unit.
Upon completion of this offering and the concurrent private
placement, Invesco, through our Manager, will beneficially own
0.87% of our common stock (or 0.76% if the underwriters fully
exercise their option to purchase additional shares). Assuming
that all OP units are redeemed for an equivalent number of
shares of our common stock, Invesco, through the Invesco
Purchaser, would beneficially own 15% of our outstanding common
stock upon completion of this offering and the concurrent
private placement (or 13.3% if the underwriters fully exercise
their option to purchase additional shares). We believe that the
significant ownership of our common stock by Invesco, through
the Invesco Purchaser, will align Invesco and our Managers
interests with our interests.
Tax
Advantages of REIT Qualification
Assuming that we meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Internal
Revenue Code, we will generally be entitled to a deduction for
dividends that we pay and, therefore, will not be subject to
U.S. federal corporate income tax on our net income that is
distributed currently to our stockholders. This treatment
substantially eliminates the double taxation at the
corporate and stockholder levels that results generally from
investment in a corporation.
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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 22 of this prospectus before purchasing our common
stock. If any of the following risks occur, our business,
financial condition or results of operations could be materially
and adversely affected. In that case, the trading price of our
common stock could decline, and you may lose some or all of your
investment.
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We are dependent on our Manager and its key personnel for our
success. In addition, we intend to rely on our financing
opportunities relating to our repurchase agreement financing
that have been and will be facilitated
and/or
provided by Invesco Aim Advisors, an affiliate of our Manager.
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Neither Invesco nor our Manager have any experience operating a
REIT or managing a portfolio of our target assets on a leveraged
basis and we cannot assure you that our Managers past
experience will be sufficient to successfully manage our
business as a REIT with such a portfolio.
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There are conflicts of interest in our relationship with our
Manager and Invesco, which could result in decisions that are
not in the best interests of our stockholders.
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The management agreement with our Manager was not negotiated on
an arms-length basis and may not be as favorable to us as
if it had been negotiated with an unaffiliated third party and
may be costly and difficult to terminate.
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Our board of directors will approve very broad investment
guidelines for our Manager and will not approve each investment
and financing decision made by our Manager.
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There can be no assurance that the actions of the
U.S. Government, Federal Reserve, U.S. Treasury and
other governmental and regulatory bodies for the purpose of
stabilizing the financial markets, including the establishment
of the TALF and the PPIP, or market response to those actions,
will achieve the intended effect, and our business may not
benefit from these actions and further government or market
developments could adversely impact us.
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We may change any of our strategies, policies or procedures
without stockholder consent.
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We have no operating history and may not be able to successfully
operate our business or generate sufficient revenue to make or
sustain distributions to our stockholders.
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Maintenance of our 1940 Act exemption imposes limits on our
operations.
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We expect to use leverage in executing our business strategy,
which may adversely affect the return on our assets and may
reduce cash available for distribution to our stockholders, as
well as increase losses when economic conditions are unfavorable.
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We will depend on repurchase agreement financing to acquire
Agency RMBS, and our inability to access this funding for our
Agency RMBS could have a material adverse effect on our results
of operations, financial condition and business.
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As a result of recent market events, including the contraction
among and failure of certain lenders, it may be more difficult
for us to secure non-governmental financing.
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An increase in our borrowing costs relative to the interest we
receive on investments in our target assets may adversely affect
our profitability, and our cash available for distribution to
our stockholders.
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To the extent available to us, we may seek to finance our
investments in non-Agency RMBS, CMBS and mortgage loan portfolio
with equity and debt financing under U.S. government
programs, and our inability to access this financing could have
a material adverse effect on our results of operations,
financial condition and business.
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Hedging against interest rate exposure may adversely affect our
earnings, which could reduce our cash available for distribution
to our stockholders.
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We have not yet identified any specific investments in our
target asset classes.
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We may allocate the net proceeds from this offering and the
concurrent private placement to investments with which you may
not agree.
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Our investments may be concentrated and will be subject to risk
of default.
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Continued adverse developments in the residential and commercial
mortgage markets, including recent increases in defaults, credit
losses and liquidity concerns, could make it difficult for us to
borrow money to acquire our target assets on a leveraged basis,
on attractive terms or at all, which could adversely affect our
profitability.
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We operate in a highly competitive market for investment
opportunities and competition may limit our ability to acquire
desirable investments in our target assets and could also affect
the pricing of these securities.
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We may acquire non-Agency RMBS collateralized by subprime and
Alt-A mortgage loans, which are subject to increased risks.
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The mortgage loans that we will acquire, and the mortgage and
other loans underlying the non-Agency RMBS and CMBS that we will
acquire, are subject to defaults, foreclosure timeline
extension, fraud and commercial and residential price
depreciation, and unfavorable modification of loan principal
amount, interest rate and amortization of principal, which could
result in losses to us.
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If our Manager overestimates the loss-adjusted yields of our
CMBS investments, we may experience losses.
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An increase in interest rates may cause a decrease in the volume
of certain of our target assets which could adversely affect our
ability to acquire target assets that satisfy our investment
objectives and to generate income and pay dividends.
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Prepayment rates may adversely affect the value of our
investment portfolio.
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Our failure to qualify as a REIT would subject us to
U.S. federal income tax and potentially increased state and
local taxes, which would reduce the amount of cash available for
distribution to our stockholders.
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Complying with REIT requirements may cause us to forego
otherwise attractive investment opportunities or financing or
hedging strategies.
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Our
Structure
We were organized as a Maryland corporation on June 5,
2008. We consider Invesco to be our promoter. We will conduct
substantially all of our operations through our operating
partnership, of which we are the sole general partner. Subject
to certain limitations and exceptions, the limited partners of
the operating partnership, other than us or our subsidiaries,
will have the right to cause the operating partnership to redeem
their OP units for cash equal to the market value of an
equivalent number of our shares of common stock, or, at our
option, we may purchase their OP units by issuing one share of
common stock for each OP unit redeemed.
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The following chart shows our structure after giving effect to
this offering and the concurrent private placement to the
Invesco Purchaser:
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(1) |
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Assuming redemption of all OP units owned by the Invesco
Investments (Bermuda) Ltd. for the equivalent number of shares
of our common stock, Invesco would beneficially own (through the
holdings of the Invesco Purchaser) 15% of our common stock and
the public would own the remaining 85%. |
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(2) |
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We expect IAS Asset I LLC to qualify for an exemption from
registration under the 1940 Act as an investment company
pursuant to Section 3(c)(5)(C) of the 1940 Act. We may in
the future organize special purpose subsidiaries that may borrow
under the TALF. We anticipate that some of these subsidiaries
may be organized to rely on the 1940 Act exemption provided to
certain structured financing vehicles by
Rule 3a-7.
We intend to conduct our operations so that the value of our
operating partnerships investment in IAS I LLC, these
special purpose subsidiaries, as well as other subsidiaries not
relying on Section 3(c)(1) or Section 3(c)(7) of the
1940 Act will at all times, on an unconsolidated basis, exceed
60% of our operating partnerships total assets. See
Business Operating and Regulatory
Structure 1940 Act Exemption. |
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Management
Agreement
We will be externally managed and advised by our Manager. We
expect to benefit from the personnel, infrastructure,
relationships and experience of our Manager to enhance the
growth of our business. Each of our officers is an employee of
Invesco. We do not expect to have any employees. Our Manager is
not obligated to dedicate certain of its personnel exclusively
to us, nor is our Manager or its personnel obligated to dedicate
any specific portion of its or their time to our business.
We will enter into a management agreement with our Manager
effective upon the closing of this offering. Pursuant to the
management agreement, our Manager will implement our business
strategy and perform certain services for us, subject to
oversight by our board of directors. Our Manager will be
responsible for, among other duties, (1) performing all of
our day-to-day functions, (2) determining investment
criteria in conjunction with our board of directors,
(3) sourcing, analyzing and executing investments, asset
sales and financings, and (4) performing asset management
duties. In addition, our Manager has an Investment Committee of
our Managers professionals that will oversee compliance
with our investment guidelines, investment portfolio holdings,
financing and leveraging strategies.
The initial term of the management agreement will end two years
after the closing of this offering, with automatic one-year
renewal terms that end on the anniversary of the closing of this
offering. Our independent directors will review our
Managers performance annually and, following the initial
term, the management agreement may be terminated annually upon
the affirmative vote of at least two-thirds of our independent
directors based upon: (1) our Managers unsatisfactory
performance that is materially detrimental to us or (2) our
determination that the management fees payable to our Manager
are not fair, subject to our Managers right to prevent
termination based on unfair fees by accepting a reduction of
management fees agreed to by at least two-thirds of our
independent directors. We will provide our Manager with
180 days prior notice of such termination. Upon such a
termination, we will pay our Manager a termination fee equal to
three times the management fee described in the table below. We
may also terminate the management agreement with 30 days
prior notice from our board of directors, without payment of a
termination fee, for cause, as defined in the management
agreement. Our Manager may terminate the management agreement if
we become required to register as an investment company under
the 1940 Act, with such termination deemed to occur immediately
before such event, in which case we would not be required to pay
a termination fee. Our Manager may also decline to renew the
management agreement by providing us with 180 days written
notice, in which case we would not be required to pay a
termination fee.
Invesco Aim Advisors will serve as our sub-adviser pursuant to
an agreement between our Manager and Invesco Aim Advisors.
Invesco Aim Advisors will provide input on overall trends in
short-term financing markets and make specific recommendations
regarding financing of Agency RMBS. We do not expect our Manager
to provide these services to us directly. The fees charged by
Invesco Aim Advisors shall be paid by our Manager and shall not
constitute a reimbursable expense by our Manager under the
management agreement.
14
The following table summarizes the fees and expense
reimbursements that we will pay to our Manager:
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Type
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Description
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Payment
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Management fee:
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1.50% of our stockholders equity per annum and calculated
and payable quarterly in arrears. For purposes of calculating
the management fee, our stockholders equity means the sum
of the net proceeds from all issuances of our equity securities
since inception (allocated on a pro rata daily basis for such
issuances during the fiscal quarter of any such issuance), plus
our retained earnings at the end of the most recently completed
calendar quarter (without taking into account any non-cash
equity compensation expense incurred in current or prior
periods), less any amount that we pay to repurchase our common
stock since inception, and excluding any unrealized gains,
losses or other items that do not affect realized net income
(regardless of whether such items are included in other
comprehensive income or loss, or in net income). This amount
will be adjusted to exclude one-time events pursuant to changes
in accounting principles generally accepted in the
United States, or GAAP, and certain non-cash items after
discussions between our Manager and our independent directors
and approved by a majority of our independent directors. Our
stockholders equity, for purposes of calculating the
management fee, could be greater or less than the amount of
stockholders equity shown on our financial statements. We
will treat outstanding limited partner interests (not held by
us) as outstanding shares of capital stock for purposes of
calculating the management fee.
To the extent we pay any fees to our Manager or any of its
affiliates in connection with any PPIF, our Manager has agreed
to reduce the management fee payable by us under the management
agreement (but not below zero) in respect of any equity
investment we may decide to make in any PPIF managed by our
Manager or any of its affiliates by the amount of the fees
payable to our Manager or its affiliates under the PPIF with
regard to our equity investment. 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.
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Quarterly in cash
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Expense reimbursement
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Reimbursement of operating expenses related to us incurred by
our Manager, including certain salary expenses and other
expenses relating to legal, accounting, due diligence and other
services. Our reimbursement obligation is not subject to any
dollar limitation.
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Monthly in cash.
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Termination fee
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Termination fee equal to three times the sum of the average
annual management fee earned by our Manager during the prior
24-month period prior to such termination, calculated as of the
end of the most recently completed fiscal quarter.
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Upon termination of the management agreement by us without cause
or by our Manager if we materially breach the management
agreement.
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Type
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Payment
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Incentive plan
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Our equity incentive plan includes provisions for grants of
restricted common stock and other equity based awards to our
directors or officers or any employees of our Manager. We do not
expect to grant any awards under our equity incentive plan upon
completion of this offering.
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Conflicts
of Interest
We are dependent on our Manager for our day-to-day management
and do not have any independent officers or employees. Each of
our officers and two of our directors, Mr. Armour and
Ms. Dunn Kelley, are employees of Invesco. Our management
agreement with our Manager was negotiated between related
parties and its terms, including fees and other amounts payable,
may not be as favorable to us as if it had been negotiated at
arms length with an unaffiliated third party. In addition,
the obligations of our Manager and its officers and personnel to
engage in other business activities, including for Invesco, may
reduce the time our Manager and its officers and personnel spend
managing us.
As of March 31, 2009, Invesco had $348.2 billion in
managed assets and our Manager managed approximately
$177.0 billion of fixed income and real estate investments,
including approximately $18.8 billion of structured
securities, consisting of approximately $11.0 billion of
Agency RMBS, $2.0 billion of non-Agency RMBS and
$1.9 billion of CMBS and we will compete for investment
opportunities directly with our Manager or other clients of our
Manager or Invesco and its subsidiaries. A substantial number of
separate accounts managed by our Manager had limited exposure to
our target assets. In addition, in the future our Manager may
have additional clients that compete directly with us for
investment opportunities, although Invesco has indicated to us
that it expects that we will be the only publicly traded REIT
advised by our Manager or Invesco and its subsidiaries whose
investment strategy is to invest substantially all of its
capital in our target assets. Our Manager and Invesco Aim
Advisors have an investment allocation policy in place that is
intended to enable us to share equitably with the investment
companies and institutional and separately managed accounts that
effect securities transactions in fixed income securities for
which our Manager and Invesco Aim Advisors are responsible in
the selection of brokers, dealers and other trading
counterparties. According to this policy, investments may be
allocated by taking into account factors, including but not
limited to investment objectives or strategies, the size of the
available investment, cash availability and cash flow
expectations, and the tax implications of an investment. The
investment allocation policy also requires a fair and equitable
allocation of financing opportunities over time among us and
other accounts. The investment allocation policy also includes
other procedures intended to prevent any of its other accounts
from receiving favorable treatment in accessing investment
opportunities over any other account. The investment allocation
policy may be amended by our Manager and Invesco Aim Advisors at
anytime without our consent. To the extent that a conflict
arises with respect to the business of our Manager or Invesco
Aim Advisors or us in such a way as to give rise to conflicts
not currently addressed by the investment allocation policy, our
Manager and Invesco Aim Advisors may need to refine its policy
to address such situation. Our independent directors will review
our Managers and Invesco Aim Advisors compliance
with the investment allocation policy. In addition, to avoid any
actual or perceived conflicts of interest with our Manager or
Invesco Aim Advisors, a majority of our independent directors
will be required to approve an investment in any security
structured or issued by an entity managed by our Manager,
Invesco Aim Advisors, or any of their affiliates, or any
purchase or sale of our assets by or to our Manager, Invesco Aim
Advisors or their affiliates or an entity managed by our
Manager, Invesco Aim Advisors or its affiliates.
To the extent available to us, we may seek to finance our
non-Agency RMBS and CMBS portfolios with financings under the
Legacy Securities Program, and, if the program delay is removed,
we may also seek to acquire residential and commercial mortgage
loans with financing under the Legacy Loan Program. One of the
ways we may access this financing is by contributing our equity
capital to one or more Legacy Securities or Legacy Loan PPIFs
that will be established and managed by our Manager or one of
its affiliates. To date, the terms of any equity investment that
we would make to any Legacy Securities or Legacy Loan PPIFs that
may be established in the future have not yet been determined.
However, we expect that any investment we make
16
will be on terms that are no less favorable to us than those
made available to other third party institutional investors in
the Legacy Securities or Legacy Loan PPIF. In addition, to the
extent we pay any fees to our Manager or any of its affiliates
in connection with any PPIF, our Manager has agreed to reduce
the management fee payable by us under the management agreement
(but not below zero) in respect of any equity investment we may
decide to make in any PPIF managed by our Manager or any of its
affiliates by the amount of the fees payable to our Manager or
its affiliates under the PPIF with regard to our equity
investment. 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. Our
Manager would have a conflict of interest in recommending our
participation in any Legacy Securities or Legacy Loan PPIFs it
manages for the fees payable to it by the Legacy Securities or
Legacy Loan PPIF may be greater than the fees payable to it by
us under the management agreement. We have addressed this
conflict by requiring that the terms of any equity investment we
make in any such Legacy Securities or Legacy Loan PPIF be
approved by our board of directors, including a majority of our
independent directors.
We do not have a policy that expressly prohibits our directors,
officers, security holders or affiliates from engaging for their
own account in business activities of the types conducted by us.
However, subject to Invescos allocation policy, our code
of business conduct and ethics contains a conflicts of interest
policy that prohibits our directors, officers and personnel, as
well as employees of our Manager who provide services to us,
from engaging in any transaction that involves an actual
conflict of interest with us.
Operating
and Regulatory Structure
REIT
Qualification
We intend to elect to qualify as a REIT under Sections 856
through 859 of the Internal Revenue Code commencing with our
taxable year ending on December 31, 2009. Our qualification
as a REIT depends upon our ability to meet on a continuing
basis, through actual investment and operating results, various
complex requirements under the Internal Revenue Code relating
to, among other things, the sources of our gross income, the
composition and values of our assets, our distribution levels
and the diversity of ownership of our shares. We believe that we
have been organized in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue
Code, and that our intended manner of operation will enable us
to meet the requirements for qualification and taxation as a
REIT.
So long as we qualify as a REIT, we generally will not be
subject to U.S. federal income tax on our net taxable
income we distribute currently to our stockholders. If we fail
to qualify as a REIT in any taxable year and do not qualify for
certain statutory relief provisions, we will be subject to
U.S. federal income tax at regular corporate rates and may
be precluded from qualifying as a REIT for the subsequent four
taxable years following the year during which we lost our REIT
qualification. Even if we qualify for taxation as a REIT, we may
be subject to certain U.S. federal, state and local taxes
on our income or property.
1940
Act Exemption
We intend to conduct our operations so that we are not required
to register as an investment company under the 1940 Act.
Section 3(a)(1)(A) of the 1940 Act defines an investment
company as any issuer that is or holds itself out as being
engaged primarily in the business of investing, reinvesting or
trading in securities. Section 3(a)(1)(C) of the 1940 Act
defines an investment company as any issuer that is engaged or
proposes to engage in the business of investing, reinvesting,
owning, holding or trading in securities and owns or proposes to
acquire investment securities having a value exceeding 40% of
the value of the issuers total assets (exclusive of
U.S. Government securities and cash items) on an
unconsolidated basis, which we refer to as the 40% test.
Excluded from the term investment securities, among
other things, are U.S. Government securities and securities
issued by majority-owned subsidiaries that are not themselves
investment companies and are not relying on the exception from
the definition of investment company set forth in
Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
The company is organized as a holding company that conducts its
businesses primarily through the operating partnership. Both the
company and the operating partnership intend to conduct
17
their operations so that they comply with the 40% test. The
securities issued to our operating partnership by any wholly
owned or majority-owned subsidiaries that we may form in the
future that are excepted from the definition of investment
company based on Section 3(c)(1) or 3(c)(7) of the
1940 Act, together with any other investment securities the
operating partnership may own, may not have a value in excess of
40% of the value of the operating partnerships total
assets on an unconsolidated basis. We will monitor our holdings
to ensure continuing and ongoing compliance with this test. In
addition, we believe neither the company nor the operating
partnership will be considered an investment company under
Section 3(a)(1)(A) of the 1940 Act because it will not
engage primarily or hold itself out as being engaged primarily
in the business of investing, reinvesting or trading in
securities. Rather, through the operating partnerships
wholly owned or majority-owned subsidiaries, the company and the
operating partnership will be primarily engaged in the
non-investment company businesses of these subsidiaries.
IAS Asset I LLC intends to qualify for an exemption from
registration as an investment company under the 1940 Act
pursuant to Section 3(c)(5)(C) of the 1940 Act, which is
available for entities primarily engaged in the business
of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate. In addition, certain of
the operating partnerships other subsidiaries that we may
form in the future also intend to rely on the
Section 3(c)(5)(C) exemption. This exemption generally
requires that at least 55% of our subsidiaries portfolios
must be comprised of qualifying assets and at least another 25%
of each of their portfolios must be comprised of real
estate-related assets under the 1940 Act (and no more than 20%
comprised of miscellaneous assets). Qualifying assets for this
purpose include mortgage loans and other assets, such as whole
pool Agency RMBS, that the Securities and Exchange Commission,
or SEC, staff in various no-action letters has determined are
the functional equivalent of mortgage loans for the purposes of
the 1940 Act. We intend to treat as real estate-related assets
non-Agency RMBS, CMBS, debt and equity securities of companies
primarily engaged in real estate businesses, agency partial pool
certificates and securities issued by pass-through entities of
which substantially all of the assets consist of qualifying
assets
and/or real
estate-related assets. Any Legacy Securities PPIF that may be
formed and managed by our Manager or one of its affiliates will
rely on Section 3(c)(7) for its 1940 Act exemption. The
terms of our participation in any such Legacy Securities PPIF
have not as yet been established. As a result, the treatment of
IAS Asset I LLCs participation in any Legacy Securities
PPIF as a real estate-related asset or a miscellaneous asset for
purposes of its Section 3(c)(5)(C) analysis has not been
determined. We will discuss with the SEC staff how IAS Asset I
LLCs participation in any Legacy Securities PPIF should be
treated for purposes of its Section 3(c)(5)(C) analysis.
Depending on this determination, 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 exemption. 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 intend to monitor our portfolio
periodically and prior to each investment acquisition, there can
be no assurance that we will be able to maintain this exemption
from registration for each of these subsidiaries.
We may in the future organize special purpose subsidiaries of
the operating partnership that will borrow under the TALF. We
expect that these TALF subsidiaries will rely on
Section 3(c)(7) for their 1940 Act exemption and,
therefore, the operating partnerships interest in each of
these TALF subsidiaries would constitute an investment
security for purposes of determining whether the operating
partnership passes the 40% test. We may in the future organize
one or more TALF subsidiaries that seek to rely on the 1940 Act
exemption provided to certain structured financing vehicles by
Rule 3a-7.
Any such TALF subsidiary would need to be structured to comply
with any guidance that may be issued by the Division of
Investment Management of the SEC on the restrictions contained
in
Rule 3a-7.
In certain circumstances, compliance with
Rule 3a-7
may require, among other things, that the indenture governing
the TALF subsidiary include limitations on the types of assets
the subsidiary may sell or acquire out of the proceeds of assets
that mature, are refinanced or otherwise sold, on the period of
time during which such transactions may occur, and on the level
of transactions that may occur. We expect that the aggregate
value of the operating partnerships interests in TALF
subsidiaries that seek to rely on
Rule 3a-7
will comprise less than 20% of the operating partnerships
(and, therefore, the companys) total assets on an
unconsolidated basis.
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We expect that IAS Asset I LLC and most of our other
majority-owned subsidiaries will not be relying on exemptions
under either Section 3(c)(1) or 3(c)(7) of the 1940 Act.
Consequently, we expect that our interests in these subsidiaries
(which we expect will constitute a substantial majority of our
assets) will not constitute investment securities.
Consequently, we expect to be able to conduct our operations so
that we are not required to register as an investment company
under the 1940 Act.
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 exemption from registration under the 1940 Act
will limit our ability to make certain investments. For example,
these restrictions will limit the ability of our subsidiaries to
invest directly in mortgage-backed securities that represent
less than the entire ownership in a pool of mortgage loans, debt
and equity tranches of securitizations and certain ABS and real
estate companies or in assets not related to real estate.
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.
Restrictions
on Ownership of Our Common Stock
To assist us in complying with the limitations on the
concentration of ownership of a REIT imposed by the Internal
Revenue Code, our charter prohibits, with certain exceptions,
any stockholder from beneficially or constructively owning,
applying certain attribution rules under the Internal Revenue
Code, more than 9.8% by value or number of shares, whichever is
more restrictive, of our outstanding shares of common stock, or
9.8% by value or number of shares, whichever is more
restrictive, of our outstanding capital stock. Our board of
directors may, in its sole discretion, waive the 9.8% ownership
limit with respect to a particular stockholder if it is
presented with evidence satisfactory to it that such ownership
will not then or in the future jeopardize our qualification as a
REIT. In addition, different ownership limits will apply to
Invesco. These ownership limits, which our board of directors
has determined will not jeopardize our REIT qualification, will
allow Invesco to hold up to 25% (by value or by number of
shares, whichever is more restrictive) of our common stock or up
to 25% (by value or by number of shares, whichever is more
restrictive) of our outstanding capital stock.
Our charter also prohibits any person from, among other things:
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beneficially or constructively owning shares of our capital
stock that would result in our being closely held
under Section 856(h) of the Internal Revenue Code, or
otherwise cause us to fail to qualify as a REIT; and
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transferring shares of our capital stock if such transfer would
result in our capital stock being owned by fewer than
100 persons.
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In addition, our charter provides that any ownership or
purported transfer of our capital stock in violation of the
foregoing restrictions will result in the shares so owned or
transferred being automatically transferred to a charitable
trust for the benefit of a charitable beneficiary, and the
purported owner or transferee acquiring no rights in such
shares. If a transfer to a charitable trust would be ineffective
for any reason to prevent a violation of the restriction, the
transfer resulting in such violation will be void from the time
of such purported transfer.
19
THE
OFFERING
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Common stock offered by us |
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8,500,000 shares (plus up to an additional
1,275,000 shares of our common stock that we may issue and
sell upon the exercise of the underwriters over-allotment
option). |
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Common stock to be outstanding after this offering and the
concurrent private placement to Invesco |
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10,000,100 shares.(1) |
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Use of proceeds |
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We intend to invest the net proceeds of this offering and the
concurrent private placement of common stock and OP units to the
Invesco Purchaser in our target assets. Our Manager will make
determinations as to the percentage of our assets that will be
invested in each of our target assets. Based on prevailing
market conditions, our current expectation is that our initial
investment portfolio will consist of between 45% to 55%
non-Agency RMBS, 10% to 15% CMBS and the balance in Agency RMBS.
However, there is no assurance that upon the completion of this
offering we will not allocate the proceeds from this offering
and concurrent private placement in a different manner among our
target assets. Our decisions will depend on prevailing market
conditions and may change over time in response to opportunities
available in different interest rate, economic and credit
environments. Until appropriate investments can be identified,
our Manager may invest these funds in interest-bearing
short-term investments, including money market accounts and/or
funds, that are consistent with our intention to qualify as a
REIT. These initial investments are expected to provide a lower
net return than we will seek to achieve from investments in our
target assets. See Use of Proceeds. |
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Distribution policy |
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We intend to make regular quarterly distributions to holders of
our common stock. U.S. federal income tax law generally requires
that a REIT distribute annually at least 90% of its REIT taxable
income, without regard to the deduction for dividends paid and
excluding net capital gains, and that it pay tax at regular
corporate rates to the extent that it annually distributes less
than 100% of its net taxable income. We generally intend over
time to pay quarterly dividends in an amount equal to our net
taxable income. We plan to pay our first dividend in respect of
the period from the closing of this offering through
September 30, 2009 which may be prior to the time that we
have fully invested the net proceeds from this offering in
investments in our target assets. |
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Any distributions we make will be at the discretion of our board
of directors and will depend upon, among other things, our
actual results of operations. These results and our ability to
pay distributions will be affected by various factors, including
the net interest and other income from our portfolio, our
operating expenses and any other expenditures. For more
information, see Distribution Policy. |
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(1) |
Includes 75,000 shares of our common stock to be sold to
Invesco, through our Manager, and shares that may be issued by
us upon a redemption of all of the 1,425,000 OP units to be
sold to Invesco, through Invesco Investments (Bermuda) Ltd., in
each case, in a private placement concurrent with this offering.
Excludes 1,275,000 shares of our common stock that we may
issue and sell upon the exercise of the underwriters
over-allotment option in full.
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Proposed NYSE symbol |
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IVR |
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Ownership and transfer restrictions |
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To assist us in complying with limitations on the concentration
of ownership of a REIT imposed by the Internal Revenue Code and
for other purposes, our charter generally prohibits, among other
prohibitions, any stockholder from beneficially or
constructively owning more than 9.8% by value or number of
shares, whichever is more restrictive, of our outstanding shares
of common stock, or 9.8% by value or number of shares, whichever
is more restrictive, of our outstanding capital stock. Different
ownership limits will apply to Invesco and its direct and
indirect subsidiaries, including but not limited to our Manager
and Invesco Investments (Bermuda) Ltd. See Description of
Capital Stock Restrictions on Ownership and
Transfer. |
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Risk factors |
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Investing in our common stock involves a high degree of risk.
You should carefully read and consider the information set forth
under the heading Risk Factors beginning on
page 22 of this prospectus and all other information in
this prospectus before investing in our common stock. |
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.
21
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus before purchasing
our common stock. If any of the following risks occur, our
business, financial condition or results of operations could be
materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose some
or all of your investment.
Risks
Related to Our Relationship With Our Manager
We are
dependent on our Manager and its key personnel for our success.
In addition, we intend to rely on our financing opportunities
relating to our repurchase agreement financing that have been
and will be facilitated and/or provided by Invesco Aim Advisors,
an affiliate of our Manager.
We have no separate facilities and are completely reliant on our
Manager. We do not expect to have any employees. Our executive
officers are employees of Invesco. Our Manager has significant
discretion as to the implementation of our investment and
operating policies and strategies. Accordingly, we believe that
our success will depend to a significant extent upon the
efforts, experience, diligence, skill and network of business
contacts of the executive officers and key personnel of our
Manager. The executive officers and key personnel of our Manager
will evaluate, negotiate, close and monitor our investments;
therefore, our success will depend on their continued service.
The departure of any of the executive officers or key personnel
of our Manager could have a material adverse effect on our
performance. In addition, we offer no assurance that our Manager
will remain our investment manager or that we will continue to
have access to our Managers principals and professionals.
The initial term of our management agreement with our Manager
only extends until the second anniversary of the closing of this
offering, with automatic one-year renewals thereafter. If the
management agreement is terminated and no suitable replacement
is found to manage us, we may not be able to execute our
business plan. Moreover, our Manager is not obligated to
dedicate certain of its personnel exclusively to us nor is it
obligated to dedicate any specific portion of its time to our
business, and none of our Managers personnel are
contractually dedicated to us under our management agreement
with our Manager.
To date, we have signed nine master repurchase agreements with
nine financial institutions, including with affiliates of Morgan
Stanley & Co. Incorporated and Credit Suisse Securities
(USA) LLC, and we are in discussions with nine additional
financial institutions for repurchase facilities, in order to
finance our acquisitions of Agency RMBS. Our Manager is in the
process of securing additional commitments on our behalf from a
number of the counterparties with whom Invesco Aim Advisors has
long-standing relationships. Therefore, if the management
agreement is terminated, we cannot assure you that we would
continue to have access to these sources of financing for our
investments.
Neither
Invesco nor our Manager have any experience operating a REIT or
managing a portfolio of our target assets on a leveraged basis
and we cannot assure you that our Managers past experience
will be sufficient to successfully manage our business as a REIT
with such a portfolio.
Our Manager has never operated a REIT. The REIT provisions of
the Internal Revenue Code are complex, and any failure to comply
with those provisions in a timely manner could prevent us from
qualifying as a REIT or force us to pay unexpected taxes and
penalties. In such event, our net income would be reduced and we
could incur a loss. In addition, neither Invesco Aim Advisors
nor our Manager have experience managing a portfolio of our
target assets using leverage.
There
are conflicts of interest in our relationship with our Manager
and Invesco, which could result in decisions that are not in the
best interests of our stockholders.
We are subject to conflicts of interest arising out of our
relationship with Invesco and our Manager. Specifically, each of
our officers and two of our directors, Mr. Armour and
Ms. Dunn Kelley, are employees of Invesco. Our Manager and
our executive officers may have conflicts between their duties
to us and their duties to, and interests in, Invesco. Our
Manager is not required to devote a specific amount of time to
our operations. As of March 31, 2009, our Manager managed
approximately $177.0 billion of fixed income and real
estate
22
investments, including approximately $18.8 billion of
structured securities consisting of approximately
$11.0 billion of Agency RMBS, $2.0 billion of
non-Agency RMBS and $1.9 billion of CMBS, and we will
compete for investment opportunities directly with our Manager
or other clients of our Manager or Invesco and its subsidiaries.
A substantial number of separate accounts managed by our Manager
had limited exposure to our target assets. In addition, in the
future our Manager may have additional clients that compete
directly with us for investment opportunities, although Invesco
has indicated to us that it expects that we will be the only
publicly traded REIT advised by our Manager or Invesco and its
subsidiaries whose investment strategy is to invest
substantially all of its capital in our target assets. Our
Manager and Invesco Aim Advisors have an investment and
financing allocation policy in place intended to enable us to
share equitably with the investment companies and institutional
and separately managed accounts that effect securities
transactions in fixed income securities for which our Manager
and Invesco Aim Advisors are responsible in the selection of
brokers, dealers and other trading counterparties. Therefore, we
may compete with our Manager and Invesco Aim Advisors for
investment or financing opportunities sourced by our Manager and
Invesco Aim Advisors and, as a result, we may either not be
presented with the opportunity or have to compete with our
Manager and Invesco Aim Advisors to acquire these investments or
have access to these sources of financing. Our Manager and our
executive officers may choose to allocate favorable investments
to Invesco or other clients of Invesco instead of to us.
Further, at times when there are turbulent conditions in the
mortgage markets or distress in the credit markets or other
times when we will need focused support and assistance from our
Manager, Invesco or entities for which our Manager also acts as
an investment manager will likewise require greater focus and
attention, placing our Managers resources in high demand.
In such situations, we may not receive the level of support and
assistance that we may receive if we were internally managed or
if our Manager did not act as a manager for other entities.
There is no assurance that our Managers allocation
policies that address some of the conflicts relating to our
access to investment and financing sources, which are described
under Management Conflicts of Interest,
will be adequate to address all of the conflicts that may arise.
We will pay our Manager substantial management fees regardless
of the performance of our portfolio. Our Managers
entitlement to a management fee, which is not based upon
performance metrics or goals, might reduce its incentive to
devote its time and effort to seeking investments that provide
attractive risk-adjusted returns for our portfolio. This in turn
could hurt both our ability to make distributions to our
stockholders and the market price of our common stock.
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
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. Upon completion of
this offering and the concurrent private placement, Invesco,
through our Manager, will beneficially own 0.87% of our common
stock (or 0.76% if the underwriters fully exercise their option
to purchase additional shares). Assuming that all OP units are
redeemed for an equivalent number of shares of our common stock,
Invesco, through the Invesco Purchaser, would beneficially own
15% of our outstanding common stock upon completion of this
offering and the concurrent private placement (or 13.3% if the
underwriters fully exercise their option to purchase additional
shares). Each of our Manager and Invesco Investments (Bermuda)
Ltd. will agree that, for a period of one year after the date of
this prospectus, neither will, without the prior written consent
of Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated, dispose of or hedge any of
the shares of our common stock or OP units that it purchases in
the concurrent private placement, subject to extension in
certain circumstances. Each of our Manager and Invesco
Investments (Bermuda) Ltd. may sell any of these securities at
any time following the expiration of this one-year
lock-up
period. To the extent our Manager or Invesco Investments
(Bermuda) Ltd. sell some of these securities, its interests may
be less aligned with our interests.
Our
Manager would have a conflict in recommending our participation
in any Legacy Security or Legacy Loan PPIFs it
manages.
To the extent available to us, we may seek to finance our
non-Agency RMBS and CMBS portfolios with financings under the
Legacy Securities Program, and, if the program delays are
removed, we may seek to acquire residential and commercial
mortgage loans with financing under the Legacy Loan Program. One
of the
23
ways we may access this financing is by contributing our equity
capital to one or more PPIFs that will be established and
managed by our Manager or one of its affiliates. To date, the
terms of any equity investment that we would make to any PPIFs
that may be established in the future have not yet been
determined. Our Manager would have a conflict of interest in
recommending our participation in any Legacy Securities or
Legacy Loan PPIFs it manages for the fees payable to it by the
Legacy Securities or Legacy Loan PPIF may be greater than the
fees payable to it by us under the management agreement.
The
management agreement with our Manager was not negotiated on an
arms-length basis and may not be as favorable to us as if
it had been negotiated with an unaffiliated third party and may
be costly and difficult to terminate.
Our executive officers and two of our five directors are
employees of Invesco. Our management agreement with our Manager
was negotiated between related parties and its terms, including
fees payable, may not be as favorable to us as if it had been
negotiated with an unaffiliated third party.
Termination of the management agreement with our Manager without
cause is difficult and costly. Our independent directors will
review our Managers performance and the management fees
annually and, following the initial two-year term, the
management agreement may be terminated annually upon the
affirmative vote of at least two-thirds of our independent
directors based upon: (1) our Managers unsatisfactory
performance that is materially detrimental to us, or (2) a
determination that the management fees payable to our Manager
are not fair, subject to our Managers right to prevent
termination based on unfair fees by accepting a reduction of
management fees agreed to by at least two-thirds of our
independent directors. Our Manager will be provided
180 days prior notice of any such termination.
Additionally, upon such a termination, the management agreement
provides that we will pay our Manager a termination fee equal to
three times the sum of the average annual management fee
received by our Manager during the prior
24-month
period before such termination, calculated as of the end of the
most recently completed fiscal quarter. These provisions may
increase the cost to us of terminating the management agreement
and adversely affect our ability to terminate our Manager
without cause.
Our Manager is only contractually committed to serve us until
the second anniversary of the closing of this offering.
Thereafter, the management agreement is renewable for one-year
terms; provided, however, that our Manager may terminate the
management agreement annually upon 180 days prior notice.
If the management agreement is terminated and no suitable
replacement is found to manage us, we may not be able to execute
our business plan.
Pursuant to the management agreement, our Manager will not
assume any responsibility other than to render the services
called for thereunder and will not be responsible for any action
of our board of directors in following or declining to follow
its advice or recommendations. Our Manager maintains a
contractual as opposed to a fiduciary relationship with us.
Under the terms of the management agreement, our Manager, its
officers, stockholders, members, managers, directors, personnel,
any person controlling or controlled by our Manager and any
person providing
sub-advisory
services to our Manager will not be liable to us, any subsidiary
of ours, our directors, our stockholders or any
subsidiarys stockholders or partners for acts or omissions
performed in accordance with and pursuant to the management
agreement, except because of acts constituting bad faith,
willful misconduct, gross negligence, or reckless disregard of
their duties under the management agreement. In addition, we
have agreed to indemnify our Manager, its officers,
stockholders, members, managers, directors, personnel, any
person controlling or controlled by our Manager and any person
providing
sub-advisory
services to our Manager with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from
acts of our Manager not constituting bad faith, willful
misconduct, gross negligence, or reckless disregard of duties,
performed in good faith in accordance with and pursuant to the
management agreement. See Our Manager and the Management
Agreement Management Agreement.
24
Our
board of directors will approve very broad investment guidelines
for our Manager and will not approve each investment and
financing decision made by our Manager.
Our Manager will be authorized to follow very broad investment
guidelines. Our board of directors will periodically review our
investment guidelines and our investment portfolio but will not,
and will not be required to, review all of our proposed
investments, except that an investment in a security structured
or issued by an entity managed by Invesco must be approved by a
majority of our independent directors prior to such investment.
In addition, in conducting periodic reviews, our board of
directors may rely primarily on information provided to them by
our Manager. Furthermore, our Manager may use complex
strategies, and transactions entered into by our Manager may be
costly, difficult or impossible to unwind by the time they are
reviewed by our board of directors. Our Manager will have great
latitude within the broad parameters of our investment
guidelines in determining the types and amounts of Agency RMBS,
non-Agency RMBS, CMBS and mortgage loans it may decide are
attractive investments for us, which could result in investment
returns that are substantially below expectations or that result
in losses, which would materially and adversely affect our
business operations and results. Further, decisions made and
investments and financing arrangements entered into by our
Manager may not fully reflect the best interests of our
stockholders.
Risks
Related to Our Company
There
can be no assurance that the actions of the U.S. Government,
Federal Reserve, U.S. Treasury and other governmental and
regulatory bodies for the purpose of stabilizing the financial
markets, including the establishment of the TALF and the PPIP,
or market response to those actions, will achieve the intended
effect, and our business may not benefit from these actions and
further government or market developments could adversely impact
us.
In response to the financial issues affecting the banking system
and the financial markets and going concern threats to
investment banks and other financial institutions, the
U.S. Government, Federal Reserve and U.S. Treasury and
other governmental and regulatory bodies have taken action to
stabilize the financial markets. Significant measures include:
the enactment of the Emergency Economic Stabilization Act of
2008, or the EESA, to, among other things, establish TARP; the
enactment of the Housing and Economic Recovery Act of 2008, or
the HERA, which established a new regulator for Fannie Mae and
Freddie Mac; and the establishment of the TALF and the PPIP.
There can be no assurance that the EESA, HERA, TALF, PPIP or
other recent U.S. Government actions will have a beneficial
impact on the financial markets, including on current extreme
levels of volatility. To the extent the market does not respond
favorably to these initiatives or these initiatives do not
function as intended, our business may not receive the
anticipated positive impact from the legislation. There can also
be no assurance that we will be eligible to participate in any
programs established by the U.S. Government such as the
TALF or the PPIP or, if we are eligible, that we will be able to
utilize them successfully or at all. In addition, because the
programs are designed, in part, to restart the market for
certain of our target assets, the establishment of these
programs may result in increased competition for attractive
opportunities in our target assets. It is also possible that our
competitors may utilize the programs which would provide them
with attractive debt and equity capital funding from the
U.S. Government. In addition, the U.S. Government, the
Federal Reserve, the U.S. Treasury and other governmental
and regulatory bodies have taken or are considering taking other
actions to address the financial crisis. We cannot predict
whether or when such actions may occur, and such actions could
have a dramatic impact on our business, results of operations
and financial condition.
We may
change any of our strategies, policies or procedures without
stockholder consent.
We may change any of our strategies, policies or procedures with
respect to investments, acquisitions, growth, operations,
indebtedness, capitalization and distributions at any time
without the consent of our stockholders, which could result in
an investment portfolio with a different risk profile. A change
in our investment strategy may increase our exposure to interest
rate risk, default risk and real estate market fluctuations.
Furthermore, a change in our asset allocation could result in
our making investments in asset
25
categories different from those described in this prospectus.
These changes could adversely affect our financial condition,
results of operations, the market price of our common stock and
our ability to make distributions to our stockholders.
We
have no operating history and may not be able to successfully
operate our business or generate sufficient revenue to make or
sustain distributions to our stockholders.
We were organized in June 2008 and have no operating history. We
have no assets and will commence operations only upon completion
of this offering. We cannot assure you that we will be able to
operate our business successfully or implement our operating
policies and strategies as described in this prospectus. The
results of our operations depend on several factors, including
the availability of opportunities for the acquisition of assets,
the level and volatility of interest rates, the availability of
adequate short and long-term financing, conditions in the
financial markets and economic conditions.
We are
highly dependent on information systems and systems failures
could significantly disrupt our business, which may, in turn,
negatively affect the market price of our common stock and our
ability to pay dividends.
Our business is highly dependent on communications and
information systems of Invesco. Any failure or interruption of
Invescos systems could cause delays or other problems in
our securities trading activities, which could have a material
adverse effect on our operating results and negatively affect
the market price of our common stock and our ability to pay
dividends to our stockholders.
Maintenance
of our 1940 Act exemption imposes limits on our
operations.
The company intends to conduct its operations so as not to
become regulated as an investment company under the 1940 Act.
Because the company is a holding company that will conduct its
businesses through the operating partnership and its wholly
owned or majority-owned subsidiaries, the securities issued by
these subsidiaries that are excepted from the definition of
investment company under Section 3(c)(1) or
Section 3(c)(7) of the 1940 Act, together with any other
investment securities the operating partnership may own, may not
have a combined value in excess of 40% of the value of the
operating partnerships total assets on an unconsolidated
basis 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 exemption from registration as an investment company
under the 1940 Act pursuant to Section 3(c)(5)(C) of the
1940 Act, which is available for entities primarily
engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate.
This exemption generally requires that at least 55% of our
subsidiaries portfolios must be comprised of qualifying
assets and at least another 25% of each of their portfolios must
be comprised of real estate-related assets under the 1940 Act
(and no more than 20% comprised of miscellaneous assets).
Qualifying assets for this purpose include mortgage loans and
other assets, such as whole pool Agency RMBS, that the
Securities and Exchange Commission (or SEC) staff in various
no-action letters has determined are the functional equivalent
of mortgage loans for the purposes of the 1940 Act. We intend to
treat as real estate-related assets non-Agency RMBS, CMBS, debt
and equity securities of companies primarily engaged in real
estate businesses, agency partial pool certificates and
securities issued by pass-through entities of which
substantially all of the assets consist of qualifying assets
and/or real
estate-related assets. Any Legacy Securities PPIF that may be
formed and managed by our Manager or one of its affiliates will
rely on Section 3(c)(7) for its 1940 Act exemption. The
terms of our participation in any such Legacy Securities PPIF
have not as yet been established. As a result, the treatment of
IAS Asset I LLCs participation in any Legacy Securities
PPIF as a real estate-related asset or a miscellaneous asset for
purposes of its Section 3(c)(5)(C) analysis has not been
determined. We will discuss with the SEC staff how IAS Asset I
LLCs participation in any Legacy Securities PPIF should be
treated for purposes of its Section 3(c)(5)(C) analysis.
Depending on this determination, 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 exemption. Any
such adjustment in IAS Asset I LLCs assets or strategy is
not expected to have a material
26
adverse effect on our business or strategy. Although we intend
to monitor our portfolio periodically and prior to each
investment acquisition, there can be no assurance that we will
be able to maintain this exemption from registration for each of
these subsidiaries.
We may in the future organize special purpose subsidiaries of
the operating partnership that will borrow under the TALF. We
expect that these TALF subsidiaries will rely on
Section 3(c)(7) for their 1940 Act exemption and,
therefore, the operating partnerships interest in each of
these TALF subsidiaries would constitute an investment
security for purposes of determining whether the operating
partnership passes the 40% test. We may in the future organize
one or more TALF subsidiaries that seek to rely on the 1940 Act
exemption provided to certain structured financing vehicles by
Rule 3a-7.
Any such TALF subsidiary would need to be structured to comply
with any guidance that may be issued by the Division of
Investment Management of the SEC on the restrictions contained
in
Rule 3a-7.
The company expects that the aggregate value of the operating
partnerships interests in TALF subsidiaries that seek to
rely on
Rule 3a-7
will comprise less than 20% of the operating partnerships
(and, therefore, the companys) total assets on an
unconsolidated basis.
In addition, if we organize special purpose subsidiaries in the
future that will borrow under the TALF, we anticipate that some
of these subsidiaries may be organized to rely on the 1940 Act
exemption provided to certain structured financing vehicles by
Rule 3a-7.
To the extent that we organize subsidiaries that rely on
Rule 3a-7
for an exemption from the 1940 Act, these subsidiaries will need
to comply with the restrictions contained in this Rule. In
general,
Rule 3a-7
exempts from the 1940 Act issuers that limit their activities as
follows:
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the issuer issues securities the payment of which depends
primarily on the cash flow from eligible assets,
which include many of the types of assets that we expect to
acquire in our TALF fundings, that by their terms convert into
cash within a finite time period;
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the securities sold are fixed income securities rated investment
grade by at least one rating agency (fixed income securities
which are unrated or rated below investment grade may be sold to
institutional accredited investors and any securities may be
sold to qualified institutional buyers and to
persons involved in the organization or operation of the issuer);
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the issuer acquires and disposes of eligible assets
(1) only in accordance with the agreements pursuant to
which the securities are issued, (2) so that the
acquisition or disposition does not result in a downgrading of
the issuers fixed income securities and (3) the
eligible assets are not acquired or disposed of for the primary
purpose of recognizing gains or decreasing losses resulting from
market value changes; and
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unless the issuer is issuing only commercial paper, the issuer
appoints an independent trustee, takes reasonable steps to
transfer to the trustee an ownership or perfected security
interest in the eligible assets, and meets rating agency
requirements for commingling of cash flows.
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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
27
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 exemption from registration under the 1940 Act
will limit our ability to make certain investments. For example,
these restrictions will limit the ability of our subsidiaries to
invest directly in mortgage-backed securities that represent
less than the entire ownership in a pool of mortgage loans, debt
and equity tranches of securitizations and certain ABS and real
estate companies or in assets not related to real estate.
There can be no assurance that the laws and regulations
governing the 1940 Act status of REITs, including the Division
of Investment Management of the SEC providing more specific or
different guidance regarding these exemptions, will not change
in a manner that adversely affects our operations. 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
expect to use leverage in executing our business strategy, which
may adversely affect the return on our assets and may reduce
cash available for distribution to our stockholders, as well as
increase losses when economic conditions are
unfavorable.
We expect to use leverage to finance our assets through
borrowings from repurchase agreements, to the extent available
to us, borrowings under programs established by the
U.S. Government such as the TALF, and other secured and
unsecured forms of borrowing and, if available, we may make
investments in funds that receive financing under the PPIP.
Initially, we do not expect to deploy leverage on our non-Agency
RMBS, CMBS and mortgage loan assets, except with borrowings, to
the extent available to us, under programs established by the
U.S. Government. Although we are not required to maintain
any particular
assets-to-equity
leverage ratio, the amount of leverage we may deploy for
particular assets will depend upon our Managers assessment
of the credit and other risks of those assets. We expect,
initially, that we may deploy, on a
debt-to-equity
basis, up to seven to eight times leverage on our Agency RMBS
assets and approximately five to six times leverage on our
non-Agency RMBS, CMBS and mortgage loan assets. We consider
these initial leverage ratios to be prudent for these asset
classes.
The capital and credit markets have been experiencing extreme
volatility and disruption since July 2007. In recent months, the
volatility and disruption have reached unprecedented levels. In
a large number of cases, the markets have exerted downward
pressure on stock prices and credit capacity for issuers. Our
access to capital depends upon a number of factors over which we
have little or no control, including:
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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 U.S. Government;
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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.
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28
The current weakness in the financial markets, the residential
and commercial mortgage markets and the economy generally could
adversely affect one or more of our potential lenders and could
cause one or more of our potential lenders to be unwilling or
unable to provide us with financing or to increase the costs of
that financing. Current market conditions have affected
different types of financing for mortgage-related assets to
varying degrees, with some sources generally being unavailable,
others being available but at a higher cost, while others being
largely unaffected. For example, in the repurchase agreement
market, non-Agency RMBS have been more difficult to finance than
Agency RMBS. In connection with repurchase agreements, financing
rates and advance rates, or haircut levels, have also increased.
Repurchase agreement counterparties have taken these steps in
order to compensate themselves for a perceived increased risk
due to the illiquidity of the underlying collateral. In some
cases, margin calls have forced borrowers to liquidate
collateral in order to meet the capital requirements of these
margin calls, resulting in losses.
The return on our assets and cash available for distribution to
our stockholders may be reduced to the extent that market
conditions prevent us from leveraging our assets or cause the
cost of our financing to increase relative to the income that
can be derived from the assets acquired. Our financing costs
will reduce cash available for distributions to stockholders. We
may not be able to meet our financing obligations and, to the
extent that we cannot, we risk the loss of some or all of our
assets to liquidation or sale to satisfy the obligations. We
plan to leverage our Agency RMBS through repurchase agreements.
A decrease in the value of these assets may lead to margin calls
which we will have to satisfy. We may not have the funds
available to satisfy any such margin calls and may be forced to
sell assets at significantly depressed prices due to market
conditions or otherwise, which may result in losses. The
satisfaction of such margin calls may reduce cash flow available
for distribution to our stockholders. Any reduction in
distributions to our stockholders may cause the value of our
common stock to decline.
As a
result of recent market events, including the contraction among
and failure of certain lenders, it may be more difficult for us
to secure non-governmental financing.
Our results of operations are materially affected by conditions
in the financial markets and the economy generally. Recently,
concerns over inflation, energy price volatility, geopolitical
issues, unemployment, the availability and cost of credit, the
mortgage market and a declining real estate market have
contributed to increased volatility and diminished expectations
for the economy and markets.
Dramatic declines in the residential and commercial real estate
markets, with decreasing home prices and increasing foreclosures
and unemployment, have resulted in significant asset write-downs
by financial institutions, which have caused many financial
institutions to seek additional capital, to merge with other
institutions and, in some cases, to fail. We rely on the
availability of repurchase agreement financing to acquire Agency
RMBS on a leveraged basis. Although, to the extent available to
us, we initially may use U.S. Government financing to
acquire our other target assets, we may in the future seek
private funding sources to acquire these assets as well.
Institutions from which we seek to obtain financing may have
owned or financed residential or commercial mortgage loans, real
estate-related securities and real estate loans which have
declined in value and caused losses as a result of the recent
downturn in the markets. Many lenders and institutional
investors have reduced and, in some cases, ceased to provide
funding to borrowers, including other financial institutions. If
these conditions persist, these institutions may become
insolvent. As a result of recent market events, it may be more
difficult for us to secure non-governmental financing as there
are fewer institutional lenders and those remaining lenders have
tightened their lending standards.
If a
counterparty to our repurchase transactions defaults on its
obligation to resell the underlying security back to us at the
end of the transaction term, or if the value of the underlying
security has declined as of the end of that term, or if we
default on our obligations under the repurchase agreement, we
will lose money on our repurchase transactions.
When we engage in repurchase transactions, we generally sell
securities to lenders (repurchase agreement counterparties) and
receive cash from these lenders. The lenders are obligated to
resell the same securities back to us at the end of the term of
the transaction. Because the cash we receive from the lender
when we initially sell the securities to the lender is less than
the value of those securities (this difference is the haircut),
29
if the lender defaults on its obligation to resell the same
securities back to us we may incur a loss on the transaction
equal to the amount of the haircut (assuming there was no change
in the value of the securities). We would also lose money on a
repurchase transaction if the value of the underlying securities
has declined as of the end of the transaction term, as we would
have to repurchase the securities for their initial value but
would receive securities worth less than that amount. Further,
if we default on one of our obligations under a repurchase
transaction, the lender can terminate the transaction and cease
entering into any other repurchase transactions with us. We
expect our repurchase agreements will contain cross-default
provisions, so that if a default occurs under any one agreement,
the lenders under our other agreements could also declare a
default. Any losses we incur on our repurchase transactions
could adversely affect our earnings and thus our cash available
for distribution to our stockholders.
Our
use of repurchase agreements to finance our Agency RMBS may give
our lenders greater rights in the event that either we or a
lender files for bankruptcy.
Our borrowings under repurchase agreements for our Agency RMBS
may qualify for special treatment under the U.S. Bankruptcy
Code, giving our lenders the ability to avoid the automatic stay
provisions of the U.S. Bankruptcy Code and to take
possession of and liquidate the assets that we have pledged
under their repurchase agreements without delay in the event
that we file for bankruptcy. Furthermore, the special treatment
of repurchase agreements under the U.S. Bankruptcy Code may
make it difficult for us to recover our pledged assets in the
event that a lender party to such agreement files for
bankruptcy. Therefore, our use of repurchase agreements to
finance our investments exposes our pledged assets to risk in
the event of a bankruptcy filing by either a lender or us.
We
will depend on repurchase agreement financing to acquire Agency
RMBS, and our inability to access this funding for our Agency
RMBS could have a material adverse effect on our results of
operations, financial condition and business.
We may use repurchase agreement financing as a strategy to
increase the return on our assets. However, we may not be able
to achieve our desired leverage ratio for a number of reasons,
including if the following events occur:
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our lenders do not make repurchase agreement financing available
to us at acceptable 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.
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Our ability to fund our Agency RMBS may be impacted by our
ability to secure repurchase agreement financing on acceptable
terms. We can provide no assurance that lenders will be willing
or able to provide us with sufficient financing. In addition,
because repurchase agreements are short term commitments of
capital, lenders may respond to market conditions making it more
difficult for us to secure continued financing. During certain
periods of the credit cycle, lenders may curtail their
willingness to provide financing.
If major market participants continue to exit the repurchase
agreement financing business, the value of our Agency RMBS could
be negatively impacted, thus reducing net stockholder equity, or
book value. Furthermore, if many of our potential lenders are
unwilling or unable to provide us with repurchase agreement
financing, we could be forced to sell our Agency RMBS assets at
an inopportune time when prices are depressed. In addition, if
the regulatory capital requirements imposed on our lenders
change, they may be required to significantly increase the cost
of the financing that they provide to us. Our lenders also may
revise their eligibility requirements for the types of assets
they are willing to finance or the terms of such financings,
based on, among other factors, the regulatory environment and
their management of perceived risk, particularly with respect to
assignee liability. Moreover, the amount of financing we will
receive under our repurchase agreements will be directly related
to the lenders valuation of the Agency RMBS that secure
the outstanding borrowings. Typically repurchase agreements
grant the respective lender the absolute right to reevaluate the
30
market value of the assets that secure outstanding borrowings at
any time. If a lender determines in its sole discretion that the
value of the assets has decreased, it has the right to initiate
a margin call. A margin call would require us to transfer
additional assets to such lender without any advance of funds
from the lender for such transfer or to repay a portion of the
outstanding borrowings. Any such margin call could have a
material adverse effect on our results of operations, financial
condition, business, liquidity and ability to make distributions
to our stockholders, and could cause the value of our common
stock to decline. We may be forced to sell assets at
significantly depressed prices to meet such margin calls and to
maintain adequate liquidity, which could cause us to incur
losses. Moreover, to the extent we are forced to sell assets at
such time, given market conditions, we may be selling at the
same time as others facing similar pressures, which could
exacerbate a difficult market environment and which could result
in our incurring significantly greater losses on our sale of
such assets. In an extreme case of market duress, a market may
not even be present for certain of our assets at any price.
Our liquidity may also be adversely affected by margin calls
under repurchase agreements for our Agency RMBS because we will
be dependent in part on the lenders valuation of the
collateral securing the financing. Any such margin call could
harm our liquidity, results of operation, and financial
condition. Additionally, in order to obtain cash to satisfy a
margin call, we may be required to liquidate assets at a
disadvantageous time, which could cause us to incur further
losses and adversely affect our results of operations and
financial condition.
The
current dislocations in the residential and commercial mortgage
sector could cause one or more of our potential lenders to be
unwilling or unable to provide us with financing for our target
assets on attractive terms or at all.
The current dislocations in the residential mortgage sector have
caused many lenders to tighten their lending standards, reduce
their lending capacity or exit the market altogether. Further
contraction among lenders, insolvency of lenders or other
general market disruptions could adversely affect one or more of
our potential lenders and could cause one or more of our
potential lenders to be unwilling or unable to provide us with
financing on attractive terms or at all. This could increase our
financing costs and reduce our access to liquidity. If one or
more major market participants fails or otherwise experiences a
major liquidity crisis, as was the case for Bear
Stearns & Co. in March 2008 and Lehman Brothers
Holdings Inc. in September 2008, it could negatively impact the
marketability of all fixed income securities, including our
target assets, and this could negatively impact the value of the
assets we acquire, thus reducing our net book value.
Furthermore, if many of our potential lenders are unwilling or
unable to provide us with financing, we could be forced to sell
our assets at an inopportune time when prices are depressed.
The
repurchase agreements that we will use to finance our
investments may require us to provide additional collateral and
may restrict us from leveraging our assets as fully as
desired.
We intend to use repurchase agreements to finance our
acquisition of Agency RMBS. If the market value of the Agency
RMBS pledged or sold by us to a financing institution declines,
we may be required by the financing institution to provide
additional collateral or pay down a portion of the funds
advanced, but we may not have the funds available to do so,
which could result in defaults. Posting additional collateral to
support our credit will reduce our liquidity and limit our
ability to leverage our assets, which could adversely affect our
business. In the event we do not have sufficient liquidity to
meet such requirements, financing institutions can accelerate
repayment of our indebtedness, increase interest rates,
liquidate our collateral or terminate our ability to borrow.
Such a situation would likely result in a rapid deterioration of
our financial condition and possibly necessitate a filing for
bankruptcy protection.
Further, financial institutions providing the repurchase
facilities may require us to maintain a certain amount of cash
uninvested or to set aside non-levered assets sufficient to
maintain a specified liquidity position which would allow us to
satisfy our collateral obligations. As a result, we may not be
able to leverage our assets as fully as we would choose, which
could reduce our return on equity. If we are unable to meet
these collateral obligations, our financial condition could
deteriorate rapidly.
31
Lenders
may require us to enter into restrictive covenants relating to
our operations.
When we obtain financing, lenders could impose restrictions on
us that would affect our ability to incur additional debt, our
capability to make distributions to stockholders and our
flexibility to determine our operating policies. Loan documents
we execute may contain negative covenants that limit, among
other things, our ability to repurchase stock, distribute more
than a certain amount of our funds from operations, and employ
leverage beyond certain amounts.
An
increase in our borrowing costs relative to the interest we
receive on investments in our target assets may adversely affect
our profitability, and our cash available for distribution to
our stockholders.
As our financings mature, we will be required either to enter
into new borrowings or to sell certain of our investments. An
increase in short-term interest rates at the time that we seek
to enter into new borrowings would reduce the spread between our
returns on our assets and the cost of our borrowings. This would
adversely affect our returns on our assets, which might reduce
earnings and, in turn, cash available for distribution to our
stockholders.
We may
use U.S. government equity and debt financing to acquire our
non-Agency RMBS, CMBS and mortgage loan portfolio.
We may seek to acquire non-Agency RMBS and CMBS with financings
under the TALF. On March 23, 2009, the U.S. Treasury
announced preliminary plans to expand the TALF to include
non-Agency RMBS and CMBS that were originally rated AAA. On
May 1, 2009, the Federal Reserve published the terms for
the expansion of TALF to CMBS and announced that, beginning on
June 16, 2009, up to $100 billion of TALF loans will
be available to finance purchases of CMBS created on or after
January 1, 2009. Additionally, on May 19, 2009, the
Federal Reserve announced that certain high quality legacy CMBS,
including CMBS issued before January 1, 2009, would become
eligible collateral under the TALF starting in July 2009.
However, the TALF has not yet been expanded to cover any other
CMBS. In addition, to date, neither the FRBNY nor the
U.S. Treasury has announced how the TALF will be expanded
to non- Agency RMBS. There can no assurance that the TALF will
be expanded to include these asset classes and, if so expanded,
that we will be able to utilize this program successfully or at
all.
We may also seek to acquire non-Agency RMBS and CMBS with
financings under the Legacy Securities Program. However, the
equity and debt financing under the Legacy Securities Program
are available to Legacy Securities PPIFs managed by investment
managers who have been selected as a Legacy Securities PPIF
asset manager under the program. Invesco has applied to serve as
one of the investment managers for the Legacy Securities
Program. However, there can be no assurance that Invesco will be
selected for this role.
We may also acquire residential and commercial mortgage loans
with financing under the Legacy Loan Program. However, the
details of this program are still emerging and there can no
assurance that we will be eligible to participate in this
program or, if we are eligible, that we will be able to utilize
it successfully or at all.
Risks
Relating to the PPIP and TALF
The
terms and conditions of the PPIP have not been finalized and
there is no assurance it will be finalized or that the final
terms will enable us to participate in the PPIP in a manner
consistent with our investment strategy.
While the U.S. Treasury and the FDIC have released a
summary of proposed terms and conditions for the PPIP, they have
not released the final terms and conditions governing these
programs and there is no assurance that these programs will be
finalized. The existing proposed terms and conditions do not
address the specific terms and conditions relating to:
(1) the guaranteed debt to be issued by participants in the
Legacy Loan Program, (2) the debt financing from the
U.S. Treasury in the Legacy Securities Program and
(3) the warrants the U.S. Treasury will receive under
both programs. In addition, the U.S. Treasury and the FDIC
have reserved the right to modify the proposed terms of the
PPIP. If final terms and conditions are released, there is no
32
assurance that we will be able to participate in the PPIP in a
manner acceptable to us consistent with our investment strategy.
The
terms and conditions of the TALF may change, which could
adversely affect our investments.
The terms and conditions of the TALF, including asset and
borrower eligibility, could be changed at any time. Any such
modifications may adversely affect the market value of any of
our assets financed through the TALF or our ability to obtain
additional TALF financing. If the TALF is prematurely
discontinued or reduced while our assets financed through the
TALF are still outstanding, there may be no market for these
assets and the market value of these assets would be adversely
affected.
There
is no assurance that we will be able to participate in the PPIP
or, if we are able to participate, that funding will be
available.
Investors in the Legacy Loan Program must be pre-qualified by
the FDIC. The FDIC has complete discretion regarding the
qualification of investors in the Legacy Loan Program and is
under no obligation to approve Invescos participation even
if it meets all of the applicable criteria.
Requests for funding under the PPIP may surpass the amount of
funding authorized by the U.S. Treasury, resulting in an
early termination of the PPIP. In addition, under the terms of
the Legacy Securities Program, the U.S. Treasury has the
right to cease funding of committed but undrawn equity capital
and debt financing to a specific fund participating in the
Legacy Securities Program in its sole discretion. We may be
unable to obtain capital and debt financing on similar terms and
such actions may adversely affect our ability to purchase
eligible assets and may otherwise affect expected returns on our
investments.
There
is no assurance that we will be able to obtain any TALF
loans.
The TALF is to be operated by the FRBNY. The FRBNY has complete
discretion regarding the extension of credit under the TALF and
is under no obligation to make any loans to us even if we meet
all of the applicable criteria. Requests for TALF loans may
surpass the amount of funding authorized by the Federal Reserve
and the U.S. Treasury, resulting in an early termination of
the TALF. Depending on the demand for TALF loans and the general
state of the credit markets, the Federal Reserve and the
U.S. Treasury may decide to modify the terms and conditions
of the TALF. Such actions may adversely affect our ability to
obtain TALF loans and use the loan leverage to enhance returns,
and may otherwise affect expected returns on our investments.
We
could lose our eligibility as a TALF borrower, which would
adversely affect our ability to fulfill our investment
objectives.
Any U.S. company is permitted to participate in the TALF,
provided that it maintains an account relationship with a
primary dealer. An entity is a U.S. company for purposes of
the TALF if it is (1) a business entity or institution that
is organized under the laws of the United States or a political
subdivision or territory thereof
(U.S.-organized)
and conducts significant operations or activities in the United
States, including any
U.S.-organized
subsidiary of such an entity; (2) a U.S. branch or
agency of a
non-U.S. bank
(other than a foreign central bank) that maintains reserves with
a Federal Reserve Bank; (3) a U.S. insured depository
institution; or (4) an investment fund that is
U.S.-organized
and managed by an investment manager that has its principal
place of business in the United States. An entity that satisfies
any one of the requirements above is a U.S. company
regardless of whether it is controlled by, or managed by, a
company that is not
U.S.-organized.
Notwithstanding the foregoing, a U.S. company excludes any
entity, other than those described in clauses (2) and
(3) above, that is controlled by a
non-U.S. government
or is managed by an investment manager controlled by a
non-U.S. government,
other than those described in clauses (2) and
(3) above. For these purposes, a
non-U.S. government
controls a company if, among other things, such
non-U.S. government
owns, controls, or holds with power to vote 25% or more of a
class of voting securities of the company. The application of
these rules under the TALF is not clear. For instance, it is
uncertain how a change of control subsequent to a
stockholders purchase of shares of common stock which
results in such shareholder being
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owned or controlled by a
non-U.S. government
will be treated for purposes of the 25% limitation. If for any
reason we are deemed not to be eligible to participate in the
TALF, all of our outstanding TALF loans will become immediately
due and payable and we will not be eligible to obtain future
TALF loans.
It may
be difficult to acquire sufficient amounts of eligible assets to
qualify to participate in the PPIP or the TALF consistent with
our investment strategy.
Assets to be used as collateral for PPIP and TALF loans must
meet strict eligibility criteria with respect to characteristics
such as issuance date, maturity, and credit rating and with
respect to the origination date of the underlying collateral.
These restrictions may limit the availability of eligible
assets, and it may be difficult to acquire sufficient amounts of
assets to obtain financing under the PPIP and TALF consistent
with our investment strategy.
In the Legacy Loan Program, eligible financial institutions must
consult with the FDIC before offering an asset pool for sale and
there is no assurance that a sufficient number of eligible
financial institutions will be willing to participate as sellers
in the Legacy Loan Program.
Once an asset pool has been offered for sale by an eligible
financial institution, the FDIC will determine the amount of
leverage available to finance the purchase of the asset pool.
There is no assurance that the amount of leverage available to
finance the purchase of eligible assets will be acceptable to
our Manager.
The asset pools will be purchased through a competitive auction
conducted by the FDIC. The auction process may increase the
price of these eligible asset pools. Even if a fund in which we
invest submits the winning bid on an eligible asset pool at a
price that is acceptable to the fund, the selling financial
institution may refuse to sell to the fund the eligible asset
pool at that price.
These factors may limit the availability of eligible assets, and
it may be difficult to acquire sufficient amounts of assets to
obtain financing under the Legacy Loan Program consistent with
our investment strategy.
It may
be difficult to transfer any assets purchased using PPIP and
TALF funding.
Any assets purchased using funding will be pledged to the FRBNY
as collateral for the TALF loans. Transfer or sale of any of
these assets requires repayment of the related TALF loan or the
consent of the FRBNY to assign obligations under the related
TALF loan to the applicable assignee. The FRBNY in its
discretion may restrict or prevent assignment of loan
obligations to a third party, including a third party that meets
the criteria of an eligible borrower. In addition, the FRBNY
will not consent to any assignments after the termination date
for making new loans, which is December 31, 2009, unless
extended by the Federal Reserve.
Any assets purchased using PPIP funding, to the extent
available, will be pledged to the FDIC as collateral for their
guarantee under the Legacy Loan Program and to the
U.S. Treasury as collateral for debt financing under the
Legacy Securities Program. Transfer or sale of any of these
assets requires repayment of the related loan or the consent of
the FDIC or the U.S. Treasury to assign obligations to the
applicable assignee. The FDIC or the U.S. Treasury, each in
its discretion, may restrict or prevent assignment of
obligations to a third party, including a third party that meets
the criteria for participation in the PPIP.
These restrictions may limit our ability to trade or otherwise
dispose of our investments, and may adversely affect our ability
to take advantage of favorable market conditions and make
distributions to stockholders.
We may
need to surrender eligible TALF assets to repay TALF loans at
maturity.
Each TALF loan must be repaid within three to five years. We
intend to invest in CMBS that do not mature within the term of
the TALF loan. If we do not have sufficient funds to repay
interest and principal on the related TALF loan at maturity and
if these assets cannot be sold for an amount equal to or greater
than the amount owed on such loan, we must surrender the assets
to the FRBNY in lieu of repayment. If we are forced to sell any
assets to repay a TALF loan, we may not be able to obtain a
favorable price. If we default on our obligation to pay a TALF
loan and the FRBNY elects to liquidate the assets used as
collateral to secure such
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TALF loan, the proceeds from that sale will be applied, first,
to any enforcement costs, second, to unpaid principal and,
finally, to unpaid interest. Under the terms of the TALF, if
assets are surrendered to the FRBNY in lieu of repayment, all
assets that collateralize that loan must be surrendered. In
these situations, we would forfeit any equity that we held in
these assets.
FRBNY
consent is required to exercise our voting rights on
CMBS.
As a requirement of the TALF, we must agree not to exercise or
refrain from exercising any voting, consent or waiver rights
under a CMBS without the consent of the FRBNY. During the
continuance of a collateral enforcement event, the FRBNY will
have the right to exercise voting rights in the collateral.
We
will be dependent on the activities of our primary
dealers.
To obtain TALF loans, we must execute a customer agreement with
at least one primary dealer which will act on our behalf under
the agreement with the FRBNY. The primary dealer will submit
aggregate loan request amounts on behalf of its customers in the
form and manner specified by the FRBNY. Each primary dealer is
required to apply its internal customer identification program
and due diligence procedures to each borrower and represent that
each borrower is an eligible borrower for purposes of the TALF,
and to provide the FRBNY with information sufficient to describe
the dealers customer risk assessment methodology. These
customer agreements may impose additional requirements that
could affect our ability to obtain TALF loans. Each primary
dealer is expected to have relationships with other TALF
borrowers, and a primary dealer may allocate more resources
toward assisting other borrowers with whom it has other business
dealings. Primary dealers are also responsible for distributing
principal and interest after receipt thereof from The Bank of
New York Mellon, as custodian for the TALF. Once funds or
collateral are transferred to a primary dealer or at the
direction of a primary dealer, neither the custodian nor the
FRBNY has any obligation to account for whether the funds or
collateral are transferred to the borrower. We will therefore be
exposed to bankruptcy risk of our primary dealers.
We
will be subject to interest rate risk, which can adversely
affect our net income.
We expect interest rates on fixed-rate TALF loans will be set at
a premium over the then-current three-year or five-year LIBOR
swap rate. As a result, we may be exposed to (1) timing
risk between the dates on which payments are received on assets
financed through the TALF and the dates on which interest
payments are due on the TALF loans and (2) asset/liability
repricing risk, due to differences in the dates and indices on
which floating rates on the financed assets and on the related
TALF loans are reset.
Our
ability to receive the interest earnings may be
limited.
We expect to make interest payments on any TALF loan from the
interest paid to us on the assets used as collateral for the
TALF loan. To the extent that we receive distributions from
pledged assets in excess of our required interest payments on a
TALF loan during any loan year, the amount of excess interest we
may retain will be limited.
Under
certain conditions, we may be required to provide full recourse
for TALF loans or to make indemnification
payments.
To participate in the TALF, we must execute a customer agreement
with a primary dealer authorizing it, among other things, to act
as our agent under TALF and to act on our behalf under the
agreement with the FRBNY and with The Bank of New York Mellon as
administrator and as the FRBNYs custodian of the CMBS.
Under such agreements, we will be required to represent to the
primary dealer and to the FRBNY that, among other things, we are
an eligible borrower and that the CMBS that we pledge meet the
TALF eligibility criteria. The FRBNY will have full recourse to
us for repayment of the loan for any breach of these
representations. Further, the FRBNY may have full recourse to us
for repayment of a TALF loan if the eligibility criteria for
collateral under the TALF are considered continuing requirements
and the pledged collateral no longer satisfies such criteria. In
addition, we will be required to pay to our primary dealers fees
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under the customer agreements and to indemnify our primary
dealers for certain breaches under the customer agreements and
to indemnify the FRBNY and its custodian for certain breaches
under the agreement with the FRBNY. Payments made to satisfy
such full recourse requirements and indemnities could have a
material adverse effect on our net income and our distributions
to our stockholders, including any proceeds of this offering
that we have not yet invested in CMBS or distributed to our
stockholders.
Changes
in accounting treatment may adversely affect our reported
profitability.
In February 2008, the Financial Accounting Standards Board, or
FASB, issued final guidance regarding the accounting and
financial statement presentation for transactions that involve
the acquisition of Agency RMBS from a counterparty and the
subsequent financing of these securities through repurchase
agreements with the same counterparty. We will evaluate our
position based on the final guidance issued by FASB. If we do
not meet the criteria under the final guidance to account for
the transactions on a gross basis, our accounting treatment
would not affect the economics of these transactions, but would
affect how these transactions are reported on our financial
statements. If we are not able to comply with the criteria under
this final guidance for same party transactions we would be
precluded from presenting Agency RMBS and the related
financings, as well as the related interest income and interest
expense, on a gross basis on our financial statements. Instead,
we would be required to account for the purchase commitment and
related repurchase agreement on a net basis and record a forward
commitment to purchase Agency RMBS as a derivative instrument.
Such forward commitments would be recorded at fair value with
subsequent changes in fair value recognized in earnings.
Additionally, we would record the cash portion of our investment
in Agency RMBS as a mortgage related receivable from the
counterparty on our balance sheet. Although we would not expect
this change in presentation to have a material impact on our net
income, it could have an adverse impact on our operations. It
could have an impact on our ability to include certain Agency
RMBS purchased and simultaneously financed from the same
counterparty as qualifying real estate interests or real
estate-related assets used to qualify under the exemption to not
have to register as an investment company under the 1940 Act. It
could also limit our investment opportunities as we may need to
limit our purchases of Agency RMBS that are simultaneously
financed with the same counterparty.
We may
enter into hedging transactions that could expose us to
contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, part of our
investment strategy will involve entering into hedging
transactions that could require us to fund cash payments in
certain circumstances (such as the early termination of the
hedging instrument caused by an event of default or other early
termination event, or the decision by a counterparty to request
margin securities it is contractually owed under the terms of
the hedging instrument). The amount due would be equal to the
unrealized loss of the open swap positions with the respective
counterparty and could also include other fees and charges.
These economic losses will be reflected in our results of
operations, and our ability to fund these obligations will
depend on the liquidity of our assets and access to capital at
the time, and the need to fund these obligations could adversely
impact our financial condition.
Hedging
against interest rate exposure may adversely affect our
earnings, which could reduce our cash available for distribution
to our stockholders.
Subject to maintaining our qualification as a REIT, we intend to
pursue various hedging strategies to seek to reduce our exposure
to adverse changes in interest rates. Our hedging activity will
vary in scope based on the level 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 for which protection is sought;
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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 TRS) to offset interest rate losses is limited by
U.S. federal tax provisions governing REITs;
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the credit quality of the hedging counterparty owing money on
the hedge may be downgraded to such an extent that it impairs
our ability to sell or assign our side of the hedging
transaction; and
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the hedging counterparty owing money in the hedging transaction
may default on its obligation to pay.
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Our hedging transactions, which are intended to limit losses,
may actually adversely affect our earnings, which could reduce
our cash available for distribution to our stockholders.
In addition, hedging instruments involve risk since they often
are not traded on regulated exchanges, guaranteed by an exchange
or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial
responsibility or segregation of customer funds and positions.
Furthermore, the enforceability of agreements underlying hedging
transactions may depend on compliance with applicable statutory
and commodity and other regulatory requirements and, depending
on the identity of the counterparty, applicable international
requirements. The business failure of a hedging counterparty
with whom we enter into a hedging transaction will most likely
result in its default. Default by a party with whom we enter
into a hedging transaction may result in the loss of unrealized
profits and force us to cover our commitments, if any, at the
then current market price. Although generally we will seek to
reserve the right to terminate our hedging positions, it may not
always be possible to dispose of or close out a hedging position
without the consent of the hedging counterparty and we may not
be able to enter into an offsetting contract in order to cover
our risk. We cannot assure you that a liquid secondary market
will exist for hedging instruments purchased or sold, and we may
be required to maintain a position until exercise or expiration,
which could result in losses.
We may
fail to qualify for hedge accounting treatment.
We intend to record derivative and hedging transactions in
accordance with Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging
Activities, or SFAS 133. Under these standards, we may fail
to qualify for hedge accounting treatment for a number of
reasons, including if we use instruments that do not meet the
SFAS 133 definition of a derivative (such as short sales),
we fail to satisfy SFAS 133 hedge documentation and hedge
effectiveness assessment requirements or our instruments are not
highly effective. If we fail to qualify for hedge accounting
treatment, our operating results may suffer because losses on
the derivatives that we enter into may not be offset by a change
in the fair value of the related hedged transaction.
We
have limited experience in making critical accounting estimates,
and our financial statements may be materially affected if our
estimates prove to be inaccurate.
Financial statements prepared in accordance with GAAP require
the use of estimates, judgments and assumptions that affect the
reported amounts. Different estimates, judgments and assumptions
reasonably could be used that would have a material effect on
the financial statements, and changes in these estimates,
judgments and assumptions are likely to occur from period to
period in the future. Significant areas of accounting requiring
the application of managements judgment include, but are
not limited to (1) assessing the adequacy of the allowance
for loan losses and (2) determining the fair value of
investment securities. These estimates, judgments and
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.
37
Risks
Related to Our Investments
We
have not yet identified any specific investments in our target
assets.
We have not yet identified any specific investments for our
portfolio and, thus, you will not be able to evaluate any
proposed investments before purchasing shares of our common
stock. Additionally, our investments will be selected by our
Manager and our stockholders will not have input into such
investment decisions. Both of these factors will increase the
uncertainty, and thus the risk, of investing in shares of our
common stock.
Until appropriate investments can be identified, our Manager may
invest the net proceeds of this offering and the concurrent
private offering in interest-bearing short-term investments,
including money market accounts
and/or
funds, that are consistent with our intention to qualify as a
REIT. These investments are expected to provide a lower net
return than we will seek to achieve from investments in our
target assets. We expect to reallocate a portion of the net
proceeds from these offerings into a portfolio of our target
assets within three months, subject to the availability of
appropriate investment opportunities, although Invesco has
indicated to us that it expects that we will be the only
publicly traded REIT advised by our Manager or Invesco and its
subsidiaries whose investment strategy is to invest
substantially all of its capital in our target assets. Our
Manager intends to conduct due diligence with respect to each
investment and suitable investment opportunities may not be
immediately available. Even if opportunities are available,
there can be no assurance that our Managers due diligence
processes will uncover all relevant facts or that any investment
will be successful.
We may
allocate the net proceeds from this offering and the concurrent
private placement to investments with which you may not
agree.
You will be unable to evaluate the manner in which the net
proceeds of these offerings will be invested or the economic
merit of our expected investments and, as a result, we may use
the net proceeds from these offerings to invest in investments
with which you may not agree. The failure of our management to
apply these proceeds effectively or find investments that meet
our investment criteria in sufficient time or on acceptable
terms could result in unfavorable returns, could cause a
material adverse effect on our business, financial condition,
liquidity, results of operations and ability to make
distributions to our stockholders, and could cause the value of
our common stock to decline.
Because
assets we expect to acquire may experience periods of
illiquidity, we may lose profits or be prevented from earning
capital gains if we cannot sell mortgage-related assets at an
opportune time.
We bear the risk of being unable to dispose of our target assets
at advantageous times or in a timely manner because
mortgage-related assets generally experience periods of
illiquidity, including the recent period of delinquencies and
defaults with respect to residential and commercial mortgage
loans. The lack of liquidity may result from the absence of a
willing buyer or an established market for these assets, as well
as legal or contractual restrictions on resale or the
unavailability of financing for these assets. As a result, our
ability to vary our portfolio in response to changes in economic
and other conditions may be relatively limited, which may cause
us to incur losses.
The
lack of liquidity in our investments may adversely affect our
business.
We expect that the assets that we will acquire will not be
publicly traded. A portion of these securities may be subject to
legal and other restrictions on resale or will otherwise be less
liquid than publicly-traded securities. The illiquidity of our
investments may make it difficult for us to sell such
investments if the need or desire arises. In addition, if we are
required to liquidate all or a portion of our portfolio quickly,
we may realize significantly less than the value at which we
have previously recorded our investments. Further, we may face
other restrictions on our ability to liquidate an investment in
a business entity to the extent that we or our Manager has or
could be attributed with material, non-public information
regarding such business entity. As a result, our ability to vary
our portfolio in response to changes in economic and other
conditions may be relatively limited, which could adversely
affect our results of operations and financial condition.
38
Our
investments may be concentrated and will be subject to risk of
default.
While we intend to diversify our portfolio of investments in the
manner described in this prospectus, we are not required to
observe specific diversification criteria, except as may be set
forth in the investment guidelines adopted by our board of
directors. Therefore, our investments in our target assets may
at times be concentrated in certain property types that are
subject to higher risk of foreclosure, or secured by properties
concentrated in a limited number of geographic locations. To the
extent that our portfolio is concentrated in any one region or
type of security, downturns relating generally to such region or
type of security may result in defaults on a number of our
investments within a short time period, which may reduce our net
income and the value of our common stock and accordingly reduce
our ability to pay dividends to our stockholders.
Difficult
conditions in the mortgage, residential and commercial real
estate markets may cause us to experience market losses related
to our holdings, and we do not expect these conditions to
improve in the near future.
Our results of operations are materially affected by conditions
in the mortgage market, the residential and commercial real
estate markets, the financial markets and the economy generally.
Recently, concerns about the mortgage market and a declining
real estate market, as well as inflation, energy costs,
geopolitical issues and the availability and cost of credit,
have contributed to increased volatility and diminished
expectations for the economy and markets going forward. The
mortgage market has been severely affected by changes in the
lending landscape and there is no assurance that these
conditions have stabilized or that they will not worsen. The
disruption in the mortgage market has an impact on new demand
for homes, which will compress the home ownership rates and
weigh heavily on future home price performance. There is a
strong correlation between home price growth rates and mortgage
loan delinquencies. The further deterioration of the RMBS market
may cause us to experience losses related to our assets and to
sell assets at a loss. Declines in the market values of our
investments may adversely affect our results of operations and
credit availability, which may reduce earnings and, in turn,
cash available for distribution to our stockholders.
Dramatic declines in the residential and commercial real estate
markets, with falling home prices and increasing foreclosures
and unemployment, have resulted in significant asset write-downs
by financial institutions, which have caused many financial
institutions to seek additional capital, to merge with other
institutions and, in some cases, to fail. Institutions from
which we may seek to obtain financing may have owned or financed
residential or commercial mortgage loans, real estate-related
securities and real estate loans, which have declined in value
and caused them to suffer losses as a result of the recent
downturn in the residential and commercial mortgage markets.
Many lenders and institutional investors have reduced and, in
some cases, ceased to provide funding to borrowers, including
other financial institutions. If these conditions persist, these
institutions may become insolvent or tighten their lending
standards, which could make it more difficult for us to obtain
financing on favorable terms or at all. Our profitability may be
adversely affected if we are unable to obtain cost-effective
financing for our assets.
Continued
adverse developments in the residential and commercial mortgage
markets, including recent increases in defaults, credit losses
and liquidity concerns, could make it difficult for us to borrow
money to acquire our target assets on a leveraged basis, on
attractive terms or at all, which could adversely affect our
profitability.
Since mid-2008, there have been several announcements of
proposed mergers, acquisitions or bankruptcies of investment
banks and commercial banks that have historically acted as
repurchase agreement counterparties. This has resulted in a
fewer number of potential repurchase agreement counterparties
operating in the market. In addition, many commercial banks,
investment banks and insurance companies have announced
extensive losses from exposure to the residential and commercial
mortgage markets. These losses have reduced financial industry
capital, leading to reduced liquidity for some institutions.
Many of these institutions may have owned or financed assets
which have declined in value and caused them to suffer losses,
enter bankruptcy proceedings, further tighten their lending
standards or increase the amount of equity capital or haircut
required to obtain financing. These difficulties have resulted
in part from declining markets for their mortgage loans as well
as from claims for repurchases of mortgage loans previously sold
under provisions that
39
require repurchase in the event of early payment defaults or for
breaches of representations regarding loan quality. In addition,
a rising interest rate environment and declining real estate
values may decrease the number of borrowers seeking or able to
refinance their mortgage loans, which would result in a decrease
in overall originations. In addition, the Federal Reserves
program to purchase Agency RMBS could cause an increase in the
price of Agency RMBS, which would negatively impact the net
interest margin with respect to Agency RMBS we expect to
purchase. The general market conditions discussed above may make
it difficult or more expensive for us to obtain financing on
attractive terms or at all, and our profitability may be
adversely affected if we were unable to obtain cost-effective
financing for our investments.
We
operate in a highly competitive market for investment
opportunities and competition may limit our ability to acquire
desirable investments in our target assets and could also affect
the pricing of these securities.
We operate in a highly competitive market for investment
opportunities. Our profitability depends, in large part, on our
ability to acquire our target assets at attractive prices. In
acquiring our target assets, we will compete with a variety of
institutional investors, including other REITs, specialty
finance companies, public and private funds (including other
funds managed by Invesco), commercial and investment banks,
commercial finance and insurance companies and other financial
institutions. Many of our competitors are substantially larger
and have considerably greater financial, technical, marketing
and other resources than we do. Several other REITs have
recently raised, or are expected to raise, significant amounts
of capital, and may have investment objectives that overlap with
ours, which may create additional competition for investment
opportunities. Some competitors may have a lower cost of funds
and access to funding sources that may not be available to us,
such as funding from the U.S. Government, if we are not
eligible to participate in programs established by the
U.S. Government. Many of our competitors are not subject to
the operating constraints associated with REIT tax compliance or
maintenance of an exemption from the 1940 Act. In addition, some
of our competitors may have higher risk tolerances or different
risk assessments, which could allow them to consider a wider
variety of investments and establish more relationships than us.
Furthermore, competition for investments in our target assets
may lead to the price of such assets increasing, which may
further limit our ability to generate desired returns. We cannot
assure you that the competitive pressures we face will not have
a material adverse effect on our business, financial condition
and results of operations. Also, as a result of this
competition, desirable investments in our target assets may be
limited in the future and we may not be able to take advantage
of attractive investment opportunities from time to time, as we
can provide no assurance that we will be able to identify and
make investments that are consistent with our investment
objectives. In addition, the Federal Reserves program to
purchase Agency RMBS could cause an increase in the price of
Agency RMBS, which would negatively impact the net interest
margin with respect to Agency RMBS we expect to purchase.
We may
acquire non-Agency RMBS collateralized by subprime and Alt A
mortgage loans, which are subject to increased
risks.
We may acquire non-Agency RMBS backed by collateral pools of
mortgage loans that have been originated using underwriting
standards that are less restrictive than those used in
underwriting prime mortgage loans and Alt A
mortgage loans. These lower standards include mortgage
loans made to borrowers having imperfect or impaired credit
histories, mortgage loans where the amount of the loan at
origination is 80% or more of the value of the mortgage
property, mortgage loans made to borrowers with low credit
scores, mortgage loans made to borrowers who have other debt
that represents a large portion of their income and mortgage
loans made to borrowers whose income is not required to be
disclosed or verified. Due to economic conditions, including
increased interest rates and lower home prices, as well as
aggressive lending practices, subprime mortgage loans have in
recent periods experienced increased rates of delinquency,
foreclosure, bankruptcy and loss, and they are likely to
continue to experience delinquency, foreclosure, bankruptcy and
loss rates that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in
a more traditional manner. Thus, because of the higher
delinquency rates and losses associated with subprime mortgage
loans, the performance of non-Agency RMBS backed by subprime
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mortgage loans that we may acquire could be correspondingly
adversely affected, which could adversely impact our results of
operations, financial condition and business.
The
mortgage loans that we will acquire, and the mortgage and other
loans underlying the non-Agency RMBS and CMBS that we will
acquire, are subject to defaults, foreclosure timeline
extension, fraud and commercial and residential price
depreciation, and unfavorable modification of loan principal
amount, interest rate and amortization of principal, which could
result in losses to us.
Residential mortgage loans are secured by single family
residential property and are subject to risks of delinquency and
foreclosure and risks of loss. The ability of a borrower to
repay a loan secured by a residential property typically is
dependent upon the income or assets of the borrower. A number of
factors, including a general economic downturn, acts of God,
terrorism, social unrest and civil disturbances, may impair
borrowers abilities to repay their loans. In addition, we
intend to acquire non-Agency RMBS, which are backed by
residential real property but, in contrast to Agency RMBS, their
principal and interest are not guaranteed by federally chartered
entities such as Fannie Mae and Freddie Mac and, in the case of
Ginnie Mae, the U.S. Government. The ability of a borrower
to repay these loans or other financial assets is dependent upon
the income or assets of these borrowers.
CMBS are secured by a single commercial mortgage loan or a pool
of commercial mortgage loans. Accordingly, the CMBS we invest in
is subject to all of the risks of the respective underlying
commercial mortgage loans. Commercial mortgage loans are secured
by multifamily or commercial property and are subject to risks
of delinquency and foreclosure, and risks of loss that are
greater than similar risks associated with loans made on the
security of single-family residential property. The ability of a
borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation
of such property rather than upon the existence of independent
income or assets of the borrower. If the net operating income of
the property is reduced, the borrowers ability to repay
the loan may be impaired.
In the event of any default under a mortgage loan held directly
by us, we will bear a risk of loss of principal to the extent of
any deficiency between the value of the collateral and the
principal and accrued interest of the mortgage loan, which could
have a material adverse effect on our cash flow from operations.
In the event of the bankruptcy of a mortgage loan borrower, the
mortgage loan to such borrower will be deemed to be secured only
to the extent of the value of the underlying collateral at the
time of bankruptcy (as determined by the bankruptcy court), and
the lien securing the mortgage loan will be subject to the
avoidance powers of the bankruptcy trustee or debtor in
possession to the extent the lien is unenforceable under state
law. Foreclosure of a mortgage loan can be an expensive and
lengthy process which could have a substantial negative effect
on our anticipated return on the foreclosed mortgage loan.
Agency
RMBS are subject to risks particular to investments secured by
mortgage loans on residential real property.
Our investments in Agency RMBS will be subject to the risks of
defaults, foreclosure timeline extension, fraud and home price
depreciation and unfavorable modification of loan principal
amount, interest rate and amortization of principal,
accompanying the underlying residential mortgage loans. The
ability of a borrower to repay a mortgage loan secured by a
residential property is dependent upon the income or assets of
the borrower. A number of factors may impair borrowers
abilities to repay their loans, including:
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acts of God, including earthquakes, floods and other natural
disasters, which may result in uninsured losses;
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acts of war or terrorism, including the consequences of
terrorist attacks, such as those that occurred on
September 11, 2001;
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adverse changes in national and local economic and market
conditions;
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changes in governmental laws and regulations, fiscal policies
and zoning ordinances and the related costs of compliance with
laws and regulations, fiscal policies and ordinances;
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costs of remediation and liabilities associated with
environmental conditions such as indoor mold; and
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the potential for uninsured or under-insured property losses.
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In the event of defaults on the residential mortgage loans that
underlie our investments in Agency RMBS and the exhaustion of
any underlying or any additional credit support, we may not
realize our anticipated return on our investments and we may
incur a loss on these investments.
The
commercial mortgage loans we expect to acquire and the
commercial mortgage loans underlying the CMBS we may acquire
will be subject to defaults, foreclosure timeline extension,
fraud and home price depreciation and unfavorable modification
of loan principal amount, interest rate and amortization of
principal.
Commercial mortgage loans are secured by multifamily or
commercial property and are subject to risks of delinquency and
foreclosure, and risks of loss that may be greater than similar
risks associated with loans made on the security of
single-family residential property. The ability of a borrower to
repay a loan secured by an income-producing property typically
is dependent primarily upon the successful operation of such
property rather than upon the existence of independent income or
assets of the borrower. If the net operating income of the
property is reduced, the borrowers ability to repay the
loan may be impaired. Net operating income of an
income-producing property can be affected by, among other things,
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tenant mix;
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success of tenant businesses;
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property management decisions;
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property location and condition;
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competition from comparable types of properties;
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changes in laws that increase operating expenses or limit rents
that may be charged;
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any need to address environmental contamination at the property
or the occurrence of any uninsured casualty at the property;
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changes in national, regional or local economic conditions
and/or
specific industry segments;
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declines in regional or local real estate values;
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declines in regional or local rental or occupancy rates;
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increases in interest rates;
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real estate tax rates and other operating expenses;
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changes in governmental rules, regulations and fiscal policies,
including environmental legislation; and
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acts of God, terrorist attacks, social unrest and civil
disturbances.
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In the event of any default under a mortgage loan held directly
by us, we will bear a risk of loss of principal to the extent of
any deficiency between the value of the collateral and the
principal and accrued interest of the mortgage loan, which could
have a material adverse effect on our cash flow from operations
and limit amounts available for distribution to our
stockholders. In the event of the bankruptcy of a mortgage loan
borrower, the mortgage loan to such borrower will be deemed to
be secured only to the extent of the value of the underlying
collateral at the time of bankruptcy (as determined by the
bankruptcy court), and the lien securing the mortgage loan will
be subject to the avoidance powers of the bankruptcy trustee or
debtor-in-possession
to the extent the lien is unenforceable under state law.
Foreclosure of a mortgage loan can be an expensive and lengthy
process, which could have a substantial negative effect on our
anticipated return on the foreclosed mortgage loan.
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Our
investments in CMBS are generally subject to
losses.
We may acquire CMBS. In general, losses on a mortgaged property
securing a mortgage loan included in a securitization will be
borne first by the equity holder of the property, then by a cash
reserve fund or letter of credit, if any, then by the holder of
a mezzanine loan or B-Note, if any, then by the first
loss subordinated security holder (generally, the
B-Piece buyer) and then by the holder of a
higher-rated security. In the event of default and the
exhaustion of any equity support, reserve fund, letter of
credit, mezzanine loans or B-Notes, and any classes of
securities junior to those in which we invest, we will not be
able to recover all of our investment in the securities we
purchase. In addition, if the underlying mortgage portfolio has
been overvalued by the originator, or if the values subsequently
decline and, as a result, less collateral is available to
satisfy interest and principal payments due on the related MBS.
The prices of lower credit quality securities are generally less
sensitive to interest rate changes than more highly rated
investments, but more sensitive to adverse economic downturns or
individual issuer developments.
We may
not control the special servicing of the mortgage loans included
in the CMBS in which we invest and, in such cases, the special
servicer may take actions that could adversely affect our
interests.
With respect to each series of CMBS in which we invest, overall
control over the special servicing of the related underlying
mortgage loans will be held by a directing
certificateholder or a controlling class
representative, which is appointed by the holders of the
most subordinate class of CMBS in such series. Since we will
focus on acquiring classes of existing series of CMBS originally
rated AAA, we will not have the right to appoint the directing
certificateholder. In connection with the servicing of the
specially serviced mortgage loans, the related special servicer
may, at the direction of the directing certificateholder, take
actions with respect to the specially serviced mortgage loans
that could adversely affect our interests.
If our
Manager overestimates the loss-adjusted yields of our CMBS
investments, we may experience losses.
Our Manager will value our potential CMBS investments based on
loss-adjusted yields, taking into account estimated future
losses on the mortgage loans included in the
securitizations pool of loans, and the estimated impact of
these losses on expected future cash flows. Based on these loss
estimates, our Manager will either adjust the pool composition
accordingly through loan removals and other credit enhancement
mechanisms or leave loans in place and negotiate for a price
adjustment. Our Managers loss estimates may not prove
accurate, as actual results may vary from estimates. In the
event that our Manager overestimates the pool level losses
relative to the price we pay for a particular CMBS investment,
we may experience losses with respect to such investment.
The
B-Notes we may acquire may be subject to additional risks
related to the privately negotiated structure and terms of the
transaction, which may result in losses to us.
We may acquire B-Notes. A B-Note is a mortgage loan typically
(1) secured by a first mortgage on a single large
commercial property or group of related properties and
(2) subordinated to an A-Note secured by the same first
mortgage on the same collateral. As a result, if a borrower
defaults, there may not be sufficient funds remaining for B-Note
holders after payment to the A-Note holders. However, because
each transaction is privately negotiated, B-Notes can vary in
their structural characteristics and risks. For example, the
rights of holders of B-Notes to control the process following a
borrower default may vary from transaction to transaction.
Further, B-Notes typically are secured by a single property and
so reflect the risks associated with significant concentration.
Significant losses related to our B-Notes would result in
operating losses for us and may limit our ability to make
distributions to our stockholders.
Our
mezzanine loan assets will involve greater risks of loss than
senior loans secured by income-producing
properties.
We may acquire mezzanine loans, which take the form of
subordinated loans secured by second mortgages on the underlying
property or loans secured by a pledge of the ownership interests
of either the
43
entity owning the property or a pledge of the ownership
interests of the entity that owns the interest in the entity
owning the property. These types of assets involve a higher
degree of risk than long-term senior mortgage lending secured by
income-producing real property, because the loan may become
unsecured as a result of foreclosure by the senior lender. In
the event of a bankruptcy of the entity providing the pledge of
its ownership interests as security, we may not have full
recourse to the assets of such entity, or the assets of the
entity may not be sufficient to satisfy our mezzanine loan. If a
borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine
loan will be satisfied only after the senior debt. As a result,
we may not recover some or all of our initial expenditure. In
addition, mezzanine loans may have higher
loan-to-value
ratios than conventional mortgage loans, resulting in less
equity in the property and increasing the risk of loss of
principal. Significant losses related to our mezzanine loans
would result in operating losses for us and may limit our
ability to make distributions to our stockholders.
Bridge
loans will involve a greater risk of loss than traditional
investment-grade mortgage loans with fully insured
borrowers.
We may acquire bridge loans secured by first lien mortgages on a
property to borrowers who are typically seeking short-term
capital to be used in an acquisition, construction or
redevelopment of a property. The borrower has usually identified
an undervalued asset that has been under-managed
and/or is
located in a recovering market. If the market in which the asset
is located fails to recover according to the borrowers
projections, or if the borrower fails to improve the quality of
the assets management
and/or the
value of the asset, the borrower may not receive a sufficient
return on the asset to satisfy the bridge loan, and we bear the
risk that we may not recover some or all of our initial
expenditure.
In addition, borrowers usually use the proceeds of a
conventional mortgage to repay a bridge loan. Bridge loans
therefore are subject to risks of a borrowers inability to
obtain permanent financing to repay the bridge loan. Bridge
loans are also subject to risks of borrower defaults,
bankruptcies, fraud, losses and special hazard losses that are
not covered by standard hazard insurance. In the event of any
default under bridge loans held by us, we bear the risk of loss
of principal and non-payment of interest and fees to the extent
of any deficiency between the value of the mortgage collateral
and the principal amount of the bridge loan. To the extent we
suffer such losses with respect to our bridge loans, the value
of our company and the price of our shares of common stock may
be adversely affected.
Increases
in interest rates could adversely affect the value of our
investments and cause our interest expense to increase, which
could result in reduced earnings or losses and negatively affect
our profitability as well as the cash available for distribution
to our stockholders.
We expect to invest in Agency RMBS, non-Agency RMBS, CMBS and
mortgage loans. In a normal yield curve environment, an
investment in such assets will generally decline in value if
long-term interest rates increase. Declines in market value may
ultimately reduce earnings or result in losses to us, which may
negatively affect cash available for distribution to our
stockholders.
A significant risk associated with our target assets is the risk
that both long-term and short-term interest rates will increase
significantly. If long-term rates increased significantly, the
market value of these investments would decline, and the
duration and weighted average life of the investments would
increase. We could realize a loss if the securities were sold.
At the same time, an increase in short-term interest rates would
increase the amount of interest owed on the repurchase
agreements we may enter into to finance the purchase of Agency
RMBS.
Market values of our investments may decline without any general
increase in interest rates for a number of reasons, such as
increases or expected increases in defaults, or increases or
expected increases in voluntary prepayments for those
investments that are subject to prepayment risk or widening of
credit spreads.
In addition, in a period of rising interest rates, our operating
results will depend in large part on the difference between the
income from our assets and financing costs. We anticipate that,
in most cases, the income from such assets will respond more
slowly to interest rate fluctuations than the cost of our
borrowings.
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Consequently, changes in interest rates, particularly short-term
interest rates, may significantly influence our net income.
Increases in these rates will tend to decrease our net income
and market value of our assets.
An
increase in interest rates may cause a decrease in the volume of
certain of our target assets which could adversely affect our
ability to acquire target assets that satisfy our investment
objectives and to generate income and pay
dividends.
Rising interest rates generally reduce the demand for mortgage
loans due to the higher cost of borrowing. A reduction in the
volume of mortgage loans originated may affect the volume of our
target assets available to us, which could adversely affect our
ability to acquire assets that satisfy our investment
objectives. Rising interest rates may also cause our target
assets that were issued prior to an interest rate increase to
provide yields that are below prevailing market interest rates.
If rising interest rates cause us to be unable to acquire a
sufficient volume of our target assets with a yield that is
above our borrowing cost, our ability to satisfy our investment
objectives and to generate income and pay dividends may be
materially and adversely affected.
The relationship between short-term and longer-term interest
rates is often referred to as the yield curve.
Ordinarily, short-term interest rates are lower than longer-term
interest rates. If short-term interest rates rise
disproportionately relative to longer-term interest rates (a
flattening of the yield curve), our borrowing costs may increase
more rapidly than the interest income earned on our assets.
Because we expect our investments, on average, generally will
bear interest based on longer-term rates than our borrowings, a
flattening of the yield curve would tend to decrease our net
income and the market value of our net assets. Additionally, to
the extent cash flows from investments that return scheduled and
unscheduled principal are reinvested, the spread between the
yields on the new investments and available borrowing rates may
decline, which would likely decrease our net income. It is also
possible that short-term interest rates may exceed longer-term
interest rates (a yield curve inversion), in which event our
borrowing costs may exceed our interest income and we could
incur operating losses.
Interest
rate fluctuations may adversely affect the level of our net
income and the value of our assets and common
stock.
Interest rates are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and
international economic and political considerations and other
factors beyond our control. Interest rate fluctuations present a
variety of risks, including the risk of a narrowing of the
difference between asset yields and borrowing rates, flattening
or inversion of the yield curve and fluctuating prepayment
rates, and may adversely affect our income and the value of our
assets and common stock.
Interest
rate mismatches between our Agency RMBS backed by ARMs or hybrid
ARMs and our borrowings used to fund our purchases of these
assets may reduce our net interest income and cause us to suffer
a loss during periods of rising interest rates.
We expect to fund most of our investments in Agency RMBS with
borrowings that have interest rates that adjust more frequently
than the interest rate indices and repricing terms of Agency
RMBS backed by ARMs or hybrid ARMs. Accordingly, if short-term
interest rates increase, our borrowing costs may increase faster
than the interest rates on Agency RMBS backed by ARMs or hybrid
ARMs adjust. As a result, in a period of rising interest rates,
we could experience a decrease in net income or a net loss.
In most cases, the interest rate indices and repricing terms of
Agency RMBS backed by ARMs or hybrid ARMs and our borrowings
will not be identical, thereby potentially creating an interest
rate mismatch between our investments and our borrowings. While
the historical spread between relevant short-term interest rate
indices has been relatively stable, there have been periods when
the spread between these indices was volatile. During periods of
changing interest rates, these interest rate index mismatches
could reduce our net income or produce a net loss, and adversely
affect the level of our dividends and the market price of our
common stock.
In addition, Agency RMBS backed by ARMs or hybrid ARMs will
typically be subject to lifetime interest rate caps which limit
the amount an interest rate can increase through the maturity of
the Agency RMBS. However, our borrowings under repurchase
agreements typically will not be subject to similar
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restrictions. Accordingly, in a period of rapidly increasing
interest rates, the interest rates paid on our borrowings could
increase without limitation while caps could limit the interest
rates on these types of Agency RMBS. This problem is magnified
for Agency RMBS backed by ARMs or hybrid ARMs that are not fully
indexed. Further, some Agency RMBS backed by ARMs or hybrid ARMs
may be subject to periodic payment caps that result in a portion
of the interest being deferred and added to the principal
outstanding. As a result, we may receive less cash income on
these types of Agency RMBS than we need to pay interest on our
related borrowings. These factors could reduce our net interest
income and cause us to suffer a loss during periods of rising
interest rates.
Because
we may acquire fixed-rate securities, an increase in interest
rates on our borrowings may adversely affect our book
value.
Increases in interest rates may negatively affect the market
value of our assets. Any fixed-rate securities we invest in
generally will be more negatively affected by these increases
than adjustable-rate securities. In accordance with accounting
rules, we will be required to reduce our book value by the
amount of any decrease in the market value of our assets that
are classified for accounting purposes as
available-for-sale.
We will be required to evaluate our assets on a quarterly basis
to determine their fair value by using third party bid price
indications provided by dealers who make markets in these
securities or by third-party pricing services. If the fair value
of a security is not available from a dealer or third-party
pricing service, we will estimate the fair value of the security
using a variety of methods including, but not limited to,
discounted cash flow analysis, matrix pricing, option-adjusted
spread models and fundamental analysis. Aggregate
characteristics taken into consideration include, but are not
limited to, type of collateral, index, margin, periodic cap,
lifetime cap, underwriting standards, age and delinquency
experience. However, the fair value reflects estimates and may
not be indicative of the amounts we would receive in a current
market exchange. If we determine that an agency security is
other-than-temporarily
impaired, we would be required to reduce the value of such
agency security on our balance sheet by recording an impairment
charge in our income statement and our stockholders equity
would be correspondingly reduced. Reductions in
stockholders equity decrease the amounts we may borrow to
purchase additional target assets, which could restrict our
ability to increase our net income.
We may
experience a decline in the market value of our
assets.
A decline in the market value of our assets may require us to
recognize an
other-than-temporary
impairment against such assets under GAAP if we were to
determine that, with respect to any assets in unrealized loss
positions, we do not have the ability and intent to hold such
assets to maturity or for a period of time sufficient to allow
for recovery to the amortized cost of such assets. If such a
determination were to be made, we would recognize unrealized
losses through earnings and write down the amortized cost of
such assets to a new cost basis, based on the fair market value
of such assets on the date they are considered to be
other-than-temporarily
impaired. Such impairment charges reflect non-cash losses at the
time of recognition; subsequent disposition or sale of such
assets could further affect our future losses or gains, as they
are based on the difference between the sale price received and
adjusted amortized cost of such assets at the time of sale.
Some
of our portfolio investments will be recorded at fair value and,
as a result, there will be uncertainty as to the value of these
investments.
Some of our portfolio investments will be in the form of
securities that are not publicly traded. The fair value of
securities and other investments that are not publicly traded
may not be readily determinable. We will value these investments
quarterly at fair value, as determined in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 157, Fair Value Measurements, or
SFAS 157, which may include unobservable inputs. Because
such valuations are subjective, the fair value of certain of our
assets may fluctuate over short periods of time and our
determinations of fair value may differ materially from the
values that would have been used if a ready market for these
securities existed. The value of our common stock
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could be adversely affected if our determinations regarding the
fair value of these investments were materially higher than the
values that we ultimately realize upon their disposal.
Prepayment
rates may adversely affect the value of our investment
portfolio.
Pools of residential mortgage loans underlie the RMBS that we
will acquire. In the case of residential mortgage loans, there
are seldom any restrictions on borrowers abilities to
prepay their loans. We will generally receive payments from
principal payments that are made on these underlying mortgage
loans. When borrowers prepay their mortgage loans faster than
expected, this results in prepayments that are faster than
expected on the RMBS. Faster than expected prepayments could
adversely affect our profitability, including in the following
ways:
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We may purchase RMBS that have a higher interest rate than the
market interest rate at the time. In exchange for this higher
interest rate, we may pay a premium over the par value to
acquire the security. In accordance with GAAP, we may amortize
this premium over the estimated term of the RMBS. If the RMBS is
prepaid in whole or in part prior to its maturity date, however,
we may be required to expense the premium that was prepaid at
the time of the prepayment.
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We anticipate that a substantial portion of our adjustable-rate
RMBS may bear interest rates that are lower than their fully
indexed rates, which are equivalent to the applicable index rate
plus a margin. If an adjustable-rate RMBS is prepaid prior to or
soon 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.
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While we will seek to minimize prepayment risk to the extent
practical, in selecting investments we must balance prepayment
risk against other risks and the potential returns of each
investment. No strategy can completely insulate us from
prepayment risk.
Recent
market conditions may upset the historical relationship between
interest rate changes and prepayment trends, which would make it
more difficult for us to analyze our investment
portfolio.
Our success depends on our ability to analyze the relationship
of changing interest rates on prepayments of the mortgage loans
that underlie our RMBS and mortgage loans we acquire. Changes in
interest rates and prepayments affect the market price of the
target assets that we intend to purchase and any target assets
that we hold at a given time. As part of our overall portfolio
risk management, we will analyze interest rate changes and
prepayment trends separately and collectively to assess their
effects on our investment portfolio. In conducting our analysis,
we will depend on certain assumptions based upon historical
trends with respect to the relationship between interest rates
and prepayments under normal market conditions. If the recent
dislocations in the mortgage market or other developments change
the way that prepayment trends have historically responded to
interest rate changes, our ability to (1) assess the market
value of our investment portfolio, (2) implement our
hedging strategies and (3) implement techniques to reduce
our prepayment rate volatility would be significantly affected,
which could materially adversely affect our financial position
and results of operations.
Mortgage
loan modification programs and future legislative action may
adversely affect the value of, and the returns on, the target
assets in which we intend to invest.
The U.S. Government, through the Federal Reserve, the FHA
and the FDIC, commenced implementation of programs designed to
provide homeowners with assistance in avoiding residential or
commercial mortgage loan foreclosures. The programs may involve,
among other things, the modification of mortgage loans to
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reduce the principal amount of the loans or the rate of interest
payable on the loans, or to extend the payment terms of the
loans. In addition, members of Congress have indicated support
for additional legislative relief for homeowners, including an
amendment of the bankruptcy laws to permit the modification of
mortgage loans in bankruptcy proceedings. The servicer will have
the authority to modify mortgage loans that are in default, or
for which default is reasonably foreseeable, if such
modifications are in the best interests of the holders of the
mortgage securities and such modifications are done in
accordance with the terms of the relevant agreements. Loan
modifications are more likely to be used when borrowers are less
able to refinance or sell their homes due to market conditions,
and when the potential recovery from a foreclosure is reduced
due to lower property values. A significant number of loan
modifications could result in a significant reduction in cash
flows to the holders of the mortgage securities on an ongoing
basis. These loan modification programs, as well as future
legislative or regulatory actions, including amendments to the
bankruptcy laws, that result in the modification of outstanding
mortgage loans may adversely affect the value of, and the
returns on, the target assets in which we intend to invest.
Risks
Related to Our Common Stock
There
is no public market for our common stock and a market may never
develop, which could result in holders of our common stock being
unable to monetize their investment.
Our shares of common stock are newly-issued securities for which
there is no established trading market. Our common stock has
been approved for listing on the NYSE subject to official notice
of issuance, but there can be no assurance that an active
trading market for our common stock will develop. Accordingly,
no assurance can be given as to the ability of our stockholders
to sell their common stock or the price that our stockholders
may obtain for their common stock.
Some of the factors that could negatively affect the market
price of our common stock include:
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our actual or anticipated variations in our quarterly operating
results;
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changes in our earnings estimates or publication of research
reports about us or the real estate industry;
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changes in market valuations of similar companies;
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adverse market reaction to any increased indebtedness we incur
in the future;
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additions to or departures of our Managers key personnel;
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actions by our stockholders; and
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speculation in the press or investment community.
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Market factors unrelated to our performance could also
negatively impact the market price of our common stock. One of
the factors that investors may consider in deciding whether to
buy or sell our common stock is our distribution rate as a
percentage of our stock price relative to market interest rates.
If market interest rates increase, prospective investors may
demand a higher distribution rate or seek alternative
investments paying higher dividends or interest. As a result,
interest rate fluctuations and conditions in the capital markets
can affect the market value of our common stock. For instance,
if interest rates rise, it is likely that the market price of
our common stock will decrease as market rates on
interest-bearing securities increase.
Common
stock eligible for future sale may have adverse effects on our
share price.
We are offering 8,500,000 shares of our common stock as
described in this prospectus. In addition, concurrently with the
completion of this offering, we will complete a private
placement in which we will sell 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., at $20.00 per unit. Upon
completion of this offering and the concurrent private
placement, Invesco, through our Manager, will beneficially own
0.87% of our common stock (or 0.76% if the underwriters fully
exercise their option to purchase additional shares). Assuming
that all OP units are redeemed for an equivalent number of
shares of our common stock, Invesco,
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through the Invesco Purchaser, would beneficially own 15% of
our outstanding common stock upon completion of this offering
and the concurrent private placement (or 13.3% if the
underwriters fully exercise their option to purchase additional
shares). Our equity incentive plan provides for grants of
restricted common stock and other equity-based awards up to an
aggregate of 6% of the issued and outstanding shares of our
common stock (on a fully diluted basis) at the time of the
award, subject to a ceiling of 40 million shares of our
common stock.
We, our Manager, each of our executive officers and directors
and each officer of our Manager have agreed with the
underwriters to a 180 day
lock-up
period (subject to extension in certain circumstances), meaning
that, until the end of the 180 day
lock-up
period, we and they will not, subject to certain exceptions,
sell or transfer any shares of common stock without the prior
consent of Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated, the representatives of the
underwriters. Each of our Manager and Invesco Investments
(Bermuda) Ltd. will agree that, for a period of one year after
the date of this prospectus, it will not, without the prior
written consent of Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated, dispose of or hedge any of
the shares of our common stock or OP units, respectively, that
it purchases in the concurrent private placement, subject to
extension in certain circumstances. The representatives of the
underwriters may, in their sole discretion, at any time from
time to time and without notice, waive the terms and conditions
of the
lock-up
agreements to which they are a party. Additionally, each of our
Manager and Invesco Investments (Bermuda) Ltd. has agreed with
us to a further
lock-up
period that will expire at the earlier of (i) the date
which is one year following the date of this prospectus or
(ii) the termination of the management agreement. Assuming
no exercise of the underwriters over-allotment option to
purchase additional shares, approximately 0.87% of our shares of
common stock are subject to
lock-up
agreements. When the
lock-up
periods expire, these shares of common stock will become
eligible for sale, in some cases subject to the requirements of
Rule 144 under the Securities Act of 1933, as amended (or
the Securities Act), which are described under
Shares Eligible for Future Sale.
We cannot predict the effect, if any, of future sales of our
common stock, or the availability of shares for future sales, on
the market price of our common stock. The market price of our
common stock may decline significantly when the restrictions on
resale by certain of our stockholders lapse. Sales of
substantial amounts of common stock or the perception that such
sales could occur may adversely affect the prevailing market
price for our common stock.
Also, we may issue additional shares in subsequent public
offerings or private placements to make new investments or for
other purposes. We are not required to offer any such shares to
existing stockholders on a preemptive basis. Therefore, it may
not be possible for existing stockholders to participate in such
future share issuances, which may dilute the existing
stockholders interests in us.
We
have not established a minimum distribution payment level and we
cannot assure you of our ability to pay distributions in the
future.
We intend to pay quarterly distributions and to make
distributions to our stockholders in an amount such that we
distribute all or substantially all of our REIT taxable income
in each year, subject to certain adjustments. We have not
established a minimum distribution payment level and our ability
to pay distributions may be adversely affected by a number of
factors, including the risk factors described in this
prospectus. All distributions will be made at the discretion of
our board of directors and will depend on our earnings, our
financial condition, debt covenants, maintenance of our REIT
qualification and other factors as our board of directors may
deem relevant from time to time. We believe that a change in any
one of the following factors could adversely affect our results
of operations and impair our ability to pay distributions to our
stockholders:
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the profitability of the investment of the net proceeds of this
offering;
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our ability to make profitable investments;
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margin calls or other expenses that reduce our cash flow;
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defaults in our asset portfolio or decreases in the value of our
portfolio; and
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the fact that anticipated operating expense levels may not prove
accurate, as actual results may vary from estimates.
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We cannot assure you that we will achieve investment results
that will allow us to make a specified level of cash
distributions or
year-to-year
increases in cash distributions in the future. In addition, some
of our distributions may include a return in capital.
Investing
in our common stock may involve a high degree of
risk.
The investments we make in accordance with our investment
objectives may result in a high amount of risk when compared to
alternative investment options and volatility or loss of
principal. Our investments may be highly speculative and
aggressive, and therefore an investment in our common stock may
not be suitable for someone with lower risk tolerance.
Future
offerings of debt or equity securities, which would rank senior
to our common stock, may adversely affect the market price of
our common stock.
If we decide to issue debt or equity securities in the future,
which would rank senior to our common stock, it is likely that
they will be governed by an indenture or other instrument
containing covenants restricting our operating flexibility.
Additionally, any convertible or exchangeable securities that we
issue in the future may have rights, preferences and privileges
more favorable than those of our common stock and may result in
dilution to owners of our common stock. We and, indirectly, our
stockholders, will bear the cost of issuing and servicing such
securities. Because our decision to issue debt or equity
securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot
predict or estimate the amount, timing or nature of our future
offerings. Thus holders of our common stock will bear the risk
of our future offerings reducing the market price of our common
stock and diluting the value of their stock holdings in us.
Risks
Related to Our Organization and Structure
Certain
provisions of Maryland law could inhibit changes in
control.
Certain provisions of the Maryland General Corporation Law, or
the MGCL, may have the effect of deterring a third party from
making a proposal to acquire us or of impeding a change in
control under circumstances that otherwise could provide the
holders of our common stock with the opportunity to realize a
premium over the then-prevailing market price of our common
stock. We are subject to the business combination
provisions of the MGCL that, subject to limitations, prohibit
certain business combinations (including a merger,
consolidation, share exchange, or, in circumstances specified in
the statute, an asset transfer or issuance or reclassification
of equity securities) between us and an interested
stockholder (defined generally as any person who
beneficially owns 10% or more of our then outstanding voting
capital stock or an affiliate or associate of ours who, at any
time within the two-year period prior to the date in question,
was the beneficial owner of 10% or more of our then outstanding
voting capital stock) or an affiliate thereof for five years
after the most recent date on which the stockholder becomes an
interested stockholder. After the
five-year
prohibition, any business combination between us and an
interested stockholder generally must be recommended by our
board of directors and approved by the affirmative vote of at
least (1) 80% of the votes entitled to be cast by holders
of outstanding shares of our voting capital stock; and
(2) two-thirds of the votes entitled to be cast by holders
of voting capital stock of the corporation other than shares
held by the interested stockholder with whom or with whose
affiliate the business combination is to be effected or held by
an affiliate or associate of the interested stockholder. These
super-majority vote requirements do not apply if our common
stockholders receive a minimum price, as defined under Maryland
law, for their shares in the form of cash or other consideration
in the same form as previously paid by the interested
stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or
exempted by a board of directors prior to the time that the
interested stockholder becomes an interested stockholder.
Pursuant to the statute, our board of directors has by
resolution exempted business combinations between us
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and any other person, provided that such business combination is
first approved by our board of directors (including a majority
of our directors who are not affiliates or associates of such
person).
The control share provisions of the MGCL provide
that control shares of a Maryland corporation
(defined as shares which, when aggregated with other shares
controlled by the stockholder (except solely by virtue of a
revocable proxy), entitle the stockholder to exercise one of
three increasing ranges of voting power in electing directors)
acquired in a control share acquisition (defined as
the direct or indirect acquisition of ownership or control of
control shares) have no voting rights except to the
extent approved by our stockholders by the affirmative vote of
at least two-thirds of all the votes entitled to be cast on the
matter, excluding votes entitled to be cast by the acquiror of
control shares, our officers and our personnel who are also our
directors. Our Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by
any person of shares of our stock. There can be no assurance
that this provision will not be amended or eliminated at any
time in the future.
The unsolicited takeover provisions of the MGCL
permit our board of directors, without stockholder approval and
regardless of what is currently provided in our charter or
Bylaws, to implement takeover defenses, some of which (for
example, a classified board) we do not yet have. These
provisions may have the effect of inhibiting a third party from
making an acquisition proposal for us or of delaying, deferring
or preventing a change in control of us under the circumstances
that otherwise could provide the holders of shares of common
stock with the opportunity to realize a premium over the then
current market price. Our charter contains a provision whereby
we have elected to be subject to the provisions of Title 3,
Subtitle 8 of the MGCL relating to the filling of vacancies on
our board of directors. See Certain Provisions of The
Maryland General Corporation Law and Our Charter and
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 stockholder approval, amend our
charter to increase the aggregate number of our shares of stock
or the number of shares of stock of any class or series that we
have authority to issue and classify or reclassify any unissued
shares of common or preferred stock and set the preferences,
rights and other terms of the classified or reclassified shares.
As a result, our board of directors may establish a series of
shares of common or preferred stock that could delay or prevent
a transaction or a change in control that might involve a
premium price for our shares of common stock or otherwise be in
the best interest of our stockholders.
We are
the sole general partner of our operating partnership and could
become liable for the debts and other obligations of our
operating partnership beyond the amount of our initial
expenditure.
We are the sole general partner of our operating partnership,
IAS Operating Partnership LP. As the sole general partner, we
are liable for our operating partnerships debts and other
obligations. Therefore, if our operating partnership is unable
to pay its debts and other obligations, we will be liable for
such debts and other obligations beyond the amount of our
expenditure for ownership interests in our operating
partnership. These obligations could include unforeseen
contingent liabilities and could materially adversely affect our
financial condition, operating results and ability to make
distributions to our stockholders.
Ownership
limitations may restrict change of control of business
combination opportunities in which our stockholders might
receive a premium for their shares.
In order for us to qualify as a REIT for each taxable year after
2008, no more than 50% in value of our outstanding capital stock
may be owned, directly or indirectly, by five or fewer
individuals during the last half of any calendar year.
Individuals for this purpose include natural
persons, private foundations, some employee benefit plans and
trusts, and some charitable trusts. To preserve our REIT
qualification, our charter generally prohibits any person from
directly or indirectly owning more than 9.8% in value or in
number of
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shares, whichever is more restrictive, of the outstanding shares
of our capital stock or more than 9.8% in value or in number of
shares, whichever is more restrictive, of the outstanding shares
of our common stock. This ownership limitation could have the
effect of discouraging a takeover or other transaction in which
holders of our common stock might receive a premium for their
shares over the then prevailing market price or which holders
might believe to be otherwise in their best interests. Different
ownership limits will apply to Invesco. These ownership limits,
which our board of directors has determined will not jeopardize
our REIT qualification, will allow Invesco to hold up to 25% (by
value or by number of shares, whichever is more restrictive) of
our common stock or up to 25% (by value or by number of shares,
whichever is more restrictive) of our outstanding capital stock.
Tax
Risks
Your
investment has various U.S. federal income tax
risks.
This summary of certain tax risks is limited to the
U.S. federal tax risks addressed below. Additional risks or
issues may exist that are not addressed in this prospectus and
that could affect the U.S. federal income tax treatment of
us or our stockholders.
We strongly urge you to review carefully the discussion under
U.S. Federal Income Tax Considerations and to
seek advice based on your particular circumstances from an
independent tax advisor concerning the effects of
U.S. federal, state and local income tax law on an
investment in our common stock and on your individual tax
situation.
Our
failure to qualify as a REIT would subject us to U.S. federal
income tax and potentially increased state and local taxes,
which would reduce the amount of cash available for distribution
to our stockholders.
We have been organized and we intend to operate in a manner that
will enable us to qualify as a REIT for U.S. federal income
tax purposes commencing with our taxable year ending
December 31, 2009. We have not requested and do not intend
to request a ruling from the Internal Revenue Service, or the
IRS, that we qualify as a REIT. The U.S. federal income tax
laws governing REITs are complex. The complexity of these
provisions and of the applicable U.S. Treasury Department
regulations that have been promulgated under the Internal
Revenue Code, or Treasury Regulations, is greater in the case of
a REIT that, like us, holds its assets through a partnership,
and judicial and administrative interpretations of the
U.S. federal income tax laws governing REIT qualification
are limited. To qualify as a REIT, we must meet, on an ongoing
basis, various tests regarding the nature of our assets and our
income, the ownership of our outstanding shares, and the amount
of our distributions. Moreover, new legislation, court decisions
or administrative guidance, in each case possibly with
retroactive effect, may make it more difficult or impossible for
us to qualify as a REIT. Thus, while we intend to operate so
that we will qualify as a REIT, given the highly complex nature
of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in our
circumstances, no assurance can be given that we will so qualify
for any particular year. These considerations also might
restrict the types of assets that we can acquire in the future.
If we fail to qualify as a REIT in any taxable year, and we do
not qualify for certain statutory relief provisions, we would be
required to pay U.S. federal income tax on our taxable
income, and distributions to our stockholders would not be
deductible by us in determining our taxable income. In such a
case, we might need to borrow money or sell assets in order to
pay our taxes. Our payment of income tax would decrease the
amount of our income available for distribution to our
stockholders. Furthermore, if we fail to maintain our
qualification as a REIT, we no longer would be required to
distribute substantially all of our net taxable income to our
stockholders. In addition, unless we were eligible for certain
statutory relief provisions, we could not re-elect to qualify as
a REIT until the fifth calendar year following the year in which
we failed to qualify.
52
Complying
with REIT requirements may cause us to forego otherwise
attractive investment opportunities or financing or hedging
strategies.
To qualify as a REIT for U.S. federal income tax purposes,
we must continually satisfy various tests regarding the sources
of our income, the nature and diversification of our assets, the
amounts we distribute to our stockholders and the ownership of
our stock. To meet these tests, we may be required to forego
investments we might otherwise make. We may be required to make
distributions to stockholders at disadvantageous times or when
we do not have funds readily available for distribution. Thus,
compliance with the REIT requirements may hinder our investment
performance.
Complying
with REIT requirements may force us to liquidate otherwise
attractive investments.
To qualify as a REIT, we generally must ensure that at the end
of each calendar quarter at least 75% of the value of our total
assets consists of cash, cash items, government securities and
qualified REIT real estate assets, including certain mortgage
loans and MBS. The remainder of our investment in securities
(other than government securities and qualifying real estate
assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10%
of the total value of the outstanding securities of any one
issuer. In addition, in general, no more than 5% of the value of
our assets (other than government securities and qualifying real
estate assets) can consist of the securities of any one issuer,
and no more than 25% of the value of our total securities can be
represented by securities of one or more TRSs. See
U.S. Federal Income Tax 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 stockholders.
Potential
characterization of distributions or gain on sale may be treated
as unrelated business taxable income to tax exempt
investors.
If (1) all or a portion of our assets are subject to the
rules relating to taxable mortgage pools, (2) we are a
pension held REIT, (3) a tax exempt stockholder
has incurred debt to purchase or hold our common stock, or
(4) the residual REMIC interests we buy generate
excess inclusion income, then a portion of the
distributions to and, in the case of a stockholder described in
clause (3), gains realized on the sale of common stock by such
tax exempt stockholder may be subject to federal income tax as
unrelated business taxable income under the Internal Revenue
Code.
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 stockholders
each calendar year at least 90% of our REIT taxable income
(including certain items of non-cash income), determined without
regard to the deduction for dividends paid and excluding net
capital gain. To the extent that we satisfy the 90% distribution
requirement, but distribute less than 100% of our taxable
income, we will be subject to U.S. federal corporate income
tax on our undistributed income. In addition, we will incur a 4%
nondeductible excise tax on the amount, if any, by which our
distributions in any calendar year are less than a minimum
amount specified under U.S. federal income tax laws. We
intend to distribute our net taxable income to our stockholders
in a manner intended to satisfy the 90% distribution requirement
and to avoid both corporate income tax and the 4% nondeductible
excise tax.
Our taxable income may substantially exceed our net income as
determined based on GAAP, or 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
53
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 stockholders may elect to receive shares
of common stock or (subject to a limit measured as a percentage
of 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
stockholders may be required to pay income taxes in excess of
the cash dividends received.
We may distribute taxable dividends that are payable in cash and
shares of our common stock at the election of each stockholder.
Under IRS Revenue Procedure
2009-15, up
to 90% of any such taxable dividend for 2009 could be payable in
our stock. Taxable stockholders receiving such dividends will be
required to include the full amount of the dividend as ordinary
income to the extent of our current and accumulated earnings and
profits for federal income tax purposes. As a result, a
U.S. stockholder may be required to pay income taxes with
respect to such dividends in excess of the cash dividends
received. If a U.S. stockholder sells the stock it receives
as a dividend in order to pay this tax, the sales proceeds may
be less than the amount included in income with respect to the
dividend, depending on the market price of our stock at the time
of the sale. Furthermore, with respect to
non-U.S. stockholders,
we may be required to withhold U.S. tax with respect to
such dividends, including in respect of all or a portion of such
dividend that is payable in stock. In addition, if a significant
number of our stockholders determine to sell shares of our
common stock in order to pay taxes owed on dividends, it may put
downward pressure on the trading price of our common stock.
Our
ownership of and relationship with any TRS which we may form or
acquire following the completion of this offering will be
limited, and a failure to comply with the limits would
jeopardize our REIT qualification and may result in the
application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A
TRS may earn income that would not be qualifying income if
earned directly by the parent REIT. Both the subsidiary and the
REIT must jointly elect to treat the subsidiary as a TRS.
Overall, no more than 25% of the value of a REITs assets
may consist of stock or securities of one or more TRSs. A TRS
will pay federal, state and local income tax at regular
corporate rates on any income that it earns. In addition, the
TRS rules impose a 100% excise tax on certain transactions
between a TRS and its parent REIT that are not conducted on an
arms length basis.
Any TRS that we may form following the completion of this
offering would pay U.S. federal, state and local income tax
on its taxable income, and its after tax net income would be
available for distribution to us but would not be required to be
distributed to us. We anticipate that the aggregate value of the
TRS stock and securities owned by us will be less than 25% of
the value of our total assets (including the TRS stock and
securities). Furthermore, we will monitor the value of our
investments in our TRSs to ensure compliance with the rule that
no more than 25% of the value of our assets may consist of TRS
stock and securities (which is applied at the end of each
calendar quarter). In addition, we will scrutinize all of our
transactions with TRSs
54
to ensure that they are entered into on arms length terms
to avoid incurring the 100% excise tax described above. There
can be no assurance, however, that we will be able to comply
with the TRS limitations or to avoid application of the 100%
excise tax discussed above.
Liquidation
of our assets may jeopardize our REIT
qualification.
To qualify as a REIT, we must comply with requirements regarding
our assets and our sources of income. If we are compelled to
liquidate our investments to repay obligations to our lenders,
we may be unable to comply with these requirements, ultimately
jeopardizing our qualification as a REIT, or we may be subject
to a 100% tax on any resultant gain if we sell assets in
transactions that are considered to be prohibited transactions.
Characterization
of the repurchase agreements we enter into to finance our
investments as sales for tax purposes rather than as secured
lending transactions or the failure of a mezzanine loan to
qualify as a real estate asset would adversely affect our
ability to qualify as a REIT.
We anticipate entering into repurchase agreements with a variety
of counterparties to achieve our desired amount of leverage for
the assets in which we intend to invest. When we enter into a
repurchase agreement, we generally sell assets to our
counterparty to the agreement and receive cash from the
counterparty. The counterparty is obligated to resell the assets
back to us at the end of the term of the transaction. We believe
that for U.S. federal income tax purposes we will be
treated as the owner of the assets that are the subject of
repurchase agreements and that the repurchase agreements will be
treated as secured lending transactions notwithstanding that
such agreements may transfer record ownership of the assets to
the counterparty during the term of the agreement. It is
possible, however, that the IRS could successfully assert that
we did not own these assets during the term of the repurchase
agreements, in which case we could fail to qualify as a REIT.
In addition, we may acquire mezzanine loans, which are loans
secured by equity interests in a partnership or limited
liability company that directly or indirectly owns real
property. In Revenue Procedure
2003-65, the
IRS provided a safe harbor pursuant to which a mezzanine loan,
if it meets each of the requirements contained in the Revenue
Procedure, will be treated by the IRS as a real estate asset for
purposes of the REIT asset tests, and interest derived from the
mezzanine loan will be treated as qualifying mortgage interest
for purposes of the REIT 75% income test. Although the Revenue
Procedure provides a safe harbor on which taxpayers may rely, it
does not prescribe rules of substantive tax law. We may acquire
mezzanine loans that may not meet all of the requirements for
reliance on this safe harbor. In the event we own a mezzanine
loan that does not meet the safe harbor, the IRS could challenge
such loans treatment as a real estate asset for purposes
of the REIT asset and income tests, and if such a challenge were
sustained, we could fail to qualify as a REIT.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Internal Revenue Code limit our
ability to hedge MBS and related borrowings. Under these
provisions, our annual gross income from non-qualifying hedges,
together with any other income not generated from qualifying
real estate assets, cannot exceed 25% of our gross income
(excluding for this purpose, gross income from qualified
hedges). In addition, our aggregate gross income from
non-qualifying hedges, fees, and certain other non qualifying
sources cannot exceed 5% of our annual gross income. As a
result, we might have to limit our use of advantageous hedging
techniques or implement those hedges through a TRS, which we may
form following the completion of this offering. This could
increase the cost of our hedging activities or expose us to
greater risks associated with changes in interest rates than we
would otherwise want to bear.
Even
if we qualify as a REIT, we may face tax liabilities that reduce
our cash flow.
Even if we qualify as a REIT, we may be subject to certain
U.S. federal, state and local taxes on our income and
assets, including taxes on any undistributed income, tax on
income from some activities conducted as a result of a
foreclosure, and state or local income, franchise, property and
transfer taxes, including mortgage related taxes. See
U.S. Federal Income Tax Considerations
Taxation of REITs in General. In addition, any
55
TRSs we own will be subject to U.S. federal, state, and
local corporate taxes. In order to meet the REIT qualification
requirements, or to avoid the imposition of a 100% tax that
applies to certain gains derived by a REIT from sales of
inventory or property held primarily for sale to customers in
the ordinary course of business, we may hold some of our assets
through taxable subsidiary corporations, including TRSs. Any
taxes paid by such subsidiary corporations would decrease the
cash available for distribution to our stockholders.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our common stock.
At any time, the U.S. federal income tax laws or
regulations governing REITs or the administrative
interpretations of those laws or regulations may be amended. We
cannot predict when or if any new U.S. federal income tax
law, regulation or administrative interpretation, or any
amendment to any existing federal income tax law, regulation or
administrative interpretation, will be adopted, promulgated or
become effective and any such law, regulation or interpretation
may take effect retroactively. We and our stockholders could be
adversely affected by any such change in, or any new, federal
income tax law, regulation or administrative interpretation.
Dividends
payable by REITs do not qualify for the reduced tax
rates.
Legislation enacted in 2003 generally reduces the maximum tax
rate for dividends payable to domestic stockholders that are
individuals, trusts and estates from 38.6% to 15% (through
2010). Dividends payable by REITs, however, are generally not
eligible for the reduced rates. Although this legislation does
not adversely affect the taxation of REITs or dividends paid by
REITs, the more favorable rates applicable to regular corporate
dividends could cause investors who are individuals, trusts and
estates to perceive investments in REITs to be relatively less
attractive than investments in stock of non REIT corporations
that pay dividends, which could adversely affect the value of
the stock of REITs, including our common stock.
56
FORWARD-LOOKING
STATEMENTS
We make forward-looking statements in this prospectus that are
subject to risks and uncertainties. These forward-looking
statements include information about possible or assumed future
results of our business, financial condition, liquidity, results
of operations, plans and objectives. When we use the words
believe, expect, anticipate,
estimate, plan, continue,
intend, should, may or
similar expressions, we intend to identify forward-looking
statements. Statements regarding the following subjects, among
others, may be forward-looking:
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use of proceeds of this offering;
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our business and investment strategy;
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our projected operating results;
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actions and initiatives of the U.S. Government and changes
to U.S. Government policies;
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our ability to obtain financing arrangements;
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financing and advance rates for our target assets;
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our expected leverage;
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general volatility of the securities markets in which we invest;
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our expected investments;
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interest rate mismatches between our target assets and our
borrowings used to fund such investments;
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changes in interest rates and the market value of our target
assets;
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changes in prepayment rates on our target assets;
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effects of hedging instruments on our target assets;
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rates of default or decreased recovery rates on our target
assets;
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the degree to which our hedging strategies may or may not
protect us from interest rate volatility;
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changes in governmental regulations, tax law and rates, and
similar matters;
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our ability to maintain our qualification as a REIT for
U.S. federal income tax purposes;
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our ability to maintain our exemption from registration under
the 1940 Act;
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availability of investment opportunities in mortgage-related,
real estate-related and other securities;
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availability of qualified personnel;
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estimates relating to our ability to make distributions to our
stockholders in the future;
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our understanding of our competition; and
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market trends in our industry, interest rates, real estate
values, the debt securities markets or the general economy.
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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.
57
USE OF
PROCEEDS
We are offering 8,500,000 shares of our common stock at the
anticipated public offering price of $20.00 per share.
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
75,000 shares of our common stock to Invesco, through our
Manager, at $20.00 per share and 1,425,000 units of limited
partnership interest in our operating partnership to Invesco,
through Invesco Investments (Bermuda) Ltd., at $20.00 per unit.
We estimate that the net proceeds we will receive from selling
common stock in this offering will be approximately
$165.6 million, after deducting the portion of the assumed
underwriting discounts and commissions payable by us and
estimated offering expenses of approximately $4.4 million
(or, if the underwriters exercise their over-allotment option in
full, approximately $190.7 million, after deducting the
portion of the assumed underwriting discounts and commissions
payable by us and estimated offering expenses of approximately
$4.8 million). We estimate that the net proceeds we will
receive in the concurrent private placement of our common stock
and OP units will be approximately $30 million.
We plan to use all the net proceeds from this offering and the
concurrent private placement as described above to acquire our
target assets in accordance with our objectives and strategies
described in this prospectus. See Business Our
Investment Strategy. We expect that our focus will be on
purchasing Agency RMBS, non-Agency RMBS, CMBS and certain
mortgage loans, subject to our investment guidelines and to the
extent consistent with maintaining our REIT qualification. Our
Manager will make determinations as to the percentage of our
assets that will be invested in each of our target assets. Based
on prevailing market conditions, our current expectation is that
our initial investment portfolio will consist of between 45% to
55% non-Agency RMBS, 10% to 15% CMBS and the balance in Agency
RMBS. However, there is no assurance that upon the completion of
this offering we will not allocate the proceeds from this
offering and concurrent private placement in a different manner
among our target assets. Our decisions will depend on prevailing
market conditions and may change over time in response to
opportunities available in different interest rate, economic and
credit environments. Until appropriate assets can be identified,
our Manager may invest the net proceeds from this offering and
the concurrent private placement in interest-bearing short-term
investments, including money market accounts, that are
consistent with our intention to qualify as a REIT. These
investments are expected to provide a lower net return than we
will seek to achieve from our target assets. Prior to the time
we have fully used the net proceeds of this offering and the
concurrent private placement to acquire our target assets, we
may fund our quarterly distributions out of such net proceeds.
58
DISTRIBUTION
POLICY
We intend to make regular quarterly distributions to holders of
our common stock. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its
REIT taxable income, without regard to the deduction for
dividends paid and excluding net capital gains, and that it pay
tax at regular corporate rates to the extent that it annually
distributes less than 100% of its net taxable income. We
generally intend over time to pay quarterly dividends in an
amount equal to our net taxable income. We plan to pay our first
dividend in respect of the period from the closing of this
offering through September 30, 2009, which may be prior to
the time when we have fully invested the net proceeds from this
offering in our target assets.
To the extent that in respect of any calendar year, cash
available for distribution is less than our net taxable income,
we could be required to sell assets or borrow funds to make cash
distributions or make a portion of the required distribution in
the form of a taxable stock distribution or distribution of debt
securities. In addition, prior to the time we have fully
invested the net proceeds of this offering, we may fund our
quarterly distributions out of such net proceeds. We will
generally not be required to make distributions with respect to
activities conducted through any TRS that we form following the
completion of this offering. For more information, see
U.S. Federal Income Tax Considerations
Taxation of Our Company in General.
To satisfy the requirements to qualify as a REIT and generally
not be subject to U.S. federal income and excise tax, we
intend to make regular quarterly distributions of all or
substantially all of our net taxable income to holders of our
common stock out of assets legally available therefor. Any
distributions we make will be at the discretion of our board of
directors and will depend upon our earnings and financial
condition, debt covenants, funding or margin requirements under
repurchase agreements, warehouse facilities or other secured and
unsecured borrowing agreements, maintenance of our REIT
qualification, applicable provisions of the MGCL, and such other
factors as our board of directors deems relevant. Our earnings
and financial condition will be affected by various factors,
including the net interest and other income from our portfolio,
our operating expenses and any other expenditures. For more
information regarding risk factors that could materially
adversely affect our earnings and financial condition, see
Risk Factors.
We anticipate that our distributions generally will be taxable
as ordinary income to our stockholders, although a portion of
the distributions may be designated by us as qualified dividend
income or capital gain, or may constitute a return of capital.
We will furnish annually to each of our stockholders a statement
setting forth distributions paid during the preceding year and
their characterization as ordinary income, return of capital,
qualified dividend income or capital gain. For more information,
see U.S. Federal Income Tax
Considerations Taxation of Taxable
U.S. Stockholders.
59
CAPITALIZATION
The following table sets forth (1) our actual
capitalization at March 31, 2009 and (2) our
capitalization as adjusted to reflect the effect of the sale of
our common stock in this offering at an assumed offering price
of $20.00 per share after deducting the underwriting
discount and estimated organizational and offering expenses
payable by us and the concurrent private placement to the
Invesco Purchaser of 75,000 shares of our common stock and
1,425,000 OP units at the assumed initial public offering price.
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 March 31, 2009
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As
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Actual
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Adjusted(1)
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(Unaudited)
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(Dollars in Thousands)
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Stockholders equity:
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Common stock, par value $0.01 per share; 100,000 shares
authorized, and 100 shares issued and outstanding, actual
and 450,000,000 shares authorized and 8,575,100 shares
outstanding, as adjusted
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$
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$
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86
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Preferred Stock, par value $0.01 per share; 0 shares
authorized and 0 shares issued and outstanding, actual and
50,000,000 shares authorized and 0 shares outstanding,
as adjusted
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Additional paid in capital
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1
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166,965
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(2)
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Accumulated deficit during development stage
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(70
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)
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(70
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)
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Total stockholders (deficiency) equity
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$
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(69
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)
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$
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166,981
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Noncontrolling interests:
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Operating partnership
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28,500
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(3)
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Total capitalization
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$
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(69
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)
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$
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195,481
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(1) |
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Does not include the underwriters option to purchase up to
1,275,000 additional shares. |
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(2) |
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Represents additional paid in capital net of issuance costs. |
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(3) |
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Represents 1,425,000 OP units issued to Invesco Investments
(Bermuda) Ltd. by our operating partnership, at $20.00 per
OP unit. |
60
SELECTED
FINANCIAL INFORMATION
The following table presents selected historical financial
information as of March 31, 2009 and December 31,
2008, and for the three months ended March 31, 2009 and for
the period from June 5, 2008 (date of incorporation) to
December 31, 2008. The historical financial information as
of December 31, 2008 and for the period from June 5,
2008 (date of incorporation) to December 31, 2008 presented
in the table below has been derived from our audited financial
statements. The information presented below is not necessarily
indicative of the trends in our performance or our results for a
full fiscal year.
The information presented below is only a summary and does not
provide all of the information contained in our historical
financial statements, including the related notes. You should
read the information below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our historical
financial statements, including the related notes, included
elsewhere in this prospectus.
Balance
Sheet Data
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As of
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As of
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March 31, 2009
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December 31, 2008
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(Unaudited)
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Assets:
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Cash
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$
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1,000
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$
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1,000
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Other assets deferred offering costs
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1,213,582
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978,333
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Total Assets
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$
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1,214,582
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$
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979,333
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Liabilities and Stockholders Deficiency:
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Due to affiliate
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$
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1,283,909
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$
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1,000,714
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficiency
|
|
|
(69,327
|
)
|
|
|
(21,381
|
)
|
Total Liabilities and Stockholders Deficiency
|
|
$
|
1,214,582
|
|
|
$
|
979,333
|
|
|
|
|
|
|
|
|
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
June 5, 2008
|
|
|
|
|
|
|
(Date of
|
|
|
|
For the
|
|
|
Incorporation)
|
|
|
|
Three Months Ended
|
|
|
Through
|
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
45,237
|
|
|
|
|
|
Organizational Costs
|
|
|
2,709
|
|
|
|
22,381
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(47,946
|
)
|
|
$
|
(22,381
|
)
|
|
|
|
|
|
|
|
|
|
61
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
the sections of this prospectus entitled Risk
Factors, Forward-Looking Statements,
Business and our audited balance sheet as of
December 31, 2008 and the related notes thereto included
elsewhere in this prospectus. This discussion contains
forward-looking statements reflecting current expectations that
involve risks and uncertainties. Actual results and the timing
of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including
those discussed in the section entitled Risk Factors
and elsewhere in this prospectus.
Overview
We are a newly-formed Maryland corporation focused on investing
in, financing and managing residential and commercial
mortgage-backed securities and mortgage loans. We will seek to
invest in Agency RMBS, non-Agency RMBS, CMBS and residential and
commercial mortgage loans. We anticipate financing our Agency
RMBS through traditional repurchase agreement financing. In
addition, to the extent available to us, we may seek to finance
our investments in CMBS and non-Agency RMBS with financings
under TALF, or with private financing sources. If available, we
may also finance our investments in certain CMBS and non-Agency
RMBS by contributing capital to one or more of the Legacy
Securities PPIFs, that receive financing under PPIP, and our
investments in certain legacy commercial and residential
mortgage loans by contributing capital to one or more Legacy
Loan PPIFs, that receive such funding or through private
financing sources. Legacy Securities PPIFs and Legacy Loan PPIFs
may be established and managed by our Manager or one of its
affiliates or by unaffiliated third parties; however, our
Manager or its affiliates may only establish a Legacy Securities
PPIF if their application to serve as an investment manager of
this type of PPIP fund is accepted by the U.S. Treasury. To
the extent we pay any fees to our Manager or any of its
affiliates in connection with any PPIF, our Manager has agreed
to reduce the management fee payable by us under the management
agreement (but not below zero) in respect of any equity
investment we may decide to make in any PPIF managed by our
Manager or any of its affiliates by the amount of the fees
payable to our Manager or its affiliates under the PPIF with
regard to our equity investment.
We will be externally managed and advised by our Manager, an
SEC-registered investment adviser and indirect wholly owned
subsidiary of Invesco. Invesco is a leading independent global
investment management company with $348.2 billion in assets
under management as of March 31, 2009. Our Manager will
draw upon the expertise of Invescos Worldwide Fixed Income
investment team of 114 investment professionals operating in six
cities, across four countries, with approximately
$157 billion in securities under management and Invesco
Real Estates 219 employees operating in
13 cities across eight countries with over $20 billion
in private and public real estate assets under management. With
over 25 years of experience, Invescos teams of
dedicated professionals have developed exceptional track records
across multiple fixed income sectors and asset classes,
including structured securities, such as RMBS, ABS, CMBS, and
leveraged loan portfolios. In addition, the investment team will
draw upon the mortgage market insights of our Managers WL
Ross subsidiary.
Our objective is to provide attractive risk adjusted returns to
our investors over the long term, primarily through dividends
and secondarily through capital appreciation. We intend to
achieve this objective by selectively acquiring target assets to
construct a diversified investment portfolio designed to produce
attractive returns across a variety of market conditions and
economic cycles. We intend to construct a diversified investment
portfolio by focusing on security selection and the relative
value of various sectors within the mortgage market. We intend
to finance our Agency RMBS investments primarily through
short-term borrowings structured as repurchase agreements. To
date, we have signed nine master repurchase agreements with
nine financial institutions, and we are in discussions with
nine additional financial institutions for repurchase
facilities. As described in more detail below, to the extent
available to us, we may seek to finance our non-Agency RMBS,
CMBS and mortgage loan portfolios with attractive non-recourse
term borrowing facilities and equity financing under the TALF or
with private financing sources and, if available, we may make
investments in funds that receive financing under the PPIP that
will be established and managed by our
62
Manager or one of its affiliates if their application to serve
as one of the investment managers for the Legacy Securities
Program is accepted by the U.S. Treasury.
We will commence operations upon completion of this offering. We
intend to elect and qualify to be taxed as a REIT for
U.S. federal income tax purposes, commencing with our
taxable year ending December 31, 2009. We generally will
not be subject to U.S. federal income taxes on our taxable
income to the extent that we annually distribute all of our net
taxable income to stockholders and maintain our intended
qualification as a REIT. We also intend to operate our business
in a manner that will permit us to maintain our exemption from
registration under the 1940 Act.
Factors
Impacting Our Operating Results
We expect that the results of our operations will be affected by
a number of factors and primarily depend on, among other things,
the level of our net interest income, the market value of our
assets and the supply of, and demand for, the target assets in
which we intend to invest. Our net interest income, which
includes the amortization of purchase premiums and accretion of
purchase discounts, varies primarily as a result of changes in
market interest rates and prepayment speeds, as measured by the
Constant Prepayment Rate, or CPR, on our target assets. Interest
rates and prepayment speeds vary according to the type of
investment, conditions in the financial markets, competition and
other factors, none of which can be predicted with any certainty.
Changes
in Market Interest Rates
With respect to our proposed business operations, increases in
interest rates, in general, may over time cause: (1) the
interest expense associated with our borrowings to increase;
(2) the value of our investment portfolio to decline;
(3) coupons on our ARMs and hybrid ARMs, RMBS, CMBS and
mortgage loans mortgage loans to reset, although on a delayed
basis, to higher interest rates; (4) prepayments on our
RMBS and residential mortgage loans to slow, thereby slowing the
amortization of our purchase premiums and the accretion of our
purchase discounts; and (5) to the extent we enter into
interest rate swap agreements as part of our hedging strategy,
the value of these agreements to increase. Conversely, decreases
in interest rates, in general, may over time cause:
(1) prepayments on our RMBS and residential mortgage loans
to increase, thereby accelerating the amortization of our
purchase premiums and the accretion of our purchase discounts;
(2) the interest expense associated with our borrowings to
decrease; (3) the value of our investment portfolio to
increase; (4) to the extent we enter into interest rate
swap agreements as part of our hedging strategy, the value of
these agreements to decrease; and (5) coupons on our
adjustable-rate and hybrid Agency RMBS and non-Agency RMBS
assets and mortgage loans to reset, although on a delayed basis,
to lower interest rates.
Residential
Mortgage Loan Prepayment Speeds
Prepayment speeds vary according to interest rates, the type of
investment, conditions in the financial markets, competition,
foreclosures and other factors, none of which can be predicted
with any certainty. We expect that over time our adjustable-rate
and hybrid Agency RMBS and non-Agency RMBS will experience
higher prepayment rates than do fixed-rate RMBS, as we believe
that homeowners with ARMs and hybrid ARMs exhibit more rapid
housing turnover levels or refinancing activity compared to
fixed-rate borrowers.
Spreads
on RMBS
The spread between swap rates and RMBS has recently been
volatile. Spreads on non-Treasury, fixed income assets have
moved sharply wider due to the difficult credit conditions. The
poor collateral performance of the sub-prime mortgage sector
coupled with declining home prices have had a negative impact on
investor confidence. As the prices of securitized assets have
declined, a number of investors and a number of structured
investment vehicles have faced margin calls from dealers and
have been forced to sell assets in order to reduce leverage. The
price volatility of these assets has also impacted lending terms
in the repurchase market, as counterparties have raised margin
requirements to reflect the more difficult environment. The
spread between the yield on our assets and our funding costs is
an important factor in the performance of our business. Wider
spreads imply greater income on new asset purchases but may have
a negative impact on our stated book
63
value. Wider spreads may also negatively impact asset prices. In
an environment where spreads are widening, counterparties may
require additional collateral to secure borrowings which may
require us to reduce leverage by selling assets. Conversely,
tighter spreads imply lower income on new asset purchases but
may have a positive impact on our stated book value. Tighter
spreads may have a positive impact on asset prices. In this case
we may be able to reduce the amount of collateral required to
secure borrowings.
RMBS
Extension Risk
Our Manager will compute the projected weighted-average life of
our investments based on assumptions regarding the rate at which
the borrowers will prepay the underlying mortgages. In general,
when we acquire a FRM or hybrid ARM security, we may, but are
not required to, enter into an interest rate swap agreement or
other hedging instrument that effectively fixes our borrowing
costs for a period close to the anticipated average life of the
fixed-rate portion of the related assets. This strategy is
designed to protect us from rising interest rates, because the
borrowing costs are fixed for the duration of the fixed-rate
portion of the related RMBS.
However, if prepayment rates decrease in a rising interest rate
environment, the life of the fixed-rate portion of the related
assets could extend beyond the term of the swap agreement or
other hedging instrument. This could have a negative impact on
our results of operations, as borrowing costs would no longer be
fixed after the end of the hedging instrument while the income
earned on the hybrid ARM security would remain fixed. This
situation may also cause the market value of our hybrid ARM
security to decline, with little or no offsetting gain from the
related hedging transactions. In extreme situations, we may be
forced to sell assets to maintain adequate liquidity, which
could cause us to incur losses.
CMBS
Real Estate Risk
Commercial property values and net operating income derived from
such properties are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to:
national, regional and local economic conditions (which may be
adversely affected by industry slowdowns and other factors);
local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes
or continued weakness in specific industry segments;
construction quality, age and design; demographic factors;
retroactive changes to building or similar codes; and increases
in operating expenses (such as energy costs). In the event net
operating income decreases, a borrower may have difficulty
making its debt service payments, which could adversely affect
the value of our CMBS.
Size
of Investment Portfolio
The size of our investment portfolio, as measured by the
aggregate principal balance of our mortgage related securities
and the other assets we own, is also a key revenue driver.
Generally, as the size of our investment portfolio grows, the
amount of interest income we receive increases. A larger
investment portfolio, however, drives increased expenses, as we
incur additional interest expense to finance the purchase of our
assets.
Since changes in interest rates may significantly affect our
activities, our operating results depend, in large part, upon
our ability to effectively manage interest rate risks and
prepayment risks while maintaining our qualification as a REIT.
Market
Conditions
Beginning in the summer of 2007, significant adverse changes in
financial market conditions have resulted in a deleveraging of
the entire global financial system. As part of this process,
residential and commercial mortgage markets in the United States
have experienced a variety of difficulties including loan
defaults, credit losses and reduced liquidity. As a result, many
lenders have tightened their lending standards, reduced lending
capacity, liquidated significant portfolios or exited the market
altogether, and therefore, financing with attractive terms is
generally unavailable. In response to these unprecedented
events, the U.S. Government has taken a number of actions
to improve stability in the financial markets and encourage
lending.
64
Housing
and Economic Recovery Act of 2008
In response to general market instability and, more
specifically, the financial conditions of Fannie Mae and Freddie
Mac, on July 30, 2008, the HERA established a new regulator
for Fannie Mae and Freddie Mac, the U.S. Federal Housing
Finance Agency, or the FHFA. On September 7, 2008, the
U.S. Treasury, the FHFA, and the U.S. Federal Reserve
announced a comprehensive action plan to help stabilize the
financial markets, support the availability of mortgage finance
and protect taxpayers. Under this plan, among other things, the
FHFA has been appointed as conservator of both Fannie Mae and
Freddie Mac, allowing the FHFA to control the actions of the two
government sponsored enterprises, or GSEs, without forcing them
to liquidate, which would be the case under receivership.
Importantly, the primary focus of the plan is to increase the
availability of mortgage financing by allowing these GSEs to
continue to grow their guarantee business without limit, while
limiting net purchase of Agency RMBS to a modest amount through
the end of 2009. Beginning in 2010, these GSEs will gradually
reduce their Agency RMBS portfolios. In addition, in an effort
to further stabilize the U.S. mortgage market, the
U.S. Treasury took three additional actions. First, it
entered into a preferred stock purchase agreement with each of
the GSEs, pursuant to which $100 billion will be available
to each GSE. Second, it established a new secured credit
facility, the GSECF, available to each of Fannie Mae and Freddie
Mac (as well as Federal Home Loan Banks) through
December 31, 2009, when other funding sources are
unavailable. Third, it established an Agency RMBS purchase
program, under which the U.S. Treasury may purchase Agency
RMBS in the open market. This Agency RMBS purchase program will
also expire on December 31, 2009. Initially, Fannie Mae and
Freddie Mac each issued $1.0 billion of senior preferred
stock to the U.S. Treasury and warrants to purchase 79.9%
of the fully-diluted common stock outstanding of each GSE at a
nominal exercise price. Pursuant to these agreements, each of
Fannie Maes and Freddie Macs mortgage and Agency
RMBS portfolio may not exceed $850 billion as of
December 31, 2009, and will decline by 10% each year until
such portfolio reaches $250 billion. After reporting a
substantial loss in the third quarter of 2008, Freddie Mac
requested a capital injection of $13.8 billion by the
U.S. Treasury pursuant to its preferred stock purchase
agreement. Although the U.S. Government has committed
capital to Fannie Mae and Freddie Mac, there can be no assurance
that these actions will be adequate for their needs. These
uncertainties lead to questions about the future of the GSEs in
their current form, or at all, and the availability of, and
trading market for, Agency RMBS. If these actions are
inadequate, and the GSEs continue to suffer losses or cease to
exist, our business, operations and financial condition could be
materially adversely affected. See Risk
Factors Risks Related to Our Company
There can be no assurance that the actions of the
U.S. Government, Federal Reserve, U.S. Treasury and
other governmental and regulatory bodies for the purpose of
stabilizing the financial markets, including the establishment
of the TALF and the PPIP, or market response to those actions,
will achieve the intended effect, and our business may not
benefit from these actions and further government or market
developments could adversely impact us.
Guarantee
Program for Money Market Funds
In an effort to stabilize the money market fund industry, the
U.S. Treasury on September 19, 2008 announced the
establishment of the Temporary Guarantee Program for Money
Market Funds, through which U.S. Treasury guarantees the
share price of any publicly offered eligible money market mutual
fund both retail and institutional that
applies for and pays a fee to participate in the program. The
temporary measure will enable the Exchange Stabilization Fund,
established in 1934 as part of the Gold Reserve Act, to insure
the holdings of any publicly offered money market mutual fund
for both retail and institutional clients. The current
termination date for the guarantee program is September 18,
2009.
Money market funds are a vital source of short-term liquidity in
the financial markets. Money market funds provide for repurchase
agreement financing by lending cash versus collateral, such as
debt issued by the U.S. Treasury and Agency RMBS, for short
periods of time. Pressure on asset prices in the credit markets
has recently caused several money market funds to come under
pressure from a pricing and redemption standpoint. This
insurance program will help ease this pressure over time and
should allow lending capacity offered by money market funds to
return to more normal levels.
65
As we will rely on short-term borrowing in the form of
repurchase agreements to fund the purchase of some of our target
assets, we believe that this action should positively impact us
by stabilizing a major source of our anticipated borrowings.
Capital
Assistance Program and Bank Stress Tests
On February 25, 2009, the U.S. Treasury and federal
banking agencies released details about the Capital Assistance
Program, or the CAP. The CAP has two elements: (1) a
forward looking stress test to determine if any major bank
requires an additional capital buffer, and (2) access to
preferred shares convertible into common equity from the
government as a bridge to private capital in the future.
Nineteen banks with risk weighted assets exceeding
$100 billion have been stress tested under various economic
assumptions relating to further contractions in the
U.S. economy and further declines in housing prices and
increases in unemployment. The stress tests were completed on
April 24, 2009 and shared confidentially with the
institutions subject to the test. The results were made public
on May 7, 2009. We believe that in the aftermath of the
completion of the bank stress tests being conducted
by the U.S. Treasury, banks determined to be
undercapitalized may be pressured to dispose of some or all of
their non-Agency RMBS, CMBS and mortgage loan portfolios, which
could make significant quantities of these assets available to
us at attractive prices.
The
Term Asset-Backed Securities Lending Facility
In response to the severe dislocation in the credit markets, the
U.S. Treasury and the Federal Reserve jointly announced the
establishment of the TALF on November 25, 2008. The TALF is
designed to increase credit availability and support economic
activity by facilitating renewed securitization activities.
Under the initial version of TALF, or TALF 1.0, the FRBNY makes
non-recourse loans to borrowers to fund their purchase of ABS
collateralized by certain assets such as student loans, auto
loans and leases, floor plan loans, credit card receivables,
receivables related to residential mortgage services advances,
equipment loans and leases and loans guaranteed by the SBA.
Under TALF 1.0, the FRBNY announced its intention to lend up to
$200 billion to certain holders of TALF-eligible ABS. Any
U.S. company that owns TALF-eligible ABS may borrow from
the FRBNY under TALF, provided that the company maintains an
account relationship with a primary dealer. TALF 1.0 is
presently expected to run through December 31, 2009.
On March 23, 2009, the U.S. Treasury announced
preliminary plans to expand the TALF to include non-Agency RMBS
that were originally rated AAA and outstanding CMBS that are
rated AAA. On May 1, 2009, the Federal Reserve published
the terms for the expansion of TALF to CMBS and announced that,
beginning on June 16, 2009, up to $100 billion of TALF
loans will be available to finance purchases of eligible CMBS.
In this publication, the Federal Reserve stated conditions for
TALF eligibility. Such conditions are described under
Business Our Financing Strategy below.
The Federal Reserve also described the terms for CMBS
collateralized TALF loans. Such conditions are also described
under Business Our Financing Strategy
below. Additionally, on May 19, 2009, the Federal Reserve
announced that certain high quality legacy CMBS, including CMBS
issued before January 1, 2009, would become eligible
collateral under the TALF starting in July 2009.
We believe that the expansion of the TALF to include highly
rated CMBS, to the extent available to us, may provide us with
attractively priced non-recourse term borrowings that we could
use to purchase newly created and legacy CMBS that are eligible
for funding under this program. However, many legacy CMBS have
had their ratings downgraded by at least one rating agency (or
have been put on notice as being likely to be downgraded in the
near future) as property values have declined during the current
recession because a large amount of legacy CMBS are backed by
whole loans that were originated during a period of time when
property values were relatively high and economic fundamentals
were relatively strong. These downgradings significantly reduce
the quantity of legacy CMBS that are TALF eligible. Accordingly,
unless the criteria for legacy CMBS eligibility change, we
expect most of our TALF eligible CMBS investments will be in
newly issued CMBS. In addition, there can be no assurance that
we may be able to use funding provided under the Legacy
Securities Program, to the extent available to us, to acquire
older vintage CMBS.
66
To date, neither the FRBNY nor the U.S. Treasury has
announced how TALF will be expanded to non-Agency RMBS. We
believe that once so expanded, the TALF should provide us with
attractively priced non-recourse term borrowing facilities that
we can use to purchase non-Agency RMBS. However, there can be no
assurance that the TALF will be expanded to include this asset
class and, if so expanded, that we will be able to utilize it
successfully or at all. Although there can be no assurance in
this regard, as described below under Business
Our Financing Strategy, we anticipate being able to use
funding provided under the Legacy Securities Program to acquire
RMBS.
The
Public-Private Investment Program
On March 23, 2009, the U.S. Treasury, in conjunction
with the FDIC and the Federal Reserve, announced the
establishment of the PPIP. The PPIP is designed to encourage the
transfer of certain illiquid legacy real estate-related assets
off of the balance sheets of financial institutions, restarting
the market for these assets and supporting the flow of credit
and other capital into the broader economy. The PPIP is expected
to be $500 billion to $1 trillion in size and has two
primary components: the Legacy Securities Program and the Legacy
Loan Program. Under the Legacy Securities Program, Legacy
Securities PPIFs will be established to purchase from financial
institutions certain non-Agency RMBS and newly issued and legacy
CMBS that were originally rated in the highest rating category
by one or more of the national recognized statistical rating
organizations. Under the Legacy Loan Program, Legacy Loan PPIFs
will be established to purchase troubled loans (including
residential and commercial mortgage loans) from insured
depository institutions. The terms of the Legacy Loan and Legacy
Securities Program are described under
Business Our Financing Strategy below.
To the extent available to us, we may seek to finance our
non-Agency RMBS and CMBS portfolios with financings under the
Legacy Securities Program. We may access this financing by
contributing our equity capital to one or more Legacy Securities
PPIFs that will be established and managed by our Manager or one
of its affiliates if their application to serve as one of the
investment managers for the Legacy Securities Program is
accepted by the U.S. Treasury, or to other Legacy
Securities PPIFs established and managed by third parties. We
expect that these Legacy Securities PPIFs would directly access
the favorable financing available under this program.
We may seek to acquire residential and commercial mortgage loans
with financing under the Legacy Loan Program. To the extent
available to us, we anticipate that we would access this
financing by contributing equity capital to one or more Legacy
Loan PPIFs that will be established and managed by our Manager
or one of its affiliates. We expect that these Legacy Loan PPIFs
would directly access the favorable financing available under
this program.
To date, the terms of any equity investment that we would make
to any Legacy Securities or Legacy Loan PPIFs that may be
established in the future have not yet been determined and there
is no assurance that these programs will be finalized or that we
will participate in these programs. However, we anticipate that
any such Legacy Securities or Legacy Loan PPIF would:
|
|
|
|
|
be structured as partnership for U.S. tax purposes;
|
|
|
|
|
|
have a finite life, meaning that after a specified holding
period the assets held by the Legacy Securities or Legacy Loan
PPIF would be sold and the proceeds from such sale would be
distributed to the applicable Legacy Securities and Legacy Loan
PPIF investors; and
|
|
|
|
|
|
provide for the payment of fees to the investment manager of the
Legacy Securities or Legacy Loan PPIF, which we anticipate to
include base management fees and the payment of an incentive fee
to the investment manager after investors receive minimum hurdle
rates of return.
|
Any equity investment we may make in any such Legacy Securities
or Legacy Loan PPIF may be subject to transfer restrictions. The
terms of any equity investment we make in any such Legacy
Securities or Legacy Loan PPIF must be approved by our board of
directors, including a majority of our independent directors. In
addition, we expect that any investment we make will be on terms
that are no less favorable to us than those made available to
other third party institutional investors in the Legacy
Securities or Legacy Loan PPIF. We
67
expect that any investment we make will be on terms that are no
less favorable to us than those made available to other third
party institutional investors in the Legacy Securities or Legacy
Loan PPIF. In addition, to the extent we pay any fees to our
Manager or any of its affiliates in connection with any PPIF,
our Manager has agreed to reduce the management fee payable by
us under the management agreement (but not below zero) in
respect of any equity investment we may decide to make in any
PPIF managed by our Manager or any of its affiliates by the
amount of the fees payable to our Manager or its affiliates
under the PPIF with regard to our equity investment. However,
our Managers management fee will not be reduced in respect
of any fees payable for any equity investment we may decide to
make in a Legacy Securities or Legacy Loan PPIF managed by an
entity other than our Manager or any of its affiliates.
Emergency
Economic Stabilization Act of 2008 and TARP
On October 3, 2008, President George Bush signed into law
the EESA. The EESA provides the Secretary of the
U.S. Treasury with the authority to establish a Troubled
Asset Relief Program, or TARP, to purchase from financial
institutions up to $700 billion of residential or
commercial mortgages and any securities, obligations or other
instruments that are based on or related to such mortgages, that
in each case was originated or issued on or before
March 14, 2008, as well as any other financial instrument
that the Secretary of the U.S. Treasury, after consultation
with the Chairman of the Board of Governors of the Federal
Reserve System, determines the purchase of which is necessary to
promote financial market stability, upon transmittal of such
determination, in writing, to the appropriate committees of the
U.S. Congress.
Capital
Purchase Program
The Capital Purchase Program, or the CPP, is a voluntary program
designed to encourage U.S. financial institutions to build
capital to increase the flow of financing to
U.S. businesses and consumers and to support the
U.S. economy. Under this program, the U.S. Treasury is
authorized to purchase up to $250 billion of senior
preferred shares in qualifying domestically-controlled banks,
savings associations, and certain bank and savings and loan
holding companies engaged only in financial activities. As of
January 13, 2009, the U.S. Treasury had invested
approximately $192 billion in 258 publicly-traded and
private banking organizations under the CPP.
Targeted
Investment Program
The Targeted Investment Program, or the TIP, is intended to
prevent significant market disruptions that could result from a
loss of confidence in a particular financial institution. The
U.S. Treasury will determine whether a financial
institution is eligible for the program on a case by case basis
based on a number of considerations. As of January 16,
2009, the U.S. Treasury had invested $40 billion in
two banking organizations under the TIP.
Systemically
Significant Failing Institutions Program
The Systemically Significant Failing Institutions Program, or
the SSFIP, is intended to provide stability and prevent
disruption to financial markets that could result from the
failure of a systemically significant institution. The
U.S. Treasury will consider whether an institution is
systemically significant and at substantial risk of failure, and
thereby eligible for the SSFIP, on a case by case basis based on
a number of considerations. As of January 13, 2008, the
U.S. Treasury had invested $40 billion in one
institution under the SSFIP. This institution was an insurance
company and not a bank. However, banks are certainly of the
types of institutions that are eligible for the SSFIP.
Asset
Guarantee Program
The Asset Guarantee Program, or AGP, is designed to provide
guarantees for assets held by systemically significant financial
institutions that face a high risk of losing market confidence
due in large part to a portfolio of distressed or illiquid
assets. The U.S. Treasury will determine the eligibility of
participants and the allocation of resources on a
case-by-case
basis. In a report to Congress, the U.S. Treasury stated
that it may
68
use this program in coordination with a broader guarantee
involving one or more other U.S. government agencies. As of
January 20, 2008, the U.S. Treasury had released no
data about the use of this program.
We believe that the relatively low cost capital infusions and
other assistance made available to banking organizations under
the TARP programs will improve, the functioning of financial
markets which will improve as banks make loans supported by the
capital infusions. We further believe that there is a reasonable
likelihood that banks will deploy at least a portion of the
capital that they receive in the Agency RMBS market, resulting
in narrower Agency RMBS spreads. We anticipate that narrower
spreads on Agency RMBS will be offset in part by improved
financing levels and rates, as overall liquidity improves. While
we anticipate spreads on Agency RMBS and financing spreads will
be positively correlated going forward, there can be no
assurance this will occur. Additionally, the amount of
tightening that can occur in financing levels and advance rates
is limited by the overall low absolute level of short-term
funding rates. Advance rates on repurchase agreement funding
with respect to Agency RMBS generally are approximately 90% to
95% (which means a 5% to 10% haircut), down from 97% (which
means a 3% haircut).
As the banks overall capital positions improve because of
capital infusions under the TARP programs (and the CPP, in
particular), we believe that they will seek to once again deploy
capital through various lending channels, including repurchase
lending.
However, there can be no assurance that the EESA or the TARP
programs will have a beneficial impact on the financial markets,
including on current levels of volatility. To the extent the
market does not respond favorably to the TARP programs or the
TARP programs do not function as intended, our business may not
receive the anticipated positive impact from the legislation. We
cannot predict whether or when the TARP programs will have any
impact and to what extent it will affect our business, results
of operations and financial condition.
Hope
for Homeowners Act of 2008
On July 30, 2008, the Hope for Homeowners Act of 2008, or
the H4H Act, was signed into law. The H4H Act created a new,
temporary, voluntary program within the FHA to back FHA-insured
mortgages to distressed borrowers. The Hope for Homeowners
program, which is effective from October 1, 2008 through
September 30, 2011, will enable certain distressed
borrowers to refinance their mortgages into FHA-insured loans.
Ginnie Mae, which guarantees the payment of principal and
interest on Hope for Homeowners MBS, requires that all loans
under the H4H Act must be pooled only under the Ginnie
Mae II programs multiple issuer type, or MFS. Ginnie
Mae will accept loan packages under the H4H Act to be pooled in
MFS securities with a November 1, 2008 issue date and
thereafter. If a loan in an existing or seasoned pool is
refinanced under this program the prepayment speeds on existing
pools may rise. Depending on whether or not the bond was
purchased at a premium or discount, the yield may be positively
or negatively impacted. Furthermore, the coupons on new pools
generated under this program based on refinanced loans may be
lower potentially negatively impacting our yield on new
opportunities.
Other
Initiatives
Federal
Reserve
During 2008, the Federal Reserve also initiated a number of
other programs aimed at improving broader financial markets,
such as establishing a $1.8 trillion commercial paper funding
facility and a $200 billion facility to finance consumer
asset-backed securities. The U.S. Treasury committed
$20 billion from TARP to support the Federal Reserves
$200 billion consumer facility. In addition, in order to
provide further liquidity to financial institutions, the Federal
Reserve has provided primary dealers with access to the Federal
Reserves discount window and, in instances of distress,
arranged financing for certain holding entities. For example, in
September 2008, the Federal Reserve took action to help American
International Group, or AIG, a large insurance company, avoid
insolvency by providing AIG with an emergency $85 billion
credit facility. By November 2008, AIG needed additional help,
leading the Federal Reserve, in conjunction with the
69
U.S. Treasury, to replace the $85 billion facility
with a revised emergency government assistance package totaling
over $150 billion ($60 billion of which was a credit
facility from the Federal Reserve). We believe that programs
have and will continue to improve short-term credit markets,
including the repurchase financing market. Given the Federal
Reserves actions to date, we believe the Federal Reserve
will remain committed to assuring that short-term credit markets
function efficiently, which, in turn, will reduce our borrowing
costs over time. The Federal Reserve programs are likely to
result in both Agency RMBS spreads tightening and improved
liquidity in this market. The improved liquidity should increase
the availability and attractiveness of repurchase financing, as
banks become more comfortable with their ability to value and,
in the event of default, efficiently liquidate collateral.
On November 25, 2008, the Federal Reserve announced that it
will initiate a program to purchase $100 billion in direct
obligations of Fannie Mae, Freddie Mac and the Federal Home Loan
Banks and $500 billion in mortgage-backed securities backed
by Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve
stated that its actions are intended to reduce the cost and
increase the availability of credit for the purchase of houses,
which in turn should support housing markets and foster improved
conditions in financial markets more generally. The purchases of
direct obligations began during the first week of December 2008,
and the purchases of Agency RMBS began during the first week of
January 2009. The Federal Reserves program to purchase
Agency RMBS could cause an increase in the price of Agency RMBS,
which would negatively impact the net interest margin with
respect to Agency RMBS we expect to purchase.
FDIC
During 2008, the FDIC also initiated programs in an effort to
restore confidence and functioning in the banking system and
attempt to reduce foreclosures through loan modifications.
Specifically, the FDIC adopted the Temporary Liquidity Guarantee
Program, which has two primary components: the Debt Guarantee
Program, by which the FDIC will guarantee the payment of certain
newly issued senior unsecured debt and the Transaction Account
Guarantee, Program by which the FDIC will guarantee up to an
unlimited amount certain transaction accounts bearing no or
minimal interest (e.g. NOW accounts paying no more than 0.50%
interest), until December 31, 2009. The FDIC also raised
the deposit insurance limits to $250,000 up from $100,000
through December 31, 2009. Additionally, in an attempt to
reduce foreclosures, the FDIC encouraged uniform guidelines for
loan modifications, which include reduction of interest rate,
extension of maturity and balance reductions.
Recent
Interagency Coordinated Efforts
The Federal Reserve, U.S. Treasury and FDIC on
January 16, 2009 announced the execution of agreements
under which they would guarantee large pools of assets held by
Citigroup and Bank of America. We believe this action reflects
improved coordination among the principal government agencies
responsible for implementing the U.S. Governments
response to the current financial crisis.
The agreement with Citigroup (a non-binding version of which was
initially announced November 23, 2008) provides loss
protection on an asset pool of approximately $301 billion
of loans and securities backed by residential and commercial
real estate and other such assets, all of which will remain on
Citigroups balance sheet. According to a term sheet
released by Citigroup, the first loss position of
$39.5 billion would be absorbed by Citigroup, the second
loss position would be absorbed 90% by the U.S. Treasury, up to
its advance of $5 billion, and 10% by Citigroup, the third
loss position would be absorbed 90% by FDIC, up to its advance
of $10 billion, and 10% by Citigroup. Additional losses
would be addressed through a loan provided to Citigroup by the
Federal Reserve.
The agreement with Bank of America called for the
U.S. Treasury and FDIC to provide loss protection on an
asset pool of approximately $118 billion of loans,
securities backed by residential and commercial real estate
loans, and other such assets. Under the agreement, the first
loss position of $10 billion would be absorbed by Bank of
America, and the second loss position would be absorbed 90% by
the U.S. Treasury and the FDIC, up to their advance of
$10 billion, and 10% by Bank of America. Additional losses
would be
70
absorbed 10% by Bank of America and the remaining 90% through a
loan provided to Bank of America by the Federal Reserve.
Critical
Accounting Policies
Our financial statements will be prepared in accordance with
GAAP which requires the use of estimates and assumptions that
involve the exercise of judgment and use of assumptions as to
future uncertainties. In accordance with SEC guidance, the
following discussion addresses the accounting policies that we
will apply based on our expectation of our initial operations.
Our most critical accounting policies will involve decisions and
assessments that could affect our reported assets and
liabilities, as well as our reported revenues and expenses. We
believe that all of the decisions and assessments upon which our
financial statements will be based will be reasonable at the
time made and based upon information available to us at that
time. We will rely on independent pricing of our assets at each
quarters end to arrive at what we believe to be reasonable
estimates of fair market value. We have identified what we
believe will be our most critical accounting policies to be the
following:
Repurchase
Agreements
We will finance the acquisition of Agency RMBS for our
investment portfolio through the use of repurchase agreements.
Repurchase agreements will be treated as collateralized
financing transactions and will be carried at primarily their
contractual amounts, including accrued interest, as specified in
the respective agreements.
In instances where we acquire Agency RMBS through repurchase
agreements with the same counterparty from whom the Agency RMBS
were purchased, we will account for the purchase commitment and
repurchase agreement on a net basis and record a forward
commitment to purchase Agency RMBS as a derivative instrument if
the transaction does not comply with the criteria in FASB Staff
Position, or FSP,
FAS 140-3,
Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions, or FSP
FAS 140-3,
for gross presentation. If the transaction complies with the
criteria for gross presentation in FSP
FAS 140-3,
we will record the assets and the related financing on a gross
basis in our statements of financial condition, and the
corresponding interest income and interest expense in our
statements of operations and comprehensive income (loss). Such
forward commitments are recorded at fair value with subsequent
changes in fair value recognized in income. Additionally, we
will record the cash portion of our investment in Agency RMBS as
a mortgage related receivable from the counterparty on our
balance sheet.
Fair
Value Measurements
The FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS 157. SFAS 157 defines fair
value, establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements.
SFAS 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy
(levels 1, 2, and 3, as defined). Additionally, companies
are required to provide enhanced disclosure regarding
instruments in the level 3 category (which require
significant management judgment), including a reconciliation of
the beginning and ending balances separately for each major
category of assets and liabilities.
Additionally, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of
SFAS No. 115, or SFAS 159. SFAS 159
permits entities to choose to measure many financial instruments
and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected
will be recognized in earnings at each subsequent reporting date.
Securities
Held for Investment
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, or SFAS 115, requires that at the time of
purchase, we designate a security as either held-to-maturity,
available-for-sale, or trading, depending on our ability and
intent to hold such security to maturity.
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Securities available-for-sale will be reported at fair value,
while securities held-to-maturity will be reported at amortized
cost. Although we generally intend to hold most of our RMBS and
CMBS until maturity, we may, from time to time, sell any of our
RMBS and CMBS as part of our overall management of our
investment portfolio.
All securities classified as available-for-sale will be reported
at fair value, based on market prices from third-party sources
when available, with unrealized gains and losses excluded from
earnings and reported as a separate component of
stockholders equity. We do not have an investment
portfolio at this time.
Our Manager will evaluate securities for other-than-temporary
impairment at least on a quarterly basis, and more frequently
when economic or market conditions warrant such evaluation. The
determination of whether a security is other-than-temporarily
impaired will involve judgments and assumptions based on
subjective and objective factors. Consideration will be given to
(1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition
and near-term prospects of recovery in fair value of the agency
security, and (3) our intent and ability to retain our
investment in the RMBS or CMBS for a period of time sufficient
to allow for any anticipated recovery in fair value.
Investments with unrealized losses will not be considered
other-than-temporarily impaired if we have the ability and
intent to hold the investments for a period of time, to maturity
if necessary, sufficient for a forecasted market price recovery
up to or beyond the cost of the investments. Unrealized losses
on securities that are considered other-than-temporary, as
measured by the amount of the difference between the
securities cost basis and their fair value, will be
recognized in earnings as unrealized losses and the cost basis
of the securities will be adjusted.
Interest
Income Recognition
Interest income on available-for-sale securities will be
recognized over the life of the investment using the effective
interest method. Interest income on mortgage-backed securities
is recognized using the effective interest method as described
by SFAS No. 91, Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases, or SFAS 91, for
securities of high credit quality and Emerging Issues Task Force
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets, or
EITF 99-20,
for all other securities.
Under SFAS 91 and
EITF 99-20,
management will estimate, at the time of purchase, the future
expected cash flows and determine the effective interest rate
based on these estimated cash flows and our purchase price. As
needed, these estimated cash flows will be updated and a revised
yield computed based on the current amortized cost of the
investment. In estimating these cash flows, there will be a
number of assumptions that will be subject to uncertainties and
contingencies. These include the rate and timing of principal
payments (including prepayments, repurchases, defaults and
liquidations), the pass through or coupon rate and interest rate
fluctuations. In addition, interest payment shortfalls due to
delinquencies on the underlying mortgage loans have to be
judgmentally estimated. These uncertainties and contingencies
are difficult to predict and are subject to future events that
may impact managements estimates and our interest income.
Security transactions will be recorded on the trade date.
Realized gains and losses from security transactions will be
determined based upon the specific identification method and
recorded as gain (loss) on sale of available-for-sale securities
and loans held for investment in the statement of income.
We will account for accretion of discounts or premiums on
available-for-sale securities and real estate loans using the
effective interest yield method. Such amounts will be included
as a component of interest income in the income statement.
Residential
and Commercial Real Estate Loans Fair
Value
Residential and commercial real estate loans at fair value are
loans where we will elect the fair value option under
SFAS 159. Interest will be recognized as revenue when
earned and deemed collectible or until a
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loan becomes more than 90 days past due. Changes in fair
value (gains and losses) will be reported through our
consolidated statements of (loss) income.
Residential
and Commercial Real Estate Loans
Held-for-Sale
Residential and commercial real estate loans held-for-sale are
loans that we will be marketing for sale to independent third
parties. These loans are carried at the lower of their cost or
fair value in accordance with SFAS No. 65,
Accounting for Certain Mortgage Banking Activities
as measured on an individual basis. Interest will be recognized
as revenue when earned and deemed collectible or until a loan
becomes more than 90 days past due. If fair value is lower
than amortized cost, changes in fair value (gains and losses)
are reported through our consolidated statements of (loss)
income.
Residential
and Commercial Real Estate Loans
Held-for-Investment
Real estate loans held-for-investment will be carried at their
unpaid principal balances adjusted for net unamortized premiums
or discounts and net of any allowance for credit losses.
Interest will be recognized as revenue when earned and deemed
collectible or until a loan becomes more than 90 days past
due. Pursuant to SFAS 91, we will use the interest method
to determine an effective yield and to amortize the premium or
discount on real estate loans held-for-investment.
Real
Estate Loans Allowance for Loan Losses
For real estate loans classified as held-for-investment, we will
establish and maintain an allowance for loan losses based on our
estimate of credit losses inherent in our loan portfolios. To
calculate the allowance for loan losses, we will assess inherent
losses by determining loss factors (defaults, the timing of
defaults, and loss severities upon defaults) that can be
specifically applied to each of the consolidated loans or pool
of loans.
We will follow the guidelines of SEC Staff Accounting
Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation, SFAS No. 5,
Accounting for Contingencies,
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures in setting the allowance for
loan losses.
We will consider the following factors in determining the
allowance for loan losses:
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Ongoing analyses of loans, including, but not limited to, the
age of loans, underwriting standards, business climate, economic
conditions, geographical considerations, and other observable
data;
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Historical loss rates and past performance of similar loans;
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Relevant environmental factors;
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Relevant market research and publicly available third-party
reference loss rates;
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Trends in delinquencies and charge-offs;
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Effects and changes in credit concentrations;
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Information supporting a borrowers ability to meet
obligations;
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Ongoing evaluations of fair values of collateral using current
appraisals and other valuations; and,
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Discounted cash flow analyses.
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Accounting
for Derivative Financial Instruments
Our policies permit us to enter into derivative contracts,
including interest rate swaps, interest rate caps and interest
rate floors, as a means of mitigating our interest rate risk. We
intend to use interest rate derivative financial instruments to
mitigate interest rate risk rather than to enhance returns.
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We will account for derivative financial instruments in
accordance with SFAS 133 Accounting for Derivative
Instruments and Hedging Activities, or SFAS 133, as
amended and interpreted. SFAS 133 requires an entity to
recognize all derivatives as either assets or liabilities in the
balance sheets and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either
other comprehensive income in stockholders equity until
the hedged item is recognized in earnings or net income
depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the
hedging activity.
In the normal course of business, we may use a variety of
derivative financial instruments to manage or hedge interest
rate risk. These derivative financial instruments must be
effective in reducing our interest rate risk exposure in order
to qualify for hedge accounting. When the terms of an underlying
transaction are modified, or when the underlying hedged item
ceases to exist, all changes in the fair value of the instrument
are marked-to-market with changes in value included in net
income for each period until the derivative instrument matures
or is settled. Any derivative instrument used for risk
management that does not meet the hedging criteria is
marked-to-market with the changes in value included in net
income.
Derivatives will be used for hedging purposes rather than
speculation. We will rely on quotations from a third party to
determine these fair values. If our hedging activities do not
achieve our desired results, our reported earnings may be
adversely affected.
Income
Taxes
We intend to elect and qualify to be taxed as a REIT, commencing
with our taxable year ending December 31, 2009.
Accordingly, we will generally not be subject to corporate
U.S. federal or state income tax to the extent that we make
qualifying distributions to our stockholders, and provided that
we satisfy on a continuing basis, through actual investment and
operating results, the REIT requirements including certain
asset, income, distribution and stock ownership tests. If we
fail to qualify as a REIT, and do not qualify for certain
statutory relief provisions, we will be subject to
U.S. federal, state and local income taxes and may be
precluded from qualifying as a REIT for the subsequent four
taxable years following the year in which we lost our REIT
qualification. Accordingly, our failure to qualify as a REIT
could have a material adverse impact on our results of
operations and amounts available for distribution to our
stockholders.
The dividends paid deduction of a REIT for qualifying dividends
to its stockholders is computed using our taxable income as
opposed to net income reported on the financial statements.
Taxable income, generally, will differ from net income reported
on the financial statements because the determination of taxable
income is based on tax provisions and not financial accounting
principles.
We may elect to treat certain of our subsidiaries as TRSs. In
general, a TRS of ours may hold assets and engage in activities
that we cannot hold or engage in directly and generally may
engage in any real estate or non-real estate-related business. A
TRS is subject to U.S. federal, state and local corporate
income taxes.
While a TRS will generate net income, a TRS can declare
dividends to us which will be included in our taxable income and
necessitate a distribution to our stockholders. Conversely, if
we retain earnings at a TRS level, no distribution is required
and we can increase book equity of the consolidated entity.
Share-Based
Compensation
The Company will follow SFAS No. 123R,
Share-Based Payments, or SFAS 123(R), with
regard to its stock option plan. SFAS 123(R) covers a wide
range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
SFAS 123 (R) requires that compensation cost relating to
share-based payment transactions be recognized in financial
statements. The cost is measured based on the fair value of the
equity or liability instruments issued.
The Company intends to adopt an equity incentive plan under
which its independent directors are eligible to receive annual
nondiscretionary awards of nonqualified stock options. The board
of directors may make
74
appropriate adjustments to the number of shares available for
awards and the terms of outstanding awards under the stock
option plan to reflect any change in the Companys capital
structure.
Recent
Accounting Pronouncements
In March 2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities, an
amendment to SFAS 133, or SFAS 161. This new
standard requires enhanced disclosures for derivative
instruments, including those used in hedging activities. It is
effective for fiscal years and interim periods beginning after
November 15, 2008 and will be applicable to the Company in
the first quarter of fiscal 2009. The Company is assessing the
potential impact that the adoption of SFAS 161 may have on
its financial statements.
The FASB issued FSP
FAS 140-3
relating to SFAS 140, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions, or
SFAS 140, to address questions where assets purchased from
a particular counterparty and financed through a repurchase
agreement with the same counterparty can be considered and
accounted for as separate transactions. Currently, we are still
evaluating our ability to record such assets and the related
financing on a gross basis in our statements of financial
condition, and the corresponding interest income and interest
expense in our statements of operations and comprehensive income
(loss). For assets representing available-for-sale investment
securities, as in our case, any change in fair value will be
reported through other comprehensive income under
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, with the exception of
impairment losses, which will be recorded in the statement of
operations and comprehensive (loss) income as realized losses.
FASBs staff position requires that all of the following
criteria be met in order to continue the application of
SFAS No. 140 as described above: (1) the initial
transfer of repurchase financing cannot be contractually
contingent; (2) the repurchase financing entered into
between the parties provides full recourse to the transferee,
and the repurchase price is fixed; (3) the financial asset
has an active market, and the transfer is executed at market
rates; and (4) the repurchase agreement and financial asset
do not mature simultaneously.
On October 10, 2008, FASB issued
FSP 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, or
FSP 157-3,
in response to the deterioration of the credit markets. This FSP
provides guidance clarifying how SFAS 157 should be applied
when valuing securities in markets that are not active. The
guidance provides an illustrative example that applies the
objectives and framework of SFAS 157, utilizing
managements internal cash flow and discount rate
assumptions when relevant observable data does not exist. It
further clarifies how observable market information and market
quotes should be considered when measuring fair value in an
inactive market. It reaffirms the notion of fair value as an
exit price as of the measurement date and that fair value
analysis is a transactional process and should not be broadly
applied to a group of assets.
FSP 157-3
is effective upon issuance including prior periods for which
financial statements have not been issued.
FSP 157-3
does not have a material effect on the fair value of its assets
as the Company intends to continue to hold assets that can be
valued via level 1 and level 2 criteria, as defined
under SFAS No. 157.
Pursuant to Section 133 of the EESA, the SEC has commenced
a study of the impact of the fair value or
mark-to-market accounting standards, including, but
not limited to: (1) the effects of such accounting
standards on a financial institutions balance sheet;
(2) the impacts of such accounting on bank failures in
2008; (3) the impact of such standards on the quality of
financial information available to investors; (4) the
process used by the Financial Accounting Standards Board in
developing accounting standards; (5) the advisability and
feasibility of modification to such standards; and
(6) alternative accounting standards to those provided in
SFAS 157. The study, which is being conducted in
consultation with the Secretary of the U.S. Treasury and the
Board of Governors of the Federal Reserve System, is expected to
be completed before the end of the
90-day
period beginning on the date of the enactment of this Act, which
is October 3, 2008.
On December 11, 2008, the FASB issued
FSP 140-4
and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities. The FSP increases
disclosures for public companies about securitizations,
asset-backed financings and variable interest entities. The FSP
is effective for reporting periods that end after
December 15, 2008.
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In January 2009, the FASB issued FASB Staff Position
No. EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20
or FSP
EITF 99-20-1,
which became effective for us on December 31, 2008. FSP
EITF 99-20-1
revises the impairment guidance provided by
EITF 99-20
for beneficial interests to make it consistent with the
requirements of FASB Statement No. 115 for determining
whether an impairment of other debt and equity securities is
other-than-temporary. FSP
EITF 99-20-1
eliminates the requirement that a holders best estimate of
cash flows be based upon those that a market participant would
use. Instead,
FSP 99-20-1
requires that an other-than-temporary impairment be recognized
when it is probable that there has been an adverse change in the
holders estimated cash flows. FSP
EITF 99-20-1
did not have a material impact on our financial statements.
On April 9, 2009, the FASB issued three FSPs intended to
provide additional application guidance and enhance disclosures
regarding fair value measurements and impairments of securities.
FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that Are Not Orderly or,
FSP 157-4,
provides guidelines for making fair value measurements more
consistent with the principles presented in FASB Statement
No. 157. FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments or
FSP 107-1,
enhances consistency in financial reporting by increasing the
frequency of fair value disclosures. FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairments, or
FSP 115-2,
provides additional guidance designed to create greater clarity
and consistency in accounting for and presenting impairment
losses on securities.
FSP 157-4
addresses the measurement of fair value of financial assets when
there is no active market or where the price inputs being used
could be indicative of distressed sales.
FSP 157-4
reaffirms the definition of fair value already reflected in FASB
Statement No. 157, which is the price that would be paid to
sell an asset in an orderly transaction (as opposed to a
distressed or forced transaction) at the measurement date under
current market conditions.
FSP 157-4
also reaffirms the need to use judgment to ascertain if a
formerly active market has become inactive and in determining
fair values when markets have become inactive.
FSP 107-1
was issued to improve the fair value disclosures for any
financial instruments that are not currently reflected on the
balance sheet of companies at fair value. Prior to issuing
FSP 107-1,
fair values of these assets and liabilities were only disclosed
once a year.
FSP 107-1
now requires these disclosures on a quarterly basis, providing
qualitative and quantitative information about fair value
estimates for all those financial instruments not measured on
the balance sheet at fair value.
FSP 115-2
on other-than-temporary impairments is intended to improve the
consistency in the timing of impairment recognition, and provide
greater clarity to investors about the credit and noncredit
components of impaired debt securities that are not expected to
be sold.
FSP 115-2
requires increased and more timely disclosures sought by
investors regarding expected cash flows, credit losses, and an
aging of securities with unrealized losses.
FSP 157-4,
FSP 107-1
and
FSP 115-2
are effective for interim and annual periods ending after
June 15, 2009, and provide for early adoption for the
interim and annual periods ending after March 15, 2009. All
three FSPs must be adopted in conjunction with each other. We
will adopt all three FSPs for the interim period ending
June 30, 2009.
Results
of Operations
As of the date of this prospectus, we have not commenced any
significant operations because we are in our organization stage.
We will not commence any significant operations until we have
completed this offering. We are not aware of any material trends
or uncertainties, other than economic conditions affecting
mortgage loans, MBS and real estate, generally, that may
reasonably be expected to have a material impact, favorable or
unfavorable, on revenues or income from the acquisition of real
estate-related investments, other than those referred to in this
prospectus.
76
Liquidity
and Capital Resources
Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to pay dividends,
fund investments and other general business needs. Our primary
sources of funds for liquidity will consist of the net proceeds
from this offering and the concurrent private placements, net
cash provided by operating activities, cash from repurchase
agreements and other financing arrangements and future issuances
of common equity, preferred equity, convertible securities,
trust preferred
and/or debt
securities. To the extent available to us, we may seek to also
finance our assets under, and may otherwise participate in,
programs established by the U.S. Government such as the
TALF and, if available, we may make investments in funds that
receive financing under the PPIP. See Business
Our Financing Strategy.
We anticipate that, upon repayment of each borrowing under a
repurchase agreement, we will use the collateral immediately for
borrowing under a new repurchase agreement. We have not at the
present time entered into any commitment agreements under which
the lender would be required to enter into new repurchase
agreements during a specified period of time.
Under repurchase agreements, we may be required to pledge
additional assets to our repurchase agreement counterparties
(lenders) in the event that the estimated fair value of the
existing pledged collateral under such agreements declines and
such lenders demand additional collateral which may take the
form of additional securities or cash. Generally, repurchase
agreements contain a financing rate, term and trigger levels for
margin calls and haircuts depending on the types of collateral
and the counterparties involved. If the estimated fair value of
investment securities increase due to changes in market interest
rates or market factors, lenders may release collateral back to
us. Specifically, margin calls result from a decline in the
value of the investments securing our repurchase agreements,
prepayments on the mortgages securing such investments and from
changes in the estimated fair value of such investments
generally due to principal reduction of such investments from
scheduled amortization and resulting from changes in market
interest rates and other market factors. Counterparties also may
choose to increase haircuts based on credit evaluations of our
company
and/or the
performance of the bonds in question. We believe that the
current levels of haircuts are approximately 5% on fixed-rate
Agency RMBS that are mortgage pass-through certificates,
approximately 5% to 7% on adjustable-rate or hybrid Agency RMBS
that are mortgage pass-through certificates and approximately
10% on Agency RMBS that are CMOs. Trigger levels for margin
calls generally vary from $250,000 to $1 million at the
discretion of the counterparty. The recent disruptions in the
financial and credit markets have resulted in increased
volatility in these levels, and we expect further changes as
market conditions continue to change. Should prepayment speeds
on the mortgages underlying our investments or market interest
rates suddenly increase, margin calls on our repurchase
agreements could result, causing an adverse change in our
liquidity position.
Invesco Aim Advisors has been active in the repurchase agreement
lending market since 1980 and currently has master repurchase
agreements in place with a number of counterparties. At
March 31, 2009, Invesco Aim Advisors had provided
repurchase agreement financing to these counterparties equal to
approximately $20.7 billion.
To the extent available to us, we may finance our non-Agency
RMBS and CMBS portfolios with financings under the TALF or with
private financing sources. If available, we may also finance our
investments in certain CMBS and non-Agency RMBS by contributing
capital to one or more of the Legacy Securities PPIFs that
receive financing under the PPIP. We also expect to focus our
residential and commercial mortgage loan acquisitions through
our investments in Legacy Loan PPIFs on the purchase of loan
portfolios made available to us under the Legacy Loan Program,
to the extent available to us. There can be no assurance that we
will be eligible to participate in these funds or programs or,
if we are eligible, that we will be able to utilize them
successfully or at all.
We believe these identified sources of funds will be adequate
for purposes of meeting our short-term (within one year)
liquidity and long-term liquidity needs. Our short-term and
long-term liquidity needs include funding future investments,
operating costs and distributions to our stockholders. Our
ability to meet our long-term liquidity and capital resource
requirements may be subject to additional financing. A number of
financial institutions, including potential and current
repurchase agreement lenders with whom we are speaking, have
77
tightened their lending standards and reduced their lending
overall. If we are unable to obtain or renew our sources of
financing or unable to obtain them on attractive terms, it may
have an adverse effect on our business and results of operations.
To qualify as a REIT, we must distribute annually at least 90%
of our taxable income. These distribution requirements limit our
ability to retain earnings and thereby replenish or increase
capital for operations.
Contractual
Obligations and Commitments
Prior to the completion of this offering, we will enter into a
management agreement with our Manager. Our Manager will be
entitled to receive a management fee and the reimbursement of
certain expenses. The management fee will be calculated and
payable quarterly in arrears in an amount equal to 1.50% of our
stockholders equity, per annum, calculated and payable
quarterly in arrears. Our Manager will use the proceeds from its
management fee in part to pay compensation to its officers and
personnel who, notwithstanding that certain of them also are our
officers, will receive no cash compensation directly from us. In
addition, we expect to enter into a license agreement with
Invesco Holding Company Limited relating to the use of the
Invesco name and logo.
Under our equity incentive plan, our compensation committee
appointed by the board to administer the plan (or our board of
directors, if no such committee is designated by the board) is
authorized to approve grants of equity-based awards to our
directors and executive officers, our Manager, its personnel and
its affiliates as well as certain other service providers. To
date, our board of directors has not approved any grants of
equity awards. See Management Equity Incentive
Plan.
We expect to enter into certain contracts that may contain a
variety of indemnification obligations, principally with
brokers, underwriters and counterparties to repurchase
agreements. The maximum potential future payment amount we could
be required to pay under these indemnification obligations may
be unlimited.
Off-Balance
Sheet Arrangements
As of March 31, 2009, we had no off-balance sheet
arrangements.
Dividends
We intend to make regular quarterly distributions to holders of
our common stock. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its
REIT taxable income, without regard to the deduction for
dividends paid and excluding net capital gains, and that it pay
tax at regular corporate rates to the extent that it annually
distributes less than 100% of its net taxable income. We intend
to pay regular quarterly dividends to our stockholders in an
amount equal to our net taxable income. Before we pay any
dividend, whether for U.S. federal income tax purposes or
otherwise, we must first meet both our operating requirements
and debt service on our repurchase agreements and other debt
payable. If our cash available for distribution is less than our
net taxable income, we could be required to sell assets or
borrow funds to make cash distributions, or we may make a
portion of the required distribution in the form of a taxable
stock distribution or distribution of debt securities.
Inflation
Virtually all of our assets and liabilities will be interest
rate sensitive in nature. As a result, interest rates and other
factors influence our performance far more so than does
inflation. Changes in interest rates do not necessarily
correlate with inflation rates or changes in inflation rates.
Our financial statements are prepared in accordance with GAAP,
and our distributions will be determined by our board of
directors consistent with our obligation to distribute to our
stockholders at least 90% of our net taxable income on an annual
basis in order to maintain our REIT qualification; in each case,
our activities and balance sheet are measured with reference to
historical cost
and/or fair
market value without considering inflation.
78
Quantitative
and Qualitative Disclosures About Market Risk
The primary components of our market risk are related to
interest rate, prepayment and market value risk. While we do not
seek to avoid risk completely, we believe the risk can be
quantified from historical experience and seek to actively
manage that risk, to earn sufficient compensation to justify
taking those risks and to maintain capital levels consistent
with the risks we undertake.
Interest
Rate Risk
Interest rate risk is highly sensitive to many factors,
including governmental monetary and tax policies, domestic and
international economic and political considerations, and other
factors beyond our control.
We will be subject to interest rate risk in connection with our
investments and our repurchase agreements. Our repurchase
agreements will typically be of limited duration will be
periodically refinanced at current market rates. We intend to
mitigate this risk through utilization of derivative contracts,
primarily interest rate swap agreements, interest rate caps and
interest rate floors.
Interest
Rate Effect on Net Interest Income
Our operating results will depend in large part on differences
between the yields earned on our investments and our cost of
borrowing and interest rate hedging activities. Most of our
repurchase agreements will provide financing based on a floating
rate of interest calculated on a fixed spread over LIBOR. The
fixed spread will vary depending on the type of underlying asset
which collateralizes the financing. Accordingly, the portion of
our portfolio which consists of floating interest rate assets
will be match-funded utilizing our expected sources of
short-term financing, while our fixed interest rate assets will
not be match-funded. During periods of rising interest rates,
the borrowing costs associated with our investments tend to
increase while the income earned on our fixed interest rate
investments may remain substantially unchanged. This will result
in a narrowing of the net interest spread between the related
assets and borrowings and may even result in losses. Further,
during this portion of the interest rate and credit cycles,
defaults could increase and result in credit losses to us, which
could adversely affect our liquidity and operating results. Such
delinquencies or defaults could also have an adverse effect on
the spread between interest-earning assets and interest-bearing
liabilities.
Hedging techniques are partly based on assumed levels of
prepayments of our RMBS. If prepayments are slower or faster
than assumed, the life of the RMBS will be longer or shorter,
which would reduce the effectiveness of any hedging strategies
we may use and may cause losses on such transactions. Hedging
strategies involving the use of derivative securities are highly
complex and may produce volatile returns.
Interest
Rate Effects on Fair Value
Another component of interest rate risk is the effect changes in
interest rates will have on the market value of the assets we
acquire. We will face the risk that the market value of our
assets will increase or decrease at different rates than those
of our liabilities, including our hedging instruments.
We will primarily assess our interest rate risk by estimating
the duration of our assets and the duration of our liabilities.
Duration essentially measures the market price volatility of
financial instruments as interest rates change. We generally
calculate duration using various financial models and empirical
data. Different models and methodologies can produce different
duration numbers for the same securities.
It is important to note that the impact of changing interest
rates on fair value can change significantly when interest rates
change materially. Therefore, the volatility in the fair value
of our assets could increase significantly when interest rates
change materially. In addition, other factors impact the fair
value of our interest rate-sensitive investments and hedging
instruments, such as the shape of the yield curve, market
expectations as to future interest rate changes and other market
conditions. Accordingly, changes in actual interest rates may
have a material adverse effect on us.
Prepayment
Risk
As we receive prepayments of principal on these investments,
premiums paid on such investments will be amortized against
interest income. In general, an increase in prepayment rates
will accelerate the amortization
79
of purchase premiums, thereby reducing the interest income
earned on the investments. Conversely, discounts on such
investments are accreted into interest income. In general, an
increase in prepayment rates will accelerate the accretion of
purchase discounts, thereby increasing the interest income
earned on the investments.
Extension
Risk
Our Manager will compute the projected weighted-average life of
our investments based on assumptions regarding the rate at which
the borrowers will prepay the underlying mortgages. In general,
when a fixed-rate or hybrid adjustable-rate security is acquired
with borrowings, we may, but are not required to, enter into an
interest rate swap agreement or other hedging instrument that
effectively fixes our borrowing costs for a period close to the
anticipated average life of the fixed-rate portion of the
related assets. This strategy is designed to protect us from
rising interest rates, because the borrowing costs are fixed for
the duration of the fixed-rate portion of the related target
asset.
However, if prepayment rates decrease in a rising interest rate
environment, the life of the fixed-rate portion of the related
assets could extend beyond the term of the swap agreement or
other hedging instrument. This could have a negative impact on
our results from operations, as borrowing costs would no longer
be fixed after the end of the hedging instrument, while the
income earned on the hybrid adjustable-rate assets would remain
fixed. This situation may also cause the market value of our
hybrid adjustable-rate assets to decline, with little or no
offsetting gain from the related hedging transactions. In
extreme situations, we may be forced to sell assets to maintain
adequate liquidity, which could cause us to incur losses.
Market
Risk
Market
Value Risk
Our available-for-sale securities will be reflected at their
estimated fair value with unrealized gains and losses excluded
from earnings and reported in other comprehensive income
pursuant to SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities. The estimated fair value of these
securities fluctuates primarily due to changes in interest rates
and other factors. Generally, in a rising interest rate
environment, the estimated fair value of these securities would
be expected to decrease; conversely, in a decreasing interest
rate environment, the estimated fair value of these securities
would be expected to increase.
Real
Estate Risk
Residential and commercial property values are subject to
volatility and may be affected adversely by a number of factors,
including, but not limited to: national, regional and local
economic conditions (which may be adversely affected by industry
slowdowns and other factors); local real estate conditions (such
as an oversupply of housing); changes or continued weakness in
specific industry segments; construction quality, age and
design; demographic factors; and retroactive changes to building
or similar codes. In addition, decreases in property values
reduce the value of the collateral and the potential proceeds
available to a borrower to repay our loans, which could also
cause us to suffer losses.
Credit
Risk
We believe our investment strategy will generally keep our
credit losses and financing costs low. However, we retain the
risk of potential credit losses on all of the residential and
commercial mortgage loans, as well as the loans underlying the
non-Agency RMBS and CMBS we hold. We seek to manage this risk
through our pre-acquisition due diligence process and through
use of non-recourse financing which limits our exposure to
credit losses to the specific pool of mortgages that are subject
to the non-recourse financing. In addition, with respect to any
particular target asset, our Managers investment team
evaluates, among other things, relative valuation, supply and
demand trends, shape of yield curves, prepayment rates,
delinquency and default rates, recovery of various sectors and
vintage of collateral.
80
Risk
Management
To the extent consistent with maintaining our REIT
qualification, we will seek to manage risk exposure to protect
our investment portfolio against the effects of major interest
rate changes. We generally seek to manage this risk by:
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monitoring and adjusting, if necessary, the reset index and
interest rate related to our target assets and our financings;
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attempting to structure our financing agreements to have a range
of different maturities, terms, amortizations and interest rate
adjustment periods;
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using hedging instruments, primarily interest rate swap
agreements but also financial futures, options, interest rate
cap agreements, floors and forward sales to adjust the interest
rate sensitivity of our target assets and our
borrowings; and
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actively managing, on an aggregate basis, the interest rate
indices, interest rate adjustment periods, and gross reset
margins of our target assets and the interest rate indices and
adjustment periods of our financings.
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81
BUSINESS
Our
Company
We are a newly-formed Maryland corporation focused on investing
in, financing and managing residential and commercial
mortgage-backed securities and mortgage loans. We will seek to
invest in Agency RMBS, non-Agency RMBS, CMBS and residential and
commercial mortgage loans. We anticipate financing our Agency
RMBS through traditional repurchase agreement financing. In
addition, to the extent available to us, we may seek to finance
our investments in CMBS and non-Agency RMBS with financings
under TALF, or with private financing sources. If available, we
may also finance our investments in certain CMBS and non-Agency
RMBS by contributing capital to one or more of the Legacy
Securities PPIFs, that receive financing under PPIP, and our
investments in certain legacy commercial and residential
mortgage loans by contributing capital to one or more Legacy
Loan PPIFs, that receive such funding or through private
financing sources. Legacy Securities PPIFs and Legacy Loan PPIFs
may be established and managed by our Manager or one of its
affiliates or by unaffiliated third parties; however, our
Manager or its affiliates may only establish a Legacy Securities
PPIF if their application to serve as an investment manager of
this type of PPIP fund is accepted by the U.S. Treasury. To
the extent we pay any fees to our Manager or any of its
affiliates in connection with any PPIF, our Manager has agreed
to reduce the management fee payable by us under the management
agreement (but not below zero) in respect of any equity
investment we may decide to make in any PPIF managed by our
Manager or any of its affiliates by the amount of the fees
payable to our Manager or its affiliates under the PPIF with
regard to our equity investment.
We will be externally managed and advised by our Manager, an
SEC-registered investment adviser and indirect wholly owned
subsidiary of Invesco. Invesco is a leading independent global
investment management company with $348.2 billion in assets
under management as of March 31, 2009. Our Manager will
draw upon the expertise of Invescos Worldwide Fixed Income
investment team of 114 investment professionals operating in six
cities, across four countries, with approximately
$157 billion in securities under management and Invesco
Real Estates 219 employees operating in
13 cities across eight countries with over $20 billion
in private and public real estate assets under management. With
over 25 years of experience, Invescos teams of
dedicated professionals have developed exceptional track records
across multiple fixed income sectors and asset classes,
including structured securities, such as RMBS, ABS, CMBS, and
leveraged loan portfolios. In addition, the investment team will
draw upon the mortgage market insights of WL Ross,
Invescos distressed investment unit.
Our objective is to provide attractive risk adjusted returns to
our investors over the long term, primarily through dividends
and secondarily through capital appreciation. We intend to
achieve this objective by selectively acquiring target assets to
construct a diversified investment portfolio designed to produce
attractive returns across a variety of market conditions and
economic cycles. We intend to construct a diversified investment
portfolio by focusing on security selection and the relative
value of various sectors within the mortgage market. We intend
to finance our Agency RMBS investments primarily through
short-term borrowings structured as repurchase agreements. To
date, we have signed nine master repurchase agreements with
nine financial institutions, and we are in discussions with
nine additional financial institutions for repurchase
facilities. As described in more detail below, to the extent
available to us, we may seek to finance our non-Agency RMBS,
CMBS and mortgage loan portfolios with attractive non-recourse
term borrowing facilities and equity financing under the TALF or
with private financing sources and, if available, we may make
investments in funds that receive financing under the PPIP that
will be established and managed by our Manager or one of its
affiliates if their application to serve as one of the
investment managers for the Legacy Securities Program is
accepted by the U.S. Treasury.
We will commence operations upon completion of this offering. We
intend to elect and qualify to be taxed as a REIT for
U.S. federal income tax purposes, commencing with our
taxable year ending December 31, 2009. We generally will
not be subject to U.S. federal income taxes on our taxable
income to the extent that we annually distribute all of our net
taxable income to stockholders and maintain our intended
qualification as a REIT. We also intend to operate our business
in a manner that will permit us to maintain our exemption from
registration under the 1940 Act.
82
Our
Manager
We will be externally managed and advised by our Manager.
Pursuant to the terms of the management agreement, our Manager
will provide us with our management team, including our
officers, along with appropriate support personnel. Each of our
officers is an employee of Invesco. We do not expect to have any
employees. Our Manager is not obligated to dedicate any of its
employees exclusively to us, nor is our Manager or its employees
obligated to dedicate any specific portion of its or their time
to our business. Our Manager is at all times subject to the
supervision and oversight of our board of directors and has only
such functions and authority as we delegate to it.
Our Managers Worldwide Fixed Income investment
professionals have extensive experience in performing advisory
services for funds, other investment vehicles, and other managed
and discretionary accounts that focus on investing in Agency and
other RMBS as well as CMBS. As of March 31, 2009, our
Manager managed approximately $177.0 billion of fixed
income and real estate investments, including approximately
$18.8 billion of structured securities, consisting of
approximately $11.0 billion of Agency RMBS,
$3.9 billion of ABS, $2.0 billion of non-Agency RMBS
and $1.9 billion of CMBS. We expect that our Manager will
continue to manage its existing portfolio and provide management
services to its other clients, including affiliates of Invesco.
Neither our Manager nor Invesco has previously managed or
advised a public REIT or managed RMBS or CMBS on a leveraged
basis.
The Invesco Worldwide Fixed Income investment professionals will
benefit from the insight and capabilities of its distressed
investment subsidiary, WL Ross, and Invescos real estate
team.
Our Manager will draw upon the professional experience and
knowledge of the investment team of its WL Ross subsidiary. Over
the last 30 years, WL Ross has sponsored and managed more
than $8.0 billion of distressed equity investments. We will
benefit from WL Ross expertise in security selection,
portfolio management, and portfolio oversight. When combined
with our Managers investment teams experience in
fixed income investing, WL Rosss deep and broad asset
management skills will allow us to draw upon extensive
investment expertise in order to benefit our shareholders.
In addition, WL Ross-sponsored funds have expanded its position
to include the mortgage market through its 2007 investment in
AHMSI, the largest independent
sub-prime
mortgage loan servicer in the United States with an approximate
$108 billion servicing portfolio and more than 547,000
mortgage loans across 50 states. As a major loan servicer,
AHMSI has tremendous insights regarding mortgage market trends,
including prepayment speeds, delinquency rates, default and
severity information, which we intend to capitalize on when
valuing our target assets. Furthermore, WL Ross sponsored funds
have made a strategic investment in Assured Guaranty Ltd., or
AGL, which provides credit enhancement products on debt
securities issued in the public finance, structured finance and
mortgage markets.
Additionally, our Manager will be able to draw upon the
experience and resources of Invescos real estate team,
comprised of approximately 124 investment professionals on the
ground in key investment markets, which has 25 years of
direct real estate investing experience. Our Managers real
estate team will provide us with valuable insights, through its
research and monitoring capabilities, on investments in
residential and commercial properties. With the properties under
management having an aggregate market value of approximately
$22.8 billion as of March 31, 2009, this team is a
leader in the real estate marketplace and will provide us with
residential and commercial property valuations and other
property based information that will be critical in supporting
our Managers assessment of RMBS and CMBS valuations.
Invesco Aim Advisors, an affiliate of our Manager, will serve as
our sub adviser pursuant to an agreement between our Manager and
Invesco Aim Advisors. Invesco Aim Advisors will provide input on
overall trends in short-term financing markets and make specific
recommendations regarding financing of our Agency RMBS. We do
not expect our Manager to provide these services to us directly.
The fees charged by Invesco Aim Advisors shall be paid by our
Manager and shall not constitute a reimbursable expense by our
Manager under the management agreement. We expect that the fees
charged by Invesco Aim Advisors to our Manager will be
substantially similar to the fees Invesco Aim Advisors charges
to its other clients for similar services.
83
We also expect to benefit from our Managers portfolio
management, finance and administration functions, which address
legal, compliance, investor relations and operational matters,
trade allocation and execution, securities valuation, risk
management and information technologies in connection with the
performance of its duties.
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
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., at $20.00 per unit.
Upon completion of this offering and the concurrent private
placement, Invesco, through our Manager, will beneficially own
0.87% of our outstanding common stock (or 0.76% if the
underwriters fully exercise their option to purchase additional
shares). Assuming that all OP units are redeemed for an
equivalent number of shares of our common stock, Invesco,
through the Invesco Purchaser, would beneficially own 15% of our
outstanding common stock upon completion of this offering and
the concurrent private placement (or 13.3% if the underwriters
fully exercise their option to purchase additional shares). The
Invesco Purchaser will agree that, for a period of one year
after the date of this prospectus, it will not, without the
prior written consent of Credit Suisse Securities (USA) LLC and
Morgan Stanley & Co. Incorporated, dispose of or hedge
any of the shares of our common stock or OP units that it
purchases in the concurrent private placement, subject to
certain exceptions and extension in certain circumstances as
described elsewhere in this prospectus.
About
Invesco
Invesco is one of the largest independent global investment
management firms with offices worldwide. As of March 31,
2009, Invesco had 5,122 employees, the majority of whom
were located in North America. Invesco operates under the
Invesco Aim Advisors, Invesco Trimark, Atlantic Trust, Invesco,
Invesco Perpetual, Invesco PowerShares, and WL Ross brands.
Our
Competitive Advantages
We believe that our competitive advantages include the following:
Significant
Experience of Our Manager
The senior management team of our Manager has a long track
record and broad experience in managing residential and
commercial mortgage-related assets through a variety of credit
and interest rate environments and has demonstrated the ability
to generate attractive risk adjusted returns under different
market conditions and cycles. As of March 31, 2009, our
Manager managed approximately $177.0 billion of fixed
income and real estate investments, including approximately
$18.8 billion of structured securities, consisting of
approximately $11.0 billion of Agency RMBS,
$3.9 billion of ABS, $2.0 billion of non-Agency RMBS
and $1.9 billion of CMBS. In addition, our Manager will
benefit from the insight and capabilities of its distressed
investment subsidiary, WL Ross, and Invescos real estate
team. Our Manager will draw upon the professional experience and
knowledge of the investment team of its WL Ross subsidiary and
benefit from WL Ross expertise in security selection,
portfolio management, and portfolio oversight. Our Manager also
will be able to draw upon the experience and resources of
Invescos real estate team, comprised of approximately
124 investment professionals on the ground in key
investment markets, which has 25 years of direct real
estate investing experience. Our Managers real estate team
will provide us with valuable insights, through its research and
monitoring capabilities, on investments in residential and
commercial properties. Through our Managers WL Ross
subsidiary and Invescos real estate team we will also have
access to broad and deep teams of experienced investment
professionals in real estate and distressed investing. Through
these teams, we will have real time access to research and data
on the mortgage and real estate industries. Having in-house
access to these resources and expertise provides us with a
competitive advantage over other companies investing in our
target assets who have less internal resources and expertise.
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Access
to Extensive Repurchase Agreement Financing and Other Strategic
Relationships
An affiliate of our Manager and a
sub-adviser
to us, Invesco Aim Advisors, has been active in the repurchase
agreement lending market since 1980 and currently has master
repurchase agreements in place with a number of counterparties.
At March 31, 2009, Invesco Aim Advisors had provided
repurchase agreement financing to these counterparties equal to
approximately $20.7 billion.
Invesco Aim Advisors has in place a documented process to
mitigate counterparty risk. Our Manager, together with a
dedicated team of professionals at Invesco Aim Advisors pursuant
to a
sub-advisory
agreement between our Manager and Invesco Aim Advisors, follows
this established process. During these volatile times in which a
number of repurchase agreement counterparties have either
defaulted or ceased to exist, we feel that it is critical to
have controls in place that address this recent disruption in
the markets. All repurchase agreement counterparty approval
requests must be submitted to the team of nine professionals at
Invesco Aim Advisors and undergo a rigorous review and approval
process to determine whether the proposed counterparty meets
established criteria. This process involves a credit analysis of
each prospective counterparty to ensure that it meets Invesco
Aim Advisors internal credit risk requirements, a review
of the counterpartys audited financial statements, credit
ratings and clearing arrangements, and a regulatory background
check. In addition, all approved counterparties are monitored on
an ongoing basis by Invesco Aim Advisors credit team and,
if they deem a credit situation to be deteriorating, they have
the ability to restrict or terminate trading with this
counterparty. We do not expect to enter into any hedging
transactions to mitigate any risks associated with our
repurchase agreement counterparties.
Extensive
Strategic Relationships and Experience of our Manager and its
Affiliates
Our Manager and its affiliates, including Invesco Aim Advisors,
maintain extensive long-term relationships with other financial
intermediaries, including primary dealers, leading investment
banks, brokerage firms, leading mortgage originators and
commercial banks. We believe these relationships will enhance
our ability to source, finance and hedge investment
opportunities and, thus, enable us to grow in various credit and
interest rate environments. In addition, we believe the contacts
our Manager and its affiliates (including Invesco Aim Advisors)
have with numerous investment grade derivative and lending
counterparties will assist us in implementing our financing and
hedging strategies.
Disciplined
Investment Approach
We will seek to maximize our risk-adjusted returns through our
Managers disciplined investment approach, which relies on
rigorous quantitative and qualitative analysis. Our Manager will
monitor our overall portfolio risk and evaluate the
characteristics of our investments in our target assets
including, but not limited to, loan balance distribution,
geographic concentration, property type, occupancy, periodic and
lifetime interest rate caps, weighted-average
loan-to-value
and weighted-average credit score. In addition, with respect to
any particular target asset, our Managers investment team
evaluates, among other things, relative valuation, supply and
demand trends, shape of yield curves, prepayment rates,
delinquency and default rules recovery of various sectors and
vintage of collateral. As a newly organized company with no
historical investments, we will build an initial portfolio
consisting of currently priced assets and therefore we will
likely not be negatively impacted by the recent price declines
experienced by many mortgage portfolios. We believe this
strategy and our commitment to capital preservation will provide
us with a competitive advantage when operating in a variety of
market conditions.
Access
to Our Managers Sophisticated Analytical Tools,
Infrastructure and Expertise
We will utilize our Managers proprietary and third-party
mortgage-related security and portfolio management tools to seek
to generate an attractive net interest margin from our
portfolio. We intend to focus on in-depth analysis of the
numerous factors that influence our target assets, including:
(1) fundamental market and sector review; (2) rigorous
cash flow analysis; (3) disciplined security selection;
(4) controlled risk exposure; and (5) prudent balance
sheet management. We will utilize these tools to guide the
hedging strategies developed by our Manager to the extent
consistent with satisfying the requirements for qualification
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as a REIT. In addition, we will use our proprietary technology
management platform called
QTechsm
to monitor investment risk.
QTechsm
collects and stores real-time market data, and integrates
markets performance with portfolio holdings and proprietary risk
models to measure the risk positions in portfolios. This
measurement system portrays overall portfolio risk and its
sources. Through the use of the tools described above, we will
analyze factors that affect the rate at which mortgage
prepayments occur, including changes in the level of interest
rates, directional trends in residential and commercial real
estate prices, general economic conditions, the locations of the
properties securing the mortgage loans and other social and
demographic conditions in order to acquire the target assets
that we believe are undervalued. We believe that sophisticated
analysis of both macro and micro economic factors will enable us
to manage cash flow and distributions while preserving capital.
Our Manager has created and maintains analytical and portfolio
management capabilities to aid in security selection and risk
management. We intend to capitalize on the market knowledge and
ready access to data across our target markets that our Manager
and its affiliates obtain through their established platform. We
will also benefit from our Managers comprehensive finance
and administrative infrastructure, including its risk management
and financial reporting operations, as well as its business
development, legal and compliance teams.
Alignment
of Invesco and Our Managers Interests
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
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., at $20.00 per unit.
Upon completion of this offering and the concurrent private
placement, Invesco, through our Manager, will beneficially own
0.87% of our common stock (or 0.76% if the underwriters fully
exercise their option to purchase additional shares). Assuming
that all OP units are redeemed for an equivalent number of
shares of our common stock, Invesco, through the Invesco
Purchaser, would beneficially own 15% of our outstanding common
stock upon completion of this offering and the concurrent
private placement (or 13.3% if the underwriters fully exercise
their option to purchase additional shares). We believe that the
significant ownership of our common stock by Invesco, through
the Invesco Purchaser, will align Invesco and our Managers
interests with our interests.
Tax
Advantages of REIT Qualification
Assuming that we meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Internal
Revenue Code, we will generally be entitled to a deduction for
dividends that we pay and, therefore, will not be subject to
U.S. federal corporate income tax on our net income that is
distributed currently to our stockholders. This treatment
substantially eliminates the double taxation at the
corporate and stockholder levels that results generally from
investment in a corporation.
Our
Investment Strategy
We will rely on our Managers expertise in identifying
assets within our target assets. Our Managers investment
team has a strong focus on security selection and the relative
value of various sectors within the mortgage markets. We expect
that the investment team will make investment decisions on our
behalf, which will incorporate their views on the economic
environment and the outlook for the mortgage market, including
relative valuation, supply and demand trends, the level of
interest rates, the shape of the yield curve, credit risk,
prepayment rates, financing and liquidity, housing prices,
delinquencies, default rates, recovery of various sectors and
vintage of collateral, subject to maintaining our REIT
qualification and our exemption from registration under the 1940
Act.
Our investment strategy is designed to enable us to:
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build an investment portfolio consisting of Agency RMBS,
non-Agency RMBS, CMBS and mortgage loans that seeks to generate
attractive returns while having a moderate risk profile;
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manage financing, interest, prepayment rate risks and credit
risks;
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capitalize on discrepancies in the relative valuations in the
mortgage market;
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provide regular quarterly distributions to stockholders;
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qualify as a REIT; and
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remain exempt from the requirements of the 1940 Act.
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We may change our investment strategy and policies without a
vote of our stockholders.
We intend to elect and qualify to be taxed as a REIT and to
operate our business so as to be exempt from registration under
the 1940 Act, and therefore we will be required to invest a
substantial majority of our assets in loans secured by mortgages
on real estate and real estate-related assets. See
Operating and Regulatory Structure.
Subject to maintaining our REIT qualification and our 1940 Act
exemption, we do not have any limitations on the amounts we may
invest in our targeted asset class.
Our
Target Assets
Our target assets and the principal assets we expect to acquire
in each are as follows:
Agency
RMBS
Agency RMBS are residential mortgage-backed securities for which
a U.S. Government agency such as Ginnie Mae, or a federally
chartered corporation such as Fannie Mae or Freddie Mac
guarantees payments of principal and interest on the securities.
Payments of principal and interest on Agency RMBS, not the
market value of the securities themselves, are guaranteed. See
Freddie Mac Gold Certificates,
Fannie Mae Certificates and
Ginnie Mae Certificates below.
Agency RMBS differ from other forms of traditional debt
securities, which normally provide for periodic payments of
interest in fixed amounts with principal payments at maturity or
on specified call dates. Instead, Agency RMBS provide for
monthly payments, which consist of both principal and interest.
In effect, these payments are a pass-through of
scheduled and prepaid principal payments and the monthly
interest made by the individual borrowers on the mortgage loans,
net of any fees paid to the issuers, servicers or guarantors of
the securities.
The principal may be prepaid at any time due to prepayments on
the underlying mortgage loans or other assets. These differences
can result in significantly greater price and yield volatility
than is the case with traditional fixed-income securities.
Various factors affect the rate at which mortgage prepayments
occur, including changes in the level and directional trends in
housing prices, interest rates, general economic conditions, the
age of the mortgage loan, the location of the property and other
social and demographic conditions. Generally, prepayments on
Agency RMBS increase during periods of falling mortgage interest
rates and decrease during periods of rising mortgage interest
rates. However, this may not always be the case. We may reinvest
principal repayments at a yield that is higher or lower than the
yield on the repaid investment, thus affecting our net interest
income by altering the average yield on our assets.
However, when interest rates are declining, the value of Agency
RMBS with prepayment options may not increase as much as other
fixed income securities. The rate of prepayments on underlying
mortgages will affect the price and volatility of Agency RMBS
and may have the effect of shortening or extending the duration
of the security beyond what was anticipated at the time of
purchase. When interest rates rise, our holdings of Agency RMBS
may experience reduced returns if the owners of the underlying
mortgages pay off their mortgages slower than anticipated. This
is generally referred to as extension risk.
The types of Agency RMBS described below are collateralized by
either FRMs, ARMs, or hybrid ARMs. FRMs have an interest rate
that is fixed for the term of the loan and do not adjust. The
interest rates on ARMs generally adjust annually (although some
may adjust more frequently) to an increment over a specified
interest
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rate index. Hybrid ARMs have interest rates that are fixed for a
specified period of time (typically three, five, seven or ten
years) and, thereafter, adjust to an increment over a specified
interest rate index. ARMs and hybrid ARMs generally have
periodic and lifetime constraints on how much the loan interest
rate can change on any predetermined interest rate reset date.
Our allocation of our Agency RMBS collateralized by FRMs, ARMs
or hybrid ARMs will depend on various factors including, but not
limited to, relative value, expected future prepayment trends,
supply and demand, costs of hedging, costs of financing,
expected future interest rate volatility and the overall shape
of the U.S. Treasury and interest rate swap yield curves.
We intend to take these factors into account when we make
investments.
In the future our residential portfolio may extend to debentures
that are issued and guaranteed by Freddie Mac or Fannie Mae
or mortgage-backed securities the collateral of which is
guaranteed by Ginnie Mae, Freddie Mac, Fannie Mae or another
federally chartered corporation.
In our Agency RMBS portfolio the types of mortgage pass-through
certificates in which we intend to invest or which comprise CMOs
in which we intend to invest, are described below.
Mortgage
Pass-Through Certificates
Single-family residential mortgage pass-through certificates are
securities representing interests in pools of
mortgage loans secured by residential real property where
payments of both interest and principal, plus pre-paid
principal, on the securities are made monthly to holders of the
securities, in effect passing through monthly
payments made by the individual borrowers on the mortgage loans
that underlie the securities, net of fees paid to the
issuer/guarantor and servicers of the securities.
CMOs
CMOs are securities which are structured from
U.S. Government agency or federally chartered
corporation-backed mortgage pass-through certificates. CMOs
receive monthly payments of principal and interest. CMOs divide
the cash flows which come from the underlying mortgage
pass-through certificates into different classes of securities.
CMOs can have different maturities and different weighted
average lives than the underlying mortgage pass-through
certificates. CMOs can re-distribute the risk characteristics of
mortgage pass-through certificates to better satisfy the demands
of various investor types. These risk characteristics would
include average life variability, prepayments, volatility,
floating versus fixed interest rate and payment and interest
rate risk.
Freddie
Mac Gold Certificates
Freddie Mac is a shareholder-owned, federally-chartered
corporation created pursuant to an act of Congress on
July 24, 1970. The principal activity of Freddie Mac
currently consists of the purchase of mortgage loans or
participation interests in mortgage loans and the resale of the
loans and participations in the form of guaranteed
mortgage-backed securities. Freddie Mac guarantees to each
holder of Freddie Mac gold certificates the timely payment of
interest at the applicable pass-through rate and principal on
the holders pro rata share of the unpaid principal balance
of the related mortgage loans. The obligations of Freddie Mac
under its guarantees are solely those of Freddie Mac and are not
backed by the full faith and credit of the United States.
If Freddie Mac were unable to satisfy these obligations,
distributions to holders of Freddie Mac certificates would
consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, defaults and
delinquencies on the underlying mortgage loans would adversely
affect monthly distributions to holders of Freddie Mac
certificates.
Freddie Mac gold certificates are backed by pools of
single-family mortgage loans or multi-family mortgage loans.
These underlying mortgage loans may have original terms to
maturity of up to 40 years. Freddie Mac certificates may be
issued under cash programs (composed of mortgage loans purchased
from a number of sellers) or guarantor programs (composed of
mortgage loans acquired from one seller in exchange for
certificates representing interests in the mortgage loans
purchased).
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Fannie
Mae Certificates
Fannie Mae is a shareholder-owned, federally-chartered
corporation organized and existing under the Federal National
Mortgage Association Charter Act, created in 1938 and
rechartered in 1968 by Congress as a stockholder-owned company.
Fannie Mae provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. Fannie Mae
guarantees to the registered holder of a certificate that it
will distribute amounts representing scheduled principal and
interest on the mortgage loans in the pool underlying the Fannie
Mae certificate, whether or not received, and the full principal
amount of any such mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually
received. The obligations of Fannie Mae under its guarantees are
solely those of Fannie Mae and are not backed by the full faith
and credit of the United States. If Fannie Mae were unable
to satisfy its obligations, distributions to holders of Fannie
Mae certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly,
defaults and delinquencies on the underlying mortgage loans
would adversely affect monthly distributions to holders of
Fannie Mae.
Fannie Mae certificates may be backed by pools of single-family
or multi-family mortgage loans. The original term to maturity of
any such mortgage loan generally does not exceed 40 years.
Fannie Mae certificates may pay interest at a fixed rate or an
adjustable rate. Each series of Fannie Mae ARM certificates
bears an initial interest rate and margin tied to an index based
on all loans in the related pool, less a fixed percentage
representing servicing compensation and Fannie Maes
guarantee fee. The specified index used in different series has
included the U.S. Treasury Index, the 11th District
Cost of Funds Index published by the Federal Home Loan Bank of
San Francisco, LIBOR and other indices. Interest rates paid
on fully-indexed Fannie Mae ARM certificates equal the
applicable index rate plus a specified number of percentage
points. The majority of series of Fannie Mae ARM certificates
issued to date have evidenced pools of mortgage loans with
monthly, semi-annual or annual interest rate adjustments.
Adjustments in the interest rates paid are generally limited to
an annual increase or decrease of either 1.00% or 2.00% and to a
lifetime cap of 5.00% or 6.00% over the initial interest rate.
Ginnie
Mae Certificates
Ginnie Mae is a wholly owned corporate instrumentality of the
United States within HUD. The National Housing Act of 1934
authorizes Ginnie Mae to guarantee the timely payment of the
principal of and interest on certificates which represent an
interest in a pool of mortgages insured by the FHA or partially
guaranteed by the Department of Veterans Affairs and other loans
eligible for inclusion in mortgage pools underlying Ginnie Mae
certificates. Section 306(g) of the Housing Act provides
that the full faith and credit of the United States is
pledged to the payment of all amounts which may be required to
be paid under any guarantee by Ginnie Mae.
At present, most Ginnie Mae certificates are backed by
single-family mortgage loans. The interest rate paid on Ginnie
Mae certificates may be a fixed rate or an adjustable rate. The
interest rate on Ginnie Mae certificates issued under Ginnie
Maes standard ARM program adjusts annually in relation to
the U.S. Treasury index. Adjustments in the interest rate
are generally limited to an annual increase or decrease of 1.00%
and to a lifetime cap of 5.00% over the initial coupon rate.
We may, in the future, utilize to-be-announced
forward contracts, or TBAs, in order to invest in Agency RMBS.
Pursuant to these TBAs, we would agree to purchase, for future
delivery, Agency RMBS with certain principal and interest terms
and certain types of underlying collateral, but the particular
Agency RMBS to be delivered would not be identified until
shortly before the TBA settlement date. Our ability to purchase
Agency RMBS through TBAs may be limited by the 75% asset test
applicable to REITs. See U.S. Federal Income Tax
Considerations Asset Tests and
U.S. Federal Income Tax Considerations
Gross Income Tests.
Non-Agency
RMBS
Non-Agency RMBS are residential mortgage-backed securities that
are not issued or guaranteed by a U.S. Government agency.
Like Agency RMBS, non-Agency RMBS represent interests in
pools of mortgage
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loans secured by residential real property. To the extent
available to us, we may seek to finance our non-Agency RMBS
portfolio with financings under the TALF or with private
financing sources and, if available, we may also make
investments in funds that receive financing under the Legacy
Securities Program. See Our Financing
Strategy below.
Non-Agency RMBS may be AAA rated through unrated. The rating, as
determined by one or more of the nationally recognized
statistical rating organizations, including Fitch, Inc.
Moodys Investors Service, Inc. and Standard &
Poors Corporation, indicates the organizations view
of the creditworthiness of the investment. The mortgage loan
collateral for non-Agency RMBS generally consists of residential
mortgage loans that do not generally conform to the
U.S. Government agency underwriting guidelines due to
certain factors including mortgage balance in excess of such
guidelines, borrower characteristics, loan characteristics and
level of documentation.
Residential
Mortgage Loans
Residential mortgage loans are loans secured by residential real
properties. We generally expect to focus our residential
mortgage loan acquisitions on the purchase of loan portfolios
made available to us under the Legacy Loan Program. See
Our Financing Strategy below. We expect
that the residential mortgage loans we acquire will be first
lien, single-family FRMs, ARMs and Hybrid ARMs with original
terms to maturity of not more than 40 years and that are
either fully amortizing or are interest-only for up to ten
years, and fully amortizing thereafter.
Prime and
Jumbo Mortgage Loans
Prime mortgage loans are mortgage loans that generally conform
to U.S. Government agency underwriting guidelines. Jumbo
prime mortgage loans are mortgage loans that generally conform
to U.S. Government agency underwriting guidelines except
that the mortgage balance exceeds the maximum amount permitted
by U.S. Government agency underwriting guidelines.
Alt-A
Mortgage Loans
Alt-A mortgage loans are mortgage loans made to borrowers whose
qualifying mortgage characteristics do not conform to
U.S. Government agency underwriting guidelines, but whose
borrower characteristics may. Generally, Alt-A mortgage loans
allow homeowners to qualify for a mortgage loan with reduced or
alternate forms of documentation. The credit quality of Alt-A
borrowers generally exceeds the credit quality of subprime
borrowers.
Subprime
Mortgage Loans
Subprime mortgage loans are loans that do not conform to
U.S. Government agency underwriting guidelines.
CMBS
CMBS are securities backed by obligations (including
certificates of participation in obligations) that are
principally secured by commercial mortgages on real property or
interests therein having a multifamily or commercial use, such
as regional malls, other retail space, office buildings,
industrial or warehouse properties, hotels, apartments, nursing
homes and senior living facilities. To the extent available to
us, we may seek to finance our CMBS portfolio with financings
under the TALF and Legacy Securities Program or with private
financing sources. See Our Financing
Strategy below.
CMBS are typically issued in multiple tranches whereby the more
senior classes are entitled to priority distributions from the
trusts income to make specified interest and principal
payments on such tranches. Losses and other shortfalls from
expected amounts to be received on the mortgage pool are borne
by the most subordinate classes, which receive payments only
after the more senior classes have received all principal
and/or
interest to which they are entitled. The credit quality of CMBS
depends on the credit quality of the
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underlying mortgage loans, which is a function of factors such
as the following: the principal amount of loans relative to the
value of the related properties; the mortgage loan terms, such
as amortization; market assessment and geographic location;
construction quality of the property; and the creditworthiness
of the borrowers.
Commercial
Mortgage Loans
We generally expect to focus our commercial mortgage loan
acquisitions on the purchase of loan portfolios made available
to us under the Legacy Loan Program. See Our
Financing Strategy below.
First and
Second Lien Loans
Commercial mortgage loans are mortgage loans secured by first or
second liens on commercial properties such as regional malls,
other retail space, office buildings, industrial or warehouse
properties, hotels, apartments, nursing homes and senior living
facilities. These loans, which tend to range in term from five
to 15 years, can carry either fixed or floating interest
rates. They generally permit pre-payments before final maturity
but only with the payment to the lender of yield maintenance
pre-payment penalties. First lien loans represent the senior
lien on a property while second lien loans or second mortgages
represent a subordinate or second lien on a property.
B-Notes
A B-Note, unlike a second mortgage loan, is part of a single
larger commercial mortgage loan, with the other part evidenced
by an A-Note, which are evidenced by a single commercial
mortgage. The holder of the A-Note and B-Note enter into an
agreement which sets forth the respective rights and obligations
of each of the holders. The terms of the agreement provide that
the holder of the A-Note has a priority of payment over the
holder of the B-Note. A loan evidenced by a note which is
secured by a second mortgage is a separate loan and the holder
has a direct relationship with the borrower. In addition, unlike
the holder of a B-Note, the holder of the loan would also be the
holder of the mortgage. The holder of the second mortgage loan
typically enters into an intercreditor agreement with the holder
of the first mortgage loan which sets forth the respective
rights and obligations of each of the holders, similar in
substance to the agreement that is entered into between the
holder of the A-Note and the holder of the B-Note. B-Note
lenders have the same obligations, collateral and borrower as
the A-Note lender, but typically are subordinated in recovery
upon a default.
Bridge
Loans
Bridge loans tend to be floating rate whole loans made to
borrowers who are seeking short-term capital (with terms of up
to five years) to be used in the acquisition, construction or
redevelopment of a property. This type of 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.
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Investment
Methods
We may, in the future, utilize TBAs in order to invest in Agency
RMBS. Pursuant to these TBAs, we would agree to purchase, for
future delivery, Agency RMBS with certain principal and interest
terms and certain types of underlying collateral, but the
particular Agency RMBS to be delivered would not be identified
until shortly before the TBA settlement date. Our ability to
purchase Agency RMBS through TBAs may be limited by the 75%
asset test applicable to REITs. See U.S. Federal
Income Tax Considerations Asset Tests and
U.S. Federal Income Tax Considerations
Gross Income Tests.
Investment
Sourcing
We expect our Manager to take advantage of the broad network of
relationships it and Invesco have established to identify
investment opportunities, although Invesco has indicated to us
that it expects that we will be the only publicly traded REIT
advised by our Manager or Invesco and its subsidiaries whose
investment strategy is to invest substantially all of its
capital in our target assets. Our Manager and its affiliates,
including Invesco Aim Advisors, have extensive long-term
relationships with financial intermediaries, including primary
dealers, leading investment banks, brokerage firms, leading
mortgage originators and commercial banks.
Investing in, and sourcing financing for, Agency RMBS,
non-Agency RMBS, CMBS and mortgage loans is highly competitive.
Although our Manager competes with many other investment
managers for profitable investment opportunities in fixed-income
asset classes and related investment opportunities and sources
of financing, we believe that a combination of our
Managers experience, together with the vast resources and
relationships of Invesco, provide us with a significant
advantage in identifying and capitalizing on attractive
opportunities.
Investment
Guidelines
Our board of directors has adopted the following investment
guidelines:
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no investment shall be made that would cause us to fail to
qualify as a REIT for federal income tax purposes;
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no investment shall be made that would cause us to be regulated
as an investment company under the 1940 Act;
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our assets will be invested within our target assets; and
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until appropriate investments can be identified, our Manager may
invest the proceeds of this and any future offerings in
interest-bearing, short-term investments, including money market
accounts
and/or
funds, that are consistent with our intention to qualify as a
REIT.
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These investment guidelines may be changed from time to time by
our board of directors without the approval of our stockholders.
Investment
Committee
Our Manager has an Investment Committee comprised of its
officers and investment professionals. The Investment Committee
will periodically review our investment portfolio and its
compliance with our investment policies and procedures,
including these investment guidelines, and provide to our board
of directors an investment report at the end of each quarter in
conjunction with its review of our quarterly results. From time
to time, as it deems appropriate or necessary, our board of
directors also will review our investment portfolio and its
compliance with our investment policies and procedures,
including these investment guidelines. For a description of the
members comprising the Investment Committee, see Our
Manager and The Management Agreement Investment
Committee, and Management.
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Investment
Process
We expect our investment process will benefit from our
Managers resources and professionals. Moreover our
Managers Investment Committee will oversee our investment
guidelines and will meet periodically, at least every quarter,
to discuss investment opportunities.
The investment team has a strong focus on security selection and
on the relative value of various sectors within the mortgage
market. Our Manager will utilize this expertise to build a
diversified portfolio of Agency RMBS, non-Agency RMBS and CMBS.
Our Manager will incorporate its views on the economic
environment and the outlook for the mortgage market including
relative valuation, supply and demand trends, the level of
interest rates, the shape of the yield curve, prepayment rates,
financing and liquidity, housing prices, delinquencies, default
rates, recovery of various sectors and vintage of collateral.
Our investment process will include sourcing and screening of
investment opportunities, assessing investment suitability,
conducting interest rate and prepayment analysis, evaluating
cash flow and collateral performance, reviewing legal structure
and servicer and originator information and investment
structuring, as appropriate, to seek an attractive return
commensurate with the risk we are bearing. Upon identification
of an investment opportunity, the investment will be screened
and monitored by our Manager to determine its impact on
maintaining our REIT qualification and our exemption from
registration under the 1940 Act. We will seek to make
investments in sectors where our Manager has strong core
competencies and where we believe market risk and expected
performance can be reasonably quantified.
Our Manager evaluates each one of our investment opportunities
based on its expected risk-adjusted return relative to the
returns available from other, comparable investments. In
addition, we evaluate new opportunities based on their relative
expected returns compared to our comparable securities held in
our portfolio. The terms of any leverage available to us for use
in funding an investment purchase are also taken into
consideration, as are any risks posed by illiquidity or
correlations with other securities in the portfolio. Our Manager
also develops a macro outlook with respect to each target asset
class by examining factors in the broader economy such as GDP,
interest rates, unemployment rates and availability of credit,
among other things. Our Manager also analyzes fundamental trends
in the relevant target asset class sector to adjust/maintain its
outlook for that particular target asset class. Views on a
particular target asset class are recorded in our Managers
QTechsm
system. These macro decisions guide our Managers
assumptions regarding model inputs and portfolio allocations
among target assets. Additionally, our Manager conducts
extensive diligence with respect to each target asset class by,
among other things, examining and monitoring the capabilities
and financial wherewithal of the parties responsible for the
origination, administration and servicing of relevant target
assets.
Additionally, through our Managers WL Ross subsidiary and
our Invescos in-house real estate team, we will have
access to broad and deep teams of experienced investment
professionals in real estate and distressed investing. Through
these teams, we will have real time access to research and data
on the mortgage and real estate industries. Having in-house
access to these resources and expertise provides us with a
competitive advantage over other companies investing in our
target assets who have less internal resources and expertise.
Our
Financing Strategy
We intend to employ prudent leverage to increase potential
returns to our stockholders and to fund the acquisition of our
target assets. Our income will be generated primarily by the net
spread between the income we earn on our investments in our
target assets and the cost of our financing and hedging
activities. Although we are not required to maintain any
particular leverage ratio, the amount of leverage we will deploy
for particular investments in our target assets will depend upon
our Managers assessment of a variety of factors, which may
include the anticipated liquidity and price volatility of the
assets in our investment portfolio, the gap between the duration
of our assets and liabilities, including hedges, the
availability and cost of financing the assets, our opinion of
the creditworthiness of our financing counterparties, the health
of the U.S. economy and residential and commercial
mortgage-related markets, our outlook for the level, slope, and
volatility of interest rates, the credit quality of the loans we
acquire, the collateral underlying our Agency RMBS, non-Agency
RMBS and CMBS, and our outlook for asset spreads relative to the
LIBOR curve.
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We expect, initially, that we may deploy, on a
debt-to-equity
basis, up to seven to eight times leverage on our Agency RMBS
assets. In addition, initially we do not expect under current
market conditions to deploy leverage on our non-Agency RMBS,
CMBS and mortgage loan assets, except in conjunction with
financings that may be available to us under programs
established by the U.S. Government. For these asset
classes, we expect to use approximately five to six times
leverage. We consider these initial leverage ratios to be
prudent for these asset classes.
Subject to maintaining our qualification as a REIT for
U.S. federal income tax purposes, we expect to use a number
of sources to finance our investments. Initially, we expect our
primary financing sources to include repurchase agreements and,
to the extent available to us, fundings under programs
established by the U.S. Government such as the TALF or
private financing sources and, if available, we may make
investments in funds that receive financing under the PPIP.
Descriptions of the types of financings we expect to employ are
described in more detail below.
Repurchase
Agreements
Repurchase agreements are financings pursuant to which we will
sell our target assets to the repurchase agreement counterparty,
the buyer, for an agreed upon price with the obligation to
repurchase these assets from the buyer at a future date and at a
price higher than the original purchase price. We expect to use
repurchase agreements primarily to finance the purchase of our
Agency RMBS portfolio. The amount of financing we will receive
under a repurchase agreement is limited to a specified
percentage of the estimated market value of the assets we sell
to the buyer. The difference between the sale price and
repurchase price is the interest expense of financing under a
repurchase agreement. Under repurchase agreement financing
arrangements, the buyer, or lender, could require us to provide
additional cash collateral to re-establish the ratio of value of
the collateral to the amount of borrowing. In the current
economic climate, we believe that the lender generally will
advance a borrower approximately 90% to 95% of the market value
of the securities financed (meaning a 5% to 10% haircut). A
significant decrease in advance rate or an increase in the
haircut could result in the borrower having to sell securities
in order to meet any additional margin requirements by the
lender, regardless of market condition. We expect to mitigate
our risk of margin calls by employing a prudent amount of
leverage that is below what could be used under current advance
rates.
Invesco Aim Advisors has been active in the repurchase agreement
lending market since 1980 and currently has master repurchase
agreements in place with a number of counterparties. At
March 31, 2009, Invesco Aim Advisors had provided
repurchase agreement financing to these counterparties equal to
approximately $20.7 billion.
We plan to leverage our Managers and its affiliates
existing relationships with financial intermediaries, including
primary dealers, leading investment banks, brokerage firms,
commercial banks and other repurchase agreement counterparties
to execute repurchase agreements for our Agency RMBS portfolio
concurrently with or shortly after the closing of this offering.
To the extent that we invest in Agency RMBS through TBAs in the
future, we may enter into dollar roll transactions using TBAs in
which we would sell a TBA and simultaneously purchase a similar,
but not identical, TBA. Our ability to enter into dollar roll
transactions with respect to TBAs may be limited by the 75%
gross income test applicable to REITs. See
U.S. Federal Income Tax Considerations
Gross Income Tests.
Government
Financing
To the extent available to us, we may seek to finance our
non-Agency RMBS and CMBS portfolios with financings under the
TALF or with private financing sources. If available to us, we
may also finance our investments in non-Agency RMBS and CMBS by
contributing capital to one or more Legacy Securities PPIFs that
receive financing under the PPIP. We also expect to focus our
residential and commercial mortgage loan acquisitions by
contributing capital to one or more Legacy Loan PPIFs. A
description of the financing that may be made available to us
under these programs is set forth below. There can be no
assurance that we will
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be eligible to participate in these funds or programs or, if we
are eligible, that we will be able to utilize them successfully
or at all.
The
Term Asset-Backed Securities Lending Facility
In response to the severe dislocation in the credit markets, the
U.S. Treasury and the Federal Reserve jointly announced the
establishment of the TALF on November 25, 2008. The TALF is
designed to increase credit availability and support economic
activity by facilitating renewed securitization activities.
Under TALF as announced on November 28, 2008, the FRBNY
makes non-recourse loans to borrowers to fund their purchase of
ABS collateralized by certain assets such as student loans, auto
loans and leases, floor plan loans, credit card receivables,
receivables related to residential mortgage services advances,
equipment loans and leases and loans guaranteed by the SBA. The
FRBNY also announced its intention to lend up to
$200 billion to certain holders of TALF-eligible ABS. Any
U.S. company that owns TALF-eligible ABS may borrow from
the FRBNY under the TALF, provided that the company maintains an
account relationship with a primary dealer. TALF 1.0 is
presently expected to run through December 31, 2009.
On March 23, 2009, the U.S. Treasury announced
preliminary plans to expand the TALF to include non-Agency RMBS
that were originally rated AAA and outstanding CMBS that are
rated AAA. On May 1, 2009, the Federal Reserve published
the terms for the expansion of TALF to newly issued CMBS and
announced that, beginning on June 16, 2009, up to
$100 billion of TALF loans will be available to finance
purchases of eligible CMBS. The Federal Reserve stated that, to
be eligible for TALF funding, the following conditions must be
satisfied with respect to the newly issued CMBS:
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The CMBS must be collateralized by first-priority mortgage loans
or participations therein that are current in payment at the
time of securitization;
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The underlying mortgage loans must be fixed-rate loans that do
not provide for interest-only payments during any part of their
term;
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The underlying mortgage loans must be secured by one or more
income-generating commercial properties located in the United
States or one of its territories;
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The CMBS must be issued on or after January 1, 2009 and the
underlying mortgage loans must have been originated on or after
July 1, 2008;
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The underwriting for the CMBS must be prepared generally on the
basis of then-current in-place, stabilized and recurring net
operating income and then-current property appraisals;
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The CMBS collateralizing the TALF borrowing must have a credit
rating in the highest long-term investment-grade rating
category, without the benefit of third party credit support,
from at least two CMBS eligible national rating agencies;
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The CMBS must entitle its holders to payments of principal and
interest (that is, must not be an interest-only or
principal-only security);
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The CMBS must bear interest at a pass-through rate that is fixed
or based on the weighted average of the underlying fixed
mortgage rates;
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The CMBS collateralizing the TALF borrowing must not be junior
to other securities with claims on the same pool of
loans; and
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Control over the servicing of the underlying mortgage loans must
not be held by investors in a subordinate class of the CMBS once
the principal balance of that class is reduced to less than 25%
of its initial principal balance as a result of both actual
realized losses and appraisal reduction amounts.
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On May 19, 2009, the Federal Reserve announced that certain
high quality legacy CMBS, including CMBS issued before
January 1, 2009, would become eligible collateral under the
TALF starting in July 2009.
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The Federal Reserve stated that, to be eligible for TALF
funding, the following conditions must be satisfied with respect
to the legacy CMBS:
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Legacy CMBS must be senior in payment priority to all other
interests in the underlying pool of commercial mortgages;
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As of the TALF loan subscription date, at least 95% of the
properties, by related loan principal balance, must be located
in the United States or one of its territories;
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The security for each mortgage loan must include a mortgage or
similar instrument on a fee or leasehold interest in one or more
income-generating commercial properties;
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The CMBS must entitle its holders to payments of principal and
interest (that is, must not be an interest-only or
principal-only security);
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The CMBS collateralizing the TALF borrowing must have a credit
rating in the highest long-term investment-grade rating
category, without the benefit of third party credit support,
from at least two CMBS eligible national rating agencies;
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The CMBS must bear interest at a pass-through rate that is fixed
or based on the weighted average of the underlying fixed
mortgage rates;
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The CMBS must not be issued by an agency or instrumentality of
the United States or a government-sponsored enterprise; and
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Each CMBS must evidence an interest in a trust fund consisting
of fully-funded mortgage loans and not other CMBS, other
securities or interest rate swap or cap instruments or other
hedging instruments. A participation or other ownership interest
in such a loan will be considered a mortgage loan and not a CMBS
or other security if, following a loan default, the ownership
interest is senior to or pari passu with all other interests in
the same loan in right of payment of principal and interest.
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The Federal Reserve also described the following terms for newly
issued and legacy CMBS collateralized TALF loans:
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Each TALF loan secured by CMBS will have a three-year maturity
or five-year maturity, at the election of the borrower;
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A three-year TALF loan will bear interest at a fixed rate per
annum equal to 100 basis points over the three-year LIBOR
swap rate. A five-year TALF loan is expected to bear interest at
a fixed rate per annum equal to 100 basis points over the
five-year LIBOR swap rate;
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The collateral haircut for each CMBS with an average life of
five years or less will be 15%. For CMBS with average lives
beyond five years, collateral haircuts will increase by one
percentage point for each additional year of average life beyond
five years. No newly issued CMBS may have an average life beyond
ten years;
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Any remittance of principal on the CMBS must be used immediately
to reduce the principal amount of the TALF loan in proportion to
the TALF advance rate;
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The loans will be non-recourse to the borrower, unless the
borrower breaches its representations, warranties or covenants;
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The loans will be exempt from margin calls related to a decrease
in the underlying collateral value;
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The loans are pre-payable in whole or in part at the option of
the borrower, and generally prohibit collateral
substitutions; and
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A TALF borrower must agree not to exercise or refrain from
exercising any voting, consent or waiver rights under a CMBS
without the consent of the FRBNY.
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The initial subscription date will be June 16, 2009 for
newly issued CMBS and late July 2009 for legacy CMBS. The
subscription and settlement cycle for newly issued and legacy
CMBS will occur in the latter part
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of each month. However, on June 4, 2009, the Federal
Reserve announced that it may not start lending against RMBS
under the TALF. The Federal Reserve stated that it was still in
the process of assessing the feasibility and potential impact of
such a program for legacy RMBS, which would pose a significant
administrative burden.
We believe that the expansion of the TALF to include highly
rated CMBS may provide us with attractively priced non-recourse
term borrowings that we could use to purchase newly created and
legacy CMBS that are eligible for funding under this program.
However, many legacy CMBS have had their ratings downgraded by
at least one rating agency (or have been put on notice as being
likely to be downgraded in the near future) as property values
have declined during the current recession because a large
amount of legacy CMBS are backed by whole loans that were
originated during a period of time when property values were
relatively high and economic fundamentals were relatively
strong. These downgradings significantly reduce the quantity of
legacy CMBS that are TALF eligible. Accordingly, unless the
criteria for legacy CMBS eligibility change, we expect most of
our TALF eligible CMBS investments will be in newly issued CMBS.
In addition, to date, the TALF has also not yet been expanded to
cover non-Agency RMBS. We believe that once so expanded, the
TALF may provide us with attractively priced non-recourse term
borrowing facilities that we can use to purchase non-Agency
RMBS. However, there can be no assurance that the TALF will be
expanded to include this asset class and, if so expanded, that
we will be able to utilize it successfully or at all.
The
Public-Private Investment Program
On March 23, 2009, the U.S. Treasury, in conjunction
with the FDIC and the Federal Reserve, announced the
establishment of the PPIP. The PPIP is designed to encourage the
transfer of certain illiquid legacy real estate-related assets
off of the balance sheets of financial institutions, restarting
the market for these assets and supporting the flow of credit
and other capital into the broader economy. The PPIP is expected
to be $500 billion to $1 trillion in size and has two
primary components: the Legacy Securities Program and the Legacy
Loan Program.
Under the Legacy Securities Program, Legacy Securities PPIFs
will be established to purchase from financial institutions
certain non-Agency RMBS and CMBS that were originally rated in
the highest rating category by one or more of the national
recognized statistical rating organizations. The
U.S. Treasury will invest up to 50% of the equity capital
raised for each Legacy Securities PPIF and will also provide
attractively priced secured non-recourse loans in an aggregate
amount of up to 50% of the Legacy Securities PPIFs total
equity capital so long as the Legacy Securities PPIFs
private investors do not have voluntary withdrawal rights. In
addition, the U.S. Treasury will consider requests for debt
financing of up to 100% of a Legacy Securities PPIFs total
equity capital, subject to restrictions on asset level leverage,
withdrawal rights, disposition priorities and other factors to
be developed by the U.S. Treasury. Loans made by the
U.S. Treasury to any Legacy Securities PPIF will accrue
interest at an annual rate to be determined by the
U.S. Treasury and will be payable in full on the date of
termination of the Legacy Securities PPIF. The equity and debt
financing under the Legacy Securities Program is available to
Legacy Securities PPIFs managed by investment managers who have
been selected as a Legacy Securities PPIF asset manager under
the program. An affiliate of our Manager has applied to serve as
one of the investment managers for the Legacy Securities
Program. There can be no assurance that this affiliate will be
selected for this role.
To the extent available to us, we may seek to finance our
non-Agency RMBS and CMBS portfolios with financings under the
Legacy Securities Program. We may access this financing by
contributing our equity capital to one or more Legacy Securities
PPIFs that will be established and managed by our Manager or one
of its affiliates if their application to serve as one of the
investment managers for the Legacy Securities Program is
accepted by the U.S. Treasury, or to other Legacy
Securities PPIFs established and managed by third parties. We
expect that these Legacy Securities PPIFs would directly access
the favorable financing available under this program.
Under the Legacy Loan Program, Legacy Loan PPIFs will be
established to purchase troubled loans (including residential
and commercial mortgage loans) from insured depository
institutions. In the loan sales, assets will be priced through
an auction process to be established under the program. For a
bid to be
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considered in the auction process, the bid must be accompanied
by a refundable cash deposit for 5% of the bid value. The Legacy
Loan PPIF will be able to fund the asset purchase through the
issuance of senior notes issued by the Legacy Loan PPIF. The
notes will be collateralized by Legacy Loan PPIF assets and
guaranteed by the FDIC in exchange for a debt guarantee fee. The
amount of the purchase price that can be funded through the
issuance of these notes will vary from transaction to
transaction based on standards to be established by the FDIC,
but is not expected to exceed six times the amount of equity
used by the Legacy Loan PPIF to fund the acquisition. It is
expected that financing terms and leverage ratios for fundings
will be established and disclosed to potential investors prior
to bid submission in Legacy Loan Program auctions. However, in
light of the announcement by the FDIC that it is postponing the
implementation of the Legacy Loan Program, there is no assurance
that this program will ever be finalized or adopted in a way in
which we would elect to participate or that the final terms will
enable us to participate in the PPIP in a manner consistent with
our investment strategy.
The U.S. Treasury will also provide up to 50% of the equity
capital financing for each Legacy Loan PPIF. As required by the
EESA, the U.S. Treasury will receive warrants in the
transaction. The terms and amounts of such warrants have not yet
been determined.
Legacy Loan PPIFs, through their investment manager, will
control and manage their asset pools within parameters
pre-established by the FDIC and the U.S. Treasury, with
reporting to and oversight by the FDIC. Legacy Loan PPIFs must
agree to waste, fraud and abuse protections and will be required
to make certain representations, warranties and covenants
regarding the conduct of their business and compliance with
applicable law. They must also provide information to the FDIC
in performance of its oversight role.
We may seek to acquire residential and commercial mortgage loans
with financing under the Legacy Loan Program. To the extent
available to us, we anticipate that we would access this
financing by contributing equity capital to one or more Legacy
Loan PPIFs that will be established and managed by our Manager
or one of its affiliates. We expect that these Legacy Loan PPIFs
would directly access the favorable financing available under
this program.
To date, the terms of any equity investment that we would make
to any Legacy Securities or Legacy Loan PPIFs that may be
established in the future have not yet been determined and there
is no assurance that these programs will be finalized or that we
will participate in these programs. However, we anticipate that
any such Legacy Securities or Legacy Loan PPIF would:
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be structured as partnership for U.S. tax purposes;
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have a finite life, meaning that after a specified holding
period the assets held by the Legacy Securities or Legacy Loan
PPIF would be sold and the proceeds from such sale would be
distributed to the applicable Legacy Securities and Legacy Loan
PPIF investors; and
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provide for the payment of fees to the investment manager of the
Legacy Securities or Legacy Loan PPIF, which we anticipate to
include base management fees and the payment of an incentive fee
to the investment manager after investors receive minimum hurdle
rates of return.
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Any equity investment we may make in any such Legacy Securities
or Legacy Loan PPIF may be subject to transfer restrictions. The
terms of any equity investment we make in any such Legacy
Securities or Legacy Loan PPIF must be approved by our board of
directors, including a majority of our independent directors. In
addition, we expect that any investment we make will be on terms
that are no less favorable to us than those made available to
other third party institutional investors in the Legacy
Securities or Legacy Loan PPIF. We expect that any investment we
make will be on terms that are no less favorable to us than
those made available to other third party institutional
investors in the Legacy Securities or Legacy Loan PPIF. In
addition, to the extent we pay any fees to our Manager or any of
its affiliates in connection with any PPIF, our Manager has
agreed to reduce the management fee payable by us under the
management agreement (but not below zero) in respect of any
equity investment we may decide to make in any PPIF managed by
our Manager or any of its affiliates by the amount of the fees
payable to our Manager or its affiliates under the PPIF with
regard to our equity investment. However, our Managers
management fee will not be reduced in respect of any equity
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investment we may decide to make in a Legacy Securities or
Legacy Loan PPIF managed by an entity other than our Manager or
any of its affiliates.
Other
Financing
Subject to maintaining our qualification as a REIT for
U.S. federal income tax purposes, we may in the future use
other funding sources to acquire our assets, including warehouse
facilities, securitizations and other secured and unsecured
forms of borrowing. We may also need to use repurchase agreement
financings for target assets in addition to Agency RMBS.
Risk
Management
As part of our risk management strategy, our Manager will
actively manage the financing, interest rate, credit risk,
prepayment and convexity risks associated with holding a
portfolio of our target assets.
Interest
Rate Hedging
Subject to maintaining our qualification as a REIT, we intend to
engage in a variety of interest rate management techniques that
seek on one hand to mitigate the influence of interest rate
changes on the values of some of our assets, and on the other
hand help us achieve our risk management objective. Under the
U.S. federal income tax laws applicable to REITs, we
generally will be able to enter into certain transactions to
hedge indebtedness that we may incur, or plan to incur, to
acquire or carry real estate assets, although our total gross
income from interest rate hedges that do not meet this
requirement and other non-qualifying income must not exceed 25%
of our gross income.
Subject to maintaining our qualification as a REIT, we intend to
engage in a variety of interest rate management techniques that
seek on one hand to mitigate the influence of interest rate
changes on the values of some of our assets and on the other
hand help us achieve our management objective. We intend to
utilize derivative financial instruments, including, among
others, puts and calls on securities or indices of securities,
interest rate swaps, interest rate caps, interest rate
swaptions, exchange-traded derivatives, U.S. Treasury
securities and options on U.S. Treasury securities and
interest rate floors to hedge all or a portion of the interest
rate risk associated with the financing of our portfolio.
Specifically, we will seek to hedge our exposure to potential
interest rate mismatches between the interest we earn on our
investments and our borrowing costs caused by fluctuations in
short-term interest rates. In utilizing leverage and interest
rate hedges, our objectives will be to improve risk-adjusted
returns and, where possible, to lock in, on a long-term basis, a
favorable spread between the yield on our assets and the cost of
our financing. We will rely on our Managers expertise to
manage these risks on our behalf.
The U.S. federal income tax rules applicable to REITs, may
require us to implement certain of these techniques through a
TRS that is fully subject to U.S. federal corporate income
taxation.
Market
Risk Management
Risk management is an integral component of our strategy to
deliver returns to our stockholders. Because we will invest in
MBS, investment losses from prepayment, interest rate volatility
or other risks can meaningfully reduce or eliminate our
distributions to stockholders. In addition, because we will
employ financial leverage in funding our portfolio, mismatches
in the maturities of our assets and liabilities can create risk
in the need to continually renew or otherwise refinance our
liabilities. Our net interest margins will be dependent upon a
positive spread between the returns on our asset portfolio and
our overall cost of funding. To minimize the risks to our
portfolio, we will actively employ portfolio-wide and
security-specific risk measurement and management processes in
our daily operations. Our Managers risk management tools
include software and services licensed or purchased from third
parties, in addition to proprietary software and analytical
methods developed by Invesco. There can be no guarantee that
these tools will protect us from market risks.
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Policies
With Respect to Certain Other Activities
If our board of directors determines that additional funding is
required, we may raise such funds through additional offerings
of equity or debt securities or the retention of cash flow
(subject to provisions in the Internal Revenue Code concerning
distribution requirements and the taxability of undistributed
REIT taxable income) or a combination of these methods. In the
event that our board of directors determines to raise additional
equity capital, it has the authority, without stockholder
approval, to issue additional common stock or preferred stock in
any manner and on such terms and for such consideration as it
deems appropriate, at any time.
In addition, we may borrow money to finance the acquisition of
investments. We intend to use traditional forms of financing,
such as repurchase agreements. We also may utilize structured
financing techniques to create attractively priced non-recourse
financing at an all-in borrowing cost that is lower than that
provided by traditional sources of financing and that provide
long-term, floating rate financing. Our investment guidelines
and our portfolio and leverage are periodically reviewed by our
board of directors as part of their oversight of our Manager.
As of the date of this prospectus, we do not intend to offer
equity or debt securities in exchange for property. We have not
in the past but may in the future repurchase or otherwise
reacquire our shares.
As of the date of this prospectus, we do not intend to invest in
the securities of other REITs, other entities engaged in real
estate activities or securities of other issuers for the purpose
of exercising control over such entities.
We engage in the purchase and sale of investments. We have not
in the past but may in the future make loans to third parties in
the ordinary course of business for investment purposes. As of
the date of this prospectus, we do not intend to underwrite the
securities of other issuers.
We intend to furnish our stockholders with annual reports
containing consolidated financial statements audited by our
independent certified public accountants and file quarterly
reports with the SEC containing unaudited consolidated financial
statements for each of the first three quarters of each fiscal
year.
Our board of directors may change any of these policies without
prior notice to you or a vote of our stockholders.
Operating
and Regulatory Structure
REIT
Qualification
We intend to elect to qualify as a REIT under Sections 856
through 859 of the Internal Revenue Code commencing with our
taxable year ending on December 31, 2009. Our qualification
as a REIT depends upon our ability to meet on a continuing
basis, through actual investment and operating results, various
complex requirements under the Internal Revenue Code relating
to, among other things, the sources of our gross income, the
composition and values of our assets, our distribution levels
and the diversity of ownership of our shares. We believe that we
have been organized in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue
Code, and that our intended manner of operation will enable us
to meet the requirements for qualification and taxation as a
REIT.
So long as we qualify as a REIT, we generally will not be
subject to U.S. federal income tax on our REIT taxable
income we distribute currently to our stockholders. If we fail
to qualify as a REIT in any taxable year and do not qualify for
certain statutory relief provisions, we will be subject to
U.S. federal income tax at regular corporate rates and may
be precluded from qualifying as a REIT for the subsequent four
taxable years following the year during which we lost our REIT
qualification. Even if we qualify for taxation as a REIT, we may
be subject to certain U.S. federal, state and local taxes
on our income or property.
1940
Act Exemption
We intend to conduct our operations so that we are not required
to register as an investment company under the 1940 Act.
Section 3(a)(1)(A) of the 1940 Act defines an investment
company as any issuer that is or holds itself out as being
engaged primarily in the business of investing, reinvesting or
trading in securities. Section 3(a)(1)(C) of the 1940 Act
defines an investment company as any issuer that is engaged or
proposes to
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engage in the business of investing, reinvesting, owning,
holding or trading in securities and owns or proposes to acquire
investment securities having a value exceeding 40% of the value
of the issuers total assets (exclusive of
U.S. Government securities and cash items) on an
unconsolidated basis, which we refer to as the 40% test.
Excluded from the term investment securities, among
other things, are U.S. Government securities and securities
issued by majority-owned subsidiaries that are not themselves
investment companies and are not relying on the exception from
the definition of investment company set forth in
Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
The company is organized as a holding company that conducts its
businesses primarily through the operating partnership. Both the
company and the operating partnership intend to conduct their
operations so that they comply with the 40% test. The securities
issued to our operating partnership by any wholly owned or
majority-owned subsidiaries that we may form in the future that
are excepted from the definition of investment
company based on Section 3(c)(1) or 3(c)(7) of the
1940 Act, together with any other investment securities the
operating partnership may own, may not have a value in excess of
40% of the value of the operating partnerships total
assets on an unconsolidated basis. We will monitor our holdings
to ensure continuing and ongoing compliance with this test. In
addition, we believe neither the company nor the operating
partnership will be considered an investment company under
Section 3(a)(1)(A) of the 1940 Act because it will not
engage primarily or hold itself out as being engaged primarily
in the business of investing, reinvesting or trading in
securities. Rather, through the operating partnerships
wholly owned or majority-owned subsidiaries, the company and the
operating partnership will be primarily engaged in the
non-investment company businesses of these subsidiaries.
IAS Asset I LLC intends to qualify for an exemption from
registration as an investment company under the 1940 Act
pursuant to Section 3(c)(5)(C) of the 1940 Act, which is
available for entities primarily engaged in the business
of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate. In addition, certain of
the operating partnerships other subsidiaries that we may
form in the future also intend to rely on the
Section 3(c)(5)(C) exemption. This exemption generally
requires that at least 55% of our subsidiaries portfolios
must be comprised of qualifying assets and at least another 25%
of each of their portfolios must be comprised of real
estate-related assets under the 1940 Act (and no more than 20%
comprised of miscellaneous assets). Qualifying assets for this
purpose include mortgage loans and other assets, such as whole
pool Agency RMBS, that the SEC staff in various no-action
letters has determined are the functional equivalent of mortgage
loans for the purposes of the 1940 Act. We intend to treat as
real estate-related assets non-Agency RMBS, CMBS, debt and
equity securities of companies primarily engaged in real estate
businesses, agency partial pool certificates and securities
issued by pass-through entities of which substantially all of
the assets consist of qualifying assets
and/or real
estate-related assets. Any Legacy Securities PPIF that may be
formed and managed by our Manager or one of its affiliates will
rely on Section 3(c)(7) for its 1940 Act exemption. The
terms of our participation in any such Legacy Securities PPIF
have not as yet been established. As a result, the treatment of
IAS Asset I LLCs participation in any Legacy Securities
PPIF as a real estate-related asset or a miscellaneous asset for
purposes of its Section 3(c)(5)(C) analysis has not been
determined. We will discuss with the SEC staff how IAS Asset I
LLCs participation in any Legacy Securities PPIF should be
treated for purposes of its Section 3(c)(5)(C) analysis.
Depending on this determination, 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 exemption. Any
such adjustment in IAS Asset I LLCs assets or strategy is
not expected to have a material adverse effect on IAS Asset I
LLCs assets or strategy. Although we intend to monitor our
portfolio periodically and prior to each investment acquisition,
there can be no assurance that we will be able to maintain this
exemption from registration for each of these subsidiaries.
We may in the future organize special purpose subsidiaries of
the operating partnership that will borrow under the TALF. We
expect that these TALF subsidiaries will rely on
Section 3(c)(7) for their 1940 Act exemption and,
therefore, the operating partnerships interest in each of
these TALF subsidiaries would constitute an investment
security for purposes of determining whether the operating
partnership passes the 40% test. We may in the future organize
one or more TALF subsidiaries that seek to rely on the 1940 Act
exemption provided to certain structured financing vehicles by
Rule 3a-7.
Any such TALF subsidiary would need to be structured to comply
with any SEC staff guidance on how the TALF subsidiary should be
organized
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and operated to comply with the restrictions contained in
Rule 3a-7.
In general,
Rule 3a-7
exempts from the 1940 Act issuers that limit their activities as
follows:
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the issuer issues securities the payment of which depends
primarily on the cash flow from eligible assets,
which include many of the types of assets that we expect to
acquire in our TALF fundings, that by their terms convert into
cash within a finite time period;
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the securities sold are fixed-income securities rated investment
grade by at least one rating agency (fixed-income securities
which are unrated or rated below investment grade may be sold to
institutional accredited investors and any securities may be
sold to qualified institutional buyers and to
persons involved in the organization or operation of the issuer);
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the issuer acquires and disposes of eligible assets
(1) only in accordance with the agreements pursuant to
which the securities are issued, (2) so that the
acquisition or disposition does not result in a downgrading of
the issuers fixed-income securities and (3) the
eligible assets are not acquired or disposed of for the primary
purpose of recognizing gains or decreasing losses resulting from
market value changes; and
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unless the issuer is issuing only commercial paper, the issuer
appoints an independent trustee, takes reasonable steps to
transfer to the trustee an ownership or perfected security
interest in the eligible assets, and meets rating agency
requirements for commingling of cash flows.
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In addition, in certain circumstances, compliance with
Rule 3a-7
may also require, among other things, that the indenture
governing the TALF 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. We
expect that the aggregate value of the operating
partnerships interests in TALF subsidiaries that seek to
rely on
Rule 3a-7
will comprise less than 20% of the operating partnerships
(and, therefore, the companys) total assets on an
unconsolidated basis.
We expect that IAS Asset I LLC and most of our other
majority-owned subsidiaries will not be relying on exemptions
under either Section 3(c)(1) or 3(c)(7) of the 1940 Act.
Consequently, we expect that our interests in these subsidiaries
(which we expect will constitute a substantial majority of our
assets) will not constitute investment securities.
Consequently, we expect to be able to conduct our operations so
that we are not required to register as an investment company
under the 1940 Act.
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 exemption from registration under the 1940 Act
will limit our ability to make certain investments. For example,
these restrictions will limit the ability of our subsidiaries to
invest directly in mortgage-backed securities that represent
less than the entire ownership in a pool of mortgage loans, debt
and equity tranches of securitizations and certain ABS and real
estate companies or in assets not related to real estate.
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.
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Competition
Our net income will depend, in large part, on our ability to
acquire assets at favorable spreads over our borrowing costs. In
acquiring our target assets, we will compete with other REITs,
specialty finance companies, savings and loan associations,
banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, financial
institutions, governmental bodies and other entities. See
Managements Discussion and Analysis of Financial
Condition and Results of 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 will increase competition for the
available supply of mortgage assets suitable for purchase. Many
of our anticipated competitors are significantly larger than we
are, have access to greater capital and other resources and may
have other advantages over us. In addition, some of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety
of investments and establish more relationships than we can.
Current market conditions may attract more competitors, which
may increase the competition for sources of financing. An
increase in the competition for sources of funding could
adversely affect the availability and cost of financing, and
thereby adversely affect the market price of our common stock.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Market
Conditions.
In the face of this competition, we expect to have access to our
Managers professionals and their industry expertise, which
may provide us with a competitive advantage and help us assess
investment risks and determine appropriate pricing for certain
potential investments. We expect that these relationships will
enable us to compete more effectively for attractive investment
opportunities. In addition, we believe that current market
conditions may have adversely affected the financial condition
of certain competitors. Thus, not having a legacy portfolio may
also enable us to compete more effectively for attractive
investment opportunities. However, we may not be able to achieve
our business goals or expectations due to the competitive risks
that we face. For additional information concerning these
competitive risks, see Risk 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 will be managed by our Manager pursuant to the management
agreement between our Manager and us. All of our officers are
employees of Invesco. Upon completion of this offering, we will
have officers but no employees. See Our Manager and The
Management Agreement Management Agreement.
Legal
Proceedings
Neither we nor, to our knowledge, our Manager is currently
subject to any legal proceedings which we or our Manager
consider to be material.
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MANAGEMENT
Our
Directors, Director Nominees and Executive Officers
Currently, we have two directors. Upon completion of the
offering, our board of directors will be comprised of five
members. Our directors will each be elected to serve a term of
one year. Our board of directors has determined that each of our
director nominees satisfy the listing standards for independence
of the NYSE. Our Bylaws provide that a majority of the entire
board of directors may at any time increase or decrease the
number of directors. However, unless our Bylaws are amended, the
number of directors may never be less than the minimum number
required by the MGCL nor more than 15.
The following sets forth certain information with respect to our
directors, director nominees, executive officers and other key
personnel:
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Name
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Age
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Position Held with Us
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G. Mark Armour
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55
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Director
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Karen Dunn Kelley
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48
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Director
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James S. Balloun
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71
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Director Nominee
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John S. Day
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60
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Director Nominee
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Neil Williams
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73
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Director Nominee
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Richard J. King
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50
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President and Chief Executive Officer
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John Anzalone
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44
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Chief Investment Officer
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Donald R. Ramon
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45
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Chief Financial Officer
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Robson J. Kuster*
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35
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Head of Research
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Jason Marshall*
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34
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Portfolio Manager
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* |
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Messrs. Kuster and Marshall are not our executive officers;
they are key personnel of our Manager. |
Set forth below is biographical information for our directors,
director nominees, executive officers and other key personnel.
Directors
and Director Nominees
G. Mark Armour, Director. Mr. Armour is the
Chief Executive Officer, President and a Director of our
Manager. Mr. Armour is also the Senior Managing Director
and Head of Invescos Worldwide Institutional business,
positions he has held since January 2007. Mr. Armour was
previously the Head of Sales & Client Service for the
Worldwide Institutional business. He was Chief Executive Officer
of Invesco Australia from September 2002 until July 2006. Prior
to joining Invesco, Mr. Armour held significant leadership
roles in the funds management business, both in Australia and
Hong Kong. He previously served as Chief Investment Officer for
ANZ Investments and spent almost 20 years with the National
Mutual/AXA Australia Group, where he was Chief Executive, and
Funds Management from 1998 to 2000. Mr. Armour graduated
with honors with a Bachelor of Economics from La Trobe
University in Melbourne, Australia.
Karen Dunn Kelley, Director. Ms. Dunn Kelley is the
Chief Executive Officer of Invesco Worldwide Fixed Income, with
responsibility for its fixed income and cash management business
and is also a member of Invescos Executive Management and
Worldwide Institutional Strategy Committees. She is President
and Principal Executive Officer of Short-Term Investments Trust
and Aim Treasurers Series Trust and serves on the
board of directors for the Short-Term Investments Company
(Global Services) plc and Aim Global Management Company, Ltd.
Ms. Dunn Kelley joined Invesco Aim Management Group, Inc.
in 1989 as a money market Portfolio Manager. Ms. Dunn
Kelley has been in the investment business since 1982.
Ms. Dunn Kelley graduated magna cum laude with a Bachelor
of Science from Villanova University, College of Commerce and
Finance.
James S. Balloun, Director Nominee. Mr. Balloun will
serve as a non-executive director of our Company and as Chairman
of the Compensation Committee. Mr. Balloun was previously
the Chairman and Chief
104
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 and Unisen/StarTrac. Mr. Balloun received a Bachelor of
Science from Iowa State University and a Master of Business
Administration from Harvard Business School.
John S. Day, Director Nominee. Mr. Day will serve as
a non-executive director of our Company and as Chairman of the
Audit Committee. Mr. Day was previously with
Deloitte & Touche LLP from 2002 until his retirement
in December 2005. Prior to joining Deloitte & Touche
LLP, Mr. Day was with Arthur Andersen LLP from 1976 to
2002. Mr. Day serves on the board of directors of Force
Protection, Inc., where he is the Chairman of the Audit
Committee, and Lenbrook Square Foundation, Inc. Mr. Day
received a Bachelor of Arts from the University of North
Carolina and a Master of Business Administration from Harvard
Business School.
Neil Williams, Director Nominee. Mr. Williams will
serve as a non-executive chairman of our Company and as Chairman
of the Nominating and Governance Committee. Mr. Williams
was previously the general counsel of Invesco from 1999 to 2002.
Mr. Williams was a partner of Alston & Bird LLP
from 1965 to 1999 where he was managing partner from 1984
through 1996. Mr. Williams serves on the board of directors
of Acuity Brands, Inc. where he is the Chairman of the
Governance Committee and on the board of directors of Printpack,
Inc. Mr. Williams received a Bachelor of Arts in 1958 and a
J.D. in 1961 from Duke University.
Executive
Officers
Richard J. King, CFA, President and Chief Executive
Officer. Mr. King is our President and Chief Executive
Officer. He is also a member of the Invesco Worldwide Fixed
Income senior management team, and is the Head of Fixed Income
Investment, contributing 24 years of fixed income
investment expertise. Mr. King joined Invesco in 2000 and
has held positions as Senior Portfolio Manager and Product
Manager for Core and Core Plus, Head of the Structured Team, and
Head of Portfolio Management, leading a team responsible for
portfolio management of all investment-grade domestic fixed
income portfolios. Prior to Invesco, Mr. King spent two
years as Head of Fixed Income at Security Management, and ten
years with Criterion Investment Management, where he served as
Chairman of the Core Sector Group. He also served as Managing
Director and Portfolio Manager with Bear Stearns Asset
Management. Starting in 1984, he spent four years with Ohio PERS
as an Investment Analyst, with the responsibility of analyzing
and trading corporate bonds and mortgage-backed securities.
Mr. King began his career in 1981, as an auditor for Touche
Ross & Co. Mr. King received a Bachelor of
Science in Business Administration from Ohio State University.
Mr. King is a Chartered Financial Analyst.
John M. Anzalone, CFA, Chief Investment Officer.
Mr. Anzalone is our Chief Investment Officer. He is also a
Senior Director and Head of Research & Trading,
Mortgage-Backed Securities for our Manager. Mr. Anzalone
joined Invescos Fixed Income Division in 2002. As the Head
of the MBS group, he is responsible for the application of
investment strategy across portfolios consistent with client
investment objectives and guidelines. Additionally, the MBS team
is responsible for analyzing and implementing investment actions
in the residential and commercial mortgage-backed securities
sectors. Mr. Anzalone began his investment career in 1992
at Union Trust. In 1994 he moved to AgriBank, FCB, where he
served as a Senior Trader for six years. Mr. Anzalone is
also a former employee of Advantus Capital Management where he
was a Senior Trader responsible for trading mortgage-backed,
asset-backed and commercial mortgage securities.
Mr. Anzalone received a Bachelor of Arts in Economics from
Hobart College and a Master of Business Administration from the
Simon School at the University of Rochester. Mr. Anzalone
is a Chartered Financial Analyst.
Donald R. Ramon, Chief Financial Officer. Mr. Ramon
is our Chief Financial Officer. Mr. Ramon has 22 years
of banking and financial institution experience which includes
five years working directly with
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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 that filed a voluntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code in
August 2007. In 2008, Mr. Ramon was named Acting Chief
Executive Officer and Chief Financial Officer. Mr. Ramon
received a bachelors degree in Accounting from the
University of South Florida. Mr. Ramon is a Certified
Public Accountant.
Other
Key Personnel
Robson J. Kuster, CFA, Head of Research. Mr. Kuster
is our Head of Research. He is also the Head of Structured
Securities Research for Invesco Worldwide Fixed Income.
Mr. Kuster is responsible for overseeing all structured
securities positions across stable value and total return
platforms and is supported by a team of seasoned analysts.
Additionally, he is closely involved in all structured product
development efforts. Mr. Kuster provides the bias decision
for mortgage-backed securities and subordinate asset-backed
securities which drive long-term positioning across all
worldwide fixed income product lines. Prior to joining Invesco
in 2002, Mr. Kuster served as a Credit Analyst with Bank
One Capital Markets, which he joined in 2000. Mr. Kuster
received a Bachelor of Arts in both Economics and American
History from Cornell College and a Master of Business
Administration from DePaul University. Mr. Kuster is a
Chartered Financial Analyst.
Jason Marshall, Portfolio Manager. Mr. Marshall is
our Portfolio Manager. Mr. Marshall is also a Portfolio
Manager on Invescos structured team with a focus in the
mortgage-backed sector. He is responsible for providing
expertise for the mortgage-related focus products and working
collectively with the structured team to implement strategies
throughout the fixed income platform. Prior to joining Invesco,
Mr. Marshall worked for PNC Financial Services Group, Inc.,
which he joined in 1997. He was most recently Vice President of
Portfolio Management, responsible for the trading and strategic
implementation of the firms large mortgage-backed
securities portfolio. Mr. Marshall received his Bachelor of
Science in Finance from Indiana University of Pennsylvania and a
Master of Business Administration with a concentration in
Finance from Duquesne University.
Corporate
Governance Board of Directors and
Committees
Our business is managed by our Manager, subject to the
supervision and oversight of our board of directors, which has
established investment guidelines described under
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.
Upon completion of this offering, our board of directors will
form an audit committee, a compensation committee and a
nominating and corporate governance committee and adopt charters
for each of these committees. Each of these committees will have
three directors and will be composed exclusively of independent
directors, as defined by the listing standards of the NYSE.
Moreover, the compensation committee will be composed
exclusively of individuals intended to be, to the extent
provided by
Rule 16b-3
of the Exchange Act, non-employee directors and will, at such
times as we are subject to Section 162(m) of the Internal
Revenue Code, qualify as outside directors for purposes of
Section 162(m) of the Internal Revenue Code.
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Audit
Committee
The audit committee will comprise Messrs. Balloun, Day and
Williams, each of whom will be an independent director and
financially literate under the rules of the NYSE.
Mr. Day will chair our audit committee and serve as our
audit committee financial expert, as that term is defined by the
SEC.
The committee assists the board of directors in overseeing:
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our financial reporting, auditing and internal control
activities, including the integrity of our financial statements;
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our compliance with legal and regulatory requirements;
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the independent auditors qualifications and
independence; and
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the performance of our internal audit function and independent
auditor.
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The audit committee is also responsible for engaging our
independent registered public accounting firm, reviewing with
the independent registered public accounting firm the plans and
results of the audit engagement, approving professional services
provided by the independent registered public accounting firm,
reviewing the independence of the independent registered public
accounting firm, considering the range of audit and non-audit
fees and reviewing the adequacy of our internal accounting
controls.
Compensation
Committee
The compensation committee will comprise Messrs. Balloun,
Day and Williams, each of whom will be an independent director.
Mr. Balloun will chair our compensation committee.
The principal functions of the compensation committee will be to:
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review and approve on an annual basis the corporate goals and
objectives relevant to Chief Executive Officer compensation, if
any, evaluate our Chief Executive Officers performance in
light of such goals and objectives and, either as a committee or
together with our independent directors (as directed by the
board of directors), determine and approve the remuneration of
our Chief Executive Officer based on such evaluation;
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review and oversee managements annual process, if any, is
paid by us for evaluating the performance of our senior officers
and review and approve on an annual basis the remuneration of
our senior officers;
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oversee our equity-based remuneration plans and programs;
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assist the board of directors and the chairman in overseeing the
development of executive succession plans; and
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determine from time to time the remuneration for our
non-executive directors (including the chairman).
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Nominating
and Corporate Governance Committee
The nominating and corporate governance committee will comprise
Messrs. Balloun, Day and Williams, each of whom will be an
independent director. Mr. Williams will chair our
nominating and corporate governance committee.
The nominating and corporate governance committee will be
responsible for
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providing counsel to the board of directors with respect to the
organization, function and composition of the board of directors
and its committees;
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overseeing the self-evaluation of the board of directors and the
board of directors evaluation of management;
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periodically reviewing and, if appropriate, recommending to the
board of directors changes to, our corporate governance policies
and procedures; and
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identifying and recommending to the board of directors potential
director candidates for nomination.
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Executive
and Director Compensation
Compensation
of Directors
A member of our board of directors who is also an employee of
Invesco is referred to as an executive director. Executive
directors will not receive compensation for serving on our board
of directors. Each
non-executive
director will receive an upfront fee of $5,000, an annual base
fee for his or her services of $25,000 and an annual deferred
director fee of $25,000 in restricted shares of our common stock
under our equity incentive plan. Base director fees will be paid
in cash and deferred director fees will be paid in restricted
shares of our common stock which may not be sold or transferred
during the non-executive directors service on our board of
directors. Both base and deferred director fees will be paid on
a quarterly basis. We will also reimburse each of our directors
for their travel expenses incurred in connection with their
attendance at full board of directors and committee meetings.
We have not made any payments to any of our directors or
director nominees to date.
Executive
Compensation
Because our management agreement provides that our Manager is
responsible for managing our affairs, our executive officers,
who are employees of Invesco, do not receive cash compensation
from us for serving as our executive officers. Instead we will
pay our Manager the management fees described in Our
Manager and the Management Agreement Management
Agreement Management Fees and Expense
Reimbursements. However, we have agreed to reimburse our
Manager for the compensation expense of our Chief Financial
Officer in respect of the services he provides to us. Our
current Chief Financial Officers annual base salary is
$175,000, and he is eligible to receive an annual bonus between
25% and 100% per annum of his base salary. We expect our Chief
Financial Officer to be dedicated exclusively to us and, as a
result, we will be responsible for his total compensation. In
their capacities as officers or personnel of Invesco, persons
other than our Chief Financial Officer will devote such portion
of their time to our affairs as is necessary to enable us to
operate our business.
Except for certain equity grants that we may make in the future,
our Manager compensates each of our executive officers. We pay
our Manager a management fee and our Manager uses the proceeds
from the management fee in part to pay compensation to its
officers and personnel. We will adopt an equity incentive plan
for our officers, our non-employee directors, our Managers
personnel and other service providers to encourage their efforts
toward our continued success, long-term growth and profitability
and to attract, reward and retain key personnel. See
Equity Incentive Plan for detailed
description of our equity incentive plan.
Equity
Incentive Plan
Prior to the completion of this offering, we will adopt an
equity incentive plan to provide incentive compensation to
attract and retain qualified directors, officers, advisors,
consultants and other personnel, including our Manager and
affiliates and personnel of our Manager and its affiliates, and
any joint venture affiliates of ours. Unless terminated earlier,
our equity incentive plan will terminate in 2019, but will
continue to govern unexpired awards. Our equity incentive plan
provides for grants of share options, restricted shares of
common stock, phantom shares, dividend equivalent rights and
other equity-based awards up to an aggregate of 6% of the issued
and outstanding shares of our common stock (on a fully diluted
basis) at the time of the award, subject to a ceiling of
40 million shares available for issuance under the plan. In
making awards under the plan, our board of directors or the
compensation committee, as applicable, may consider the
recommendations of our Manager as to the personnel who should
receive awards and the amounts of the awards. Prior to the
completion of this offering, we have not issued any equity-based
compensation.
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The equity incentive plan is administered by the compensation
committee appointed for such purposes. The compensation
committee, as appointed by our board of directors, has the full
authority (1) to administer and interpret the equity
incentive plan, (2) to authorize the granting of awards,
(3) to determine the eligibility of directors, officers,
advisors, consultants and other personnel, including our Manager
and affiliates and personnel of our Manager and its affiliates,
and any joint venture affiliates of ours, to receive an award,
(4) to determine the number of shares of common stock to be
covered by each award (subject to the individual participant
limitations provided in the equity incentive plan), (5) to
determine the terms, provisions and conditions of each award
(which may not be inconsistent with the terms of the equity
incentive plan), (6) to prescribe the form of instruments
evidencing such awards and (7) to take any other actions
and make all other determinations that it deems necessary or
appropriate in connection with the equity incentive plan or the
administration or interpretation thereof. In connection with
this authority, the compensation committee may, among other
things, establish performance goals that must be met in order
for awards to be granted or to vest, or for the restrictions on
any such awards to lapse. From and after the consummation of
this offering, the compensation committee will consist solely of
non-employee directors, each of whom is intended to be, to the
extent required by
Rule 16b-3
under the Exchange Act, a non-employee director and will, at
such times as we are subject to Section 162(m) of the
Internal Revenue Code, qualify as an outside director for
purposes of Section 162(m) of the Internal Revenue Code,
or, if no committee exists, the board of directors.
Code of
Business Conduct and Ethics
Our board of directors has established a code of business
conduct and ethics that applies to our officers and directors
and to our Managers officers, directors and personnel when
such individuals are acting for or on our behalf. Among other
matters, our code of business conduct and ethics is designed to
deter wrongdoing and to promote:
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honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
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full, fair, accurate, timely and understandable disclosure in
our SEC reports and other public communications;
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compliance with applicable governmental laws, rules and
regulations;
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prompt internal reporting of violations of the code to
appropriate persons identified in the code; and
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accountability for adherence to the code.
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Any waiver of the code of business conduct and ethics for our
executive officers or directors may be made only by our board of
directors or one of our board committees and will be promptly
disclosed as required by law or stock exchange regulations.
Conflicts
of Interest
We are dependent on our Manager for our
day-to-day
management and do not have any independent officers or
employees. Each of our officers and two of our directors,
Mr. Armour and Ms. Dunn Kelley, are employees of
Invesco. Our management agreement with our Manager was
negotiated between related parties and its terms, including fees
and other amounts payable, may not be as favorable to us as if
it had been negotiated at arms length with an unaffiliated
third party. In addition, the obligations of our Manager and its
officers and personnel to engage in other business activities,
including for Invesco, may reduce the time our Manager and its
officers and personnel spend managing us.
As of March 31, 2009, Invesco had $348.2 billion in
managed assets and our Manager managed approximately
$177.0 billion of fixed income and real estate investments,
including approximately $18.8 billion of structured
securities, consisting of approximately $11.0 billion of
Agency RMBS, $2.0 billion of non-Agency RMBS and
$1.9 billion of CMBS, and we will compete for investment
opportunities directly with our Manager or other clients of our
Manager or Invesco and its subsidiaries. A substantial number of
separate accounts managed by our Managers had limited
exposure to our target assets. In addition, in the future our
Manager may
109
have additional clients that compete directly with us for
investment opportunities, although Invesco has indicated to us
that it expects that we will be the only publicly traded REIT
advised by our Manager or Invesco and its subsidiaries whose
investment strategy is to invest substantially all of its
capital in our target assets. Our Manager and Invesco Aim
Advisors have an investment allocation policy in place that is
intended to enable us to share equitably with the investment
companies and institutional and separately managed accounts that
effect securities transactions in fixed income securities for
which our Manager and Invesco Aim Advisors are responsible in
the selection of brokers, dealers and other trading
counterparties. According to this policy, investments may be
allocated by taking into account factors, including but not
limited to investment objectives or strategies, the size of the
available investment, cash availability and cash flow
expectations, and the tax implications of an investment. The
investment allocation policy also requires a fair and equitable
allocation of financing opportunities over time among us and
other accounts. The investment allocation policy also includes
other procedures intended to prevent any of its other accounts
from receiving favorable treatment in accessing investment
opportunities over any other account. The investment allocation
policy may be amended by our Manager and Invesco Aim Advisors at
anytime without our consent. To the extent that a conflict
arises with respect to the business of our Manager or Invesco
Aim Advisor or us in such a way as to give rise to conflicts not
currently addressed by the investment allocation policy, our
Manager and Invesco Aim Advisors may need to refine its policy
to address such situation. Our independent directors will review
our Managers and Invesco Aim Advisors compliance
with the investment allocation policy. In addition, to avoid any
actual or perceived conflicts of interest with our Manager or
Invesco Aim Advisors, a majority of our independent directors
will be required to approve an investment in any security
structured or issued by an entity managed by our Manager,
Invesco Aim Advisors, or any of their affiliates, or any
purchase or sale of our assets by or to our Manager, Invesco Aim
Advisors or their affiliates or an entity managed by our
Manager, Invesco Aim Advisors or its affiliates.
To the extent available to us, we may seek to finance our
non-Agency RMBS and CMBS portfolios with financings under the
Legacy Securities Program, and, if the program delay is removed,
we may also seek to acquire residential and commercial mortgage
loans with financing under the Legacy Loan Program. One of the
ways we may access this financing is by contributing our equity
capital to one or more Legacy Securities or Legacy Loan PPIFs
that will be established and managed by our Manager or one of
its affiliates. To date, the terms of any equity investment that
we would make to any Legacy Securities or Legacy Loan PPIFs that
may be established in the future have not yet been determined.
However, we expect that any investment we make will be on terms
that are no less favorable to us than those made available to
other third party institutional investors in the Legacy
Securities or Legacy Loan PPIF. In addition, to the extent we
pay any fees to our Manager or any of its affiliates in
connection with any PPIF, our Manager has agreed to reduce the
management fee payable by us under the management agreement (but
not below zero) in respect of any equity investment we may
decide to make in any PPIF managed by our Manager or any of its
affiliates by the amount of the fees payable to our Manager or
its affiliates under the PPIF with regard to our equity
investment. 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. Our
Manager would have a conflict of interest in recommending our
participation in any Legacy Securities or Legacy Loan PPIFs it
manages for the fees payable to it by the Legacy Securities or
Legacy Loan PPIF may be greater than the fees payable to it by
us under the management agreement. We have addressed this
conflict by requiring that the terms of any equity investment we
make in any such Legacy Securities or Legacy Loan PPIF be
approved by our board of directors, including a majority of our
independent directors.
We do not have a policy that expressly prohibits our directors,
officers, security holders or affiliates from engaging for their
own account in business activities of the types conducted by us.
However, subject to Invescos allocation policy, our code
of business conduct and ethics contains a conflicts of interest
policy that prohibits our directors, officers and personnel, as
well as employees of our Manager who provide services to us,
from engaging in any transaction that involves an actual
conflict of interest with us.
110
Limitation
of Liability and Indemnification
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (1) actual
receipt of an improper benefit or profit in money, property or
services or (2) active and deliberate dishonesty
established by a final judgment as being material to the cause
of action. Our charter contains such a provision and limits the
liability of our directors and officers to the maximum extent
permitted by Maryland law.
Our charter authorizes us, to the maximum extent permitted by
Maryland law, to indemnify and pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to
(1) any present or former director or officer of our
company or (2) any individual who, while serving as our
director or officer and at our request, serves or has served
another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or any other
enterprise as a director, officer, partner or trustee of such
corporation, REIT, partnership, joint venture, trust, employee
benefit plan or other enterprise, from and against any claim or
liability to which such person may become subject or which such
person may incur by reason of his or her service in such
capacity or capacities. Our Bylaws obligate us, to the maximum
extent permitted by Maryland law, to indemnify and pay or
reimburse reasonable expenses in advance of final disposition of
a proceeding to (1) any present or former director or
officer of our company who is made or threatened to be made a
party to the proceeding by reason of his service in that
capacity or (2) any individual who, while serving as our
director or officer and at our request, serves or has served
another corporation, REIT, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, REIT,
partnership, joint venture, trust, employee benefit plan or
other enterprise, and who is made or threatened to be made a
party to the proceeding by reason of his service in that
capacity. Our charter and Bylaws also permit us to indemnify and
advance expenses to any person who served any predecessor of our
company in any of the capacities described above and to any
personnel or agent of our company or of any predecessor.
The MGCL requires us (unless our charter provides otherwise,
which our charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made or threatened to
be made a party by reason of his service in that capacity. The
MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made or threatened to be made a party by reason of their
service in those or other capacities unless it is established
that (1) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and
(A) was committed in bad faith or (B) was the result
of active and deliberate dishonesty, (2) the director or
officer actually received an improper personal benefit in money,
property or services, or (3) in the case of any criminal
proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under
the MGCL, a Maryland corporation may not indemnify a director or
officer in a suit by or in the right of the corporation in which
the director or officer was adjudged liable on the basis that a
personal benefit was improperly received. A court may order
indemnification if it determines that the director or officer is
fairly and reasonably entitled to indemnification, even though
the director or officer did not meet the prescribed standard of
conduct or was adjudged liable on the basis that personal
benefit was improperly received. However, indemnification for an
adverse judgment in a suit by us or in our right, or for a
judgment of liability on the basis that personal benefit was
improperly received, is limited to expenses. In addition, the
MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporations receipt of
(1) a written affirmation by the director or officer of his
good faith belief that he has met the standard of conduct
necessary for indemnification by the corporation and (2) a
written undertaking by him or on his behalf to repay the amount
paid or reimbursed by the corporation if it is ultimately
determined that the appropriate standard of conduct was not met.
111
OUR
MANAGER AND THE MANAGEMENT AGREEMENT
General
We will be externally managed and advised by our Manager. Each
of our officers is an employee of Invesco. Our Manager will be
entitled to receive a management fee pursuant to the management
agreement. The executive offices of our Manager are located at
1555 Peachtree Street, NE, Atlanta, Georgia 30309, and the
telephone number of our Managers executive offices is
(404) 892-0896.
Executive
Officers and Key Personnel of Our Manager
The following sets forth certain information with respect to
each of the executive officers and certain other key personnel
of our Manager:
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Executive Officer
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Age
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Position Held with Our Manager
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G. Mark Armour
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55
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Chief Executive Officer, President and Director
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David A. Hartley
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Chief Accounting Officer and Director
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Jeffrey H. Kupor
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40
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General Counsel and Secretary
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Todd L. Spillane
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50
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Chief Compliance Officer
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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, Director Nominees
and Executive Officers Directors and Director
Nominees for his biographical information.
David A. Hartley, Chief Accounting Officer and Director.
Mr. Hartley is the Chief Accounting Officer and a Director
of our Manager. He has also served as Chief Accounting Officer
of Invesco since April 2004. Mr. Hartley served as Chief
Financial Officer of our Manager from September 1998 to January
2003. During this time, he was the Head of Institutional
Services for our Manager, providing operational, administrative
and back office support to Invesco. Since 1993, Mr. Hartley
served as the Principal Accounting Officer for AMVESCAP PLC, as
Invesco was then known. In 1991, Mr. Hartley joined Invesco
as Controller for Invesco North American operations.
Mr. Hartley began his career in 1982 at KPMG Peat Marwick
in London before moving to Atlanta in 1987. Mr. Hartley
received a Bachelor of Science in Economics and Accounting from
the University of Bristol. Mr. Hartley is an English
Chartered Accountant.
Jeffrey H. Kupor, General Counsel and Secretary.
Mr. Kupor is the General Counsel and Secretary of our
Manager. He has also served as the Head of Invesco Worldwide
Institutionals legal department since August 2006.
Mr. Kupor served as General Counsel of Invesco North
America from December 2003 until August 2006. From January 2002
to November 2003, he was the Assistant General Counsel of
AMVESCAP PLC, as Invesco was then known. Mr. Kupor received
a Bachelor of Science in Economics from the Wharton School of
the University of Pennsylvania and a Juris Doctorate from Boalt
Hall School of Law of the University of California at Berkeley.
Todd Spillane, Chief Compliance Officer.
Mr. Spillane is the Chief Compliance Officer of our
Manager. He has also served as Chief Compliance Officer of
Invesco U.S. Compliance since March 2006. As Chief
Compliance Officer, Mr. Spillane directs the compliance
teams that support the U.S. Retail and
U.S. Institutional operations of Invesco Aim Advisors and
Invesco. Previously, Mr. Spillane served as the Advisory
Compliance Director for Invesco Aim Advisors and was responsible
for the management of the Advisory Compliance group. Prior to
joining Invesco Aim Advisors in 2004, Mr. Spillane was the
Vice President of global product development with AIG Global
Investment Group. While at AIG, he also served as Chief
Compliance Officer and Deputy General Counsel for AIG/SunAmerica
Asset Group and AIG/American General Investment Management.
Mr. Spillane began his career in 1988 as an attorney with
Aetna Life Insurance Company. He also served as Director of
Compliance for Nicholas-Applegate Capital Management from 1994
to 1999. Mr. Spillane received a Bachelor of Arts in
Politics from Fairfield University and a Juris Doctorate from
Western New England School of Law. He is a member of the
Connecticut Bar Association.
112
Brian P. Norris, CFA, Portfolio Manager, Mortgage-Backed
Securities. Mr. Norris is a Portfolio Manager on the
structured securities team with a focus in the mortgage-backed
sector. He is responsible for trading for the mortgage-related
focus products and works collectively with the structured team
to implement strategies throughout the fixed income platform.
Mr. Norris moved to the investment team in 2006. He has
been employed by Invesco since March 2001 and served for five
years as an Account Manager, where he was responsible for
communicating the fixed income investment process and strategy
to both clients and consultants. Mr. Norris began his
investment career in 1999 with Todd Investment Advisers in
Louisville, Kentucky, as a Securities Trader. Mr. Norris
received a Bachelor of Science in Business Administration
majoring in Finance from the University of Louisville.
Mr. Norris is a Chartered Financial Analyst and a member of
the CFA Institute.
Clint Dudley, Portfolio Manager, Mortgage-Backed
Securities. Mr. Dudley is a Portfolio Manager for Invesco
Worldwide Fixed Income and is responsible for the management of
mortgage-backed securities in the long-term investment grade
bond funds. Mr. Dudley joined Invesco Aim Advisors in 1998
as a Systems Analyst in the information technology department.
Mr. Dudley was promoted to Money Market Portfolio Manager
in 2000 and assumed his current duties in 2001. Mr. Dudley
received a Bachelor of Business Administration and a Master of
Business Administration from Baylor University. Mr. Dudley
is a Chartered Financial Analyst.
David B. Lyle, Senior Analyst, Structured Securities.
Mr. Lyle joined our Manager in June 2006 as a Structured
Securities Analyst. He is responsible for evaluating and forming
credit opinions of issuers, originators, servicers, insurance
providers and other parties associated with a range of
structured securities and related collateral. Mr. Lyle is
also involved in the management of structured credit vehicles
and the development and marketing of new investment products.
Prior to joining Invesco, Mr. Lyle spent three years at
Friedman Billings Ramsey where he was a Vice President in the
Investment Banking ABS group. From 2001 to 2003, Mr. Lyle
was an Analyst in the Mortgage Finance group at Wachovia
Securities. Mr. Lyle graduated magna cum laude with a
Bachelor of Engineering from Vanderbilt University.
Kevin M. Collins, Senior Analyst, Structured Securities.
Mr. Collins joined our Manager in 2007 and is currently a
Senior Analyst in the Structured Securities division. He is
responsible for evaluating residential mortgage, commercial
mortgage and asset-backed securities investments and determining
views on issuers, originators, servicers, insurance providers,
and other parties involved in the structured securities market.
Additionally, Mr. Collins is involved in identifying new
investment strategies and creating related product offerings for
Invesco Worldwide Fixed Income. Prior to joining Invesco,
Mr. Collins raised capital for banks and specialty finance
companies by originating and executing securitizations at Credit
Suisse from 2004 to 2007. Mr. Collins began his career in
the Structured Finance Advisory Services practice at Ernst and
Young LLP in 2002. Mr. Collins graduated magna cum laude
with a Bachelor of Science in Accounting from Florida State
University.
Laurie F. Brignac, CFA, Senior Portfolio Manager, Cash
Management. Ms. Brignac is a Senior Portfolio Manager for
Invesco Worldwide Fixed Income and is responsible for the
management of all cash management products, including
institutional, retail and offshore money funds, as well as
private accounts. She joined Invesco Aim Advisors in 1992 as a
Money Market Trader specializing in the repurchase agreement and
time deposit markets. She was promoted to Investment Officer in
1994 and to Senior Portfolio Manager in 2002. Her duties have
expanded to include all forms of short-term taxable fixed income
securities, but her primary responsibility lies in the enhanced
cash and short-term cash management area. Prior to joining
Invesco Aim Advisors, Ms. Brignac was a Sales Assistant for
HSBC Securities, Inc. She began her investment career as a Money
Market Trader responsible for managing the Federal Reserve
position at Premier Bank in Louisiana. Ms. Brignac received
a Bachelor of Science in Accounting from Louisiana State
University. Ms. Brignac is a Chartered Financial Analyst
and a member of the Association for Investment Management and
Research.
Lyman Missimer III, CFA, Chief Investment Officer, Cash
Management, Senior Vice President of Invesco Aim Distributors,
Inc., Assistant Vice President of Invesco Aim Advisors and
Invesco Aim Capital Management, Inc. Mr. Missimer is
responsible for directing the management of all cash management
products including, institutional, retail, offshore money market
funds, as well as enhanced cash and private accounts.
113
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.
Thomas Gerhardt, Portfolio Manager, Cash Management.
Mr. Gerhardt is a Portfolio Manager for Invesco Worldwide
Fixed Income and is responsible for the management of all cash
management products, including institutional, retail and
offshore money funds, as well as private accounts.
Mr. Gerhardt joined Invesco Aim Advisors in 1992 as a
Portfolio Administrator specializing in the pricing of
collateral for repurchase agreements and assisting in the
day-to-day
operations surrounding the money market funds. In 1999, he
rejoined Invesco Aim Advisors after several years in the
teaching profession. He joined Invesco Aim Advisors Cash
Management Marketing team in 2002 as an Internal Wholesaler and
he assumed his current position as Portfolio Manager in 2006.
Mr. Gerhardt received a Bachelor of Arts in Communications
from Trinity University and a Master of Business Administration
from the University of St. Thomas.
Mark V. Matthews, Ph.D., Head of Global Process
Management. Mr. Matthews joined Invescos Quantitative
Research group in September 2000. He is responsible for
developing models and forecasting tools for fixed income
markets. Mr. Matthews develops models and measurement
algorithms for investment opportunity and performance, and works
on quantitative product design, risk measurement, and
performance attribution. Mr. Matthews began his career in
1991 as Assistant Professor of Applied Math at the Massachusetts
Institute of Technology. From 1996 to 1999, he worked on
security analytics for a financial software company. Immediately
prior to joining Invesco, Mr. Matthews was a Quantitative
Analyst in the Equity Trading group at Fidelity Investments. He
became Director of Quantitative Research for Invesco in 2004. In
2007, he joined Invescos Global Process Management team as
Head of Research and Development and was named Head of Global
Process Management in 2008. Mr. Matthews received a
Bachelor of Arts from Harvard University, and a Masters of
Science and Doctor of Philosophy in Statistics from Stanford
University.
Historical
Performance of Our Managers Investments in RMBS and
CMBS
Our Managers investment professionals have extensive
experience in performing advisory services for funds, other
investment vehicles, and other managed and discretionary
accounts that focus on investing in RMBS and CMBS. As of
March 31, 2009, our Manager managed approximately
$18.8 billion of structured securities, consisting of
approximately $11.0 billion of Agency RMBS,
$3.9 billion of consumer ABS, $2.0 billion of
non-Agency RMBS and $1.9 billion of CMBS.
Invescos proprietary structured securities fund managed by
our Manager, is the only fund managed by our Manager that
follows an investment strategy comparable to our business
strategy. At March 31, 2009, the proprietary structured
securities fund had approximately $10.5 billion in assets.
The proprietary structured securities fund is managed by the
same individuals at our Manager who will be responsible for our
day-to-day
management. The table below identifies the target assets of the
proprietary structured securities fund compared to our target
assets, while the graph below illustrates the historical sector
weights of the target assets of the
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proprietary structured securities fund as well as the total
percentage of the proprietary structured securities fund
invested in structured securities.
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Proprietary Structured
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Invesco Mortgage
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Asset Class
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Securities Fund
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Capital Inc.
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Agency RMBS
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ü
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Non-Agency RMBS
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ü
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ü
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CMBS
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ü
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ü
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Debt issued by the U.S. Treasury or a U.S. Government agency
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ü
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Residential and Commercial Mortgage Loans
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ü
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Invescos
proprietary structured securities fund
Historical Sector Weights
The average portfolio weight in our proprietary structured
securities fund in each of our target assets are calculated
using monthly data over the period from December 2003 to March
2009 and are approximately as follows: 30% Agency RMBS, 30%
non-Agency RMBS, 15% CMBS and 25% government debt. As
illustrated in the graph above, over time, 80% to 100% of the
proprietary structured securities funds investments have
been in structured securities and the various asset classes of
the proprietary structured securities fund are substantially
similar to our target assets.
The proprietary structured securities fund was established in
April 2002. The information in the graph and tables below detail
the return profile of the proprietary structured securities fund
from December 31, 2003 through March 31, 2009. The
data presented is based on internal portfolio accounting system
output. The proprietary structured securities fund produced
positive returns for each of the past five calendar years and
annualized returns of 1.11%, 4.52% and 3.31% respectively on a
one, three, and five year basis as of March 31, 2009.
115
Quarterly
Returns (Gross)
Invescos proprietary structured securities fund
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Trailing Period Returns
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(Quarterly Data as of 3/31/09)
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1Q09
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1 Year
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3 Years
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5 Years
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Invescos proprietary structured securities fund
(gross)
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2.52
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1.11
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4.52
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3.31
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Invescos proprietary structured securities fund
(net)
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2.47
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0.92
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4.32
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3.11
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Calendar Year Returns
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2008
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2007
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2006
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2005
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2004
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Invescos proprietary structured securities fund
(gross)
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0.13
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6.82
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4.61
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2.06
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2.44
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Invescos proprietary structured securities fund
(net)
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(0.06
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6.62
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4.41
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1.87
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2.25
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We have included this historical performance data because we
believe it may be useful in assessing the capabilities of our
Manager and our ability to manage a portfolio including both
RMBS and CMBS. The gross performance results are presented
before management and custodial fees but after all trading
commissions and withholding taxes on dividends, interest and
capital gains. The net performance results are calculated by
subtracting the highest tier of the published fee schedule for
this product from the gross quarterly returns.
Although the investment objectives and strategy of the
proprietary structured securities fund have significant overlap
with our investment objectives and strategy, we intend to use
significantly more leverage than the proprietary structured
securities fund. While we anticipate using significant financing
for our assets as our Manager deems appropriate and consistent
with our investment objectives and strategy, the proprietary
structured securities fund has historically employed modest
amounts of leverage through its use of U.S. Treasury
futures, Eurodollar futures and TBA contracts and is not
permitted to borrow against its assets, other than on a
temporary basis. The proprietary structured securities fund does
not issue debt or borrow through repurchase agreement financing
or through the U.S. Government programs in which we may
participate. We expect, at least initially, that we may deploy
on a
debt-to-equity
basis leverage up to seven to eight times on our Agency RMBS
assets and up to five to six times on our non-Agency RMBS, CMBS
and mortgage loans assets. The higher levels of leverage we
expect to deploy in our investment strategy compared to the
levels of leverage historically deployed by the proprietary
structured securities fund is expected to provide us with
opportunities to earn higher returns on invested capital, while
at the same time exposing us to greater risk of
116
loss, in comparison to the proprietary structured securities
fund. For additional information regarding our financing
strategy, see Business Our Financing
Strategy.
The historical performance and other data relating to the
proprietary structured securities fund presented above is not
the performance of us or a model portfolio that we might build.
The performance presented should not be considered to be
indicative of our future performance and should not be
considered a substitute for or guarantee of our future
performance.
Investment
Committee
Our Manager has an Investment Committee comprised of our
Managers professionals comprising Messrs. King,
Anzalone, Kuster, Marshall and Missimer. For biographical
information on the members of the Investment Committee, see
Management Our Directors, Director Nominees
and Executive Officers Executive Officers,
Management Our Directors, Director Nominees
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. The Investment
Committee will meet as frequently as it believes is necessary.
Management
Agreement
Upon completion of this offering, we will enter into a
management agreement with our Manager pursuant to which it will
provide for the
day-to-day
management of our operations. The management agreement will
require our Manager to manage our business affairs in conformity
with the investment guidelines and other policies that are
approved and monitored by our board of directors. Our
Managers role as Manager will be under the supervision and
direction of our board of directors.
Management
Services
Our Manager will be responsible for (1) the selection,
purchase and sale of our portfolio investments, (2) our
financing activities, and (3) providing us with investment
advisory services. Our Manager will be responsible for our
day-to-day
operations and will perform (or will cause to be performed) such
services and activities relating to our assets and operations as
may be appropriate, which may include, without limitation, the
following:
(i) serving as our consultant with respect to the periodic
review of the investment guidelines and other parameters for our
investments, financing activities and operations, any
modification to which will be approved by a majority of our
independent directors;
(ii) investigating, analyzing and selecting possible
investment opportunities and acquiring, financing, retaining,
selling, restructuring or disposing of investments consistent
with the investment guidelines;
(iii) with respect to prospective purchases, sales or
exchanges of investments, conducting negotiations on our behalf
with sellers, purchasers and brokers and, if applicable, their
respective agents and representatives;
(iv) negotiating and entering into, on our behalf,
repurchase agreements, interest rate swap agreements, agreements
relating to borrowings under programs established by the
U.S. Government and other agreements and instruments
required for us to conduct our business;
(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;
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(vii) coordinating and managing operations of any joint
venture or co-investment interests held by us and conducting all
matters with the joint venture or co-investment partners;
(viii) providing executive and administrative personnel,
office space and office services required in rendering services
to us;
(ix) administering the
day-to-day
operations and performing and supervising the performance of
such other administrative functions necessary to our management
as may be agreed upon by our Manager and our board of directors,
including, without limitation, the collection of revenues and
the payment of our debts and obligations and maintenance of
appropriate computer services to perform such administrative
functions;
(x) communicating on our behalf with the holders of any of
our equity or debt securities as required to satisfy the
reporting and other requirements of any governmental bodies or
agencies or trading markets and to maintain effective relations
with such holders;
(xi) counseling us in connection with policy decisions to
be made by our board of directors;
(xii) evaluating and recommending to our board of directors
hedging strategies and engaging in hedging activities on our
behalf, consistent with such strategies as so modified from time
to time, with our qualification as a REIT and with our
investment guidelines;
(xiii) counseling us regarding the maintenance of our
qualification as a REIT and monitoring compliance with the
various REIT qualification tests and other rules set out in the
Internal Revenue Code and Treasury Regulations thereunder and
using commercially reasonable efforts to cause us to qualify for
taxation as a REIT;
(xiv) counseling us regarding the maintenance of our
exemption from the status of an investment company required to
register under the 1940 Act, monitoring compliance with the
requirements for maintaining such exemption and using
commercially reasonable efforts to cause us to maintain such
exemption from such status;
(xv) furnishing reports and statistical and economic
research to us regarding our activities and services performed
for us by our Manager;
(xvi) monitoring the operating performance of our
investments and providing periodic reports with respect thereto
to the board of directors, including comparative information
with respect to such operating performance and budgeted or
projected operating results;
(xvii) investing and reinvesting any moneys and securities
of ours (including investing in short-term investments pending
investment in other investments, payment of fees, costs and
expenses, or payments of dividends or distributions to our
stockholders and partners) and advising us as to our capital
structure and capital raising;
(xviii) causing us to retain qualified accountants and
legal counsel, as applicable, to assist in developing
appropriate accounting procedures and systems, internal controls
and other compliance procedures and testing systems with respect
to financial reporting obligations and compliance with the
provisions of the Internal Revenue Code applicable to REITs and,
if applicable, TRSs, and to conduct quarterly compliance reviews
with respect thereto;
(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;
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(xxi) assisting us in taking all necessary action to enable
us to make required tax filings and reports, including
soliciting stockholders for required information to the extent
required by the provisions of the Internal Revenue Code
applicable to REITs;
(xxii) placing, or arranging for the placement of, all
orders pursuant to our Managers investment determinations
for us either directly with the issuer or with a broker or
dealer (including any affiliated broker or dealer);
(xxiii) handling and resolving all claims, disputes or
controversies (including all litigation, arbitration, settlement
or other proceedings or negotiations) in which we may be
involved or to which we may be subject arising out of our
day-to-day
operations (other than with our Manager or its affiliates),
subject to such limitations or parameters as may be imposed from
time to time by the board of directors;
(xxiv) using commercially reasonable efforts to cause
expenses incurred by us or on our behalf to be commercially
reasonable or commercially customary and within any budgeted
parameters or expense guidelines set by the board of directors
from time to time;
(xxv) advising us with respect to and structuring long-term
financing vehicles for our portfolio of assets, and offering and
selling securities publicly or privately in connection with any
such structured financing;
(xxvi) forming the Investment Committee, which will propose
investment guidelines to be approved by a majority of our
independent directors;
(xxvii) serving as our consultant with respect to decisions
regarding any of our financings, hedging activities or
borrowings undertaken by us including (1) assisting us in
developing criteria for debt and equity financing that is
specifically tailored to our investment objectives, and
(2) advising us with respect to obtaining appropriate
financing for our investments;
(xxviii) providing us with portfolio management;
(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
(xxxi) using commercially reasonable efforts to cause us to
comply with all applicable laws.
Liability
and Indemnification
Pursuant to the management agreement, our Manager will not
assume any responsibility other than to render the services
called for thereunder and will not be responsible for any action
of our board of directors in following or declining to follow
its advice or recommendations. Our Manager maintains a
contractual as opposed to a fiduciary relationship with us.
Under the terms of the management agreement, our Manager, its
officers, stockholders, members, managers, directors, personnel,
any person controlling or controlled by our Manager and any
person providing
sub-advisory
services to our Manager will not be liable to us, any subsidiary
of ours, our directors, our stockholders or any
subsidiarys stockholders or partners for acts or omissions
performed in accordance with and pursuant to the management
agreement, except because of acts constituting bad faith,
willful misconduct, gross negligence, or reckless disregard of
their duties under the management agreement, as determined by a
final non-appealable order of a court of competent jurisdiction.
We have agreed to indemnify our Manager, its officers,
stockholders, members, managers, directors, personnel, any
person controlling or controlled by our Manager and any person
providing
sub-advisory
services to our Manager with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from
acts of our Manager not constituting bad faith, willful
misconduct, gross negligence, or reckless disregard of duties,
performed in good faith in accordance with and pursuant to the
management agreement. Our Manager
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has agreed to indemnify us, our directors and officers,
personnel, agents and any persons controlling or controlled by
us with respect to all expenses, losses, damages, liabilities,
demands, charges and claims arising from acts of our Manager
constituting bad faith, willful misconduct, gross negligence or
reckless disregard of its duties under the management agreement
or any claims by our Managers personnel relating to the
terms and conditions of their employment by our Manager. Our
Manager will not be liable for trade errors that may result from
ordinary negligence, such as errors in the investment decision
making process (such as a transaction that was effected in
violation of our investment guidelines) or in the trade process
(such as a buy order that was entered instead of a sell order,
or the wrong purchase or sale of security, or a transaction in
which a security was purchased or sold in an amount or at a
price other than the correct amount or price). Notwithstanding
the foregoing, our Manager will carry errors and omissions and
other customary insurance upon the completion of this offering.
Management
Team
Pursuant to the terms of the management agreement, our Manager
is required to provide us with our management team, including a
Chief Executive Officer, Chief Financial Officer, Chief
Investment Officer, Chief Accounting Officer, Head of Research
and Portfolio Manager and along with appropriate support
personnel, to provide the management services to be provided by
our Manager to us. None of the officers or employees of our
Manager will be dedicated exclusively to us.
Our Manager is required to refrain from any action that, in its
sole judgment made in good faith, (1) is not in compliance
with the investment guidelines, (2) would adversely and
materially affect our status as a REIT under the Internal
Revenue Code or our status as an entity intended to be exempted
or excluded from investment company status under the 1940 Act or
(3) would violate any law, rule or regulation of any
governmental body or agency having jurisdiction over us or that
would otherwise not be permitted by our charter or Bylaws. If
our Manager is ordered to take any action by our board of
directors, our Manager will promptly notify the board of
directors if it is our Managers judgment that such action
would adversely and materially affect such status or violate any
such law, rule or regulation or our charter or Bylaws. Our
Manager, its directors, members, officers, stockholders,
managers, personnel, employees and any person controlling or
controlled by our Manager and any person providing
sub-advisory
services to our Manager will not be liable to us, our board of
directors, our stockholders, partners or members, for any act or
omission by our Manager, its directors, officers, stockholders
or employees except as provided in the management agreement.
Term
and Termination
The management agreement may be amended or modified by agreement
between us and our Manager. The initial term of the management
agreement expires on the second anniversary of the closing of
this offering and will be automatically renewed for a one-year
term each anniversary date thereafter unless previously
terminated as described below. Our independent directors will
review our Managers performance and the management fees
annually and, following the initial term, the management
agreement may be terminated annually upon the affirmative vote
of at least two-thirds of our independent directors, based upon
(1) unsatisfactory performance that is materially
detrimental to us or (2) our determination that the
management fees payable to our Manager are not fair, subject to
our Managers right to prevent such termination due to
unfair fees by accepting a reduction of management fees agreed
to by at least two-thirds of our independent directors. We must
provide 180 days prior notice of any such termination.
Unless terminated for cause, our Manager will be paid a
termination fee equal to three times the sum of the average
annual management fee during the
24-month
period immediately preceding such termination, calculated as of
the end of the most recently completed fiscal quarter before the
date of termination.
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
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Manager, under certain circumstances, has taken steps to cure
such breach within 30 days of the written notice);
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our Managers fraud, misappropriation of funds, or
embezzlement against us;
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our Managers gross negligence of duties under the
management agreement;
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the occurrence of certain events with respect to the bankruptcy
or insolvency of our Manager, including an order for relief in
an involuntary bankruptcy case or our Manager authorizing or
filing a voluntary bankruptcy petition;
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our Manager is convicted (including a plea of nolo contendere)
of a felony; and
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the dissolution of our Manager.
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Our Manager may assign the agreement in its entirety or delegate
certain of its duties under the management agreement to any of
its affiliates without the approval of our independent directors
if such assignment or delegation does not require our approval
under the Investment Advisers Act of 1940.
Our Manager may terminate the management agreement if we become
required to register as an investment company under the 1940
Act, with such termination deemed to occur immediately before
such event, in which case we would not be required to pay a
termination fee. Our Manager may decline to renew the management
agreement by providing us with 180 days written notice, in
which case we would not be required to pay a termination fee. In
addition, if we default in the performance of any material term
of the agreement and the default continues for a period of
30 days after written notice to us, our Manager may
terminate the management agreement upon 60 days
written notice. If the management agreement is terminated by our
Manager upon our breach, we would be required to pay our Manager
the termination fee described above.
We may not assign our rights or responsibilities under the
management agreement without the prior written consent of our
Manager, except in the case of assignment to another REIT or
other organization which is our successor, in which case such
successor organization will be bound under the management
agreement and by the terms of such assignment in the same manner
as we are bound under the management agreement.
Management
Fees and Expense Reimbursements
We do not expect to maintain an office or directly employ
personnel. Instead we rely on the facilities and resources of
our Manager to manage our
day-to-day
operations.
Management
Fee
We will pay our Manager a management fee in an amount equal to
1.50% of our stockholders equity, per annum, calculated
and payable quarterly in arrears. For purposes of calculating
the management fee, our stockholders equity means the sum
of the net proceeds from all issuances of our equity securities
since inception (allocated on a pro rata basis for such
issuances during the fiscal quarter of any such issuance), plus
our retained earnings at the end of the most recently completed
calendar quarter (without taking into account any non-cash
equity compensation expense incurred in current or prior
periods), less any amount that we pay to repurchase our common
stock since inception, and excluding any unrealized gains,
losses or other items that do not affect realized net income
(regardless of whether such items are included in other
comprehensive income or loss, or in net income). This amount
will be adjusted to exclude one-time events pursuant to changes
in GAAP, and certain non-cash items after discussions between
our Manager and our independent directors and approved by a
majority of our independent directors. Our stockholders
equity, for purposes of calculating the management fee, could be
greater or less than the amount of stockholders equity
shown on our financial statements. We will treat outstanding
limited partner interests (not held by us) as outstanding shares
of capital stock for purposes of calculating the management fee.
Our Manager uses the proceeds from its management fee in part to
pay compensation to its officers and personnel who,
notwithstanding that certain of them also are our officers,
receive no cash compensation directly from us. The management
fee is payable independent of the performance of our portfolio.
In our management agreement, our Manager has agreed not
121
to charge the management fee payable in respect of any equity
investment we may decide to make in any Legacy Securities or
Legacy Loan PPIF if managed by our Manager or any of its
affiliates. 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.
The management fee of our Manager shall be calculated within
30 days after the end of each quarter and such calculation
shall be promptly delivered to us. We are obligated to pay the
management fee in cash within five business days after delivery
to us of the written statement of our Manager setting forth the
computation of the management fee for such quarter.
Although there is no current intention to do so, as a component
of our Managers compensation, we may in the future issue
to personnel of our Manager stock-based compensation under our
equity incentive plan.
Reimbursement
of Expenses
We will be required to reimburse our Manager for the expenses
described below. Expense reimbursements to our Manager are made
in cash on a monthly basis following the end of each month. Our
reimbursement obligation is not subject to any dollar
limitation. Because our Managers personnel perform certain
legal, accounting, due diligence tasks and other services that
outside professionals or outside consultants otherwise would
perform, our Manager is paid or reimbursed for the documented
cost of performing such tasks, provided that such costs and
reimbursements are in amounts which are no greater than those
which would be payable to outside professionals or consultants
engaged to perform such services pursuant to agreements
negotiated on an arms-length basis.
We also pay all operating expenses, except those specifically
required to be borne by our Manager under the management
agreement. The expenses required to be paid by us include, but
are not limited to:
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expenses in connection with the issuance and transaction costs
incident to the acquisition, disposition and financing of our
investments;
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costs of legal, tax, accounting, consulting, auditing,
administrative and other similar services rendered for us by
providers retained by our Manager or, if provided by our
Managers personnel, in amounts which are no greater than
those which would be payable to outside professionals or
consultants engaged to perform such services pursuant to
agreements negotiated on an arms-length basis;
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the compensation and expenses of our directors and the cost of
liability insurance to indemnify our directors and officers;
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costs associated with the establishment and maintenance of any
of our credit or other indebtedness of ours (including
commitment fees, accounting fees, legal fees, closing and other
similar costs) or any of our securities offerings;
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expenses connected with communications to holders of our
securities or of our subsidiaries and other bookkeeping and
clerical work necessary in maintaining relations with holders of
such securities and in complying with the continuous reporting
and other requirements of governmental bodies or agencies,
including, without limitation, all costs of preparing and filing
required reports with the SEC, the costs payable by us to any
transfer agent and registrar in connection with the listing
and/or
trading of our stock on any exchange, the fees payable by us to
any such exchange in connection with its listing, costs of
preparing, printing and mailing our annual report to our
stockholders and proxy materials with respect to any meeting of
our stockholders;
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costs associated with any computer software or hardware,
electronic equipment or purchased information technology
services from third-party vendors that is used for us;
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expenses incurred by managers, officers, personnel and agents of
our Manager for travel on our behalf and other
out-of-pocket
expenses incurred by managers, officers, personnel and agents of
our Manager in connection with the purchase, financing,
refinancing, sale or other disposition of an investment or
establishment and maintenance of any of our repurchase
agreements or any of our securities offerings;
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costs and expenses incurred with respect to market information
systems and publications, research publications and materials,
and settlement, clearing and custodial fees and expenses;
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compensation and expenses of our custodian and transfer agent,
if any;
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the costs of maintaining compliance with all federal, state and
local rules and regulations or any other regulatory agency;
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all taxes and license fees;
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all insurance costs incurred in connection with the operation of
our business except for the costs attributable to the insurance
that our Manager elects to carry for itself and its personnel;
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costs and expenses incurred in contracting with third parties,
including affiliates of our Manager, for the servicing and
special servicing of our assets;
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all other costs and expenses relating to our business and
investment operations, including, without limitation, the costs
and expenses of acquiring, owning, protecting, maintaining,
developing and disposing of investments, including appraisal,
reporting, audit and legal fees;
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expenses relating to any office(s) or office facilities,
including but not limited to disaster backup recovery sites and
facilities, maintained for us or our investments separate from
the office or offices of our Manager;
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expenses connected with the payments of interest, dividends or
distributions in cash or any other form authorized or caused to
be made by the board of directors to or on account of holders of
our securities or of our subsidiaries, including, without
limitation, in connection with any dividend reinvestment plan;
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any judgment or settlement of pending or threatened proceedings
(whether civil, criminal or otherwise) against us or any
subsidiary, or against any trustee, director, partner, member or
officer of us or of any subsidiary in his capacity as such for
which we or any subsidiary is required to indemnify such
trustee, director, partner, member or officer by any court or
governmental agency; and
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all other expenses actually incurred by our Manager (except as
described below) which are reasonably necessary for the
performance by our Manager of its duties and functions under the
management agreement.
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We will not reimburse our Manager for the salaries and other
compensation of its personnel, except, we will reimburse our
Manager for our allocable share of our Chief Financial
Officers compensation based on the percentage of his or
her working time spent on our affairs as compared to his or her
working time spent on other matters for our Manager. The
compensation of our Chief Financial Officer is competitive with
other similarly situated public REITs. See
Management Executive and Director
Compensation Executive Compensation. The fees
charged by Invesco Aim Advisors for the performance of
sub-advisory
services to our Manager shall be paid by our Manager and shall
not constitute a reimbursable expense by our Manager under the
management agreement.
In addition, we may be required to pay our pro rata portion of
rent, telephone, utilities, office furniture, equipment,
machinery and other office, internal and overhead expenses of
our Manager and its affiliates required for our operations.
Grants of
Equity Compensation to Our Manager, Its Personnel and Its
Affiliates
Under our equity incentive plan, our compensation committee (or
our board of directors, if no such committee is designated by
the board) is authorized to approve grants of equity-based
awards to our Manager, its personnel.
Future equity awards may be made to our officers or directors
and to our Manager and its personnel and affiliates under our
equity incentive plan. See Management Equity
Incentive Plan.
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PRINCIPAL
STOCKHOLDERS
Immediately prior to the completion of this offering, there will
be 100 shares of common stock outstanding and one
stockholder of record. At that time, we will have no other
shares of capital stock outstanding. The following table sets
forth certain information, prior to and after this offering,
regarding the ownership of each class of our capital stock by:
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each of our directors and director nominees;
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each of our executive officers;
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each holder of 5% or more of each class of our capital
stock; and
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all of our directors, director nominees and executive officers
as a group.
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In accordance with SEC rules, each listed persons
beneficial ownership includes:
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all shares the investor actually owns beneficially or of record;
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all shares over which the investor has or shares voting or
dispositive control (such as in the capacity as a general
partner of an investment fund); and
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all shares the investor has the right to acquire within
60 days (such as shares of restricted common stock that are
currently vested or which are scheduled to vest within
60 days).
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Unless otherwise indicated, all shares are owned directly, and
the indicated person has sole voting and investment power.
Except as indicated in the footnotes to the table below, the
business address of the stockholders listed below is the address
of our principal executive office, 1555 Peachtree Street, NE,
Atlanta, Georgia 30309.
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Percentage of Common Stock Outstanding
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Immediately Prior to this Offering
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Immediately after this Offering(2)
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Name and Address
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Shares Owned
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Percentage
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Shares Owned
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Percentage
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Invesco
Ltd.(1)
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100
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100
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%
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75,100
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0.87
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%
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G. Mark Armour
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Karen Dunn Kelley
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James S. Balloun
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John S. Day
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Neil Williams
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Richard J. King
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John Anzalone
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Donald R. Ramon
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All directors, director nominees and executive officers as a
group
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* |
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Represents less than 1% of the common shares outstanding upon
the closing of this offering. |
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(1) |
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Invesco is the indirect 100% stockholder of Invesco
Institutional (N.A.), Inc. which purchased 100 shares of
common stock in connection with our initial capitalization and
will purchase 75,000 shares of common stock in the
concurrent private offering. |
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(2) |
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Does not reflect (i) shares of common stock reserved for
issuance upon exercise of the underwriters over-allotment,
and (ii) shares of our common stock that may be issued by
us upon a redemption of all of the 1,425,000 OP units to be
owned by Invesco, through Invesco Investments (Bermuda) Ltd.,
upon completion of this offering. |
124
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the completion of this offering, we will enter into a
management agreement with Invesco Institutional (N.A.), Inc, our
Manager, pursuant to which our Manager will provide the
day-to-day management of our operations. The management
agreement requires our Manager to manage our business affairs in
conformity with the policies and the investment guidelines that
are approved and monitored by our board of directors. The
management agreement has an initial two-year term and will be
renewed for one-year terms thereafter unless terminated by
either us or our Manager. Our Manager is entitled to receive a
termination fee from us, under certain circumstances. We are
also obligated to reimburse certain expenses incurred by our
Manager. Our Manager is entitled to receive from us a management
fee. See Our Manager and The Management
Agreement Management Agreement.
Our executive officers also are employees of Invesco. As a
result, the management agreement between us and our Manager and
the terms of the limited partner interest were negotiated
between related parties, and the terms, including fees and other
amounts payable, may not be as favorable to us as if it had been
negotiated with an unaffiliated third party. See
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
stockholders.
Our management agreement is intended to provide us with access
to our Managers pipeline of assets and its personnel and
its experience in capital markets, credit analysis, debt
structuring and risk and asset management, as well as assistance
with corporate operations, legal and compliance functions and
governance. However, our Chief Executive Officer, Chief
Investment Officer, Chief Financial Officer and Secretary also
serve as officers and employees of Invesco. As a result, the
management agreement between us and our Manager was negotiated
between related parties, and the terms, including fees and other
payments payable, may not be as favorable to us as if it had
been negotiated with an unaffiliated third party. See
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
stockholders.
Related
Party Transaction Policies
To avoid any actual or perceived conflicts of interest with our
Manager, we expect our board of directors to adopt a policy
providing that an investment in any security structured or
managed by our Manager, and any sale of our assets to our
Manager and its affiliates or any entity managed by our Manager
and its affiliates, will require the proper approval of our
independent directors. Our independent directors expect to
establish in advance parameters within which our Manager and its
affiliates may act as our counterparty and provide broker,
dealer and lending services to us in order to enable
transactions to occur in an orderly and timely manner.
We also expect our board of directors to adopt a policy
regarding the approval of any related person
transaction, which is any transaction or series of
transactions in which we or any of our subsidiaries is or are to
be a participant, the amount involved exceeds $120,000, and a
related person (as defined under SEC rules) has a
direct or indirect material interest. Under the policy, a
related person would need to promptly disclose to our Secretary
any related person transaction and all material facts about the
transaction. Our Secretary would then assess and promptly
communicate that information to the Compensation Committee of
our board of directors. Based on its consideration of all of the
relevant facts and circumstances, this committee will decide
whether or not to approve such transaction and will generally
approve only those transactions that do not create a conflict of
interest. If we become aware of an existing related person
transaction that has not been pre-approved under this policy,
the transaction will be referred to this committee which will
evaluate all options available, including ratification, revision
or termination of such transaction. Our policy requires any
director who may be interested in a related person transaction
to recuse himself or herself from any consideration of such
related person transaction. See Management
Conflicts of Interest.
125
Restricted
Common Stock and Other Equity-Based Awards
Our equity incentive plan provides for grants of restricted
common stock and other equity-based awards up to an aggregate of
6% of the issued and outstanding shares of our common stock (on
a fully diluted basis) at the time of the award, subject to a
ceiling of 40 million shares of our common stock.
Purchases
of Common Stock by Affiliates
Concurrently with the completion of this offering, we will
complete a private placement in which we will sell
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., at $20.00
per unit. Upon completion of this offering and the concurrent
private placement, Invesco, through our Manager, will
beneficially own 0.87% of our outstanding common stock (or 0.76%
if the underwriters fully exercise their option to purchase
additional shares). Assuming that all OP units are redeemed for
an equivalent number of shares of our common stock, Invesco,
through the Invesco Purchaser, would beneficially own 15% of our
outstanding common stock upon completion of this offering and
the concurrent private placement (or 13.3% if the underwriters
fully exercise their option to purchase additional shares). We
plan to invest the net proceeds of this offering and the
concurrent private offering in accordance with our investment
objectives and the strategies described in this prospectus.
Indemnification
and Limitation of Directors and Officers
Liability
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (1) actual
receipt of an improper benefit or profit in money, property or
services or (2) active and deliberate dishonesty
established by a final judgment as being material to the cause
of action. Our charter contains such a provision that limits
such liability to the maximum extent permitted by Maryland law.
The MGCL permits a corporation to indemnify its present and
former directors and officers, among