As filed with the Securities and Exchange Commission on
May 15, 2009
Registration Statement No. 333-149196
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 6
To
Form S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF
1933
OF CERTAIN REAL ESTATE
COMPANIES
MFResidential Investments,
Inc.
(Exact name of registrant as
specified in its governing instruments)
350 Park Avenue, 21st Floor
New York, New York 10022
(212) 207-6400
(Address, including Zip Code,
and Telephone Number, including Area Code, of Registrants
Principal Executive Offices)
Timothy W. Korth, Esq.
General Counsel and Senior Vice President
Business Development
c/o MFA
Financial, Inc.
350 Park Avenue, 21st Floor
New York, New York 10022
(212) 207-6400
(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.
Jacob A. Farquharson, Esq.
Clifford Chance US LLP
31 West
52
(nd)
Street
New York, New York 10019
TEL (212) 878-8000
FAX (212) 878-8375
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William G. Farrar, Esq.
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004
TEL (212) 558-4000
FAX (212) 558-3588
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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.
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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.
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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.
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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.
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If
delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check One):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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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
PRELIMINARY
PROSPECTUS DATED MAY 15, 2009
PROSPECTUS
Shares
Common Stock
MFResidential Investments, Inc. is a Maryland corporation that
will invest primarily in residential mortgage-backed securities
(or MBS), residential mortgage loans and other real
estate-related financial assets. We will be externally managed
and advised by MFA Spartan Manager, LLC, a Delaware limited
liability company (or our Manager). Our Manager is a subsidiary
of MFA Financial, Inc. (or MFA), a publicly-traded real estate
investment trust (or REIT).
This is our initial public offering and no public market
currently exists for our common stock. We are
offering shares
of our common stock as described in this prospectus. We expect
the initial public offering price of our common stock to be
$ per share. We intend to apply to
have our common stock listed on the New York Stock Exchange
under the symbol MFR. Concurrently with the closing
of this offering, we will sell to MFA in a separate private
placement at the initial public offering price per share a
number of shares of our common stock equal to 9.8% of our
outstanding shares of common stock on a fully diluted basis
after giving effect to the shares sold in this offering,
excluding shares sold pursuant to the underwriters
exercise of their overallotment option.
We intend to elect and qualify to be taxed as a REIT for
U.S. federal income tax purposes. To assist us in
qualifying as a REIT, 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 stock, or
9.8% by value or number of shares, whichever is more
restrictive, of our outstanding capital stock. 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 17 of this prospectus for a
discussion of the following and other risks
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We have no operating history and will commence operations only
upon the completion of this offering.
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We do not have any assets and the net proceeds from this
offering are not committed to specific investments; we may
allocate the net proceeds from this offering to investments with
which you may not agree and our failure to apply these proceeds
effectively could cause our operating results and the value of
our common stock to decline.
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Our performance is dependent on our Manager and its key
personnel and we may not find suitable replacements if the
management agreement with our Manager is terminated or upon the
departure of its key personnel.
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There are various conflicts of interest in our relationship with
our Manager and MFA, which could result in decisions that are
not in the best interest of our stockholders, including that our
officers and non-independent directors are also employees of
MFA, which may result in conflicts between their duties to us
and to MFA.
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If we do not qualify as a REIT or fail to remain qualified as a
REIT, we will be subject to income tax at regular corporate tax
rates and could face substantial tax liability, which would
reduce the amount of cash available for distribution to our
stockholders and adversely affect the value of our common stock.
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Maintenance of our exemption from registration under the
Investment Company Act of 1940 and our REIT qualification impose
significant 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
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$
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$
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Proceeds to us, before expenses
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$
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$
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The underwriters may also purchase up to an
additional shares
of our common stock from us at the initial public offering
price, less the underwriting discount, within 30 days after
the date of this prospectus to cover overallotments, 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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Morgan Stanley
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Deutsche Bank
Securities
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The date of this prospectus
is ,
2009.
TABLE
OF CONTENTS
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Page
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1
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15
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17
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42
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43
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44
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45
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46
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49
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58
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62
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78
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87
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95
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96
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99
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104
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106
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111
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132
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135
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135
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135
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F-1
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EX-23.1
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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.
i
PROSPECTUS
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 MFR, company, we,
us and our refer to MFResidential
Investments, Inc., a Maryland corporation, together with its
consolidated subsidiaries; our Manager refers to MFA
Spartan Manager, LLC, a Delaware limited liability company, our
external manager; and MFA refers to MFA Financial,
Inc., the parent company of our Manager. Agency MBS
and non-Agency MBS have the respective meanings set
forth in the table beginning on page 2 of this prospectus.
Unless indicated otherwise, the information in this prospectus
assumes (i) the common stock to be sold in this offering is
to be sold at $ per share,
(ii) the concurrent sale in a separate private placement to
MFA of a number of shares of our common stock equal to 9.8% of
our outstanding shares of common stock after giving effect to
the shares sold in this offering, excluding shares sold pursuant
to the underwriters exercise of their overallotment
option, and (iii) no exercise by the underwriters of their
overallotment option to purchase up to an
additional shares
of our common stock.
Our
Company
We are a Maryland corporation that will invest primarily in
residential mortgage-backed securities (or MBS), residential
mortgage loans and other real estate-related financial assets.
Our objective is to provide attractive risk-adjusted returns to
our stockholders over the long term, primarily through dividend
distributions and secondarily through capital appreciation. We
will generate income principally from the yields earned on our
investments and, to the extent that leverage is deployed, on the
difference between the yields earned on our investments and our
cost of borrowing and any hedging activities.
Our investment strategy will focus on investment opportunities
that exist in the U.S. residential mortgage markets. We
expect that our primary investment focus will initially be on
residential non-Agency MBS that represent the senior most
tranches within the MBS structure (or Senior MBS). We believe
that Senior MBS currently present highly attractive
risk-adjusted return profiles. In recent years, significant
adverse changes in financial market conditions have resulted in
a deleveraging of the entire global financial system and the
forced sale of large quantities of mortgage-related and other
financial assets. As a result of these conditions, many
traditional mortgage investors have suffered severe losses in
their residential mortgage portfolios and several major market
participants have failed or been impaired, resulting in a
significant contraction in market liquidity for mortgage-related
assets. This illiquidity has negatively affected both the terms
and availability of financing for most mortgage-related assets,
including non-Agency MBS. As a result of these and other
factors, Senior MBS are currently trading at significantly lower
prices compared to recent prior periods. Because these types of
mortgage-related assets offer the potential for a current cash
return to investors, the depressed trading prices of this asset
class have caused a corresponding increase in available yields.
While mortgage loan delinquencies and credit losses have been on
the rise, we believe that prices for certain non-Agency MBS have
declined significantly below the levels that would be justified
by the credit issues associated with these assets. In addition,
as discussed in more detail below, we believe that recent
U.S. governmental and central bank actions designed to
stabilize and restore credit flows in the financial sector and
to the broader economy could positively impact our business.
First, we anticipate that in the aftermath of the recently
completed bank stress tests conducted by the
U.S. Department of the Treasury (or the
U.S. Treasury), banks determined to be undercapitalized may
be pressured to dispose of some or all of their non-Agency MBS
portfolios, which could make significant quantities of these
assets available to us at attractive prices. Second, we believe
that the launch of the Public-Private Investment Program (or the
PPIP) by the U.S. Treasury and the Federal Deposit
Insurance Corporation (or the FDIC) and the proposed expansion
of the Term Asset-Backed Securities Loan Facility (or the TALF)
to cover non-Agency MBS that were originally rated AAA may
provide us with access to attractive non-recourse term borrowing
facilities that we may use to finance the purchase of our assets.
We intend to adjust our strategy to changing market conditions
by shifting our asset allocations across our target asset
classes to take advantage of changes in interest rates and
credit spreads as economic and credit
1
conditions change over time. We believe that our strategy will
position us to generate attractive risk-adjusted returns for our
stockholders in a variety of investment and market conditions.
We are organized as a Maryland corporation and intend to elect
and qualify to be taxed as a real estate investment trust (or
REIT) for U.S. federal income tax purposes. 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 1940 Act).
Our
Manager
We will be externally managed by our Manager. Our Manager is a
subsidiary of MFA, a REIT which commenced trading of its common
stock on the New York Stock Exchange (or NYSE) in April 1998.
MFA has an 11-year track record of investing, on a leveraged
basis, in hybrid and adjustable-rate Agency MBS and other real
estate-related financial assets, including non-Agency MBS. At
March 31, 2009, MFA had approximately $10.518 billion
of total assets, of which $9.699 billion was Agency MBS.
In addition to its Agency MBS portfolio experience, MFA also has
a long track record of investing in and managing Senior MBS and
other non-Agency MBS, which will initially be our primary
investment focus. At December 31, 2008, 2007, 2006 and
2005, MFA had investments in non-Agency MBS with fair values of
approximately $204.0 million, $431.2 million,
$254.2 million and $586.3 million, respectively, and,
over the four-year period ended December 31, 2008, has
owned as much as $910.1 million of non-Agency MBS. Since
November 2008, MFA has modeled and evaluated approximately 400
different Senior MBS with an aggregate original principal face
amount of over $3 billion. MFA has, during this period,
priced and bid on over 200 Senior MBS (over $1 billion
original principal balance), purchasing 34 Senior MBS with an
aggregate original principal balance of over $300 million.
As of March 31, 2009, MFA held Senior MBS and other
non-Agency MBS with a current face amount of approximately
$455.9 million (with an amortized cost of approximately
$383.9 million and a fair value of approximately
$245.1 million). While MFAs investments in non-Agency
MBS have primarily consisted of Senior MBS, MFAs
non-Agency portfolio has also included other non-Agency MBS.
Our Managers investment management team will be led by
Stewart Zimmerman, MFAs Chairman of the Board and Chief
Executive Officer, William Gorin, MFAs President and Chief
Financial Officer, Ronald Freydberg, MFAs Executive Vice
President and Chief Investment Officer, and Craig Knutson,
MFAs Senior Vice President Chief Risk Officer.
Messrs. Zimmerman, Gorin and Freydberg have an average of
25 years of experience in structuring and managing Agency
and non-Agency MBS and other mortgage-related assets and have
worked together at MFA since its inception. Mr. Knutson
joined MFA in 2008 and has more than 25 years of experience
in trading, structuring and investing in MBS. We believe that we
will benefit from MFAs long track record and broad
experience in managing mortgage-related assets through a variety
of credit and interest rate environments and its analytical and
portfolio management capabilities in pursuing our business
objectives.
Our
Investment Strategy
We will rely on our Managers expertise in identifying
assets within the target asset classes (or Target Assets)
described below. We expect that our Manager will make investment
decisions based on a variety of factors, including expected
risk-adjusted returns, credit fundamentals, liquidity,
availability of adequate financing, borrowing costs and
macroeconomic conditions, as well as maintaining our REIT
qualification and our exemption from registration under the 1940
Act.
Our Target Assets and the principal investments we expect to
make in each are as follows:
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Asset Classes
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Principal
Investments
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Non-Agency MBS
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Senior MBS and other residential non-Agency MBS. The
mortgage loan collateral for residential non-Agency MBS consists
of residential mortgage loans that do not generally conform to
underwriting guidelines issued by a federally chartered
corporation, such as the Federal National Mortgage Association
(or Fannie Mae) or the Federal Home Loan Mortgage Corporation
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(or Freddie Mac), or an agency of the U.S. government, such as
the Government National Mortgage Association (or Ginnie Mae)
(or, collectively, the Agencies), due to certain factors,
including mortgage balance in excess of Agency underwriting
guidelines, borrower characteristics, loan characteristics and
level of documentation, and therefore are not issued or
guaranteed by an Agency. Senior MBS typically are rated by at
least one nationally recognized statistical rating organization,
such as Moodys Investors Services, Inc. (or Moodys),
Standard & Poors Corporation (or S&P) or
Fitch, Inc. (collectively, the Rating Agencies), and are or were
at the time of issuance AAA-rated by at least one Rating Agency,
although such ratings may have been subsequently downgraded.
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Residential Mortgage Loans
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Prime mortgage loans, which are mortgage loans that
conform to Agency underwriting guidelines, and jumbo prime
mortgage loans, which are mortgage loans that conform to Agency
underwriting guidelines except that the mortgage balance exceeds
the maximum amount permitted by Agency underwriting guidelines.
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Alt-A mortgage loans are mortgage loans made to
borrowers whose qualifying mortgage characteristics do not
conform to 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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Agency MBS
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MBS that are issued or guaranteed by an Agency.
While not a primary focus of our investment strategy, whole pool
Agency MBS are considered qualifying assets for any of our
subsidiaries that intend to qualify for an exemption from
registration under the 1940 Act pursuant to
Section 3(c)(5)(C). See Business
Operating and Regulatory Structure 1940 Act
Exemption.
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Other Real Estate-Related Financial Assets
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Debt and equity tranches of securitizations backed
by various asset classes.
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Securities (common stock, preferred stock and debt)
of other mortgage-related entities.
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We expect to focus our investment activities on purchasing the
Target Assets described above. Our board of directors has
adopted investment guidelines that set out the asset classes and
other criteria to be used by our Manager to evaluate specific
investments as well as the overall portfolio composition. While
MFAs investment portfolio is primarily comprised of Agency
MBS and, to a lesser extent, Senior MBS, we expect that our
portfolio will initially be comprised principally of Senior MBS,
subject to our investment guidelines. We will also invest in
Agency MBS consistent with maintaining our exemption from
registration under the 1940 Act. We also may invest directly in
residential mortgage loans as well as other real estate-related
financial assets. The residential mortgage loans collateralizing
our MBS or that we may acquire directly may be comprised of
(i) adjustable-rate mortgage loans, which have interest
rates that generally adjust annually (although some may adjust
more frequently) to an increment over a specified interest rate
index, (ii) hybrid mortgage loans, which have interest
rates that are fixed for a specified period of time (typically
three to ten years) and, thereafter, generally adjust to an
increment over a specified interest rate index, or
(iii) fixed-rate mortgage loans, which have interest rates
that are fixed for the term of the loan and do not adjust. We do
not currently intend to invest in subprime mortgage or
mortgage-backed assets. Our investment decisions, however, 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
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cannot predict the percentage of our assets that will be
invested in any of our Target Assets or whether we will invest
in other classes of investments. We may change our investment
strategy and policies without a vote of our stockholders. We
believe that our investment strategy, combined with our
Managers expertise, will enable us to make distributions
and achieve capital appreciation throughout changing interest
rate and credit cycles and provide attractive long-term returns
to our stockholders.
Financing
and Hedging Strategy
We intend to use leverage on certain of our assets to increase
potential returns to our stockholders. 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. Initially, we do not
expect to deploy leverage on our non-Agency MBS, except to the
extent of available borrowings, if any, under temporary programs
established by the U.S. government. We expect, initially,
that we may deploy, on a debt-to-equity basis, up to six to
eight times leverage on our Agency MBS. We will generate income
principally from the yields earned on our investments and, to
the extent that leverage is deployed, on the difference between
the yields earned on our investments and our cost of borrowing
and any hedging activities. Subject to maintaining our
qualification as a REIT for U.S. federal income tax
purposes, to the extent leverage is deployed, we may use a
number of sources to finance our investments, including
repurchase agreements, warehouse facilities, borrowings under
temporary programs established by the U.S. government, such
as the TALF and the PPIP, and other secured and unsecured forms
of borrowing.
Subject to maintaining our qualification as a REIT, to the
extent leverage is deployed, we may utilize derivative financial
instruments (or hedging instruments), including interest rate
swap agreements and interest rate cap agreements, in an effort
to hedge the interest rate risk associated with the financing of
our portfolio. Specifically, we may 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 spread between the yield on our assets and
the cost of our financing.
Our
Competitive Advantages
Significant
Experience of our Manager
The investment management team of our Manager has a long track
record and broad experience in managing 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. Stewart Zimmerman, William Gorin, Ronald Freydberg and
Craig Knutson, the senior members of our Managers
investment management team, have an average of 25 years of
experience in structuring and managing Agency and non-Agency MBS
and other mortgage-related assets. Messrs. Zimmerman, Gorin
and Freydberg have worked together at MFA since its inception in
1998, while Mr. Knutson joined MFA in 2008 and has more
than 25 years of experience in trading, structuring and
investing in MBS.
Disciplined,
Credit-Oriented Investment Approach
We will seek to maximize our risk-adjusted returns through our
Managers disciplined and credit-based investment approach.
Our Manager will monitor our overall portfolio risk and evaluate
credit characteristics of our investments.
Access
to MFAs Market Database and Infrastructure
MFA has created and maintains analytical and portfolio
management capabilities. Through our Manager, we intend to
capitalize on the market knowledge and ready access to data
across the real estate finance industry that MFA obtains through
its established platform. We will also benefit from MFAs
comprehensive finance and administrative infrastructure.
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Strategic
Relationships and Access to Deal Flow
MFA maintains extensive long-term relationships with financial
intermediaries, including primary dealers, leading investment
banks, brokerage firms, repurchase agreement counterparties,
leading mortgage originators and commercial banks. We believe
these relationships will enhance our ability to source and
finance investment opportunities and access borrowings and,
thus, enable us to grow through various credit and interest rate
environments.
Alignment
of Interests
We have taken multiple steps to structure our relationship with
our Managers parent company, MFA, so that our interests
and those of MFA are closely aligned. MFA has agreed to purchase
in a separate private placement (or the private offering) a
number of shares of our common stock equal to 9.8% of our
outstanding shares of common stock after giving effect to the
shares sold in this offering, excluding shares sold pursuant to
the underwriters exercise of their overallotment option.
Access
to Attractive Non-recourse Term Borrowing
Facilities
We believe that the recent launch of the PPIP by the
U.S. Treasury and the FDIC and the proposed expansion of
the TALF to cover non-Agency MBS that were originally rated AAA
have the potential to provide us with access to attractive
non-recourse term borrowing facilities that we may use to
finance the purchase of our assets. Because we expect that our
primary investment focus will initially be on Senior MBS, we
expect that a substantial portion of our initial portfolio of
Target Assets may be eligible for financing under these programs
established by the U.S. government.
Recent
Regulatory Developments
The significant adverse changes in financial market conditions
have led to U.S. governmental and central bank actions
designed to stabilize and restore credit flows in the financial
sector and the broader economy. Set forth below is a summary of
U.S. governmental programs that may have an impact on our
business and our assessment of their anticipated impact.
Emergency
Economic Stabilization Act of 2008 and the TARP
Signed into law on October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (or the EESA) conferred broad
authority on the U.S. Treasury Secretary to use up to
$700 billion to, among other things, inject capital into
financial institutions and establish the Troubled Asset Relief
Program (or the TARP) to purchase from financial institutions
residential or commercial mortgages and any securities,
obligations or other instruments that are based on or related to
such mortgages, that were originated or issued on or before
March 14, 2008, and any other financial instrument that the
U.S. Treasury Secretary, in consultation with the Chairman
of the Board of Governors of the Federal Reserve System (or the
Federal Reserve), determines necessary to promote financial
stability. In addition, under the EESA, the U.S. Treasury
Secretary has the authority to establish a program to guarantee,
upon request of a financial institution, the timely payment of
principal and interest on these financial assets.
As of May 8, 2009, the U.S. Treasury had used
approximately $314 billion available under the TARP to make
preferred equity investments in certain financial institutions
and has not yet exercised its authority to purchase illiquid
mortgage-related assets held by these financial institutions. On
February 10, 2009, the U.S. Treasury Secretary
announced a Financial Stability Plan to further stabilize the
financial system, restore the flow of credit to consumers and
businesses, and tackle the foreclosure crisis to keep millions
of Americans in their homes. The Financial Stability Plan
includes a Capital Assistance Program (or CAP) for banking
institutions, the establishment of the PPIP to purchase, among
other things, illiquid mortgage-related assets, a Consumer and
Business Lending Initiative, built upon the Federal
Reserves Term Asset Backed Securities Loan Facility
(discussed below), which is designed to improve the flow of
credit to businesses and consumers, and a commitment to the
continued purchase of MBS issued by government-sponsored
enterprises (or GSEs). On February 18, 2009, the Treasury
Department released details about the Homeowner Affordability
and Stability Plan, which is intended to help homeowners
restructure or refinance their mortgages, reduce foreclosures
and stabilize the housing market. The U.S. government
5
has indicated that the new plan will involve, among other
things, the modification of mortgage loans to reduce the
principal amount of the loans or the rate of interest payable on
the loans, or to extend the payment terms of the loans, an
amendment of the bankruptcy laws to permit the modification of
mortgage loans in bankruptcy proceedings, and an additional
$200 billion capital infusion to Fannie Mae and Freddie Mac
to improve credit availability for residential mortgages.
The goal of these government actions is to allow the government
the flexibility to ease credit conditions in the financial
markets, inject capital into banks and other financial entities
and enable these entities to remove difficult-to-price financial
assets from their balance sheets and allow these entities to
increase the availability of credit in the broader economy. As a
result, we expect, over time, an increase of liquidity in the
market for mortgage-related and other credit assets. However,
there can be no assurance that these programs will be completed
or, if completed, will have the effect intended.
Term
Asset-Backed Securities Loan Facility
On November 25, 2008, the U.S. Treasury and the
Federal Reserve jointly announced the establishment of the TALF.
The TALF is designed to increase credit availability and support
economic activity by facilitating renewed issuance of consumer
and business asset-backed securities (or ABS) at more normal
interest rate spreads. Under the TALF, the Federal Reserve Bank
of New York (or the FRBNY) makes non-recourse loans to borrowers
collateralized by eligible collateral. Eligible collateral will
include U.S. dollar-denominated cash (that is, not
synthetic) ABS that have a credit rating in the highest
long-term or short-term investment grade rating category from
two or more Rating Agencies and do not have a credit rating
below the highest investment grade rating category from a major
Rating Agency. The underlying credit exposures of eligible ABS
currently must be auto loans, student loans, credit card loans,
equipment loans, floorplan loans, small business loans fully
guaranteed as to principal and interest by the U.S. Small
Business Administration (or the SBA), or receivables related to
residential mortgage servicing advances (servicing advance
receivables).
Under the TALF, the FRBNY will lend up to $200 billion to
certain holders of TALF-eligible assets. Any U.S. company
that owns TALF-eligible assets may borrow from the FRBNY under
the TALF, provided that the company maintains an account
relationship with a primary dealer. Loans under this facility
are presently expected to be made through December 31,
2009. Currently, loans provided through the TALF will generally
be: (i) non-recourse, unless the borrower breaches its
representations, warranties and covenants, (ii) available
for a term of three to five years, depending on the type of
collateral, with interest payable monthly and
(iii) available in an amount equal to the market value of
the eligible assets pledged as collateral, minus an upfront
haircut that varies based upon the underlying collateral. TALF
loans are also currently exempt from margin calls related to a
decrease in the underlying collateral value, and are pre-payable
in whole or in part at the option of the borrower. It is
expected that the TALF loans will require that any payments of
principal made on the underlying collateral will reduce the
principal amount of the TALF loan pro rata based upon the
original loan-to-value ratio. Additionally, certain terms of the
TALF loans may be modified. The FRBNY may reject any request for
a loan, in whole or in part, in its discretion.
In connection with the establishment of the PPIP on
March 23, 2009, the U.S. Treasury and the Federal
Reserve announced preliminary plans to expand the TALF to make
non-recourse loans available to investors to fund purchases of
legacy securitization assets, which are expected to include
certain non-Agency MBS that were originally rated AAA and
outstanding commercial mortgage-backed securities (or CMBS) and
ABS that are rated AAA. On May 1, 2009, the FRBNY published
the terms for the expansion of the TALF to CMBS and announced
that, beginning in June 2009, up to $100 billion of TALF
loans will be available to finance purchases of eligible CMBS.
However, to date, neither the FRBNY nor the U.S. Treasury
has announced how the TALF will be expanded to non-Agency MBS.
We believe that should the TALF be expanded to include
non-Agency MBS as indicated by the U.S. Treasury, a
substantial portion of our Target Assets will be eligible for
TALF financing. We believe that the proposed expansion of the
TALF to include non-Agency MBS that were originally rated AAA
could provide us with attractively priced non-recourse term
borrowing facilities that we can use to purchase non-Agency MBS.
However, there can be no assurance that the TALF will be
expanded to include non-Agency MBS or, if so expanded, that we
will be able to utilize it successfully or at all.
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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
removal of certain illiquid legacy assets, including real
estate-related assets, from 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: a Legacy Loans
Program and a Legacy Securities Program. Under the Legacy Loans
Program, joint public and private investment funds (or Legacy
Loan PPIFs) will be established to purchase troubled loans from
insured depository institutions. Acquisitions of these troubled
loans will be funded by equity capital from both the
U.S. Treasury and private investors and non-recourse debt
issued by the Legacy Loan PPIF and guaranteed by the FDIC, with
the FDIC guarantee collateralized by the assets acquired by the
Legacy Loan PPIF. Under the Legacy Securities Program, joint
public and private investment funds (or Legacy Securities PPIFs)
will be established to purchase from financial institutions
non-Agency MBS and CMBS issued prior to 2009 that were
originally rated AAA or an equivalent rating by two or more
Rating Agencies without ratings enhancement. These securities
must be secured directly by the actual mortgage loans, leases or
other assets, and not by other securities (other than certain
swap positions, as determined by the U.S. Treasury), and
the loans and other assets underlying these securities must be
situated predominantly in the United States. Legacy Securities
PPIFs will be funded with equity capital from both the
U.S. Treasury and private investors as well as debt
financing from one or more of the U.S. Treasury, the TALF,
other U.S. government programs and private sources.
We are currently actively evaluating the PPIP to determine if
participation in the PPIP would be appropriate in light of our
investment strategy. We can provide no assurance that we will be
eligible to participate in this program or, if we are eligible,
that we be able to utilize it successfully or at all. Further,
the PPIP is still in early stages of development and it is not
possible for us to predict when or if it will be implemented or,
if implemented, how it will impact our business.
Capital
Assistance Program and Bank Stress Tests
On February 25, 2009, the U.S. Treasury and the
Federal Banking Agencies released details about 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 were 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. If banks determined to be undercapitalized
are unable to raise capital, they may be pressured by the
applicable Federal Banking Agencies or the U.S. Treasury to
dispose of some or all of their non-Agency MBS portfolios, which
could make significant quantities of these assets available to
us at attractive prices.
GSE
Rescue Plan
Signed into law on July 30, 2008, the Housing and Economic
Recovery Act of 2008 (or the HERA) established a new regulator
for Fannie Mae and Freddie Mac, the U.S. Federal Housing
Finance Agency (or the FHFA). 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 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
finance by allowing these companies to continue to grow their
guarantee business without limit, while limiting net purchases
of MBS to a modest amount through the end of 2009. Beginning in
2010, these companies will gradually start to reduce their
portfolios. In addition, in an effort to further stabilize the
U.S. mortgage market, the U.S. Treasury took three
further actions. First, it has entered into a preferred stock
purchase agreement with each of the entities, pursuant to which
$200 billion will be available to each entity. Second, it
has established a new secured credit facility, the Government
Sponsored Enterprise Credit Facility (or 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 has established an Agency MBS
purchase program, under which the U.S. Treasury may
purchase up to $1.25 trillion of Agency MBS in the open
market through December 31, 2009.
7
According to the FHFA, the U.S. Treasury purchased
$94.2 billion in Agency MBS from September 2008 through
January 2009. This Agency MBS purchase program, which also
expires on December 31, 2009, is increasing prices and
reducing the yields available on Agency MBS. Through its market
activities, the government is achieving its desired goal of
lowering mortgage interest rates. We expect that these lower
mortgage rates, along with higher loan-to-value limits on Agency
refinancings, will lead to faster prepayment speeds in 2009.
Although the federal government has committed capital to Fannie
Mae and Freddie Mac, there can be no assurance that these
actions will be adequate for their needs. If these actions are
inadequate, these entities could continue to suffer losses and
could fail to honor their guarantees and other obligations which
could materially adversely affect our business, operations and
financial condition.
Summary
Risk Factors
An investment in shares of our common stock involves various
risks. You should consider carefully the risks discussed below
and under Risk Factors 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 and may not find a suitable replacement if our Manager
terminates the management agreement or if its key personnel
leave the employment of our Manager or otherwise become
unavailable to us.
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There are various conflicts of interest in our relationship with
our Manager and MFA, which could result in decisions that are
not in the best interest of our stockholders, including that our
officers and non-independent directors are also directors or
employees of MFA which may result in conflicts between their
duties to us and to MFA.
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The management agreement with our Manager was not negotiated on
an arms-length basis and the terms of the compensation may
not be as favorable to us as if they had been negotiated with an
unaffiliated third party and may be difficult and costly 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
decision made by our Manager. We may change our investment
strategy, operational policies and asset allocation without
stockholder consent, which may result in types of investments
that are different and possibly riskier than our Target Assets.
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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 operate in a highly competitive market for investment
opportunities and the competition in acquiring desirable
investments may limit their availability. We have not yet
identified any specific investments. Our financial condition and
results of operations will depend on our ability to manage
future growth effectively.
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We may leverage the acquisition of our assets and are not
limited in the amount of leverage we may use. Our use of
leverage may adversely affect our return on our investments and
may reduce cash available for distribution to our stockholders,
as well as have the effect of causing us to sell assets and
increasing losses when economic conditions are unfavorable. To
the extent that leverage is deployed, we may be subject to
counterparty risk of default.
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Loss of our 1940 Act exemption would adversely affect us and
negatively affect our stock price and our ability to distribute
dividends to our stockholders and could result in the
termination of the management agreement with our Manager. In
addition, the assets we may acquire are limited by the manner in
which we intend to remain exempt from registration under the
1940 Act and the rules and regulations promulgated thereunder
which may, in some cases, preclude us from pursuing the most
economically beneficial investment alternatives.
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Failure to procure adequate capital and funding would negatively
impact our results and may, in turn, negatively affect the
market price of shares of our common stock and our ability to
make distributions to our stockholders.
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To the extent we deploy leverage on our assets, an increase in
our borrowing costs relative to the interest we receive on our
leveraged assets may adversely affect our profitability and thus
our cash available for distribution to our stockholders.
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Difficult conditions in the markets for mortgages and
mortgage-related assets as well as the broader financial markets
have resulted in a significant contraction in liquidity for
mortgages and mortgage-related assets, which may adversely
affect the value of the assets in which we intend to invest.
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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, including the
establishment of the TALF and the PPIP, for the purpose of
stabilizing the financial markets, or market response to those
actions, will achieve the intended effect or benefit our
business. Moreover, some of the programs established by the
U.S. government or its agencies are temporary and their
expiration could result in a contraction of liquidity and other
adverse economic effects that could adversely impact our
business and results of operations.
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Increases in interest rates could adversely affect the value of
our investments, which could result in reduced earnings or
losses and negatively affect the cash available for distribution
to our stockholders.
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Our hedging transactions, if any, may not completely insulate us
from interest rate risk. Hedging against interest rate exposure
may adversely affect our earnings, which could reduce our cash
available for distribution to our stockholders, as well as
result in losses. If we enter into hedging transactions, we may
be subject to counterparty risk of default.
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Prepayment rates could adversely affect the value of, and
expected yield on, certain of our MBS and residential mortgage
loans, which could result in reduced earnings or losses and
negatively affect the cash available for distribution to our
stockholders.
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The mortgage loans we invest directly in and the mortgage loans
underlying the MBS and ABS we invest in are subject to risks of
delinquency, foreclosure and loss, which could result in losses
to us.
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Our failure to qualify as a REIT in any taxable year would
subject us to U.S. federal income tax and potentially
increased state and local taxes, which would reduce the cash
available for distribution to our stockholders.
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The REIT qualification rules impose limitations on the types of
investments and activities which we may undertake, including
limitation on our use of hedging transactions and hedging
instruments, and these limitations may, in some cases, preclude
us from pursuing the most economically beneficial investment
alternatives.
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9
Our
Structure
We were formed as a Maryland corporation on February 1,
2008. Our initial stockholder is MFA, which has agreed to
purchase in the concurrent private offering a number of shares
of our common stock equal to 9.8% of our outstanding shares of
common stock after giving effect to the shares sold in this
offering, excluding shares sold pursuant to the
underwriters exercise of their overallotment option.
The following chart shows our structure after giving effect to
this offering:
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(1)
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Includes shares of restricted common stock to be granted to our
executive officers and personnel of our Manager under our 2009
equity incentive plan.
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(2)
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MFA has advised us that it initially intends to own a 100%
interest in our Manager after the closing of this offering. We
will have no ownership interest in our Manager.
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(3)
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A taxable REIT subsidiary (or TRS).
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(4)
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We expect MFR 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 intend
to conduct our operations so that the value of MFR Operating
Company, LLCs investment in this subsidiary 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 MFR Operating Company,
LLCs total assets. See Business
Operating and Regulatory Structure 1940 Act
Exemption.
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Our
Relationship with Our Manager
We will be externally managed and advised by our Manager, a
subsidiary of MFA. We expect to benefit from the personnel,
infrastructure, relationships and experience of our Manager and
MFA to enhance the growth of our business. Each of our officers
is also an employee of MFA. We expect to have no employees
outside of our Managers officers and personnel. Our
Manager is not obligated to dedicate certain of its personnel
exclusively to us, nor is it or its personnel obligated to
dedicate any specific portion of its or their time to our
business. We expect,
10
however, that Stewart Zimmerman, MFAs Chairman of the
Board and Chief Executive Officer, William Gorin, MFAs
President and Chief Financial Officer, Ronald Freydberg,
MFAs Executive Vice President and Chief Investment
Officer, and Craig Knutson, MFAs Senior Vice
President Chief Risk Officer, will devote such
portion of their time to our affairs as is necessary to enable
us to operate 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, (i) performing all of
our day-to-day functions, (ii) determining investment
criteria in conjunction with our board of directors,
(iii) sourcing, analyzing and executing investments, asset
sales and financings, and (iv) performing asset management
duties. In addition, our Manager has an Investment Committee of
our Managers professionals, comprised of
Messrs. Zimmerman, Gorin, Freydberg and Knutson, that will
oversee our investment guidelines, investment portfolio
holdings, financing and leveraging strategies.
The initial term of the management agreement will extend for
three years from the closing of this offering, with automatic,
one-year renewals at the end of each year thereafter. 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, or by a
vote of the holders of at least a majority of the outstanding
shares of our common stock (other than shares held by MFA or its
affiliates), based upon: (i) our Managers
unsatisfactory performance that is materially detrimental to us
or (ii) 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. 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.
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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1.5% per annum, calculated and payable quarterly in arrears, of
our stockholders equity. 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 for repurchases of
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
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Quarterly in cash.
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Type
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Description
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Payment
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independent directors and approved by a majority of our
independent directors. Our stockholders equity, for
purposes of calculating the management fee, could be greater
than the amount of stockholders equity shown on our
financial statements. The management fee will be reduced, but
not below zero, by our proportionate share of any securitization
base management fees that MFA receives in connection with
securitizations in which we invest, based on the percentage of
equity we hold in such securitization.
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Expense reimbursement
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Reimbursement of expenses related to us incurred by our
Manager, including legal, accounting, due diligence and other
services, but excluding the salaries and other compensation of
our Managers personnel.
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Monthly and quarterly in cash, as the case may be.
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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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Historical
Performance
Formed in 1997, MFA has an
11-year
history of investing, on a leveraged basis, in hybrid and
adjustable-rate Agency MBS and other real estate-related
financial assets. As of March 31, 2009, MFA had
approximately $10.518 billion of total assets, of which
$9.945 billion, or 94.6%, represented its MBS portfolio. Of
MFAs MBS portfolio as of March 31, 2009,
approximately $9.699 billion, or 97.5%, was comprised of
Agency MBS, $244.9 million, or 2.5%, was comprised of
Senior MBS and $218,000, or less than 0.1%, was comprised of
other non-Agency MBS, none of which were collateralized by
subprime mortgage loans.
The tables under Business MFA Historical
Performance in this prospectus set forth certain
historical investment performance data about MFA. This
information is a reflection of the past performance of MFA and
is not intended to be indicative of, or a guarantee or
prediction of, the returns that we, MFA or our Manager may
achieve in the future. This is especially true for us because we
intend to invest in a much broader range of real estate-related
financial assets than MFA has on a historical basis. While
MFAs investment portfolio is primarily comprised of Agency
MBS and, to a lesser extent, Senior MBS, we expect that our
portfolio will initially be comprised principally of Senior MBS,
subject to our investment guidelines. We will also invest in
Agency MBS consistent with maintaining our exemption from
registration under the 1940 Act. We also may invest directly in
residential mortgage loans as well as other real estate-related
financial assets. Neither MFA nor our Manager has significant
experience in purchasing residential mortgage loans directly or
certain of the other Target Assets which we may pursue as part
of our investment strategy. Accordingly, MFAs historical
returns will not be indicative of the performance of our
investment strategy and we can offer no assurance that MFA and
our Manager will replicate the historical performance of their
investment professionals in their previous endeavors. Our
investment returns could be substantially lower than the returns
achieved by MFA and our Managers investment professionals
in their previous endeavors.
Conflicts
of Interest
We are dependent on our Manager for our day-to-day management
and do not have any independent officers or employees. Our
officers and our non-independent directors also serve as
employees of MFA. 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
they had been negotiated at arms length with an
unaffiliated third party.
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In addition, the ability of our Manager and its officers and
personnel to engage in other business activities may reduce the
time our Manager and its officers and personnel spend managing
us.
Our Managers parent, MFA, manages a large portfolio
consisting primarily of Agency MBS and, to a lesser extent,
Senior MBS. We may compete directly with MFA or other current
and future clients of MFA or our Manager for investment
opportunities in Agency MBS, Senior MBS and our other Target
Assets. We may also compete with MFA
and/or
other
clients of MFA or our Manager for the same borrowing sources.
Our Manager has an investment allocation policy in place that is
intended to enable us to share equitably with MFA and other
clients of our Manager and MFA in all investment opportunities
that may be suitable for us, MFA and such other clients. Our
Managers policy also requires a fair and equitable
allocation of financing opportunities over time among us, MFA
and other clients of our Manager and MFA. Our Managers
policy also includes other procedures intended to prevent MFA or
any such other clients from receiving favorable treatment in
accessing investment opportunities over any other account. These
allocation policies may be amended by our Manager at any time
without our consent. To the extent our Managers,
MFAs or our business evolves in such a way as to give rise
to conflicts not currently addressed by our Managers
allocation policies, our Manager may need to refine its policies
to handle such situation. Our independent directors will review
our Managers compliance with its allocation policies. In
addition, to avoid any actual or perceived conflicts of interest
with our Manager, prior to an investment in any security
structured or issued by an entity managed by our Manager or MFA,
such investment will be approved by a majority of our
independent directors. Further, although we do not expect that
assets will be traded among MFA, another account managed by MFA
and us, to the extent that such transactions do occur, all such
trades will be executed, without specific independent director
approval, at fair market value based on information available
from third-party pricing services or other sources.
We have agreed to pay our Manager a management fee that is not
tied to our performance. Since the management fee is paid
regardless of our performance, it may not provide sufficient
incentive to our Manager to seek to achieve attractive
risk-adjusted returns for our investment portfolio.
Operating
and Regulatory Structure
REIT
Qualification
In connection with this offering, 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. To qualify as a REIT, we must meet on a
continuing basis, through actual investment and operating
results, various requirements under the Internal Revenue Code
relating to, among others, the sources of our gross income, the
composition and values of our assets, our distribution levels
and the diversity of ownership of our shares. 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 some U.S. federal, state and local taxes on
our income or property. Any distributions paid by us generally
will not be eligible for taxation at the preferred tax rates
that apply (through 2010) to certain distributions received
by individuals from taxable corporations. We intend to be
organized in compliance with the requirements for qualification
and taxation as a REIT under the Internal Revenue Code, and
believe that our intended manner of operation will enable us to
meet the requirements for qualification and taxation as a REIT.
1940
Act Exemption
We intend to conduct our operations so that we are not required
to register as an investment company under the 1940 Act.
Section 3(a)(1)(A) of the 1940 Act defines an investment
company as any issuer that is or holds itself out as being
engaged primarily in the business of investing, reinvesting or
trading in securities. Section 3(a)(1)(C) of the 1940 Act
defines an investment company as any issuer that is engaged or
proposes to engage in the business of investing, reinvesting,
owning, holding or trading in securities and owns or proposes to
acquire investment securities having a value exceeding 40% of
the value of the issuers total assets (exclusive of
U.S. government securities and cash items) on an
unconsolidated basis. Excluded from the term investment
securities, among other things, are U.S. government
securities and securities issued by majority-owned subsidiaries
that are not themselves investment companies and are not relying
on the exception from the definition of investment company set
forth in
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Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
Because we are organized as a holding company that conducts its
businesses primarily through MFR Operating Company, LLC (or our
LLC Subsidiary) and its majority-owned subsidiaries, the
securities issued to our LLC Subsidiary by these subsidiaries
that are excepted from the definition of investment
company in Section 3(c)(1) or 3(c)(7) of the 1940
Act, together with any other investment securities we may own,
may not have a value in excess of 40% of the value of our total
assets on an unconsolidated basis. We will monitor our holdings
to ensure continuing and ongoing compliance with this test. In
addition, we believe our company will not be considered an
investment company under Section 3(a)(1)(A) of the 1940 Act
because we will not engage primarily or hold ourselves out as
being engaged primarily in the business of investing,
reinvesting or trading in securities. Rather, through our
majority-owned subsidiaries, we are primarily engaged in the
business of our subsidiaries.
If the value of our LLC Subsidiarys investments in its
subsidiaries that are excepted from the definition of
investment company by Section 3(c)(1) or
3(c)(7) of the 1940 Act, together with any other investment
securities it owns, exceeds 40% of its total assets on an
unconsolidated basis, or if one or more of such subsidiaries
fail to maintain their exceptions or exemptions from the 1940
Act, we may have to register under the 1940 Act and we could
become subject to substantial regulation with respect to our
capital structure (including our ability to use leverage),
management, operations, transactions with affiliated persons (as
defined in the 1940 Act), portfolio composition, including
restrictions with respect to diversification and industry
concentration, and other matters.
In addition, certain of our subsidiaries, including MFR
Asset I, LLC, intend to qualify for an exemption from the
definition of investment company under
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 means
that at least 55% of such subsidiaries portfolios must be
comprised of qualifying assets and at least 80% of each of their
portfolios must be comprised of qualifying assets and real
estate-related assets under the 1940 Act. Qualifying assets for
this purpose include mortgage loans and other assets, such as
whole pool Agency MBS, that are considered the functional
equivalent of mortgage loans for the purposes of the 1940 Act.
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.
Qualification for exemption from registration under the 1940 Act
will limit our ability to make certain investments. For example,
these restrictions will limit the ability of our subsidiaries to
invest directly in mortgage-backed securities that represent
less than the entire ownership in a pool of mortgage loans, debt
and equity tranches of securitizations and certain ABS and real
estate companies or in assets not related to real estate.
Restrictions
on Ownership of Our Common Stock
To assist us in complying with the limitations on the
concentration of ownership of a REIT imposed by the Internal
Revenue Code, our charter prohibits, with certain exceptions,
any stockholder from beneficially or constructively owning,
applying certain attribution rules under the Internal Revenue
Code, more than 9.8% by value or number of shares, whichever is
more restrictive, of our outstanding shares of common stock, or
9.8% by value or number of shares, whichever is more
restrictive, of our outstanding capital stock. Our board of
directors may, in its sole discretion, waive the 9.8% ownership
limit with respect to a particular stockholder if it is
presented with evidence satisfactory to it that such ownership
will not then or in the future jeopardize our qualification as a
REIT. 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 either (i) the shares
so owned or transferred being automatically transferred to a
charitable trust for the benefit of a charitable beneficiary or
(ii) the transfer being void ab initio, and the purported
owner or transferee acquiring no rights in such shares. If a
transfer to a charitable trust would be ineffective for any
reason to prevent a violation of the restriction, the transfer
resulting in such violation will be void from the time of such
purported transfer.
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THE
OFFERING
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Common stock offered by us
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shares
(plus up to an
additional shares
of our common stock that we may issue and sell upon the exercise
of the underwriters overallotment option).
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Common stock to be outstanding after this offering
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shares.(1)
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Use of proceeds
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We intend to invest the net proceeds of this offering and the
concurrent private offering primarily in our Target Assets.
Initially, we expect to focus our investment activities on
purchasing Senior MBS. We also may invest directly in
residential mortgage loans as well as Agency MBS and other real
estate-related financial assets. Until appropriate investments
can be identified, our Manager may invest these funds in
interest-bearing short-term investments, including money market
accounts, 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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Our 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, excluding net capital gains. We plan to pay our
first dividend in respect of the period from the closing of this
offering
through ,
2009, which may be prior to the time that we have fully invested
the net proceeds from this offering in 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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We cannot assure you that we will make any distributions to our
stockholders.
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Proposed NYSE symbol
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MFR
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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, 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. See
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(1) Includes shares
of our common stock to be sold to MFA in a concurrent private
placement. Excludes
(i) shares
of our common stock that we may issue and sell upon the exercise
of the underwriters overallotment option in full, and
(ii) shares
of our restricted common stock
(or shares
if the underwriters exercise the overallotment option in full)
to be granted to our executive officers, our independent
director nominees and personnel of our Manager under our 2009
equity incentive plan.
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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 Risk Factors and all other information in this
prospectus before investing in our common stock.
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Our
Corporate Information
Our principal executive offices are located at 350 Park Avenue,
21st Floor, New York, New York 10022. Our telephone number
is
(212) 207-6480.
Our website is www.mfresidential.com. The contents of our
website are not a part of this prospectus. We have included our
website address only as an inactive textual reference and do not
intend it to be an active link to our website.
16
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
Associated With Our Management and Relationship With Our
Manager
We are
dependent on our Manager and its key personnel for our
success.
We have no separate facilities and are completely reliant on our
Manager. Initially, we will have no employees. Our executive
officers are employees of MFA, which through 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, structure, 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 third
anniversary of the closing of this offering, with automatic
one-year renewals at the end of each year 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.
There
are conflicts of interest in our relationship with our Manager
and MFA, 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 MFA and our Manager. Certain of MFAs
executive officers serve on our board of directors and several
of MFAs executive officers and employees are officers of
our Manager and us. Specifically, each of our officers also
serves as an executive officer or an employee of our Manager or
MFA, as the case may be. Our Manager and our executive officers
may have conflicts between their duties to us and their duties
to, and interests in, MFA or our Manager. Our Manager is not
required to devote a specific amount of time to our operations.
There may also be conflicts in allocating investments and
funding opportunities which are suitable for us, MFA and other
clients of our Manager and MFA. MFA and other clients of our
Manager and MFA may compete with us with respect to certain
investments which we may want to acquire and, as a result, we
may either not be presented with the opportunity or have to
compete with MFA or such other clients to acquire these
investments. For example, we may compete directly with MFA with
respect to investments in Agency MBS and Senior MBS. Our Manager
and our executive officers may choose to allocate favorable
investments to MFA instead of to us. Further, during turbulent
conditions in the mortgage industry, distress in the credit
markets or other times when we will need focused support and
assistance from our Manager, MFA 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 necessary support and assistance we require or would
otherwise receive if we were internally managed or if our
Manager did not act as a manager for other entities. There is no
assurance that the allocation policy that addresses some of the
conflicts relating to our investments, which is 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, that 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
17
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 closing of this offering, MFA has agreed
to purchase in the private offering a number of shares of common
stock equal to 9.8% of our outstanding shares of common stock
after giving effect to the shares sold in this offering,
excluding shares sold pursuant to the underwriters
exercise of their overallotment option. MFA may sell the shares
of our common stock that it holds at any time following the
lock-up
period. The
lock-up
period for MFA expires on the earlier of (i) the date which
is three years after the date of this prospectus or
(ii) the termination of the management agreement. To the
extent MFA sells some of its shares, its interests may be less
aligned with our interests.
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 non-independent directors are
employees of MFA. 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 they had been
negotiated with an unaffiliated third party.
Termination of the management agreement with our Manager by us
without cause is difficult and costly. 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, or by a
vote of the holders of at least a majority of the outstanding
shares of our common stock (other than those shares held by MFA
or its affiliates), based upon: (i) our Managers
unsatisfactory performance that is materially detrimental to us,
or (ii) 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 third anniversary of the closing of this offering.
Thereafter, the management agreement is renewable on an annual
basis;
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.
Our
board of directors will approve very broad investment guidelines
for our Manager and will not approve each investment 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 or any type or category of investment, except that
an investment in a security structured or issued by an entity
managed by our Manager or MFA 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 of assets it may decide are proper
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
entered into by our Manager may not fully reflect the best
interests of our stockholders.
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We may
change our investment strategy, operating policies and/or asset
allocation without stockholder consent.
We may change our investment strategy, operating policies
and/or
asset
allocation with respect to investments, acquisitions, growth,
operations, indebtedness, capitalization and distributions at
any time without the consent of our stockholders, which could
result in our making investments that are different from, and
possibly riskier than, the types of investments described in
this prospectus. A change in our investment strategy may
increase our exposure to credit risk, interest rate risk,
default risk and real estate market fluctuations. Furthermore, a
change in our asset allocation could result in our making
investments in asset categories different from those described
in this prospectus. These changes could adversely affect our
financial condition, results of operations, the market price of
our common stock and our ability to make distributions to our
stockholders.
Our
investment focus is different from that of MFA.
MFA has historically pursued a business strategy which is
related to but differentiated from our strategy. In particular,
MFA has emphasized the acquisition of Agency MBS and, to a
lesser extent, Senior MBS. Our Manager and MFA have limited
experience in investing directly in residential mortgage loans
and other real estate-related financial assets that we may
pursue as part of our investment strategy. Accordingly, the
historical returns of MFA are not indicative of its performance
using our investment strategy and we can provide no assurance
that our Manager will replicate the historical performance of
our Managers investment professionals in their previous
endeavors.
We
compete with MFA for access to our Managers resources and
investment opportunities.
Our Managers personnel are also employees of MFA and in
that capacity are involved in MFAs investment process.
Accordingly, we will compete with MFA for our Managers
resources. In the future, our Manager may sponsor and manage
other investment vehicles with an investment focus that overlaps
with ours, which could result in us competing for access to the
benefits that we expect our relationship with our Manager to
provide to us.
We may
invest in the tranches of securitizations managed by our Manager
or MFA, including the purchase or sale of all or a portion of
the equity tranche of any such securitization, which may result
in an immediate loss in book value and present a conflict of
interests between us, our Manager and MFA.
We may invest in the tranches of securitizations structured or
issued by an entity managed by our Manager or MFA. If all of the
securities of a securitization structured or issued by an entity
managed by our Manager or MFA were not fully placed as a result
of our not investing, our Manager or MFA could experience losses
due to changes in the value of the underlying investments
accumulated in anticipation of the launch of such investment
vehicle. The accumulated investments in a securitization
transaction are generally sold at the price at which they were
purchased and not the prevailing market price at closing.
Accordingly, to the extent we invest in a portion of the equity
securities for which there has been a deterioration of value
since the securities were purchased, we would experience an
immediate loss equal to the decrease in the market value of the
underlying investment. As a result, the interests of our Manager
and MFA in our investing in such a securitization may conflict
with our interests and the interests of our stockholders.
Risks
Related To Our Business
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 February 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.
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We
operate in a highly competitive market for investment
opportunities and competition may limit our ability to acquire
desirable investments.
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 favorable 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, 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 as well as
borrowings that are governed by the FDIC. 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 of the types and
classes which we will seek to acquire 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 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.
Loss
of our 1940 Act exemption would adversely affect us and
negatively affect the market price of shares of our common stock
and our ability to distribute dividends, and could result in the
termination of the management agreement with our
Manager.
We intend to conduct our operations so as not to become required
to register as an investment company under the 1940 Act. Certain
of our subsidiaries 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
means that at least 55% of our subsidiaries portfolios
must be comprised of qualifying assets and at least 80% of each
of their portfolios must be comprised of qualifying assets and
real estate-related assets under the 1940 Act. Qualifying assets
for this purpose include mortgage loans and other assets, such
as whole pool Agency MBS, that are considered the functional
equivalent of mortgage loans for the purposes of the 1940 Act.
Specifically, we expect our subsidiaries to invest at least 55%
of their assets in mortgage loans, MBS that represent the entire
ownership in a pool of mortgage loans and other interests in
real estate that constitute qualifying assets in accordance with
Securities and Exchange Commission (or the SEC) staff guidance
and approximately an additional 25% of their assets in other
types of mortgages, MBS, securities of REITs and other real
estate-related assets. As a result of the foregoing
restrictions, we will be limited in our ability to make certain
investments. There can be no assurance that the laws and
regulations governing REITs, including the Division of
Investment Management of the SEC providing more specific or
different guidance regarding the treatment of assets as
qualifying real estate assets or real estate-related assets,
will not change in a manner that adversely affects our
operations. Further, although we intend to monitor our
portfolio, there can be no assurance that we will be able to
maintain our exclusion as an investment company under the 1940
Act. If we fail to qualify for this exclusion in the future, we
could be required to restructure our activities or the
activities of our subsidiaries, including effecting sales of
assets in a manner that, or at a time when, we would not
otherwise choose to do so, which could negatively affect the
value of our common stock, the sustainability of our business
model, and our ability to make distributions. The sale could
occur during adverse market conditions, and we could be forced
to accept a price below that which we believe is appropriate.
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We
intend to use leverage to finance certain of our investments,
which may adversely affect the return on our investments and may
reduce cash available for distribution to our stockholders, as
well as increase losses when economic conditions are
unfavorable.
We intend to leverage the acquisition of certain of our assets
through borrowings, generally through a number of sources,
including repurchase agreements, warehouse facilities,
borrowings under temporary programs established by the
U.S. government, such as the TALF and the PPIP, and other
secured and unsecured forms of borrowing. 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. Initially, we do not
expect to deploy leverage on our non-Agency MBS, except to the
extent of available borrowings, if any, under temporary programs
established by the U.S. government. We expect, initially,
that we may deploy, on a debt-to-equity basis, up to six to
eight times leverage on our Agency MBS. The percentage of
leverage will vary over time depending on our ability to enter
into repurchase agreements, our ability to participate in and
obtain funding under temporary programs established by the
U.S. government, available credit limits and financing
rates, type
and/or
amount of collateral required to be pledged and our assessment
of the appropriate amount of leverage for the particular assets
we are funding.
The current weakness in the financial markets, the residential
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. 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.
Our return on our assets and cash available for distribution to
our stockholders may be reduced to the extent that changes in
market conditions prevent us from leveraging our investments 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 will leverage certain of our assets 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.
We
will depend on repurchase agreements, warehouse facilities and
other secured and unsecured forms of borrowing and we may
utilize borrowings under temporary programs established by the
U.S. government to execute our business plan, and our inability
to access funding could have a material adverse effect on our
results of operations, financial condition and
business.
Our ability to fund our investments in non-Agency MBS may, and
our ability to fund our investments in Agency MBS will, be
impacted by our ability to secure repurchase, warehouse and
other secured and unsecured financing on acceptable terms, as
well as our ability to participate in and obtain financing under
temporary programs established by the U.S. government, such
as the TALF and the PPIP. We currently do not have any
commitments for any of our proposed financing arrangements and
can provide no assurance that lenders will be willing or able to
provide us with sufficient financing. In addition, because
repurchase agreements and warehouse facilities 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 typically
curtail their willingness to provide financing. If we are not
able to renew our then existing facilities or arrange for new
financing on terms acceptable to us, or if we default on our
covenants or are otherwise unable to access funds under any of
these facilities, we may have to curtail our asset acquisition
activities
and/or
dispose of assets. We are also currently
21
evaluating programs recently established by the
U.S. government, such as the TALF and the PPIP as sources
of financing for our non-Agency MBS. We can provide no assurance
that we will be eligible to participate in these programs or
that we will be able to utilize the borrowings available under
them successfully or at all.
It is possible that the lenders that will provide us with
financing could experience changes in their ability to advance
funds to us, independent of our performance or the performance
of our investments. If major market participants continue to
exit the business, it could further adversely affect the
marketability of all fixed-income securities, and this could
negatively impact the value of our investments, 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 investments 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 investments 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 and warehouse facilities
will be directly related to the lenders valuation of the
assets that secure the outstanding borrowings. Typically
repurchase and warehouse facilities grant the respective lender
the absolute right to reevaluate the market value of the assets
that secure outstanding borrowings at any time. If a lender
determines in its sole discretion that the value of the assets
has decreased, it has the right to initiate a margin call. A
margin call would require us to transfer additional assets to
such lender without any advance of funds from the lender for
such transfer or to repay a portion of the outstanding
borrowings. Any such margin call could have a material adverse
effect on our results of operations, financial condition,
business, liquidity and ability to make distributions to our
stockholders, and could cause the value of our common stock to
decline. We may be forced to sell assets at significantly
depressed prices to meet such margin calls and to maintain
adequate liquidity, which could cause us to incur losses.
Moreover, to the extent we are forced to sell assets at such
time, given market conditions, we may be selling at the same
time as others facing similar pressures, which could exacerbate
a difficult market environment and which could result in our
incurring significantly greater losses on our sale of such
assets. In an extreme case of market duress, a market may not
even be present for certain of our assets at any price.
The current dislocation in the mortgage sector 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. This could potentially 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.
Difficult
conditions in the markets for mortgages and mortgage-related
assets as well as the broader financial markets have resulted in
a significant contraction in liquidity for mortgages and
mortgage-related assets, which may adversely affect the value of
the assets in which we intend to invest.
Our results of operations will be materially affected by
conditions in the markets for mortgages and mortgage-related
assets as well as the broader financial markets and the economy
generally. In recent years, significant adverse changes in
financial market conditions have resulted in a deleveraging of
the entire global financial system and the forced sale of large
quantities of mortgage-related and other financial assets. As a
result of these conditions, many traditional mortgage investors
have suffered severe losses in their residential mortgage
portfolios and several major market participants have failed or
been impaired, resulting in a significant contraction in market
liquidity for mortgage-related assets. This illiquidity has
negatively affected both the terms and availability of financing
for most mortgage-related assets, including the Target Assets in
which we intend to invest, and has resulted in these assets
trading at significantly lower prices compared to recent
periods. Further increased volatility and deterioration in the
markets for mortgages and mortgage-related assets as well as the
broader financial markets may adversely affect the performance
and market value of our investments. Furthermore, if these
conditions persist, institutions from which we may seek
financing for our investments may become insolvent or tighten
their lending standards, which could
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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
investments.
The
conservatorship of Fannie Mae and Freddie Mac and related
efforts, along with any changes in laws and regulations
affecting the relationship between Fannie Mae and Freddie Mac
and the federal government, may adversely affect our
business.
Although the FHFA has placed Fannie Mae and Freddie Mac into
conservatorship and the U.S. Treasury has committed capital
to Fannie Mae and Freddie Mac, there can be no assurance that
these actions will be adequate for their needs. If these actions
are inadequate, Fannie Mae and Freddie Mac could continue to
suffer losses and could fail to honor their guarantees and other
obligations. The future roles of Fannie Mae and Freddie Mac
could be significantly reduced and the nature of their
guarantees could be considerably limited relative to historical
measurements. Any changes to the nature of the guarantees
provided by Fannie Mae and Freddie Mac could redefine what
constitutes an Agency MBS and could have broad adverse market
implications.
The size and timing of the federal governments Agency MBS
purchase program is subject to the discretion of the
U.S. Treasury and the Federal Reserve. Purchases under
these programs have already begun, but they are intended to be
temporary. It is possible that the U.S. Treasurys and
the Federal Reserves commitment to purchase Agency MBS in
the future could create additional demand that would negatively
affect the pricing of Agency MBS that we seek to acquire.
Further activity of the U.S. government or market response
to developments at Fannie Mae and Freddie Mac could adversely
impact our business. In addition, the termination of these
programs could adversely affect our business and results of
operations.
There
can be no assurance that the actions of the U.S. government,
Federal Reserve, U.S. Treasury and other governmental and
regulatory bodies, including the establishment of the TALF and
the PPIP, for the purpose of stabilizing the financial markets,
or market response to those actions, will achieve the intended
effect or benefit our business.
There can be no assurance that the EESA, TARP, TALF, PPIP and
other recent U.S. government actions will have a beneficial
impact on the financial markets, including current extreme
levels of volatility. To the extent the markets do not respond
favorably to the TARP or the TARP does not function as intended,
our business may not receive any benefit from the legislation.
Some of these programs are still in early stages of development,
and it is not possible to know whether or how they will be
implemented. 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 debt and equity capital
funding from the U.S. government. In addition, the
U.S. government, Federal Reserve, 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
or what impact, if any, such actions could have on our business,
results of operations and financial condition. In addition, the
U.S. government, Federal Reserve, 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.
There
is no assurance that we will be able to obtain any TALF loans,
and the terms and conditions of the TALF may change, which could
adversely affect our business.
The TALF will 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, including asset and borrower eligibility, at any
time. Any such modifications may adversely
23
affect the market value of any of our assets financed through
the TALF or our ability to obtain additional TALF financing.
When the TALF terminates, which is expected to occur on
December 31, 2009, or, 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 we will be able to do so
in a manner that is consistent with our investment
strategy.
Investors in the Legacy Loans Program must be pre-qualified by
the FDIC. The FDIC has complete discretion regarding the
qualification of investors in the Legacy Loans Program and is
under no obligation to approve our participation even if we meet
all of the applicable criteria. 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. 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 Loans Program, (2) the
debt financing from the U.S. Treasury in the Legacy
Securities Program and (3) the warrants that 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. When the final
terms and conditions are released, there is no assurance that we
will be able to participate in the PPIP in a manner that is
consistent with our investment strategy or at all.
We
expect that certain of our financing facilities will contain
covenants that restrict our operations and may inhibit our
ability to grow our business and increase
revenues.
To the extent that we deploy leverage on our assets, we expect
that certain of our financing facilities will contain
restrictions, covenants, and representations and warranties
that, among other things, will require us to satisfy specified
financial, asset quality, loan eligibility and loan performance
tests. If we fail to meet or satisfy any of these covenants or
representations and warranties, we would be in default under
these agreements and our lenders could elect to declare all
amounts outstanding under the agreements to be immediately due
and payable, enforce their respective interests against
collateral pledged under such agreements and restrict our
ability to make additional borrowings. We also expect our
financing 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.
The covenants and restrictions we expect in our financing
facilities may restrict our ability to, among other things:
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incur or guarantee additional debt;
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make certain investments or acquisitions;
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make distributions on or repurchase or redeem capital stock;
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engage in mergers or consolidations;
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finance mortgage loans with certain attributes;
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reduce liquidity below certain levels;
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grant liens or incur operating losses for more than a specified
period;
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enter into transactions with affiliates; and
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hold mortgage loans for longer than established time periods.
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These restrictions may interfere with our ability to obtain
financing, including the financing needed to qualify as a REIT,
or to engage in other business activities, which may
significantly limit or harm our business, financial condition,
liquidity and results of operations. A default and resulting
repayment acceleration could significantly reduce our liquidity,
which could require us to sell our assets to repay amounts due
and outstanding. This could also significantly harm our
business, financial condition, results of operations, and our
ability to make distributions, which could cause the value of
our common stock to decline. A default will also significantly
limit our financing alternatives such that we will be unable to
pursue our leverage strategy, which could curtail our investment
returns.
24
The
repurchase agreements, warehouse facilities and other secured
and unsecured forms of borrowings that we expect to 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 may use repurchase agreements, warehouse facilities and other
secured and unsecured forms of borrowing to finance our
investments. If the market value of the loans or securities
pledged or sold by us to a financing institution decline in
value, 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 credit 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.
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 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 (
i.e.
, repurchase agreement
counterparties) and receive cash from the lenders. The lenders
are obligated to resell the same securities back to us at the
end of the term of the transaction. Because the cash we receive
from the lender when we initially sell the securities to the
lender is less than the value of those securities (this
difference is the haircut), if the lender defaults on its
obligation to resell the same securities back to us we would
incur a loss on the transaction equal to the amount of the
haircut (assuming there was no change in the value of the
securities). 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. Our repurchase agreements contain
cross-default provisions, so that if a default occurs under any
one agreement, the lenders under our other agreements could also
declare a default. Any losses we incur on our repurchase
transactions could adversely affect our earnings and thus our
cash available for distribution to our stockholders.
To the
extent we deploy leverage on our assets, an increase in our
borrowing costs relative to the interest we receive on our
leveraged assets may adversely affect our profitability, and our
cash available for distribution to our
stockholders.
To the extent we deploy leverage on our assets, as our
repurchase agreements and other short-term borrowings mature, we
will be required to renew or replace these borrowings. If we are
not able to renew or replace maturing borrowings, we could be
forced to sell assets in order to maintain liquidity. 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.
If we
issue senior securities we will be exposed to additional
risks.
If we decide to issue senior securities in the future, it is
likely that they will be governed by an indenture or other
instrument containing covenants restricting our operating
flexibility. Holders of senior securities may be granted
specific rights, including the right to hold a perfected
security interest in certain of our assets, the right to
accelerate payments due under the indenture, rights to restrict
dividend payments, and rights to require approval to sell
assets. Additionally, any convertible or exchangeable securities
that we issue in the future may have rights,
25
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.
Our
securitizations will expose us to additional
risks.
In addition to issuing senior securities as described above, we
may in the future, and to the extent consistent with the REIT
requirements, seek to securitize certain of our portfolio
investments to generate cash for funding new investments. This
would involve conveying a pool of assets to a special purpose
vehicle (or the issuing entity) which would issue one or more
classes of non-recourse notes pursuant to the terms of an
indenture. The notes would be secured by the pool of assets. In
exchange for the transfer of assets to the issuing entity, we
would receive the cash proceeds on the sale of non-recourse
notes and a 100% interest in the equity of the issuing entity.
The securitization of our portfolio investments might magnify
our exposure to losses on those portfolio investments because
any equity interest we retain in the issuing entity would be
subordinate to the notes issued to investors and we would,
therefore, absorb all of the losses sustained with respect to a
securitized pool of assets before the owners of the notes
experience any losses. Moreover, we cannot be assured that we
will be able to access the securitization market, or be able to
do so at favorable rates. The inability to securitize our
portfolio could hurt our performance and our ability to grow our
business.
The
use of securitization financings with over-collateralization
requirements may have a negative impact on our cash
flow.
We expect that the terms of securitizations we may issue will
generally provide that the principal amount of assets must
exceed the principal balance of the related bonds by a certain
amount, commonly referred to as
over-collateralization. We anticipate that the
securitization terms will provide that, if certain delinquencies
or losses exceed the specified levels based on the analysis by
the Rating Agencies (or any financial guaranty insurer) of the
characteristics of the assets collateralizing the bonds, the
required level of over-collateralization may be increased or may
be prevented from decreasing as would otherwise be permitted if
losses or delinquencies did not exceed those levels. Other tests
(based on delinquency levels or other criteria) may restrict our
ability to receive net income from assets collateralizing the
obligations. We cannot assure you that the performance tests
will be satisfied. In advance of completing negotiations with
the Rating Agencies or other key transaction parties on our
future securitization financings, we cannot assure you of the
actual terms of the securitization delinquency tests,
over-collateralization terms, cash flow release mechanisms or
other significant factors regarding the calculation of net
income to us. Given recent volatility in the securitization
market, Rating Agencies may depart from historic practices for
securitization financings, making them more costly for us.
Failure to obtain favorable terms with regard to these matters
may materially and adversely affect the availability of net
income to us. If our assets fail to perform as anticipated,
over-collateralization or other credit enhancement expense
associated with our securitization financings will increase.
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 may involve entering into hedging
transactions that could require us to fund cash payments in
certain circumstances (
e.g.
, 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 may 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, to the
extent leverage is deployed, we may pursue various hedging
strategies to seek to reduce our exposure to adverse changes in
interest rates. Our hedging activity will vary
26
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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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 through TRSs) 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 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.
Declines
in the market values of our investments may adversely affect
periodic reported results and credit availability, which may
reduce earnings and, in turn, cash available for distribution to
our stockholders.
A substantial portion of our assets will be classified for
accounting purposes as available-for-sale. Changes
in the market values of those assets will be directly charged or
credited to stockholders equity. As a result, a decline in
values may reduce the book value of our company. Moreover, if
the decline in value of an available-for-sale security is other
than temporary, such decline will reduce earnings.
A decline in the market value of our assets may adversely affect
us, particularly in instances where we have borrowed money based
on the market value of those assets. If the market value of
those assets declines, the lender may require us to post
additional collateral to support the loan. If we were unable to
post the additional collateral, we would have to sell the assets
at a time when we might not otherwise choose to do so. A
reduction in credit available may reduce our earnings and, in
turn, cash available for distribution to stockholders.
The
lack of liquidity in our investments may adversely affect our
business, including our ability to value and sell our
assets.
We may invest in securities or other instruments that are not
liquid, including securities and other instruments that are not
publicly traded. Moreover, turbulent market conditions could
significantly and negatively impact the liquidity of our assets.
It may be difficult or impossible to obtain third-party pricing
on the investments we purchase. Illiquid investments typically
experience greater price volatility, as a ready market does not
exist, and are typically more difficult to value. In addition,
validating third-party pricing for illiquid investments is
usually more subjective than more liquid investments. The
illiquidity of our investments may make it difficult for us to
sell such investments
27
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. 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.
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 our Manager. Any failure or interruption
of our Managers 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.
We
expect to be required to obtain various state licenses in order
to purchase mortgage loans in the secondary market, and there is
no assurance we will be able to obtain or maintain those
licenses.
While we are not required to obtain licenses to purchase
mortgage-backed securities, we will be required to obtain
various state licenses to purchase mortgage loans in the
secondary market. We have not applied for these licenses and
expect that this process will be costly and could take several
months. There is no assurance that we will obtain all of the
licenses that we desire or that we will not experience
significant delays in seeking these licenses. Furthermore, we
will be subject to various information and other requirements to
maintain these licenses and there is no assurance that we will
satisfy those requirements. Our failure to obtain or maintain
licenses will restrict our investment options and could harm our
business.
We may
be subject to liability for potential violations of predatory
lending laws, which could adversely impact our results of
operations, financial condition and business.
Various federal, state and local laws have been enacted that are
designed to discourage predatory lending practices. The Home
Ownership and Equity Protection Act of 1994, commonly known as
HOEPA, prohibits inclusion of certain provisions in residential
mortgage loans that have mortgage rates or origination costs in
excess of prescribed levels and requires that borrowers be given
certain disclosures prior to origination. Some states have
enacted, or may enact, similar laws or regulations, which in
some cases impose restrictions and requirements greater than
those in HOEPA. In addition, under the anti-predatory lending
laws of some states, the origination of certain residential
mortgage loans, including loans that are not classified as
high cost loans under applicable law, must satisfy a
net tangible benefits test with respect to the related borrower.
This test may be highly subjective and open to interpretation.
As a result, a court may determine that a residential mortgage
loan, for example, does not meet the test even if the related
originator reasonably believed that the test was satisfied.
The
increasing number of proposed federal, state and local laws may
increase our risk of liability with respect to certain mortgage
loans and could increase our cost of doing
business.
The U.S. Congress and various state and local legislatures
are considering, and in the future may consider, legislation
which, among other provisions, would permit limited assignee
liability for certain violations in the mortgage loan
origination process. We cannot predict whether or in what form
the U.S. Congress or the various state and local
legislatures may enact legislation affecting our business. We
will evaluate the potential impact of any initiatives which, if
enacted, could affect our practices and results of operations.
We are unable to predict whether federal, state or local
authorities will require changes in our practices in the future.
These changes, if required, could adversely affect our
profitability, particularly if we make such changes in response
to new or amended laws, rules, regulations or ordinances in any
state where we acquire a significant portion of our mortgage
loans, or if such changes result in us being held responsible
for any violations in the mortgage loan origination process.
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We
will be subject to the requirements of the Sarbanes-Oxley Act of
2002.
After we become a public company, our management will be
required to deliver a report that assesses the effectiveness of
our internal controls over financial reporting, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (or
Sarbanes-Oxley Act). Section 404 of the Sarbanes-Oxley Act
requires our independent registered public accounting firm to
deliver an attestation report on managements assessment
of, and the operating effectiveness of, our internal controls
over financial reporting in conjunction with their opinion on
our audited financial statements as of December 31 subsequent to
the year in which our registration statement becomes effective.
Substantial work on our part is required to implement
appropriate processes, document the system of internal control
over key processes, assess their design, remediate any
deficiencies identified and test their operation. This process
is expected to be both costly and challenging. We cannot give
any assurances that material weaknesses will not be identified
in the future in connection with our compliance with the
provisions of Sections 302 and 404 of the Sarbanes-Oxley
Act. The existence of any material weakness described above
would preclude a conclusion by management and our independent
auditors that we maintained effective internal control over
financial reporting. Our management may be required to devote
significant time and incur significant expense to remediate any
material weaknesses that may be discovered and may not be able
to remediate any material weaknesses in a timely manner. The
existence of any material weakness in our internal control over
financial reporting could also result in errors in our financial
statements that could require us to restate our financial
statements, cause us to fail to meet our reporting obligations
and cause stockholders to lose confidence in our reported
financial information, all of which could lead to a decline in
the trading price of our common stock.
Risks
Related To Our Investments
We may
not realize gains or income from our investments.
We seek to generate both current income and capital appreciation
for our stockholders. However, the securities we invest in may
not appreciate in value and, in fact, may decline in value, and
the debt securities we invest in may experience defaults on
interest
and/or
principal payments. Accordingly, we may not be able to realize
gains or income from our investments. Any gains that we do
realize may not be sufficient to offset any other losses we
experience. Any income that we realize may not be sufficient to
offset our expenses.
We
have not yet identified any specific investments.
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, 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 more
diversified portfolio of investments within six months, subject
to the availability of appropriate investment opportunities. 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 offering to investments with which you may not
agree.
We will have significant flexibility in investing the net
proceeds of this offering and the concurrent private offering.
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
29
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.
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 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 shares and accordingly reduce our
ability to pay dividends to our stockholders.
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 mortgage-related assets primarily by
purchasing MBS, residential mortgage loans and other real
estate-related financial assets. In a normal yield curve
environment, an investment in these types of 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 these investments 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 these
securities.
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, 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, net of credit losses, and financing
costs. We anticipate that, in most cases, the income from such
assets will respond more slowly to interest rate fluctuations
than the cost of our borrowings. Consequently, changes in
interest rates, particularly short-term interest rates, may
significantly influence our net income. Increases in these rates
will tend to decrease our net income and market value of our
assets.
Interest
rate fluctuations may adversely affect the value of our assets,
net income 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
common stock. Furthermore, the stock market has recently
experienced extreme price and volume fluctuations that have
affected the market price of many companies in industries
similar or related to ours and that have been unrelated to these
companies operating performances. Additionally, our
operating results and prospects may be below the expectations of
public market analysts and investors or may be lower than those
of companies with comparable market capitalizations, which could
lead to a material decline in the market price of our common
stock.
30
Some
of our portfolio investments will be recorded at fair value (as
determined in accordance with our pricing policy as approved by
our board of directors) 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
FAS 157), which may include unobservable inputs. Because
such valuations are subjective, the fair value of certain of our
assets may fluctuate over short periods of time and our
determinations of fair value may differ materially from the
values that would have been used if a ready market for these
securities existed. The value of our common stock could be
adversely affected if our determinations regarding the fair
value of these investments were materially higher than the
values that we ultimately realize if we sell these investments.
A
prolonged economic slowdown, a lengthy or severe recession or
declining real estate values could impair our investments and
harm our operations.
We believe the risks associated with our business will be more
severe during periods of economic slowdown or recession if these
periods are accompanied by declining real estate values.
Declining real estate values will likely reduce our level of new
mortgage loan originations since borrowers often use
appreciation in the value of their existing properties to
support the purchase or investment in additional properties.
Borrowers may also be less able to pay principal and interest on
our loans if the value of real estate weakens. Further,
declining real estate values significantly increase the
likelihood that we will incur losses on our loans in the event
of default because the value of our collateral may be
insufficient to cover our cost on the loan. Any sustained period
of increased payment delinquencies, foreclosures or losses could
adversely affect both our net interest income from loans in our
portfolio as well as our ability to originate, sell and
securitize loans, which would significantly harm our revenues,
results of operations, financial condition, business prospects
and our ability to make distributions to our stockholders.
Prepayment
rates may adversely affect the value of our investment
portfolio.
The value of certain of our assets may be affected by prepayment
rates on mortgage loans. If we acquire mortgage-related
securities, we anticipate that the underlying mortgages will
prepay at a projected rate generating an expected yield. If we
purchase assets at a premium to par value, when borrowers prepay
their mortgage loans faster than expected, the corresponding
prepayments on the mortgage-related securities may reduce the
expected yield on such securities because we will have to
amortize the related premium on an accelerated basis.
Conversely, if we purchase assets at a discount to par value,
when borrowers prepay their mortgage loans slower than expected,
the decrease in corresponding prepayments on the
mortgage-related securities may reduce the expected yield on
such securities because we will not be able to accrete the
related discount as quickly as originally anticipated.
Prepayment rates on loans are influenced by changes in market
interest rates and a variety of economic, geographic and other
factors beyond our control. Consequently, such prepayment rates
cannot be predicted with certainty and no strategy can
completely insulate us from prepayment or other such risks. In
periods of declining interest rates, prepayment rates on
mortgage loans generally increase. If general interest rates
decline at the same time, the proceeds of such prepayments
received during such periods are likely to be reinvested by us
in assets yielding less than the yields on the assets that were
prepaid. In addition, the market value of the assets may,
because of the risk of prepayment, benefit less than other
fixed-income securities from declining interest rates.
The
mortgage loans we will invest in and the mortgage loans
underlying the mortgage and asset-backed securities we will
invest in are subject to delinquency, foreclosure and loss,
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 invest in non-Agency MBS, which are backed by
residential real property
31
but, in contrast to Agency MBS, their principal and interest is
not guaranteed by federally chartered entities such as Fannie
Mae and Freddie Mac and, in the case of Ginnie Mae, the
U.S. government. Asset-backed securities are bonds or notes
backed by loans or other financial assets. The ability of a
borrower to repay these loans or other financial assets is
dependent upon the income or assets of such borrower.
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.
Mortgage
loan modification programs and future legislative action may
adversely affect the value of, and the returns on, the assets
that we acquire.
During the second half of 2008 and in early 2009, the
U.S. government, through the Federal Reserve, the Federal
Housing Administration (or the FHA) and the FDIC, commenced
implementation of programs designed to provide homeowners with
assistance in avoiding residential mortgage loan foreclosures,
including the Hope for Homeowners Act of 2008, which allows
certain distressed borrowers to refinance their mortgages into
FHA-insured loans. These programs may involve, among other
things, the modification of mortgage loans to reduce the
principal amount of the loans and/or the rate of interest
payable on the loans, or to extend the payment terms of the
loans. 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, future legislative or regulatory actions, including
amendments to the bankruptcy laws, that result in the
modification of outstanding mortgage loans, as well as changes
in the requirements necessary to qualify for refinancing a
mortgage with Fannie Mae, Freddie Mac or Ginnie Mae, may
adversely affect the value of, and the returns on, the assets
that we intend to acquire.
Our
real estate investments are subject to risks particular to real
property.
We own assets secured by real estate and may own real estate
directly in the future, either through direct investments or
upon a default of mortgage loans. Real estate investments are
subject to various risks, including:
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natural disasters, including earthquakes, floods and others,
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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If any of these or similar events occurs, it may reduce our
return from an affected property or investment and reduce or
eliminate our ability to make distributions to stockholders.
We may
be exposed to environmental liabilities with respect to
properties to which we take title, which may in turn decrease
the value of the underlying properties.
In the course of our business, we may take title to real estate,
and, if we do take title, we could be subject to environmental
liabilities with respect to these properties. In such a
circumstance, we may be held liable to a governmental entity or
to third parties for property damage, personal injury,
investigation, and
clean-up
costs
32
incurred by these parties in connection with environmental
contamination, or we may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. If we ever become subject to
significant environmental liabilities, our business, financial
condition, liquidity, and results of operations could be
materially and adversely affected. In addition, an owner or
operator of real property may become liable under various
federal, state and local laws, for the costs of removal of
certain hazardous substances released on its property. Such laws
often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the release of such
hazardous substances. The presence of hazardous substances may
adversely affect an owners ability to sell real estate or
borrow using real estate as collateral. To the extent that an
owner of an underlying property becomes liable for removal
costs, the ability of the owner to make debt payments may be
reduced, which in turn may adversely affect the value of the
relevant mortgage-related assets held by us.
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. We expect that our
common stock will be approved for listing on the NYSE, 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.
Even if an active trading market develops, the market price of
our common stock may be highly volatile and could be subject to
wide fluctuations after this offering and may fall below the
offering price. Some of the factors that could negatively affect
our share price include:
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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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increases in market interest rates that may lead purchasers of
our shares to demand a higher yield;
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changes in market valuations of similar companies;
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adverse market reaction to any increased indebtedness we incur
in the future;
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additions to or departures of our Managers key personnel;
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actions by stockholders;
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speculation in the press or investment community; and
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general market and economic conditions.
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Common
stock eligible for future sale may have adverse effects on our
share price.
We are
offering shares
of our common stock as described in this prospectus. In
addition, MFA will hold a number of shares of our common stock
equal to 9.8% of our outstanding shares of common stock after
giving effect to the shares sold in this offering, excluding
shares sold pursuant to the underwriters exercise of their
overallotment option. Our 2009 equity incentive plan provides
for grants of restricted common stock and other equity-based
awards up to an aggregate of 8% of the issued and outstanding
shares of our common stock (on a fully diluted basis and
including shares to be sold to MFA concurrently with this
offering and shares to be sold pursuant to the
underwriters exercise of their overallotment option) at
the time of the award, subject to a ceiling of
40,000,000 shares available for issuance under the plan.
Each independent director will receive 3,000 shares of our
restricted common stock upon completion of this offering. In
addition, our executive officers and our Managers
personnel will receive shares of our restricted common stock
under our 2009 equity incentive plan in an amount equal
to % of the initial
$ of capital raised by us in
offerings of our securities. Thereafter, during the term of the
management agreement with our Manager, the management agreement
provides that any grants of equity compensation made by us to
our Manager, MFA or their respective employees shall be made
only to our Manager
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and its designees. The shares of restricted common stock to be
granted to our executive officers and our Managers
personnel shall vest in equal installments on the first business
day of each fiscal quarter over a period of five years expected
to begin
on ,
2009 and the shares of restricted common stock to be granted to
our independent directors shall fully vest
on ,
2009. We will not make distributions on shares of restricted
common stock to be granted to our independent directors and the
personnel of our Manager upon completion of the offering which
have not vested.
We, MFA, and our executive officers and directors have agreed
with the underwriters to a 180 day
lock-up
period (subject to extensions), 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 Morgan Stanley & Co. Incorporated and
Deutsche Bank Securities Inc., the representatives of the
underwriters. 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, MFA has
agreed with us to a further
lock-up
period that will expire at the earlier of (i) the date
which is three years following the date of this prospectus or
(ii) the termination of the management agreement. Assuming
no exercise of the underwriters overallotment option to
purchase additional shares,
approximately % of our shares of
common stock are subject to
lock-up
agreements. When the
lock-up
periods expire, these shares of common stock will become
eligible for sale, in some cases subject to the requirements of
Rule 144 under the Securities Act of 1933, as amended (or
the Securities Act), which are described under Shares
Eligible for Future Sale.
We cannot predict the effect, if any, of future sales of our
common stock, or the availability of shares for future sales, on
the market price of our common stock. The market price of our
common stock may decline significantly when the restrictions on
resale by certain of our stockholders lapse. Sales of
substantial amounts of common stock or the perception that such
sales could occur may adversely affect the prevailing market
price for our common stock.
Also, we may issue additional shares in subsequent public
offerings or private placements to make new investments or for
other purposes. We are not required to offer any such shares to
existing stockholders on a preemptive basis. Therefore, it may
not be possible for existing stockholders to participate in such
future share issuances, which may dilute the existing
stockholders interests in us.
We
have not established a minimum distribution payment level and we
cannot assure you of our ability to pay distributions in the
future.
We intend to pay quarterly distributions and to make
distributions to our stockholders in an amount such that we
distribute all or substantially all of our REIT taxable income
in each year, subject to certain adjustments. We have not
established a minimum distribution payment level and our ability
to pay distributions may be adversely affected by a number of
factors, including the risk factors described in this
prospectus. All distributions will be made at the discretion of
our board of directors and will depend on our earnings, our
financial condition, any 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.
34
Investing
in our shares 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 shares may not be
suitable for someone with lower risk tolerance.
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 shares of common stock with the opportunity to
realize a premium over the then-prevailing market price of such
shares. 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
shares 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 shares) 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) eighty percent of the
votes entitled to be cast by holders of outstanding shares of
our voting stock; and (2) two-thirds of the votes entitled
to be cast by holders of voting 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 our 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 (1) between us
and MFA or its affiliates and (2) between us and any
person,
provided
that such business combination is first
approved by our board of directors (including a majority of our
directors who are not affiliates or associates of such person).
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, 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 acquirer of control shares, our officers and our
employees who are also our directors. Our bylaws contain a
provision exempting from the control share acquisition statute
any and all acquisitions by any person of our shares of 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 our 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 Maryland
General Corporation Law and Our Charter and Bylaws
Business Combinations and Certain Provisions of
Maryland General Corporation Law and Our Charter and
Bylaws Control Share Acquisitions.
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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 or decrease 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 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.
Tax
Risks
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, 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.
Even if we qualify as a REIT for U.S. federal income tax
purposes, we may be required to pay some U.S. federal,
state and local taxes on our income or property and, in certain
cases, a 100% penalty tax in the event we sell property,
including mortgage loans, held as inventory or held primarily
for sale to customers in the ordinary course of business, or if
a TRS of ours enters into agreements with us on a basis that is
determined to be other than arms-length. In addition, any
domestic TRS we own will be required to pay regular
U.S. federal, state and local income taxes on its taxable
income, including income from the sale of any loans that it
holds in portfolio, as well as any other applicable taxes.
Our
qualification as a REIT and exemption from U.S. federal income
tax with respect to certain assets may be dependent on the
accuracy of legal opinions or advice rendered or given or
statements by the issuers of securities in which we invest, and
the inaccuracy of any such opinions, advice or statements may
adversely affect our REIT qualification and result in
significant corporate level tax.
When purchasing securities, we may rely on opinions or advice of
counsel for the issuer of such securities, or statements made in
related offering documents, for purposes of determining whether
such securities represent debt or equity securities for
U.S. federal income tax purposes, and also to what extent
those securities constitute REIT real estate assets for purposes
of the REIT asset tests and produce income which qualifies under
the 75% REIT gross income test. In addition, when purchasing the
equity tranche of a securitization, we may rely on opinions or
advice
36
of counsel regarding the qualification of the securitization for
exemption from U.S. corporate income tax and the
qualification of interests in such securitization as debt for
U.S. federal income tax purposes. The inaccuracy of any
such opinions, advice or statements may adversely affect our
REIT qualification and result in significant corporate-level tax.
Certain
financing activities may subject us to U.S. federal income tax
and increase the tax liability of our
stockholders.
We may enter into transactions that could result in us or a
portion of our assets being treated as a taxable mortgage
pool for U.S. federal income tax purposes.
Specifically, we may securitize MBS that we acquire and such
securitizations would likely result in us owning interests in a
taxable mortgage pool. We will be precluded from selling to
outside investors equity interests in such securitizations or
from selling any debt securities issued in connection with such
securitizations that might be considered to be equity interests
for U.S. federal income tax purposes. We are taxed at the
highest corporate income tax rate on a portion of the income,
referred to as excess inclusion income, arising from
a taxable mortgage pool that is allocable to the percentage of
our shares held in record name by disqualified
organizations, which are generally certain cooperatives,
governmental entities and tax-exempt organizations that are
exempt from tax on unrelated business taxable income. To the
extent that common stock owned by disqualified
organizations is held in record name by a broker/dealer or
other nominee, the broker/dealer or other nominee would be
liable for the corporate level tax on the portion of our excess
inclusion income allocable to the common stock held by the
broker/dealer or other nominee on behalf of the
disqualified organizations. We expect that
disqualified organizations will own our stock. Because this tax
would be imposed on us, all of our investors, including
investors that are not disqualified organizations, will bear a
portion of the tax cost associated with the classification of us
or a portion of our assets as a taxable mortgage pool. A
regulated investment company (or RIC) or other pass-through
entity owning our common stock in record name will be subject to
tax at the highest corporate tax rate on any excess inclusion
income allocated to their owners that are disqualified
organizations.
In addition, if we realize excess inclusion income and allocate
it to our stockholders, this income cannot be offset by net
operating losses of our stockholders. If the stockholder is a
tax-exempt entity and not a disqualified organization, then this
income is fully taxable as unrelated business taxable income
under Section 512 of the Internal Revenue Code. If the
stockholder is a foreign person, it would be subject to
U.S. federal income tax withholding on this income without
reduction or exemption pursuant to any otherwise applicable
income tax treaty. If the stockholder is a REIT, a RIC, common
trust fund or other pass-through entity, our allocable share of
our excess inclusion income could be considered excess inclusion
income of such entity. Accordingly, such investors should be
aware that a significant portion of our income may be considered
excess inclusion income. Finally, if we were to fail to qualify
as a REIT, our taxable mortgage pool securitizations will be
treated as separate taxable corporations for U.S. federal
income tax purposes that could not be included in any
consolidated corporate tax return.
The
failure of a loan subject to a repurchase agreement or a
mezzanine loan to qualify as a real estate asset would adversely
affect our ability to qualify as a REIT.
We may enter into repurchase agreements under which we will
nominally sell certain of our loan assets to a counterparty and
simultaneously enter into an agreement to repurchase the sold
assets. We believe that we will be treated for U.S. federal
income tax purposes as the owner of the loan assets that are the
subject of any such agreement 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 assert that we did not own the loan
assets during the term of the repurchase agreement, 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
37
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.
We may
lose our REIT qualification or be subject to a penalty tax if we
earn and the IRS successfully challenges our characterization of
income from foreign TRSs.
We may make investments in
non-U.S. corporations
some of which may, together with us, make a TRS election. We
likely will be required to include in our income, even without
the receipt of actual distributions, earnings from any such
foreign TRSs or other
non-U.S. corporations
in which we hold an equity interest. The provisions that set
forth what income is qualifying income for purposes of the 95%
gross income test provide that gross income derived from
dividends, interest and certain other enumerated classes of
passive income qualify for purposes of the 95% gross income
test. Income inclusions from equity investments in a foreign TRS
or other
non-U.S. corporations
in which we hold an equity interest will be technically neither
dividends nor any of the other enumerated categories of income
specified in the 95% gross income test for U.S. federal
income tax purposes, and there is no other clear precedent with
respect to the qualification of such income. However, based on
advice of counsel, we intend to treat such income inclusions, to
the extent distributed by a foreign TRS or other
non-U.S. corporation
in which we hold an equity interest in the year accrued, as
qualifying income for purposes of the 95% gross income test.
Nevertheless, because this income does not meet the literal
requirements of the REIT provisions, it is possible that the IRS
could successfully take the position that such income is not
qualifying income. We do not currently expect such income
together with any other nonqualifying income that we receive for
purposes of the 95% gross income test to be in excess of 5% of
our annual gross income. In the event that such income, together
with any other nonqualifying income for purposes of the 95%
gross income test was in excess of 5% of our annual gross income
and was determined not to qualify for the 95% gross income test,
we would be subject to a penalty tax with respect to such income
to the extent it and our other nonqualifying income exceeds 5%
of our gross income
and/or
we
could fail to qualify as a REIT. See U.S. Federal
Income Tax Considerations. In addition, if such income was
determined not to qualify for the 95% gross income test, we
would need to invest in sufficient qualifying assets, or sell
some of our interests in any foreign TRSs or other
non-U.S. corporations
in which we hold an equity interest to ensure that the income
recognized by us from our foreign TRSs or such other
non-U.S. corporations
does not exceed 5% of our gross income.
Even
if we qualify as a REIT, we may face tax liabilities that reduce
our cash flow.
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
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 recording taxes. See
U.S. Federal Income Tax Considerations
Taxation of REITs in General. In addition, any TRSs we own
will be subject to U.S. federal, state and local corporate
taxes. In order to meet the REIT qualification requirements, or
to avoid the imposition of a 100% tax that applies to certain
gains derived by a REIT from sales of inventory or property held
primarily for sale to customers in the ordinary course of
business, we may hold some of our assets through taxable
subsidiary corporations, including TRSs. Any taxes paid by such
subsidiary corporations would decrease the cash available for
distribution to our stockholders.
Failure
to make required distributions would subject us to tax, which
would reduce the cash available for distribution to our
stockholders, and accordingly we may be required to incur debt
or sell assets to make such distributions.
In order to qualify as a REIT, we must distribute to our
stockholders, each calendar year, at least 90% of our REIT
taxable 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 are subject to
U.S. federal corporate income tax on our undistributed
income. In addition, we will incur a 4% nondeductible excise tax
on the amount, if any, by which our distributions in any
calendar year are less than the sum of:
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85% of our ordinary income for that year;
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95% of our capital gain net income for that year; and
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100% of our undistributed taxable income from prior years.
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We intend to distribute our net 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. There is no requirement that our domestic TRSs
distribute their after-tax net income to us and such domestic
TRSs that we form may, to the extent consistent with maintaining
our qualification as a REIT, determine not to make any current
distributions to us.
Our taxable income may substantially exceed our net income as
determined by GAAP because, for example, expected capital losses
will be deducted in determining our GAAP net income, but may not
be deductible in computing our taxable income. In addition, we
will likely invest in assets, including debt instruments
requiring us to accrue original issue discount (or OID), that
generate taxable income in excess of economic income or in
advance of the corresponding cash flow from the assets, referred
to as phantom income. Although some types of phantom
income are excluded to the extent they exceed 5% of our net
income in determining the 90% distribution requirement, we may
incur corporate income tax and the 4% nondeductible excise tax
with respect to any phantom income items if we do not distribute
those items on an annual basis. As a result of the foregoing, we
may generate less cash flow than taxable income in a particular
year. In that event, we may be required to use cash reserves,
incur debt, or liquidate non-cash assets at rates or times that
we regard as unfavorable in order to satisfy the distribution
requirement and to avoid U.S. federal corporate income tax
and the 4% nondeductible excise tax in that year. Also, our
repurchase agreements and financing facilities may restrict our
ability to distribute cash. If we were required to make a
taxable distribution of our shares to comply with the REIT
distribution requirements for any taxable year and the value of
our shares was not sufficient at such time to make a
distribution to our stockholders in an amount at least equal to
the minimum amount required to comply with such distribution
requirements, we would generally fail to qualify as a REIT for
such taxable year and would be precluded from being taxed as a
REIT for the four taxable years following the year during which
we ceased to qualify as a REIT.
We may
choose to pay dividends in our own stock, in which case you may
be required to pay income taxes in excess of the cash dividends
you receive.
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. For more information on the tax consequences of
distributions with respect to our common stock, see
U.S. Federal Income Tax Considerations
Taxation of Taxable U.S. Stockholders,
Annual Distribution Requirements.
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.
Although
our use of TRSs may be able to partially mitigate the impact of
meeting the requirements necessary to maintain our qualification
as a REIT, our ownership of and relationship with our TRSs is
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 hold assets and earn income that would not be qualifying
assets or income if held or earned directly by a REIT. Both the
subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of
the stock will automatically be treated as a TRS. Overall, no
more than
39
25% of the value of a REITs assets may consist of stock
or securities of one or more TRSs. In addition, the TRS rules
limit the deductibility of interest paid or accrued by a TRS to
its parent REIT to assure that the TRS is subject to an
appropriate level of corporate taxation. The rules also impose a
100% excise tax on certain transactions between a TRS and its
parent REIT that are not conducted on an arms-length basis.
TRSs that we may form will pay U.S. federal, state and
local income tax on their taxable income, and their after-tax
net income will be available for distribution to us but are not
required to be distributed to us. We anticipate that the
aggregate value of the securities of our TRSs will be less than
25% of the value of our total assets (including our TRS
securities). Furthermore, we intend to monitor the value of our
respective investments in our TRSs for the purpose of ensuring
compliance with TRS ownership limitations. In addition, we will
review all of our transactions with TRSs to ensure that they are
entered into on arms-length terms to avoid incurring the
100% excise tax described above. There can be no assurance,
however, that we will be able to comply with the 25% limitation
or to avoid application of the 100% excise tax discussed above.
Dividends
payable by REITs do not qualify for the reduced tax rates on
dividend income from regular corporations, which could adversely
affect the value of our shares.
The maximum U.S. federal income tax rate for certain
qualified dividends payable to domestic stockholders that are
individuals, trusts and estates is 15% (through 2010). Dividends
payable by REITs, however, are generally not eligible for the
reduced rates and therefore may be subject to a 35% maximum
U.S. federal income tax rate on ordinary income. Although
the reduced U.S. federal income tax rate applicable to
dividend income from regular corporate dividends 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 the stocks of non-REIT
corporations that pay dividends, which could adversely affect
the value of the shares of REITs, including our shares.
Liquidation
of 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 assets to repay obligations to our lenders, we may
be unable to comply with these requirements, thereby
jeopardizing our qualification as a REIT, or we may be subject
to a 100% tax on any resultant gain if we sell assets that are
treated as inventory or property held primarily for sale to
customers in the ordinary course of business.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Internal Revenue Code may limit our
ability to hedge our assets and operations. Under these
provisions, any income that we generate from transactions
intended to hedge our interest rate and currency risks will
generally be excluded from gross income for purposes of the 75%
and 95% gross income tests if the instrument hedges interest
rate risk or foreign currency exposure on liabilities used to
carry or acquire real estate or income or gain that would be
qualifying income under the 75% or 95% gross income tests, and
such instrument is properly identified under applicable Treasury
regulations. In addition, any income from other hedges would
generally constitute nonqualifying income for purposes of both
the 75% and 95% gross income tests. See U.S. Federal
Income Tax Considerations Gross Income
Tests Hedging Transactions. As a result of
these rules, we may have to limit our use of hedging techniques
that might otherwise be advantageous, which could result in
greater risks associated with interest rate or other changes
than we would otherwise incur.
The
share ownership limits that apply to REITs, as prescribed by the
Internal Revenue Code and by our charter, may inhibit market
activity in our shares of common stock and restrict our business
combination opportunities.
In order for us to qualify as a REIT, not more than 50% in value
of our outstanding shares of stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities) at any time
during the last half of each taxable year after the first year
for which we elect to qualify as a REIT. Additionally, at least
100 persons must beneficially own our stock during at least
335 days of a taxable year.
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Also, rent from related party tenants is not
qualifying income for purposes of the gross income tests of the
Code. To help insure that we meet the tests, our charter
restricts the acquisition and ownership of shares of our stock.
Our charter, with certain exceptions, authorizes our directors
to take such actions as are necessary and desirable to preserve
our qualification as a REIT. Unless exempted by our board of
directors, no person may own 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 may grant such an exemption in its sole discretion,
subject to such conditions, representations and undertakings as
it may determine. These ownership limits could delay or prevent
a transaction or a change in control of our company that might
involve a premium price for our shares of common stock or
otherwise be in the best interest of our stockholders.
Complying
with REIT requirements may force us to liquidate otherwise
profitable assets.
To qualify as a REIT, we must ensure that at the end of each
calendar quarter, at least 75% of the value of our assets
consists of cash, cash items, government securities and
designated real estate assets, including certain mortgage loans
and shares in other REITs. The remainder of our ownership of
securities, other than government securities and 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 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 calendar quarter after the first calendar
quarter for which we qualify as a REIT, we must generally
correct such failure within 30 days after the end of the
calendar quarter to avoid losing our REIT qualification. As a
result, we may be required to liquidate otherwise profitable
assets prematurely, which could reduce our return on assets,
which could adversely affect returns to our stockholders.
The
tax on prohibited transactions will limit our ability to engage
in transactions, including certain methods of securitizing
mortgage loans, that would be treated as sales for U.S. federal
income tax purposes.
A REITs net income from prohibited transactions is subject
to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property, other than foreclosure property,
but including mortgage loans, held as inventory or primarily for
sale to customers in the ordinary course of business. We might
be subject to this tax if we were to sell or securitize loans in
a manner that was treated as a sale of the loans for
U.S. federal income tax purposes. Therefore, in order to
avoid the prohibited transactions tax, we may choose not to
engage in certain sales of loans, other than through a TRS, and
we may be required to limit the structures we use for our
securitization transactions, even though such sales or
structures might otherwise be beneficial for us.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our shares of 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 changed,
possibly with retroactive effect. We cannot predict if or when
any new U.S. federal income tax law, regulation or
administrative interpretation, or any amendment to any existing
U.S. federal income tax law, regulation or administrative
interpretation, will be adopted, promulgated or become effective
or whether 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, U.S. federal
income tax law, regulation or administrative interpretation.
Your
investment has various U.S. federal income tax
risks.
Although the provisions of the Internal Revenue Code generally
relevant to an investment in our shares of common stock are
described in U.S. Federal Income Tax
Considerations, we urge you to consult your tax advisor
concerning the effects of U.S. federal, state, local and
foreign tax laws to you with regard to an investment in our
shares of common stock.
41
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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our business and investment strategy;
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our projected operating results;
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our ability to obtain financing arrangements, including under
temporary programs established or proposed to be established by
the U.S. government;
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general volatility of the securities markets in which we invest;
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changes in the value of our investments;
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our expected investments;
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interest rate mismatches between our Target Assets and any
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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the impact of changes in governmental regulations, tax law and
rates, bankruptcy law, accounting rules and guidance 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;
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market trends in our industry, interest rates, real estate
values, the debt securities markets or the general
economy; and
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use of the proceeds of this offering.
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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.
42
USE OF
PROCEEDS
We estimate that our net proceeds from the initial public
offering of our shares of common stock, after deducting the
underwriting discount and our estimated offering and
organizational expenses, will be approximately
$ million (based on the
assumed offering price of $ per
share set forth on the cover of this prospectus). We estimate
that our net proceeds will be approximately
$ million if the underwriters
exercise their overallotment option in full.
Concurrent with this offering, we also expect to sell to MFA in
the private offering at a price per share equal to the initial
public offering price a number of shares of our common stock
equal to 9.8% of our outstanding shares of common stock after
giving effect to the shares sold in this offering, excluding
shares sold pursuant to the underwriters exercise of their
overallotment option. No underwriting discount is payable in
connection with the sale of shares to MFA. 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. See
Business Our Investment Strategy.
We intend to invest the net proceeds of this offering and the
concurrent private offering in our subsidiaries which in turn
will invest such net proceeds primarily in our Target Assets.
Initially, we expect to focus our investment activities on
purchasing Senior MBS. We also may invest directly in
residential mortgage loans as well as Agency MBS and other real
estate-related financial assets. Until appropriate investments
can be identified, our Manager may invest the net proceeds from
such offerings 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
investments in our Target Assets. 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. Our
Manager intends to review and conduct due diligence with respect
to each investment and suitable investment opportunities may not
be immediately available.
43
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, excluding net capital
gains. We plan to pay our first dividend in respect of the
period from the closing of this offering
through ,
2009, which may be prior to the time that we have fully invested
the net proceeds from this offering in our Target Assets.
To the extent that in respect of any calendar year, cash
available for distribution is less than our REIT 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 domestic TRS that we form
following the completion of this offering. For more information,
see U.S. Federal Income Tax
Considerations Taxation of Our Company
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, any debt covenants, funding or margin requirements
under repurchase agreements, warehouse facilities, borrowings
under temporary programs established by the
U.S. government, such as the TALF and the PPIP, 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.
44
CAPITALIZATION
The following table sets forth (1) our actual
capitalization at May 15, 2009 and (2) our
capitalization as adjusted to reflect the effects of the sale of
our common stock in this offering at an assumed offering price
of $ per share after deducting the
underwriting discount and estimated organizational and offering
expenses payable by us and the concurrent private offering to
MFA of a number of shares of our common stock equal to 9.8% of
our outstanding shares of common stock after giving effect to
the shares sold in this offering, and excluding shares sold
pursuant to the underwriters exercise of their
overallotment option, at the same assumed offering price. You
should read this table together with Use of Proceeds
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of May 15, 2009
|
|
|
|
Actual
|
|
|
As Adjusted(1)(2)(3)
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; 1,000 shares
authorized, 1,000 shares outstanding, actual and
450,000,000 shares authorized
and shares
outstanding, as adjusted(3)
|
|
$
|
10
|
|
|
$
|
|
|
Capital in excess of par value
|
|
$
|
990
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assumes shares
will be sold in this offering and the concurrent private
offering at an initial public offering price of
$ per share for net proceeds of
approximately $ after deducting
the underwriting discount and estimated organization and
offering expenses of approximately
$ . We will repurchase the
1,000 shares currently owned by MFA acquired in connection
with our formation at a cost of $1.00 per share. The shares sold
to MFA will be sold at the offering price without payment of any
underwriting discount. See Use of Proceeds.
|
|
|
|
(2)
|
|
Does not include the underwriters option to purchase up
to additional shares.
|
|
|
|
(3)
|
|
Does not
include shares
(or shares
if the underwriters exercise their overallotment option in full)
of restricted common stock to be granted pursuant to our 2009
equity incentive plan.
|
45
RECENT
REGULATORY DEVELOPMENTS
The significant adverse changes in financial market conditions
have led to U.S. governmental and central bank actions
designed to stabilize and restore credit flows in the financial
sector and the broader economy. Set forth below is a summary of
U.S. governmental programs that may have an impact on our
business and our assessment of their anticipated impact.
Emergency
Economic Stabilization Act of 2008 and the TARP
Signed into law on October 3, 2008, the EESA conferred
broad authority on the U.S. Treasury Secretary to use up to
$700 billion to, among other things, inject capital into
financial institutions and establish the TARP to purchase from
financial institutions residential or commercial mortgages and
any securities, obligations or other instruments that are based
on or related to such mortgages, that were originated or issued
on or before March 14, 2008, and any other financial
instrument that the U.S. Treasury Secretary, in
consultation with the Chairman of the Federal Reserve,
determines necessary to promote financial stability. In
addition, under the EESA, the U.S. Treasury Secretary has
the authority to establish a program to guarantee, upon request
of a financial institution, the timely payment of principal and
interest on these financial assets.
As of May 8, 2009, the U.S. Treasury had used
approximately $314 billion available under the TARP to make
preferred equity investments in certain financial institutions
and has not yet exercised its authority to purchase illiquid
mortgage-related assets held by these financial institutions. On
February 10, 2009, the U.S. Treasury Secretary
announced a Financial Stability Plan to further stabilize the
financial system, restore the flow of credit to consumers and
businesses, and tackle the foreclosure crisis to keep millions
of Americans in their homes. The Financial Stability Plan
includes a CAP for banking institutions, the establishment of
the PPIP to purchase, among other things, illiquid
mortgage-related assets, a Consumer and Business Lending
Initiative built upon the TALF, which is designed to improve the
flow of credit to businesses and consumers, and a commitment to
the continued purchase of MBS issued by GSEs. On
February 18, 2009, the Treasury Department released details
about the Homeowner Affordability and Stability Plan, which is
intended to help homeowners restructure or refinance their
mortgages, reduce foreclosures and stabilize the housing market.
The U.S. government has indicated that the new plan will
involve, among other things, the modification of mortgage loans
to reduce the principal amount of the loans or the rate of
interest payable on the loans, or to extend the payment terms of
the loans, an amendment of the bankruptcy laws to permit the
modification of mortgage loans in bankruptcy proceedings, and an
additional $200 billion capital infusion to Fannie Mae and
Freddie Mac to improve credit availability for residential
mortgages.
The goal of these government actions is to allow the government
the flexibility to ease credit conditions in the financial
markets, inject capital into banks and other financial entities
and enable these entities to remove difficult-to-price financial
assets from their balance and allow these entities to increase
the availability of credit in the broader economy. As a result,
we expect, over time, an increase of liquidity in the market for
mortgage-related and other credit assets. However, there can be
no assurance that these programs will be completed or, if
completed, will have the effect intended.
Term
Asset-Backed Securities Loan Facility
On November 25, 2008, the U.S. Treasury and the
Federal Reserve jointly announced the establishment of the TALF.
The TALF is designed to increase credit availability and support
economic activity by facilitating renewed issuance of consumer
and business ABS at more normal interest rate spreads. Under the
TALF, the FRBNY makes non-recourse loans to borrowers
collateralized by eligible collateral. Eligible collateral will
include U.S. dollar-denominated cash (that is, not
synthetic) ABS that have a credit rating in the highest
long-term or short-term investment grade rating category from
two or more major Rating Agencies and do not have a credit
rating below the highest investment grade rating category from a
major Rating Agency. The underlying credit exposures of eligible
ABS currently must be auto loans, student loans, credit card
loans, equipment loans, floorplan loans, small business loans
fully guaranteed as to principal and interest by the SBA, or
receivables related to residential mortgage servicing advances
(servicing advance receivables).
46
Under the TALF, the FRBNY will lend up to $200 billion to
certain holders of TALF-eligible assets. Any U.S. company
that owns TALF-eligible assets may borrow from the FRBNY under
the TALF, provided that the company maintains an account
relationship with a primary dealer. Loans under this facility
are presently expected to be made through December 31,
2009. Currently, loans provided through the TALF will generally
be: (i) non-recourse, unless the borrower breaches its
representations, warranties and covenants, (ii) available
for a term of three to five years, depending on the type of
collateral, with interest payable monthly and
(iii) available in an amount equal to the market value of
the eligible assets pledged as collateral, minus an upfront
haircut that varies based upon the underlying collateral. TALF
loans are also currently exempt from margin calls related to a
decrease in the underlying collateral value, and are pre-payable
in whole or in part at the option of the borrower. It is
expected that the TALF loans will require that any payments of
principal made on the underlying collateral will reduce the
principal amount of the TALF loan pro rata based upon the
original loan-to-value ratio. Additionally, certain terms of the
TALF loans may be modified. The FRBNY may reject any request for
a loan, in whole or in part, in its discretion.
In connection with the establishment of the PPIP on
March 23, 2009, the U.S. Treasury and the Federal
Reserve announced preliminary plans to expand the TALF to make
non-recourse loans available to investors to fund purchases of
legacy securitization assets, which are expected to include
certain non-Agency MBS that were originally rated AAA and
outstanding CMBS and ABS that are rated AAA. On May 1,
2009, the FRBNY published the terms for the expansion of the
TALF to CMBS and announced that, beginning in June 2009, up to
$100 billion of TALF loans will be available to finance
purchases of eligible CMBS. However, to date, neither the FRBNY
nor the U.S. Treasury has announced how the TALF will be
expanded to non-Agency MBS. We believe that should the TALF be
expanded to include non-Agency MBS as indicated by the
U.S. Treasury, a substantial portion of our Target Assets
will be eligible for TALF financing. We believe that the
proposed expansion of the TALF to include non-Agency MBS that
were originally rated AAA could provide us with attractively
priced non-recourse term borrowing facilities that we can use to
purchase non-Agency MBS. However, there can be no assurance that
the TALF will be expanded to include non-Agency MBS or, if so
expanded, that we will be able to utilize it successfully or at
all.
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
removal of certain illiquid legacy assets, including real
estate-related assets, from 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: a Legacy Loans
Program and a Legacy Securities Program. Under the Legacy Loans
Program, Legacy Loan PPIFs will be established to purchase
troubled loans from insured depository institutions.
Acquisitions of these troubled loans will be funded by equity
capital from both the U.S. Treasury and private investors
and non-recourse debt issued by the Legacy Loan PPIF and
guaranteed by the FDIC, with the FDIC guarantee collateralized
by the assets acquired by the Legacy Loan PPIF. Under the Legacy
Securities Program, Legacy Securities PPIFs will be established
to purchase from financial institutions non-Agency MBS and CMBS
issued prior to 2009 that were originally rated AAA or an
equivalent rating by two or more Rating Agencies without ratings
enhancement. These securities must be secured directly by the
actual mortgage loans, leases or other assets, and not by other
securities (other than certain swap positions, as determined by
the U.S. Treasury), and the loans and other assets
underlying these securities must be situated predominantly in
the United States. Legacy Securities PPIFs will be funded with
equity capital from both the U.S. Treasury and private
investors as well as debt financing from one or more of the
U.S. Treasury, the TALF, other U.S. government
programs and private sources.
We are currently actively evaluating the PPIP to determine if
participation in the PPIP would be appropriate in light of our
investment strategy. We can provide no assurance that we will be
eligible to participate in this program or, if we are eligible,
that we be able to utilize it successfully or at all. Further,
the PPIP is still in early stages of development and it is not
possible for us to predict when or if it will be implemented or,
if implemented, how it will impact our business.
47
Capital
Assistance Program and Bank Stress Tests
On February 25, 2009, the U.S. Treasury and the
Federal Banking Agencies released details about 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 will be 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. If banks determined to be undercapitalized
are unable to raise capital, they may be pressured by the
applicable Federal Banking Agencies or the U.S. Treasury to
dispose of some or all of their non-Agency MBS portfolios, which
could make significant quantities of these assets available to
us at attractive prices.
GSE
Rescue Plan
Signed into law on July 30, 2008, the HERA established a
new regulator for Fannie Mae and Freddie Mac, the FHFA. 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 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 finance by allowing these companies to
continue to grow their guarantee business without limit, while
limiting net purchases of MBS to a modest amount through the end
of 2009. Beginning in 2010, these companies will gradually start
to reduce their portfolios. In addition, in an effort to further
stabilize the U.S. mortgage market, the U.S. Treasury
took three further actions. First, it has entered into a
preferred stock purchase agreement with each of the entities,
pursuant to which $200 billion will be available to each
entity. Second, it has 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 has established an Agency MBS purchase
program, under which the U.S. Treasury may purchase up to
$1.25 trillion of Agency MBS in the open market through
December 31, 2009. According to the FHFA, the
U.S. Treasury purchased $94.2 billion in Agency MBS
from September 2008 through January 2009. This Agency MBS
purchase program, which also expires on December 31, 2009,
is increasing prices and reducing the yields available on Agency
MBS. Through its market activities, the government is achieving
its desired goal of lowering mortgage interest rates. We expect
that these lower mortgage rates, along with higher loan-to-value
limits on Agency refinancings will lead to faster prepayment
speeds in 2009.
Although the federal government has committed capital to Fannie
Mae and Freddie Mac, there can be no assurance that these
actions will be adequate for their needs. If these actions are
inadequate, these entities could continue to suffer losses and
could fail to honor their guarantees and other obligations which
could materially adversely affect our business, operations and
financial condition.
48
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Maryland corporation that will invest primarily in
residential MBS, residential mortgage loans and other real
estate-related financial assets. We will be externally managed
by our Manager, a subsidiary of MFA. Our objective is to provide
attractive risk-adjusted returns to our stockholders over the
long term, primarily through dividend distributions and
secondarily through capital appreciation. We will generate
income principally from the yields earned on our investments
and, to the extent that leverage is deployed, on the difference
between the yields earned on our investments and our cost of
borrowing and any hedging activities.
Our investment strategy will focus on investment opportunities
that exist in the U.S. residential mortgage markets. We
expect that our primary investment focus will initially be on
Senior MBS, subject to our investment guidelines. We believe
that Senior MBS currently present highly attractive
risk-adjusted return profiles. We will also invest in Agency MBS
consistent with maintaining our exemption from registration
under the 1940 Act. We also may invest directly in residential
mortgage loans as well as other real estate-related financial
assets. We intend to adjust our strategy to changing market
conditions by shifting our asset allocations across our Target
Asset classes to take advantage of changes in interest rates and
credit spreads as economic and credit conditions change over
time. We believe that our strategy will position us to generate
attractive risk-adjusted returns over the long term for our
stockholders in a variety of investment and market conditions.
We are organized as a Maryland corporation and intend to elect
and qualify to be taxed as a REIT for U.S. federal income
tax purposes. We also intend to operate our business in a manner
that will permit us to maintain our exemption from registration
under the 1940 Act.
Impact of
Recent U.S. Government Actions
In recent years, significant adverse changes in financial market
conditions have resulted in a deleveraging of the entire global
financial system and the forced sale of large quantities of
mortgage-related and other financial assets. As a result of
these conditions, many traditional mortgage investors have
suffered severe losses in their residential mortgage portfolios
and several major market participants have failed or been
impaired, resulting in a significant contraction in market
liquidity for mortgage-related assets. As a result of these and
other factors, Senior MBS are currently trading at significantly
lower prices compared to recent prior periods. Because these
types of mortgage-related assets offer the potential for a
current cash return to investors, the depressed trading prices
of this asset class have caused a corresponding increase in
available yields.
While mortgage loan delinquencies and credit losses have been on
the rise, we believe that prices for certain non-Agency MBS have
declined significantly below the levels that would be justified
by the credit issues associated with these assets. In addition,
we believe that recent U.S. governmental and central bank
actions designed to stabilize and restore credit flows in the
financial sector and to the broader economy could positively
impact our business. First, we anticipate that in the aftermath
of the recently completed bank stress tests
conducted by the U.S. Treasury, banks determined to be
undercapitalized may be pressured to dispose of some or all of
their non-Agency MBS portfolios, which could make significant
quantities of these assets available to us at attractive prices.
Second, we believe that the launch of the PPIP by the
U.S. Treasury and the FDIC and the proposed expansion of
the TALF to cover non-Agency MBS that were originally rated AAA
may provide us with access to attractive non-recourse term
borrowing facilities that we may use to finance the purchase of
our assets. See Recent Regulatory Developments for a
description of these and other U.S. governmental programs
that may have an impact on our business.
The end results of all of these initiatives cannot be determined
at this time due to the relative uncertainty surrounding the
plans. However, it is not unreasonable to assume that the other
initiatives described above could increase the availability of
lending in the credit markets and, perhaps, stabilize the
valuation and pricing of MBS.
49
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, non-Agency MBS, Agency
MBS and residential mortgage loans in the marketplace. Our net
interest income, which reflects the amortization of purchase
premiums and accretion of purchase discounts, will vary
primarily as a result of changes in market interest rates,
prepayment speeds, as measured by the Constant Prepayment Rate
(or CPR), on our MBS and prepayment rates on our mortgage loans.
Interest rates and prepayment rates 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. Our operating results may also be impacted by
unanticipated credit events experienced by borrowers whose
mortgage loans are included in our non-Agency MBS or are held
directly by us.
Changes in Market Interest Rates.
With respect
to our proposed business operations, increases in interest
rates, in general, may over time cause: (i) the value of
our MBS portfolio and mortgage loans to decline;
(ii) coupons on our adjustable-rate and hybrid MBS and
mortgage loans to reset, although on a delayed basis, to higher
interest rates; (iii) prepayments on our MBS and mortgage
loan portfolio to slow, thereby slowing the amortization of our
purchase premiums and the accretion of our purchase discounts;
(iv) the interest expense associated with our borrowings to
increase; and (v) 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: (i) prepayments on
our MBS and mortgage loan portfolio to increase, thereby
accelerating the amortization of our purchase premiums and the
accretion of our purchase discounts; (ii) the value of our
MBS and mortgage loan portfolio to increase; (iii) coupons
on our adjustable-rate and hybrid MBS and mortgage loans to
reset, although on a delayed basis, to lower interest rates;
(iv) the interest expense associated with our borrowings to
decrease; and (v) to the extent we enter into interest rate
swap agreements as part of our hedging strategy, the value of
these agreements to decrease.
Prepayment Speeds.
Prepayment speeds vary
according to interest rates, the type of investment, conditions
in the financial markets, competition and other factors, none of
which can be predicted with any certainty. We expect that over
time our adjustable-rate and hybrid MBS and mortgage loans will
experience higher prepayment rates than do fixed-rate MBS and
mortgage loans, as we believe that homeowners with
adjustable-rate and hybrid mortgage loans exhibit more rapid
housing turnover levels or refinancing activity compared to
fixed-rate borrowers. In addition, we anticipate that
prepayments on adjustable-rate mortgage loans accelerate
significantly as the coupon reset date approaches.
Changes in Market Value of our Assets.
It is
our business strategy to hold our Target Assets as long-term
investments. As such, we expect that our MBS will be carried at
their fair value, as available-for-sale in accordance with
FAS 115, with changes in fair value recorded through
accumulated other comprehensive income/(loss), a component of
stockholders equity, rather than through earnings. As a
result, we do not expect that changes in the market value of the
assets will normally impact our operating results. However, at
least on a quarterly basis, we will assess both our ability and
intent to continue to hold such assets as long-term investments.
As part of this process, we will monitor our Target Assets for
other-than-temporary impairment. A change in our ability
and/or
intent to continue to hold any of our investment securities
could result in our recognizing an impairment charge or
realizing losses upon the sale of such securities.
Credit Risk.
Although we do not expect to
encounter credit risk in our Agency MBS (which are guaranteed by
an Agency as to payment of principal
and/or
interest), we do expect to be subject to varying degrees of
credit risk in connection with our other Target Asset classes.
Our Manager will seek to mitigate this credit risk by estimating
expected losses on these other Target Asset classes and
purchasing such assets at appropriately discounted prices. These
discounted purchase prices will take into account any available
credit support and estimated expected losses in seeking to
produce attractive loss adjusted returns. Nevertheless,
unanticipated credit losses could occur which could adversely
impact our operating results.
Mortgage Loan Modification Programs/Government
Initiatives.
During the second half of 2008 and
in 2009, the U.S. government, through the Federal Reserve,
the FHA and the FDIC, commenced implementation of various
programs and initiatives to provide homeowners with assistance
in avoiding residential mortgage loan foreclosures.
50
These initiatives include, in some cases, modifications of
mortgage loans to reduce the interest rate payable by the
homeowner
and/or
extend the term of the mortgage loan
and/or
forgive the principal amount due on the mortgage loan. To the
extent that these loan modifications occur on a significant
portion of the loans underlying our Target Assets,
and/or
to
the extent that future governmental initiatives to provide
assistance to homeowners adversely affect the cash flows on our
Target Assets, our operating results could be adversely affected.
Market Conditions.
In recent years,
significant adverse changes in financial market conditions have
resulted in a deleveraging of the entire global financial system
and the forced sale of large quantities of mortgage-related and
other financial assets. Commercial banks, investment banks and
insurance companies have announced extensive losses from
exposure to the U.S. mortgage market, and several major
market participants have failed or been impaired. These losses
have reduced financial industry capital, leading to reduced
liquidity. Market conditions, which are likely to change over
time, 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. These factors have impacted
investor perception of the risk associated with mortgage-related
assets and, together with the forced sale of large quantities of
mortgage-related assets, have resulted in these types of assets
trading at lower prices compared to recent prior periods.
Because mortgage-related assets offer the potential for a
current cash return to investors, the depressed trading prices
of this asset class have caused a corresponding increase in
available yields. Although investor perception of the risk
associated with these assets has increased, higher yields in
turn offer the potential for us to earn higher returns on our
Target Assets.
At the same time, current market conditions have also affected
the cost and availability of financing. Current market
conditions have affected different types of financing to varying
degrees, with some sources generally being unavailable, others
being available but at a high cost, while others being largely
unaffected. In addition, as a result of lenders requiring less
risky and more secure borrowing arrangements, margin
requirements and the availability of financing have been
impacted for both non-Agency and Agency MBS. The increase in
margin requirements causes market participants to reduce their
borrowings or to pledge additional collateral to keep their
repurchase financings in place. Many borrowers have been unable
or unwilling to meet these increased margin requirements which
has resulted in a significant increase compared to prior periods
in forced sales of these assets by lenders and significant
losses to their borrowers. Further, warehouse facilities to
finance prime residential mortgage loans may, in some cases, be
available from major banks, but at significantly higher cost and
greater margin requirements than previously offered. Many major
banks who offer warehouse facilities have also reduced the
amount of capital available to new entrants and consequently the
size of those facilities offered now are smaller than those
previously available.
We believe that in spite of the difficult market environment for
mortgage-related assets, current market conditions offer
potentially attractive investment opportunities for us, even in
the face of a riskier and more volatile market environment, as
the depressed trading prices of our Target Assets have caused a
corresponding increase in available yields. We also believe that
the recent actions taken by the U.S. government, the
Federal Reserve and other governmental and regulatory bodies to
address the financial crisis may have a positive impact on
market conditions and on our business. See Recent
Regulatory Developments for a description of these recent
developments and our assessment of their anticipated impact on
our business. We expect that market conditions will continue to
impact our operating results and will cause us to adjust our
investment and financing strategies over time as new
opportunities emerge and risk profiles of our business change.
Critical
Accounting Policies and Use of Estimates
Our financial statements are prepared on the accrual basis of
accounting 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 to us 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. Our critical
accounting policies and accounting estimates will be expanded
over time as we fully implement our investment strategy. Those
material accounting policies and estimates that we initially
expect to be most critical to
51
an investors understanding of our financial results and
condition and require complex management judgment are discussed
below.
Classification
of Investment Securities and Valuations of Financial
Instruments
Our investments are expected to initially consist primarily of
Senior MBS and Agency MBS that we will classify as
available-for-sale. We have not elected to adopt fair value
accounting pursuant to SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities (or FAS 159). As such, we expect that our
MBS will be carried at their fair value, as available-for-sale
in accordance with FAS 115, with changes in fair value
recorded through accumulated other comprehensive income/(loss),
a component of stockholders equity, rather than through
earnings. We do not intend to hold any of our investment
securities for trading purposes; however, if our securities were
classified as trading securities, there could be substantially
greater volatility in our earnings, as changes in the fair value
of securities classified as trading are recorded through
earnings.
Our investments will be carried at fair value in accordance with
FAS 157, which defines fair value, establishes a framework
for measuring fair value in accordance with GAAP and expands
disclosures about fair value measurements. FAS 157 provides
a consistent definition of fair value which focuses on exit
price. In accordance with FAS 157, we will be required to
disclose the fair value of our financial instruments based upon
such instruments financial value hierarchy comprised of
inputs ranging from Level 1 through Level 3 and
provide additional disclosure for financial instruments based
upon Level 3 inputs. FAS 157 requires that the
valuation techniques used to measure fair value of our financial
instruments maximize the use of observable inputs and minimize
the use of unobservable inputs.
When the estimated fair value of an available-for-sale security
is less than amortized cost, we will consider whether there is
an other-than-temporary impairment in the value of the security.
If, in our judgment, an other-than-temporary impairment exists,
the impairment will be allocated between credit losses which are
charged to earnings and reduce the cost basis of the security
with the remainder of the impairment (non-credit component)
charged to other comprehensive income. The determination of any
other-than-temporary impairment is a subjective on-going
process, and different judgments and assumptions could affect
the timing and amount of losses realized.
Interest
Income Recognition
We expect that interest income on our non-Agency and Agency MBS
will be accrued based on the actual coupon rate and the
outstanding principal balance of such securities. Premiums and
discounts will be amortized or accreted into interest income
over the lives of the securities using the effective yield
method, as adjusted for actual prepayments in accordance with
SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases.
We expect that interest income on our securities rated A or
lower, including unrated securities, will be recognized in
accordance with Emerging Issues Task Force (or EITF) of
Financial Accounting Standards Board (or FASB)
99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets (or
EITF 99-20),
as amended by FASB Staff Position (or FSP)
EITF 99-20-1,
Amendments to the Impairment Guidance of
EITF 99-20
(or
EITF 99-20-1).
Pursuant to
EITF 99-20,
cash flows from a security are estimated based on the
holders best estimate of current information and events
and the excess of the future cash flows over the investment is
recognized as interest income under the effective yield method.
We will review and, if appropriate, make adjustments to our cash
flow projections at least quarterly and monitor these
projections based on input and analysis received from external
sources, internal models, and our judgment about interest rates,
prepayment rates, the timing and amount of credit losses, and
other factors. Changes in cash flows from those originally
projected, or from those estimated at the last evaluation, may
result in a prospective change in interest income recognized on,
or the carrying value of, such securities. We will assess the
applicability of
EITF 99-20
on a security by security basis at the date of acquisition and
on a subsequent basis for securities that have experienced both
an other-than-temporary impairment and a downgrade in rating to
single A or lower by a Rating Agency.
52
Loans
Held-for-Investment
Loans held-for-investment will be stated at the principal amount
outstanding, net of unearned income and net deferred loan fees
and costs. We expect that loan interest income will be
recognized using the interest method or a method that
approximates a level rate of return over the loan term in
accordance with FAS 91. Net deferred loan fees, origination
and acquisition costs will be recognized in interest income over
the loan term as a yield adjustment.
Allowance
for Loan Losses
We expect to establish and maintain an allowance for loan losses
which will be increased by provisions for loan losses charged to
operations and reduced by net charge-offs or reversals of
previously recognized provisions. Our allowance for loan losses
will be based on our evaluation of the probable inherent losses
in our loan portfolio. We expect to evaluate the adequacy of our
allowance for loan losses on a quarterly basis. The allowance
may be comprised of both specific valuation allowances and
general valuation allowances.
Specific valuation allowances may be established in connection
with individual loan reviews and a loan review process including
the procedures for impairment recognition under SFAS,
No. 114, Accounting by Creditors for Impairment of a
Loan, an Amendment of FASB Statements No. 5 and 15,
and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114.
Our evaluation is expected to include a review of loans on which
full collection is not reasonably assured, will consider the
estimated fair value of the underlying collateral, if any,
current and anticipated economic conditions, anticipated loss
experience for similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance.
We expect that loan losses will be charged-off in the period the
loans, or portions thereof, are deemed uncollectible. The
determination of the loans on which full collectibility is not
reasonably assured, the estimates of the fair value of the
underlying collateral and the assessments of economic and
regulatory conditions are subject to our assumptions and
judgments. Specific valuation allowances could differ materially
as a result of changes in these assumptions and judgments.
General valuation allowances will represent loss allowances
established to recognize the inherent risks associated with our
lending activities, but which, unlike specific allowances, will
not be allocated to particular loans. The determination of the
adequacy of the general valuation allowances will take into
consideration a variety of factors. We expect to implement a
loan review process based on the specific characteristics of our
portfolio over time.
While we will use available information to recognize losses on
loans, future additions to the respective loan loss allowances
may be necessary, based on changes in economic and market
condition beyond our control. Changes in estimates could result
in a material change in the allowance for loan losses.
Derivative
Financial Instruments and Hedging Activities
We may apply the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, (or FAS 133) as amended by
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities.
In accordance with FAS 133, a derivative, which is
designated as a hedge, is recognized as an asset/liability and
measured at estimated fair value. To qualify for hedge
accounting, we must, at inception of a hedge, anticipate and
document that the hedge will be highly effective and,
thereafter, assess its effectiveness on at least a quarterly
basis. Provided that the hedge remains effective, changes in the
estimated fair value of the hedging instrument are included in
accumulated other comprehensive income/(loss), a component of
stockholders equity.
To determine the estimated fair value of our hedging
instruments, we expect to receive a valuation from a third-party
pricing service. These valuations represent the amounts which we
would pay or receive if we terminated the hedging instrument at
such date, which also is the instruments fair value. We
expect to independently review the valuations we receive from
the third-party pricing service with internally developed models
that apply readily
53
observable market parameters. We will consider the
creditworthiness, along with collateral provisions contained in
each agreement, from the perspective of both the company and our
counterparties.
For interest rate cap agreements, upon commencement of the
active period and throughout the active period, the premium paid
to enter into the agreement will be amortized and reflected in
interest expense. The periodic amortization of the premium on an
interest rate cap agreement is based on an estimated allocation
of the premium, determined at inception of the hedge based on
the original purchase price. If we determine that an interest
rate cap agreement is not effective, the premium would be
reduced and a corresponding charge made for the ineffective
portion of the agreement. The maximum cost related to our
interest rate cap agreements is limited to the original purchase
price of the hedging instrument. No premium is paid to enter
into interest rate swap agreements. Net payments received on our
interest rate swap agreements, if any, will offset interest
expense on our hedged liabilities; while net payments made by us
on our interest rate swap agreements will increase our interest
expense on our hedged liabilities.
In order to continue to qualify for and to apply hedge
accounting, our interest rate swap agreements and interest rate
cap agreements will be documented at inception and monitored on
a quarterly basis to determine whether they continue to be
effective or, if prior to the commencement of the active period,
whether the hedge is expected to continue to be effective. If
during the term of a hedging instrument we were to determine
that the hedge is not effective or that the hedge is not
expected to be effective, the ineffective portion of the hedge
would no longer qualify for hedge accounting and, accordingly,
subsequent changes in the fair value of such hedging instrument
would be reflected in earnings.
Income
Taxes
Our financial results are generally not expected to reflect
provisions for current or deferred income taxes. We believe that
we will operate in a manner that will allow us to be taxed as a
REIT. As a result of our expected REIT qualification and our
intention to distribute all of our net income with respect to
each taxable year, we do not generally expect to pay corporate
level taxes. Many of the REIT requirements, however, are highly
technical and complex. If we were to fail to meet the REIT
requirements, we would be subject to U.S. federal, state
and local income taxes.
Accounting
for Stock-Based Compensation
We expect to account for our equity-based compensation on a fair
value basis in accordance with FAS No. 123R,
Share-Based Payment. We expect to expense our
equity-based compensation awards over the vesting period of such
awards using the straight-line method, based upon the fair value
of such awards at the grant date. Equity-based awards for which
there is no risk of forfeiture will be expensed upon grant or at
such time that there is no longer a risk of forfeiture.
Estimating the fair value of stock options requires that we use
a model to value such options. We expect to use the
Black-Scholes-Merton option model to value our stock options.
There are limitations inherent in this model, as with other
models currently used in the market place to value stock
options, as they typically were not designed to value stock
options which contain significant restrictions and forfeiture
risks, such as those contained in the stock options that we
issue. We expect to make significant assumptions in order to
determine our option value, all of which are subjective.
Recent
Accounting Pronouncements
On April 9, 2009, the FASB issued FSP
No. FAS 107-1
and Accounting Principles Board (or APB)
28-1,
Interim Disclosures about Fair Value of Financial
Instruments (or
FSP 107-1
and APB
28-1),
FSP
No. 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)
and FSP
No. FAS 115-2
and
FAS 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairments (or
FSP 115-2
and
124-2).
The
54
key provisions of these FSPs, which are intended to provide
additional guidance for interim fair value disclosures, fair
value measurements and the determination of other-than-temporary
impairments, are summarized as follows:
FSP
107-1
and
APB
28-1
FSP 107-1
and APB
28-1
amends FAS No. 107, Disclosures about Fair Value
of Financial Instruments, to require disclosures in the
body or in the accompanying notes to financial statements for
interim reporting periods and in financial statements for annual
reporting periods for the fair value of all financial
instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the balance sheet. This
FSP also amends APB opinion No. 28, Interim Financial
Reporting, to require entities to disclose the methods and
significant assumptions used to estimate the fair value of
financial instruments and describe changes in methods and
significant assumptions in both interim and annual financial
statements.
FSP 107-1
and APB
28-1
is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009 only if an entity also elects
to early adopt
FSP 157-4
and
FSP 115-2
and
124-2.
We do not expect that our adoption of
FSP 107-1
and APB
28-1
during the quarter
ending ,
2009 will have a material impact on our consolidated financial
statements.
FSP
157-4
FSP 157-4
provides additional guidance for estimating fair value in
accordance with FAS 157, when the volume and level of
activity for the asset or liability have significantly decreased
and also provides guidance on identifying circumstances that
indicate a transaction is not orderly.
FSP 157-4
emphasizes that even if there has been a significant decrease in
the volume and level of activity for the asset or liability and
regardless of the valuation technique(s) used, the objective of
a fair value measurement remains the same. Fair value is defined
as the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market
participants at the measurement date under current market
conditions. Among other things,
FSP 157-4
amends FAS 157 to require that a reporting entity disclose
in interim and annual periods the inputs and valuation
technique(s) used to measure fair value and a discussion of
changes in valuation techniques and related inputs, if any,
during the period.
FSP 157-4
is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. If a reporting entity elects
to adopt early either
FSP 115-2
and
124-2
or
FSP 107-1
and APB
28-1,
the
reporting entity also is required to adopt early
FSP 157-4.
Additionally, if a reporting entity elects to early adopt
FSP 157-4,
FSP 115-2
and
124-2
and
FSP 107-1
and APB
28-1
must also be adopted early. Revisions resulting from a change in
valuation technique or its application shall be accounted for as
a change in accounting estimate. We do not expect that our
adoption of
FSP 157-4
during the quarter
ending ,
2009 will have a material impact on our consolidated financial
statements.
FSP
115-2
and
124-2
The objective of an other-than-temporary impairment analysis
under existing GAAP is to determine whether the holder of an
investment in a debt or equity security, for which changes in
fair value are not regularly recognized in earnings (such as for
securities classified as held-to-maturity or
available-for-sale), should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the
fair value of the investment is less than its amortized cost
basis. The objective of
FSP 115-2
and
124-2,
which amends existing other-than-temporary impairment guidance
for debt securities, is to make the guidance more operational
and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities
in the financial statements. Specifically, the recognition
guidance contained in
FSP 115-2
and
124-2
applies to debt securities classified as available-for-sale and
held-to-maturity that are subject to other-than-temporary
impairment guidance within FAS 115, FSP
No. FAS 115-1
and
FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments,
EITF 99-20-1
and American Institute of Certified Public Accountants Statement
of Position
03-3,
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. Among other provisions,
FSP 115-2
and
124-2
requires entities to: (1) split other-than-temporary
impairment charges between credit losses (i.e., the loss based
on the entitys estimate of the decrease in cash flows,
including those that result from expected voluntary
prepayments), which are charged to earnings, and the remainder
of the impairment
55
charge (non-credit component) to other comprehensive income,
net of applicable income taxes; (2) disclose information
for interim and annual periods that enables financial statement
users to understand the types of available-for-sale and
held-to-maturity debt and equity securities held, including
information about investments in an unrealized loss position for
which an other-than-temporary impairment has or has not been
recognized, and (3) disclose for interim and annual periods
information that enables users of financial statements to
understand the reasons that a portion of an other-than-temporary
impairment of a debt security was not recognized in earnings and
the methodology and significant inputs used to calculate the
portion of the total other-than-temporary impairment that was
recognized in earnings.
FSP 115-2
and
124-2
is
effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. If an entity elects to adopt
early either FSP
FAS 157-4
or FSP
FAS 107-1
and APB
28-1,
it
would also be required to adopt early
FSP 115-2
and
124-2.
Additionally, if an entity elects to early adopt
FSP 115-2
and
124-2,
it is required to adopt
FSP 157-4
and
FSP 107-1
and APB
28-1.
For
debt securities held at the beginning of the interim period of
adoption for which an other-than-temporary impairment was
previously recognized, if an entity does not intend to sell and
it is not more likely than not that the entity will be required
to sell the security before recovery of its amortized cost
basis, the entity shall recognize the cumulative effect of
initially applying this FSP as an adjustment to the opening
balance of retained earnings with a corresponding adjustment to
accumulated other comprehensive income/(loss) and the impact of
adoption accounted for as a change in accounting principles,
with applicable disclosures provided. We do not expect that our
adoption of
FSP 115-2
and
124-2
during the quarter
ending ,
2009 will have a material impact on our consolidated financial
statements.
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 national economic conditions
affecting mortgage loans, mortgage-backed securities and real
estate, generally, that may reasonably be expected to have a
material impact, favorable or unfavorable, on revenues or income
from the acquisition of real estate-related investments, other
than those referred to in this prospectus.
Liquidity
and Capital Resources
Liquidity is a measure of our ability to meet potential cash
requirements, including ongoing commitments to fund and maintain
our investments and operations, make distributions to our
stockholders, repay any borrowings and other general business
needs. Our most significant use of cash will be to purchase our
Target Assets, make distributions to our stockholders, fund our
operations and repay principal and interest on our borrowings.
Our principal sources of cash will generally consist of payments
of principal and interest we receive on our investment
portfolio, cash generated from our operating results and any
unused borrowing capacity under our financing sources. To the
extent leverage is deployed, we expect that our primary sources
of financing will be through repurchase agreements, warehouse
facilities, borrowings under temporary programs established by
the U.S. government, such as the TALF and the PPIP, and
other secured and unsecured forms of borrowing. Initially, we do
not expect to deploy leverage on our non-Agency MBS, except to
the extent of available borrowings, if any, under temporary
programs established by the U.S. government. We expect,
initially, that we may deploy, on a debt-to-equity basis, up to
six to eight times leverage on our Agency MBS. Although we do
not have commitments in place for such financings, we believe,
based on discussions with potential counterparties and lenders,
that within such leverage parameters, financing will be
generally available to us for our Agency MBS following the
closing of this offering. Should our needs ever exceed the
sources of liquidity discussed above, we believe that in most
circumstances our investment securities will be able to be sold
to raise cash.
While we generally intend to hold our Target Assets as long-term
investments, certain of our investments securities may be sold
in order to manage our interest rate risk and liquidity needs,
meet other operating objectives and adapt to market conditions.
The timing and impact of future sales of investment securities,
if any, cannot be predicted with any certainty. Since we expect
to finance certain of our investment securities with repurchase
agreements, warehouse facilities, borrowings under temporary
programs established by the U.S. government, such as the
TALF and the PPIP, and other secured and unsecured forms of
borrowing, we expect that a portion of the
56
proceeds from sales of our investment securities (if any),
prepayments and scheduled amortization will be used to repay
balances under these financing sources.
To the extent that we enter into repurchase agreements, we will
be required to pledge additional assets as collateral to our
repurchase agreement counterparties (
i.e.
, lenders) when
the estimated fair value of the existing pledged collateral
under such agreements declines and such lenders, through a
margin call, demand additional collateral. Margin calls result
from a decline in the value of our investments collateralizing
the repurchase agreements, generally following the monthly
principal reduction of such investments due to scheduled
amortization and prepayments on the underlying mortgages,
changes in market interest rates, a decline in market prices
affecting such investments and other market factors. To cover a
margin call, we may pledge additional securities or cash. At
maturity, any cash on deposit as collateral (
i.e.
,
restricted cash) would generally be applied against the
repurchase agreement balance, thereby reducing the amount
borrowed. Should the value of our investments suddenly decrease,
significant margin calls on our repurchase agreements could
result, causing an adverse change in our liquidity position.
Contractual
Obligations and Commitments
We had no contractual obligations as of May 15, 2009. 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 1.5% per
annum of our stockholders equity (as defined in the
management agreement). 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.
Under our 2009 equity incentive plan, our board of directors is
authorized to approve grants of equity-based awards to our
Manager, its personnel and its affiliates. To date, our board of
directors has approved an initial grant of equity awards to our
executive officers and our Managers personnel in an amount
equal to % of the initial
$ of capital raised by us in
offerings of our securities. See Management
2009 Equity Incentive Plan. Thereafter, during the term of
the management agreement with our Manager, the management
agreement provides that any grants of equity compensation made
by us to our Manager, MFA or their respective employees shall be
made only to our Manager and its designees. See Our
Manager and the Management Agreement.
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 May 15, 2009, we did not maintain any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured investment vehicles, or
special purpose or variable interest entities, established to
facilitate off-balance sheet arrangements or other contractually
narrow or limited purposes. Further, as of May 15, 2009, we
had not guaranteed any obligations of unconsolidated entities or
entered into any commitment or intent to provide additional
funding to any such entities.
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, excluding net capital
gains. Before we pay any dividend, whether for U.S. federal
income tax purposes or otherwise, we must first meet both our
operating requirements and scheduled debt service payments and
other debt payable. If our cash available for distribution is
less than our REIT taxable income, we could be required to sell
assets or, subject to the requirements of the MGCL, borrow funds
to make cash distributions or we may make a portion of the
required distribution in the form of a
57
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.
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,
while our distributions will be determined by our board of
directors consistent with our obligation to distribute to our
stockholders at least 90% of our REIT taxable income on an
annual basis in order to maintain our REIT qualification; in
each case, our activities and balance sheet are measured with
reference to historical cost
and/or
fair
market value without considering inflation.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to manage our risks related to the credit quality of our
assets, interest rates, liquidity, prepayment speeds and market
value while, at the same time, seeking to provide an opportunity
to stockholders to realize attractive risk-adjusted returns
through ownership of our capital stock. 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.
Credit
Risk
Although we do not expect to encounter credit risk in our Agency
MBS, we do expect to be subject to varying degrees of credit
risk in connection with our other investments. In our non-Agency
MBS portfolio, we will have exposure to credit risk on the
underlying mortgage loans. For our non-Agency MBS portfolio, we
expect that certain of these MBS will experience credit losses
or return less than 100% of their par amount. However, because
we expect to purchase these MBS at discount prices (in some
cases significantly below their par amount), we anticipate that
the loss adjusted returns on our purchase price will be
attractive. Our Manager performs detailed analysis on underlying
loans in each MBS in order to estimate loan performance and
anticipated cash flows. Credit support contained in MBS deal
structures provide some protection from losses, but discounted
purchase prices provide additional protection because a return
of less than 100% of par does not generate a loss so long as the
amount of principal returned exceeds the price (as a percentage
of par) paid for the MBS. In our residential mortgage loan
portfolio, we may retain the risk of potential credit losses on
the mortgage loans we hold in our portfolio. We will seek to
mitigate this risk by focusing on higher quality mortgage loans
and by engaging in a due diligence process that allows us to
remove loans that do not meet our credit standards based on
loan-to-value ratios, borrowers credit scores, income and
asset documentation and other criteria that we believe to be
important indications of credit risk. Our Manager will also seek
to reduce credit risk on our investments through a comprehensive
investment review and a selection process, which is
predominantly focused on quantifying and pricing credit risk.
Our Managers review of non-Agency MBS and other real
estate-related securities will be based on quantitative and
qualitative analysis of the risk-adjusted returns on such
investments. Through rigorous analysis, modeling and scenario
analysis, our Manager will seek to evaluate the
investments credit risk as well as its sensitivity to
variance, which our Manager will factor into its valuation and
pricing of the investment. Our Managers analysis of
investments in residential mortgage loans will include borrower
profiles, as well as valuation and appraisal data. Our Manager
may also outsource underwriting services to review higher risk
loans, either due to borrower credit profiles or collateral
valuation issues. Credit risk will also be addressed through our
Managers on-going surveillance.
Interest
Rate Risk
Interest rates are highly sensitive to many factors, including
fiscal and monetary policies and domestic and international
economic and political considerations, as well as other factors
beyond our control. We will be subject to interest rate risk in
connection with our investments and our related financing
obligations. In general, to the extent leverage is deployed, we
may finance the acquisition of our Target Assets through
financings in the form of
58
repurchase agreements, warehouse facilities, borrowings under
temporary programs established by the U.S. government, such
as the TALF and the PPIP, and other secured and unsecured forms
of borrowing. To the extent leverage is deployed, we may
mitigate interest rate risk through utilization of hedging
instruments, primarily interest rate swap agreements. Interest
rate swap agreements are intended to serve as a hedge against
future interest rate increases on our borrowings.
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 any hedging activities. The cost of our borrowings
will generally be based on prevailing market interest rates.
During a period of rising interest rates, our borrowing costs
generally will increase (i) while the yields earned on our
leveraged fixed-rate mortgage assets will remain static and
(ii) at a faster pace than the yields earned on our
leveraged adjustable-rate and hybrid mortgage assets, which
could result in a decline in our net interest spread and net
interest margin. The severity of any such decline would depend
on our asset/liability composition at the time as well as the
magnitude and duration of the interest rate increase. Further,
an increase in short-term interest rates could also have a
negative impact on the market value of our Target Assets. If any
of these events happen, we could experience a decrease in net
income or incur a net loss during these periods, which could
adversely affect our liquidity and results of operations.
Hedging techniques are partly based on assumed levels of
prepayments of our Target Assets. If prepayments are slower or
faster than assumed, the life of the investment 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 Cap Risk
We will invest in adjustable-rate and hybrid mortgage assets.
These are assets in which the underlying mortgages are typically
subject to periodic and lifetime interest rate caps and floors,
which limit the amount by which the securitys interest
yield may change during any given period. However, our borrowing
costs pursuant to our financing agreements will not be subject
to similar restrictions. Therefore, in a period of increasing
interest rates, interest rate costs on our borrowings could
increase without limitation by caps, while the interest-rate
yields on our adjustable-rate and hybrid mortgage assets would
effectively be limited. This issue will be magnified to the
extent we acquire adjustable-rate and hybrid mortgage assets
that are not based on mortgages which are fully indexed. In
addition, adjustable-rate and hybrid mortgage assets may be
subject to periodic payment caps that result in some portion of
the interest being deferred and added to the principal
outstanding. This could result in our receipt of less cash
income on such assets than we would need to pay the interest
cost on our related borrowings. These factors could lower our
net interest income or cause a net loss during periods of rising
interest rates, which would harm our financial condition, cash
flows and results of operations.
Interest
Rate Mismatch Risk
We may fund a portion of our acquisition of adjustable-rate and
hybrid mortgages and MBS with borrowings that are based on
LIBOR, while the interest rates on these assets may be indexed
to LIBOR or another index rate, such as the one-year CMT rate,
MTA or COFI. Accordingly, any increase in LIBOR relative to
one-year CMT rates, MTA or COFI will generally result in an
increase in our borrowing costs that is not matched by a
corresponding increase in the interest earnings on these assets.
Any such interest rate index mismatch could adversely affect our
profitability, which may negatively impact distributions to our
stockholders. To mitigate interest rate mismatches, we may
utilize the hedging strategies discussed above.
Our analysis of risks is based on our Managers experience,
estimates, models and assumptions. These analyses rely on models
which utilize estimates of fair value and interest rate
sensitivity. Actual economic conditions or implementation of
investment decisions by our management may produce results that
differ significantly from the estimates and assumptions used in
our models and the projected results shown in this prospectus.
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Prepayment
Risk
As we receive repayments of principal on our MBS or residential
mortgage loans, from prepayments and scheduled amortization,
premiums paid on such securities are amortized against interest
income and discounts are accreted to interest income. Premiums
arise when we acquire MBS at prices in excess of the principal
balance of the mortgages securing such MBS or when we acquire
mortgage loans at prices in excess of the principal balance.
Conversely, discounts arise when we acquire MBS at prices below
the principal balance of the mortgages securing such MBS or when
we acquire mortgage loans at prices below their principal
balance. For financial accounting purposes, interest income is
accrued based on the outstanding principal balance of the
investment securities and their contractual terms. In general,
purchase premiums on investment securities are amortized against
interest income over the lives of the securities using the
effective yield method, adjusted for actual prepayment and cash
flow activity. An increase in the prepayment rate, as measured
by the CPR, will typically accelerate the amortization of
purchase premiums and a decrease in the prepayment rate will
typically slow the accretion of purchase discounts, thereby
reducing the yield/interest income earned on such assets. For
Senior MBS that we purchase at a discount, the yield on these
Senior MBS will increase if their prepayment rates exceed our
purchase and repayment assumptions.
For tax accounting purposes, the purchase premiums and discounts
are amortized based on the constant effective yield calculated
at the purchase date. Therefore, on a tax basis, amortization of
premiums and discounts will differ from those reported for
financial purposes under GAAP. In general, we believe that we
will be able to reinvest proceeds from scheduled principal
payments and prepayments at acceptable yields; however, no
assurances can be given that, should significant prepayments
occur, market conditions will be such that acceptable
investments can be identified and the proceeds timely reinvested.
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 MBS secured by hybrid or fixed-rate loans are acquired with
borrowings, we may, but are not required to, enter into interest
rate swap agreements or other hedging instruments that
effectively fixes our borrowing costs for a period close to the
anticipated average life of the fixed-rate portion of the MBS.
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 MBS.
However, if prepayment rates decrease in a rising interest rate
environment, the life of the fixed-rate portion of the related
MBS could extend beyond the term of the interest 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 or fixed-rate MBS would remain
fixed. This situation may also cause the market value of our
hybrid or fixed-rate MBS 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 the difference between amortized cost
and estimated fair value reflected in accumulated other
comprehensive income/(loss) pursuant to FAS 115. 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. As
market volatility increases or liquidity decreases, the fair
value of our investments may be adversely impacted. If we are
unable to readily obtain independent pricing to validate our
estimated fair value of the securities in our portfolio, the
fair value gains or losses recorded in other comprehensive
income may be adversely affected.
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Real
Estate Risk
Residential mortgage assets and residential 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 the
underlying loans or loans, as the case may be, which could also
cause us to suffer losses.
Risk
Management
To the extent consistent with maintaining our REIT
qualification, we will seek to manage risk exposure to protect
our portfolio of non-Agency MBS, Agency MBS, residential
mortgage loans and other Target Assets against the effects of
major interest rate changes. We generally seek to manage this
interest rate risk by:
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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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actively managing, on an aggregate basis, the interest rate
indices and interest rate adjustment periods of our MBS and the
interest rate indices and adjustment periods of our financings;
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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 borrowings; and
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using securitization financing to lower average cost of funds
relative to short-term financing vehicles further allowing us to
receive the benefit of attractive terms for an extended period
of time in contrast to short-term financing and maturity dates
of the investments included in the securitization.
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61
BUSINESS
Our
Company
We are a Maryland corporation that will invest primarily in
residential MBS, residential mortgage loans and other real
estate-related financial assets. Our objective is to provide
attractive risk-adjusted returns to our stockholders over the
long term, primarily through dividend distributions and
secondarily through capital appreciation. We will generate
income principally from the yields earned on our investments
and, to the extent that leverage is deployed, on the difference
between the yields earned on our investments and our cost of
borrowing and any hedging activities.
Our investment strategy will focus on investment opportunities
that exist in the U.S. residential mortgage markets. We
expect that our primary investment focus will initially be on
Senior MBS, subject to our investment guidelines. We will also
invest in Agency MBS consistent with maintaining our exemption
from registration under the 1940 Act. We also may invest
directly in residential mortgage loans as well as other real
estate-related financial assets. In recent years, significant
adverse changes in financial market conditions have resulted in
a deleveraging of the entire global financial system and the
forced sale of large quantities of mortgage-related and other
financial assets. As a result of these conditions, many
traditional mortgage investors have suffered severe losses in
their residential mortgage portfolios and several major market
participants have failed or been impaired, resulting in a
significant contraction in market liquidity for mortgage-related
assets. This illiquidity has negatively affected both the terms
and availability of financing for most mortgage-related assets,
including non-Agency MBS. As a result of these and other
factors, Senior MBS are currently trading at significantly lower
prices compared to recent prior periods.
We believe that Senior MBS currently present highly attractive
risk-adjusted return profiles. Because these types of
mortgage-related assets offer the potential for a current cash
return to investors, the depressed trading prices of this asset
class have caused a corresponding increase in available yields.
We intend to adjust our strategy to changing market conditions
by shifting our asset allocations across our Target Asset
classes to take advantage of changes in interest rates, credit
spreads and economic and credit conditions. We believe that our
strategy will position us to generate attractive risk-adjusted
returns for our stockholders in a variety of investment and
market conditions.
We are organized as a Maryland corporation and intend to elect
and qualify to be taxed as a REIT for U.S. federal income
tax purposes. We also intend to operate our business in a manner
that will permit us to maintain our exemption from registration
under the 1940 Act.
Our
Manager
We will be externally managed by our Manager. Our Manager is a
subsidiary of MFA, a leading U.S. REIT which commenced
trading of its common stock on the NYSE in April 1998. MFA has
an 11-year track record of investing, on a leveraged basis, in
hybrid and adjustable-rate Agency MBS and other real
estate-related financial assets, including non-Agency MBS. At
March 31, 2009, MFA had approximately $10.518 billion
of total assets, of which $9.699 billion was Agency MBS.
In addition to its Agency MBS portfolio experience, MFA also has
a long track record of investing in and managing Senior MBS and
other non-Agency MBS, which will initially be our primary
investment focus. At December 31, 2008, 2007, 2006 and
2005, MFA had investments in non-Agency MBS with fair values of
approximately $204.0 million, $431.2 million,
$254.2 million and $586.3 million, respectively, and,
over the four-year period ended December 31, 2008, has
owned as much as $910.1 million of non-Agency MBS. Since
November 2008, MFA has modeled and evaluated approximately 400
different Senior MBS with an aggregate original principal face
amount of over $3 billion. MFA has, during this period,
priced and bid on over 200 Senior MBS (over $1 billion
original principal balance), purchasing 34 Senior MBS with an
aggregate original principal balance of over $300 million.
As of March 31, 2009, MFA held Senior MBS and other
non-Agency MBS with a current face amount of approximately
$455.9 million (with an amortized cost of approximately
$383.9 million and a fair value of approximately
$245.1 million). While MFAs investments in non-Agency
MBS have primarily consisted of Senior MBS, MFAs
non-Agency portfolio has also included other non-Agency MBS.
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Our Managers investment management team will be led by
Stewart Zimmerman, MFAs Chairman of the Board and Chief
Executive Officer, William Gorin, MFAs President and Chief
Financial Officer, Ronald Freydberg, MFAs Executive Vice
President and Chief Investment Officer, and Craig Knutson,
MFAs Senior Vice President Chief Risk Officer.
Messrs. Zimmerman, Gorin and Freydberg have an average of
25 years of experience in structuring and managing Agency
and non-Agency MBS and other mortgage-related assets and have
worked together at MFA since its inception. Mr. Knutson
joined MFA in 2008 and has more than 25 years of experience
in trading, structuring and investing in MBS. We believe that we
will benefit from MFAs long track record and broad
experience in managing mortgage-related assets through a variety
of credit and interest rate environments and its analytical and
portfolio management capabilities in pursuing our business
objectives.
Our
Competitive Advantages
Significant
Experience of our Manager
The senior management team of our Manager has a long track
record and broad experience in managing mortgage-related assets
through a variety of credit and interest rate environments and
has demonstrated the ability to generate attractive
risk-adjusted returns under different market conditions and
cycles. In addition, an Investment Committee comprised of our
Managers professionals will oversee our investments and
compliance with our investment guidelines. We expect to benefit
from this varied expertise, and believe that our Managers
investment team provides us with a competitive advantage
relative to companies that have management teams with less
experience.
Disciplined,
Credit-Oriented Investment Approach
We will seek to maximize our risk-adjusted returns through our
Managers disciplined and credit-based investment approach,
which relies on rigorous quantitative and qualitative analysis.
Our Manager will monitor our overall portfolio risk and evaluate
credit characteristics of MBS investments including, but not
limited to, loan balance distribution, geographic concentration,
property type, occupancy, periodic and lifetime interest rate
cap, weighted-average loan-to-value and weighted-average credit
score. In addition, we intend to source residential mortgage
loans from originators that we believe employ rigorous and
consistent underwriting and fraud prevention standards, which we
believe will provide us with high quality and attractively
priced assets.
Access
to MFAs Market Database and Infrastructure
MFA has created and maintains analytical and portfolio
management capabilities. Through our Manager, we intend to
capitalize on the market knowledge and ready access to data
across the real estate finance industry that MFA obtains through
its established platform. We will also benefit from MFAs
comprehensive finance and administrative infrastructure.
Strategic
Relationships and Access to Deal Flow
MFA maintains extensive long-term relationships with financial
intermediaries, including primary dealers, leading investment
banks, brokerage firms, repurchase agreement counterparties,
leading mortgage originators and commercial banks. We believe
these relationships will enhance our ability to source and
finance investment opportunities and access borrowings and,
thus, enable us to grow through various credit and interest rate
environments.
Alignment
of Interests
We have taken multiple steps to structure our relationship with
our Managers parent company, MFA, so that our interests
and those of MFA are closely aligned. MFA has agreed to purchase
in the concurrent private offering a number of shares of our
common stock equal to 9.8% of our outstanding shares of common
stock after giving effect to the shares sold in this offering,
excluding shares sold pursuant to the underwriters
exercise of their overallotment option. We believe that
MFAs investment in us will align MFAs and our
Managers interests with ours and create an incentive to
maximize returns for our stockholders.
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Access
to Attractive Non-recourse Term Borrowing
Facilities
We believe that the recent launch of the PPIP by the
U.S. Treasury and the FDIC and the proposed expansion of
the TALF to cover non-Agency MBS that were originally rated AAA
have the potential to provide us with access to attractive
non-recourse term borrowing facilities that we may use to
finance the purchase of our assets. Because we expect that our
primary investment focus will initially be on Senior MBS, we
expect that a substantial portion of our initial portfolio of
Target Assets may be eligible for financing under these programs
established by the U.S. government.
Our
Investment Strategy
Our objective is to provide attractive risk-adjusted returns to
our stockholders over the long term, primarily through dividend
distributions and secondarily through capital appreciation. We
will generate income principally from the yields earned on our
investments and, to the extent that leverage is deployed, on the
difference between the yields earned on our investments and our
cost of borrowing and any hedging activities. Our investment
strategy will focus on investment opportunities that exist in
the U.S. residential mortgage markets. We expect that our
primary investment focus will initially be on Senior MBS. We
believe that Senior MBS currently present highly attractive
risk-adjusted return profiles. Because these types of
mortgage-related assets offer the potential for a current cash
return to investors, the depressed trading prices of this asset
class have caused a corresponding increase in available yields.
We will also invest in Agency MBS consistent with maintaining
our exemption from registration under the 1940 Act. We also may
invest directly in residential mortgage loans as well as other
real estate-related financial assets. We intend to adjust our
strategy to changing market conditions by shifting our asset
allocations across our target asset classes to take advantage of
changes in interest rates and credit spreads as economic and
credit conditions change over time. We believe that our strategy
will position us to generate attractive risk-adjusted returns
for our stockholders in a variety of investment and market
conditions.
We will rely on our Managers expertise in identifying
assets within the Target Assets described below and, to the
extent that leverage is deployed, efficiently financing those
assets. We expect that our Manager will make investment
decisions based on a variety of factors, including expected
risk-adjusted returns, credit fundamentals, liquidity,
availability of adequate financing, borrowing costs and
macroeconomic conditions, as well as maintaining our REIT
qualification and our exemption from registration under the 1940
Act.
Target
Assets
Our Target Assets and the principal investments we expect to
make in each are as follows:
Residential
MBS
We intend to invest in residential MBS, which are typically
pass-through certificates created by the securitization of
adjustable-rate, hybrid
and/or
fixed-rate mortgage loans that are collateralized by residential
real estate properties.
We intend to primarily invest in Senior MBS and may also invest
in other tranches of MBS. We expect to evaluate the credit
characteristics of these types of securities, including, but not
limited to, loan balance distribution, geographic concentration,
property type, periodic and lifetime interest rate caps,
weighted-average loan-to-value and weighted-average credit
score. Qualifying securities will then be analyzed using base
line expectations of expected prepayments and losses. Losses and
prepayments are stressed simultaneously based on a credit
risk-based model. Securities in this portfolio will be monitored
for variance from expected cash flows.
Non-Agency MBS may be AAA rated through unrated. The rating, as
determined by one or more of the Rating Agencies, including
Fitch, Inc., Moodys and S&P, indicates the perceived
creditworthiness of the investment (
i.e.
, the
obligors ability to meet its financial commitment on the
obligation). The mortgage loan collateral for non-Agency MBS
generally consists of residential mortgage loans that do not
generally conform to the Agency underwriting guidelines due to
certain factors including mortgage balance in excess of such
guidelines, borrower characteristics, loan characteristics and
level of documentation. We may also invest in Agency MBS, which
are guaranteed as to the payment of principal
and/or
interest by an Agency and carry an implied AAA rating. While not
64
a primary focus of our investment strategy, whole pool Agency
MBS are considered qualifying assets for any of our subsidiaries
that intend to qualify for an exemption from registration under
the 1940 Act pursuant to Section 3(c)(5)(C). See
Operating and Regulatory Structure
1940 Act Exemption.
We may also invest, subject to maintaining our qualifications as
a REIT, in net interest margin securities (or NIMs) which are
notes that are payable from and secured by excess cash flow that
is generated by MBS, after paying the debt service, expenses and
fees on such securities. The excess cash flow represents all or
a portion of a residual that is generally retained by the
originator of the MBS. The residual is illiquid, thus the
originator will monetize the position by securitizing the
residual and issuing a NIM, usually in the form of a note that
is backed by the excess cash flow expected to be generated in
the underlying securitization.
Residential
Mortgage Loans
We may invest in adjustable-rate, hybrid
and/or
fixed-rate residential mortgage loans primarily through direct
purchases from selected originators. We may enter into mortgage
loan purchase agreements with a number of primary mortgage loan
originators, including mortgage bankers, commercial banks,
savings and loan associations, home builders, credit unions and
mortgage conduits. We may also purchase mortgage loans on the
secondary market. We expect these loans to be secured primarily
by residential properties in the United States.
We may invest in residential mortgage loans underwritten to our
specifications. We will require that the selected originators
perform, or have caused to be performed, the credit review of
the borrowers, the appraisal of the properties securing the
loan, and maintain other quality control procedures. Depending
on the size of the loans, we may not review all of the loans in
a pool, but rather select loans for underwriting review based
upon specific risk-based criteria such as property location,
loan size, effective loan-to-value ratio, borrowers credit
score and other criteria we believe to be important indicators
of credit risk. Additionally, before the purchase of loans, we
will obtain representations and warranties from each originator
stating that each loan is underwritten to our requirements or,
in the event underwriting exceptions have been made, we are
informed of the exceptions so that we may evaluate whether to
accept or reject the loans. An originator who breaches these
representations and warranties in making a loan that we purchase
may be obligated to repurchase the loan from us. As added
security, we will use the services of a third-party document
custodian to insure the quality and accuracy of all individual
mortgage loan closing documents and to hold the documents in
safekeeping. As a result, all of the original loan collateral
documents that are signed by the borrower, other than the
original credit verification documents, are examined, verified
and held by the third-party document custodian. We or a third
party will perform an independent underwriting review of the
processing, underwriting and loan closing methodologies that the
originators used in qualifying a borrower for a loan. The due
diligence process is particularly important and costly with
respect to newly formed originators or issuers because there may
be little or no information publicly available about these
entities and investments.
We currently do not intend to originate mortgage loans or
provide other types of financing to the owners of real estate.
We currently do not intend to establish a loan servicing
platform, but expect to retain highly-rated servicers to service
our mortgage loan portfolio. We may also purchase certain
residential mortgage loans on a servicing-retained basis. In the
future, however, we may decide to originate mortgage loans or
other types of financing, and we may elect to service mortgage
loans and other types of financing.
We expect that all servicers servicing our loans will be highly
rated by the Rating Agencies. We will also conduct a due
diligence review of each servicer before executing a servicing
agreement. Servicing procedures will typically follow Fannie Mae
guidelines but will be specified in each servicing agreement.
All servicing agreements will meet standards for inclusion in
highly rated mortgage-backed or asset-backed securitizations.
We expect that the residential mortgage loans we acquire will be
first lien, single-family residential traditional
adjustable-rate, hybrid
and/or
fixed-rate loans with original terms to maturity of not more
than 40 years and are either fully amortizing or are
interest-only for up to ten years, and fully amortizing
thereafter. Fixed-rate mortgage loans bear an interest rate that
is fixed for the term of the loan and do not adjust. The
interest rates on adjustable-rate mortgage loans generally
adjust annually (although some may adjust more frequently) to an
increment over a specified interest rate index. Hybrid mortgage
loans have interest rates that are fixed for a specified period
of time (typically three to ten years) and, thereafter, adjust
to an increment over a specified interest rate index. Adjustable-
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rate and hybrid mortgage loans generally have periodic and
lifetime constraints on how much the loan interest rate can
change on any predetermined interest rate reset date.
We may acquire residential mortgage loans for our portfolio with
the intention of either securitizing them and either selling the
Senior MBS to investors while retaining the subordinate
securities or retaining them in our portfolio as securitized
mortgage loans, or holding them in our residential mortgage loan
portfolio. To facilitate the securitization or financing of our
loans, we expect to generally create subordinate certificates,
which provide a specified amount of credit enhancement. We
expect to issue securities through securities underwriters and
either retain these securities or finance them in the repurchase
agreement market, although we expect to retain the most junior
certificates issued within a securitization. There is no limit
on the amount we may retain of these below-investment-grade or
unrated subordinate certificates. Until we securitize our
residential mortgage loans, we may finance our residential
mortgage loan portfolio through the use of repurchase agreements
and warehouse facilities.
Once a potential residential loan package investment has been
identified, our Manager and third parties it engages will
perform financial, operational and legal due diligence to assess
the risks of the investment. Our Manager and third parties it
engages will analyze the loan pool and conduct
follow-up
due diligence as part of the underwriting process. As part of
this process, the key factors which the underwriters will
consider include, but are not limited to, documentation,
debt-to-income ratio, loan-to-value ratios and property
valuation. Consideration is also given to other factors such as
price of the pool, geographic concentrations and type of
product. Our Manager will refine its underwriting criteria based
upon actual loan portfolio experience and as market conditions
and investor requirements evolve.
Other
Real Estate-Related Financial Assets
We intend to invest in debt and equity tranches of
securitizations backed by various asset classes and in
securities, including common stock, preferred stock and debt, of
other mortgage-related entities. To avoid any actual or
perceived conflicts of interest with our Manager, prior to an
investment in any such security structured or issued by an
entity managed by our Manager or MFA, such investment will be
approved by a majority of our independent directors. To the
extent such securities are treated as debt of the issuer of the
securitization vehicle for U.S. federal income tax
purposes, we will hold the securities directly, subject to the
requirements of our continued qualification as a REIT as
described in U.S. Federal Income Tax
Considerations Asset Tests. To the extent the
securities represent equity interests in the issuer of the
securitization for U.S. federal income tax purposes, we may
hold such securities through a TRS which would cause the income
recognized with respect to such securities to be subject to
U.S. federal (and applicable state and local) corporate
income tax.
In general, issuers of securitizations are special purpose
vehicles that hold a portfolio of income-producing assets
financed through the issuance of rated debt securities of
different seniority and equity. The debt tranches are typically
rated based on cash flow structure, portfolio quality,
diversification and credit enhancement. The equity securities
issued by the securitization vehicle are the first
loss piece of the securitization vehicles capital
structure, but they are also generally entitled to all residual
amounts available for payment after the securitization
vehicles senior obligations have been satisfied.
Investment
Sourcing
We expect our Manager to take advantage of the broad network of
relationships MFA has established over the past decade to
identify investment opportunities. MFA and, as a result, our
Manager 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, our Target Assets is
highly competitive. 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.
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Investment
Process
We expect our investment process will benefit from the resources
and professionals of our Manager. The professionals responsible
for portfolio management decisions are Stewart Zimmerman,
MFAs Chairman of the Board and Chief Executive Officer,
William Gorin, MFAs President and Chief Financial Officer,
Ronald Freydberg, MFAs Executive Vice President and Chief
Investment Officer and Craig Knutson, MFAs Senior Vice
President Chief Risk Officer. Investments will
be overseen by an Investment Committee of our Managers
professionals, comprised of Messrs. Zimmerman, Gorin,
Freydberg and Knutson. This Investment Committee will oversee
our investment guidelines and will meet periodically to discuss
preferences for sectors and sub-sectors.
Our investment process will include sourcing and screening of
investment opportunities, assessing investment suitability,
conducting credit 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. Our Managers methodology for
evaluating and selecting assets will be comprised of six parts,
as follows:
1.
Underlying Collateral and Borrower
Analysis.
Our Manager believes that a critical
component of its investment process will be its analysis and
in-depth understanding of the underlying collateral and
borrower. Our Manager will estimate the current value of the
underlying collateral of MBS on a
loan-by-loan
basis using home price appreciation (depreciation) based on the
zip code in which the property is located. Our Manager will roll
forward property valuations to estimate the current
loan-to-value (or LTV) of each mortgage loan in the MBS. Current
LTV data, which our Manager believes is an important predictor
of both borrower default and loss severities, will be analyzed
at both the pool and property levels. In addition, our Manager
will conduct a borrower analysis which will include roll rate
analysis to predict future delinquencies and defaults, as well
as a borrower credit analysis which will include evaluation of
FICO scores and debt-to-income ratios.
2.
Predict and Generate Cash Flows.
Our
Manager will use the results of the collateral and borrower
analysis described above to predict the future performance of
the underlying mortgage loans. These predictions will include
future delinquencies, defaults, liquidations and loss severities
in addition to expected prepayments. While these predictions
will have a subjective element, they will largely be based on
observed roll rate analysis as well as current estimates of
underlying property values. There can be no assurance that our
Managers prediction will be correct.
3.
Application of Deal Structures and Generation of Bond
Cash Flows.
Our Manager will reverse engineer all
deal structures, including various prioritizations and triggers
in order to fully understand how underlying mortgage cash flows
will be allocated to the MBS. Our Manager believes that its
in-depth understanding of MBS cash flows comprises a critical
component of the valuation and pricing of MBS, as described
below.
4.
Discounted Cash Flow Analysis.
Our
Manager will discount the estimated MBS cash flows at various
discount rates to determine market pricing and valuation. By
generating estimated MBS cash flows independently through loan
level analysis rather than relying on industry conventions or
common marketplace assumptions, our Manager will employ a
fundamental valuation methodology.
5.
Scenario and Sensitivity Analysis.
Our
Manager recognizes that many factors influencing cash flows are
highly uncertain and subject to change. Accordingly, our Manager
will run extensive scenario and sensitivity analysis to
determine and understand the sensitivity of the investment
return to deviations from the base case assumptions. Through
this process, our Manager will be able to quantify the expected
investment return variations should performance deviate from the
base case scenario in the manner contemplated by the scenario
and sensitivity analysis.
6.
Pricing, Valuation and
Purchase.
Rather than relying on current market
pricing as an indication of the value of MBS, our Managers
investment process will enable it to develop its own valuation
or range of values. Our Manager will discount the cash flows
described above at various interest rates depending on market
rates and our targeted investment returns to determine pricing
and valuation of MBS at any given point in time. The process of
purchasing MBS will vary according to the various methods of
sale by owners and their
67
agents, and our Manager will use its experience in the MBS
market together with its extensive relationships with dealers to
position itself to be able to acquire MBS at attractive pricing.
Our Manager will employ the methodology described above to
evaluate each one of our investment opportunities based on its
expected risk-adjusted return relative to the returns available
from other, comparable investments. In addition, our Manager
will evaluate new opportunities based on their relative expected
returns compared to 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. 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
credit risk and expected performance can be reasonably
quantified.
Our
Financing Strategy
We intend to use leverage on certain of our assets to increase
potential returns to our stockholders. 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. Initially, we do not
expect to deploy leverage on our non-Agency MBS, except to the
extent of available borrowings, if any, under temporary programs
established by the U.S. government. We expect, initially,
that we may deploy, on a debt-to-equity basis, up to six to
eight times leverage on our Agency MBS. Subject to maintaining
our qualification as a REIT for U.S. federal income tax
purposes, to the extent leverage is deployed, we may use a
number of sources to finance our investments, including
repurchase agreements, warehouse facilities, borrowings under
temporary programs established by the U.S. government, such
as the TALF and the PPIP, and other secured and unsecured forms
of borrowing, as described in more detail below.
A summary of the borrowing sources we may use to finance our
investments include the following:
|
|
|
|
|
Repurchase Agreements.
We may finance certain
of our assets by pledging these assets as collateral to secure
loans with repurchase agreement counterparties (
i.e.
,
lenders). Repurchase agreements take the form of a sale of the
pledged collateral to a lender at an agreed upon price in return
for such lenders simultaneous agreement to resell the same
securities back to the borrower at a future date (
i.e.
,
the maturity of the borrowing) at a higher price. The difference
between the sale price and repurchase price is the cost, or
interest expense, of borrowing under a repurchase agreement.
Amounts borrowed under repurchase agreements are typically based
upon the market value of the pledged collateral, less an agreed
upon percentage that is referred to as the advance rate, or
haircut. Repurchase agreements typically require that the
percentage of the market value of collateral to the loan amount
at inception of the loan be maintained throughout the term of
the loan. This is done through a constant revaluation of the
collateral by the lender to its current market value and, to the
extent the lender believes the value of the collateral has
declined, it will require the pledge of additional collateral,
or a margin call, or, if it determines the value of the
collateral has increased, a portion of the collateral may be
returned. To the extent that we enter into repurchase
agreements, we will retain beneficial ownership of the pledged
collateral, while the lender maintains custody of such
collateral. At the maturity of a repurchase agreement, we would
be required to repay the loan and concurrently receive back our
pledged collateral or, with the consent of the lender, we may
renew such agreement at the then prevailing market interest
rate. We anticipate that repurchase agreements will be one of
the sources we may use to achieve our desired amount of leverage
for our residential mortgage assets. We intend to maintain
formal relationships with multiple counterparties to obtain
financing on favorable terms. For a description of risks related
to repurchase agreements, see Risk Factors
Risks Related to Our Business We intend to use
leverage to finance our investments, which may adversely affect
the return on our investments and may reduce cash available for
distribution to our stockholders, as well as increase losses
when economic conditions are unfavorable and
We will depend on repurchase agreements,
warehouse facilities and other secured and unsecured forms of
borrowing and we may utilize borrowings under temporary programs
established by the U.S. government to execute our business
plan, and our inability to access funding could have a material
adverse effect on our results of operations, financial condition
and business.
|
68
|
|
|
|
|
Warehouse Facilities.
We may rely on warehouse
facilities to fund our mortgage loans prior to arranging
long-term funding. Warehouse facilities are generally
collateralized loans made to investors who invest in securities
and loans that are pledged as collateral to the lender.
Third-party custodians, usually large banks, hold the securities
and loans funded with the warehouse facility borrowings. The
pool of assets acquired within a warehouse facility typically
must meet certain requirements, including term, average life,
investment rating, agency rating and sector diversity
requirements, as well as requirements relating to portfolio
performance. We intend to maintain formal relationships with
multiple counterparties to maintain warehouse lines on favorable
terms. For a description of risks related to warehouse
facilities, see Risk Factors Risks Related to
Our Business We will depend on repurchase
agreements, warehouse facilities and other secured and unsecured
forms of borrowing and we may utilize borrowings under temporary
programs established by the U.S. government to execute our
business plan, and our inability to access funding could have a
material adverse effect on our results of operations, financial
condition and business.
|
|
|
|
|
|
Government Financing.
To the extent that we
are eligible to participate in programs established by the
U.S. government, such as the TALF and the PPIP, we may
utilize borrowings under these programs to finance our assets.
See Recent Regulatory Developments. There can be no
assurance that we will be eligible to participate in these
programs or, if we are eligible, that we will be able to utilize
them successfully or at all.
|
Based on managements assessment of market conditions and
subject to our maintaining our qualification as a REIT, we may
also acquire residential mortgage loans or MBS for our portfolio
with the intention of securitizing them and retaining all or a
part of the securitized assets in our portfolio. To facilitate
the securitization, we will generally create subordinate
certificates, providing a specified amount of credit
enhancement, which we intend to retain in our portfolio. We
anticipate that we will often hold the most junior certificates
associated with a securitization. As a holder of the most junior
certificates, we are more exposed to losses on the portfolio
investments because the equity interest we retain in the issuing
entity would be subordinate to the more senior notes issued to
investors and we would, therefore, absorb all of the losses
sustained with respect to a securitized pool of assets before
the owners of the notes experience any losses.
Our
Interest Rate Hedging and Risk Management Strategy
We may, from time to time, utilize derivative financial
instruments to hedge the interest rate risk associated with our
borrowings. 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 sources must not
exceed 25% of our gross income.
We may engage in a variety of interest rate management
techniques that seek to mitigate changes in interest rates or
other potential influences on the values of our assets. 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 corporate income taxation. Our
interest rate management techniques may include:
|
|
|
|
|
interest rate swap agreements, interest rate cap agreements and
swaptions;
|
|
|
|
puts and calls on securities or indices of securities;
|
|
|
|
Eurodollar futures contracts and options on such contracts;
|
|
|
|
U.S. treasury securities and options on U.S. treasury
securities; and
|
|
|
|
other similar transactions.
|
We expect to attempt to reduce interest rate risks and to
minimize exposure to interest rate fluctuations through the use
of match funded financing structures, when appropriate, whereby
we seek (i) to match the maturities of our debt obligations
with the maturities of our assets and (ii) to match the
interest rates on our investments with like-kind debt
(
i.e.
, floating rate assets are financed with floating
rate debt and fixed-rate assets are financed with fixed- rate
debt), directly or through the use of interest rate swap
agreements, interest rate cap agreements, or other financial
instruments, or through a combination of these strategies. We
expect this to allow us to minimize, but not
69
eliminate, the risk that we have to refinance our liabilities
before the maturities of our assets and to reduce the impact of
changing interest rates on our earnings.
Risk management is an integral component of our strategy to
deliver consistent risk-adjusted returns to our stockholders.
Because we invest primarily in fixed-income securities,
investment losses from credit defaults, interest rate volatility
or other risks can meaningfully reduce or eliminate our
distributions to stockholders. In addition, because we employ
financial leverage in funding our portfolio, mismatches in the
maturities of our assets and liabilities creates risk in the
need to continually renew or otherwise refinance our
liabilities. Our net interest margins are dependent upon a
positive spread between the returns on our asset portfolio and
our overall cost of funding. In order to minimize the risks to
us, we actively employ portfolio-wide and security-specific risk
measurement and management processes in our daily operations.
Our risk management tools include software and services licensed
or purchased from third parties, in addition to proprietary
analytical methods developed by MFA. There can be no guarantee
that these tools will protect us from market risks.
Investment
Guidelines
Our board of directors has adopted investment guidelines that
set out the asset classes and other criteria to be used by our
Manager to evaluate specific investments as well as the overall
portfolio composition. Our Managers Investment Committee
will review our compliance with the investment guidelines
periodically and our board of directors receives an investment
report at each quarter-end in conjunction with its review of our
quarterly results. Our board also will review our investment
portfolio and related compliance with our investment policies
and procedures and investment guidelines at each regularly
scheduled board of directors meeting.
Our board of directors and our Managers Investment
Committee have adopted the following guidelines for our
investments and borrowings:
|
|
|
|
|
No investment shall be made that would cause us to fail to
qualify as a REIT for U.S. federal income tax purposes;
|
|
|
|
No investment shall be made that would cause us to be required
to register as an investment company under the 1940 Act;
|
|
|
|
With the exception of real estate and housing, no single
industry shall represent greater than 20% of the securities or
aggregate risk exposure in our portfolio; and
|
|
|
|
Investments in unrated or deeply subordinated ABS or other
securities that are non-qualifying assets for purposes of the
75% REIT asset test will be limited to an amount not to exceed
50% of our stockholders equity.
|
These investment guidelines may be changed from time to time by
a majority of our board of directors without the approval of our
stockholders.
Our board of directors has also adopted a separate set of
investment guidelines and procedures to govern our relationships
with our Manager and MFA. We have also adopted detailed
compliance policies to govern our interaction with our Manager
when our Manager is in receipt of material non-public
information.
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.
We may offer equity or debt securities in exchange for property
and to repurchase or otherwise reacquire our shares and may
engage in such activities in the future.
70
In addition, we may borrow money to finance the acquisition of
investments. To the extent leverage is deployed, we may use
traditional forms of financing, such as repurchase agreements
and warehouse facilities. To the extent that we are eligible to
participate in programs established by the U.S. government,
such as the TALF and the PPIP, we may utilize borrowings under
these programs to finance our assets. We also may utilize
structured financing techniques, such as securitizations, 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 will periodically reviewed by our board of directors as
part of their oversight of our Manager.
We may, subject to gross income and assets tests necessary for
REIT qualification, invest in securities of other REITs, other
entities engaged in real estate activities or securities of
other issuers.
We engage in the purchase and sale of investments. We may
underwrite the securities of other issuers.
Our board of directors may change any of these policies at any
time without prior notice to you or a vote of our stockholders.
MFA
Historical Performance
Formed in 1997, MFA has an
11-year
history of investing, on a leveraged basis, in hybrid and
adjustable-rate Agency MBS and other real estate-related
financial assets. As of March 31, 2009, MFA had
approximately $10.518 billion of total assets, of which
$9.945 billion, or 94.6%, represented its MBS portfolio. Of
MFAs MBS portfolio as of March 31, 2009,
approximately $9.699 billion, or 97.5%, was comprised of
Agency MBS, $244.9 million, or 2.5%, was comprised of
Senior MBS and $218,000, or less than 0.1%, was comprised of
other non-Agency MBS, none of which were collateralized by
subprime mortgage loans.
The tables below set forth certain historical investment
performance data about MFA. This information is a reflection of
the past performance of MFA and is not intended to be indicative
of, or a guarantee or prediction of, the returns that we, MFA or
our Manager may achieve in the future. This is especially true
for us because we intend to invest in a much broader range of
real estate-related financial assets than MFA has on a
historical basis. While MFAs investment portfolio is
primarily comprised of Agency MBS and, to a lesser extent,
Senior MBS, we expect that our portfolio will initially be
comprised principally of Senior MBS, subject to our investment
guidelines. We will also invest in Agency MBS consistent with
maintaining our exemption from registration under the 1940 Act.
We also may invest directly in residential mortgage loans as
well as other real estate-related financial assets. Neither MFA
nor our Manager has significant experience in purchasing
residential mortgage loans directly or certain of the other
Target Assets which we may pursue as part of our investment
strategy. Accordingly, MFAs historical returns will not be
indicative of the performance of our investment strategy and we
can offer no assurance that MFA and our Manager will replicate
the historical performance of their investment professionals in
their previous endeavors. Our investment returns could be
substantially lower than the returns achieved by MFA and our
Managers investment professionals in their previous
endeavors.
71
Table I sets forth certain historical information with respect
to MFA as of and for the three months ended March 31, 2009
and the fiscal years ended December 31, 2008, 2007, and
2006.
Table
I
MFA
Financial, Inc.
Historical
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
As of and for the Year Ended December 31,
|
|
|
|
March 31, 2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Total Capital Raised
|
|
$
|
16,765
|
|
|
$
|
720,866
|
|
|
$
|
324,961
|
|
|
$
|
11,484
|
|
Amount paid to MFA and Affiliates from proceeds of offerings(1)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Amounts paid to third parties from proceeds of offerings(2)
|
|
$
|
334
|
|
|
$
|
30,935
|
|
|
$
|
15,928
|
|
|
$
|
287
|
|
Stockholders Equity
|
|
$
|
1,459,569
|
|
|
$
|
1,257,077
|
|
|
$
|
927,263
|
|
|
$
|
678,558
|
|
Total Assets
|
|
$
|
10,517,718
|
|
|
$
|
10,641,419
|
|
|
$
|
8,605,859
|
|
|
$
|
6,443,967
|
|
Leverage(3)
|
|
|
6.0:1
|
|
|
|
7.2:1
|
|
|
|
8.1:1
|
|
|
|
8.4:1
|
|
|
|
|
(1)
|
|
MFA and its affiliates do not
receive any commissions with respect to amounts raised.
|
|
(2)
|
|
Aggregate fees and commissions paid
to underwriters and sales agents, and fees and expenses paid to
third parties in connection with the offerings such as legal,
accounting, printing, travel and listing expenses.
|
|
(3)
|
|
Ratio of debt-to-equity.
|
72
Table II sets forth certain summary financial information
about MFA for the three months ended March 31, 2009 and for
each calendar year in the five-year period ended
December 31, 2008.
Table
II
MFA
Financial, Inc.
Summary
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income on investment securities
|
|
$
|
132,153
|
|
|
$
|
519,788
|
|
|
$
|
380,328
|
|
|
$
|
216,871
|
|
|
$
|
235,798
|
|
|
$
|
174,957
|
|
Interest income on cash and cash equivalent investments
|
|
|
611
|
|
|
|
7,729
|
|
|
|
4,493
|
|
|
|
2,321
|
|
|
|
2,921
|
|
|
|
807
|
|
Interest expense
|
|
|
(72,137
|
)
|
|
|
(342,688
|
)
|
|
|
(321,305
|
)
|
|
|
(181,922
|
)
|
|
|
(183,833
|
)
|
|
|
(88,888
|
)
|
Net (loss)/gain on sale of investment securities(1)
|
|
|
|
|
|
|
(24,530
|
)
|
|
|
(21,793
|
)
|
|
|
(23,113
|
)
|
|
|
(18,354
|
)
|
|
|
371
|
|
Net loss on termination of Swaps, net(2)
|
|
|
|
|
|
|
(92,467
|
)
|
|
|
(384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments(3)
|
|
|
(1,549
|
)
|
|
|
(5,051
|
)
|
|
|
|
|
|
|
|
|
|
|
(20,720
|
)
|
|
|
|
|
Other income(4)
|
|
|
427
|
|
|
|
1,901
|
|
|
|
2,060
|
|
|
|
2,264
|
|
|
|
1,811
|
|
|
|
1,675
|
|
Operating and other expenses
|
|
|
(5,832
|
)
|
|
|
(18,885
|
)
|
|
|
(13,446
|
)
|
|
|
(11,185
|
)
|
|
|
(10,829
|
)
|
|
|
(10,622
|
)
|
Income from continuing operations
|
|
|
53,673
|
|
|
|
45,797
|
|
|
|
29,953
|
|
|
|
5,236
|
|
|
|
6,794
|
|
|
|
78,300
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
3,522
|
|
|
|
(86
|
)
|
|
|
(227
|
)
|
Net income
|
|
$
|
53,673
|
|
|
$
|
45,797
|
|
|
$
|
30,210
|
|
|
$
|
8,758
|
|
|
$
|
6,708
|
|
|
$
|
78,073
|
|
Preferred stock dividends
|
|
$
|
2,040
|
|
|
$
|
8,160
|
|
|
$
|
8,160
|
|
|
$
|
8,160
|
|
|
$
|
8,160
|
|
|
$
|
3,576
|
|
Net income/(loss) to common stockholders
|
|
$
|
51,633
|
|
|
$
|
37,637
|
|
|
$
|
22,050
|
|
|
$
|
598
|
|
|
$
|
(1,452
|
)
|
|
$
|
74,497
|
|
Net income/(loss) per common share from continuing
operations basic and diluted
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.24
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.98
|
|
Net income per common share from discontinued
operations basic and diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
Net income/(loss), per common share basic and diluted
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.24
|
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.98
|
|
Dividends declared per share of common stock(5)
|
|
$
|
0.220
|
(6)
|
|
$
|
0.810
|
|
|
$
|
0.415
|
|
|
$
|
0.210
|
|
|
$
|
0.405
|
|
|
$
|
0.960
|
|
Dividends declared per share of preferred stock
|
|
$
|
0.53125
|
|
|
$
|
2.125
|
|
|
$
|
2.125
|
|
|
$
|
2.125
|
|
|
$
|
2.125
|
|
|
$
|
1.440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
At March 31, 2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$
|
9,944,519
|
|
|
$
|
10,122,583
|
|
|
$
|
8,301,183
|
|
|
$
|
6,340,668
|
|
|
$
|
5,714,906
|
|
|
$
|
6,777,574
|
|
Total assets
|
|
|
10,517,718
|
|
|
|
10,641,419
|
|
|
|
8,605,859
|
|
|
|
6,443,967
|
|
|
|
5,846,917
|
|
|
|
6,913,684
|
|
Repurchase agreements
|
|
|
8,772,641
|
|
|
|
9,038,836
|
|
|
|
7,526,014
|
|
|
|
5,722,711
|
|
|
|
5,099,532
|
|
|
|
6,113,032
|
|
Preferred stock, liquidation preference(7)
|
|
|
96,000
|
|
|
|
96,000
|
|
|
|
96,000
|
|
|
|
96,000
|
|
|
|
96,000
|
|
|
|
96,000
|
|
Total stockholders equity
|
|
|
1,459,569
|
|
|
|
1,257,077
|
|
|
|
927,263
|
|
|
|
678,558
|
|
|
|
661,102
|
|
|
|
728,834
|
|
|
|
|
(1)
|
|
In response to tightening of market
credit conditions in the first quarter 2008, MFA adjusted its
balance sheet strategy, decreasing its target debt-to-equity
multiple range from 8x to 9x to 7x to 9x. In order to implement
this strategy, MFA reduced its borrowings, by selling MBS with
an amortized cost of $1.876 billion, realizing aggregate
net losses of $24.5 million, comprised of gross losses of
$25.1 million and gross gains of $571,000. During 2007, MFA
selectively sold $844.5 million of Agency and AAA rated
MBS, resulting in a realized net loss of
|
73
|
|
|
|
|
$21.8 million. Beginning in
the fourth quarter of 2005 through the second quarter of 2006,
MFA reduced its asset base through a strategy under which it,
among other things, sold its higher duration and lower yielding
MBS. During 2006, MFA sold approximately $1.844 billion of
MBS, realizing net losses of $23.1 million, comprised of
gross losses of $25.2 million and gross gains of
$2.1 million. For 2005, the repositioning involved the sale
of $564.8 million of MBS, which resulted in an
$18.4 million loss on sale. None of MFAs sales of MBS
in 2008, 2007, 2006 or 2005 were due to margin calls.
|
|
|
|
(2)
|
|
In March 2008, MFA terminated 48
Swaps with an aggregate notional amount of $1.637 billion,
realizing net losses of $91.5 million. In connection with
the termination of these Swaps, MFA repaid the repurchase
agreements that such Swaps hedged. In addition, during 2008, MFA
recognized losses of $986,000 in connection with two Swaps
terminated in response to the Lehman bankruptcy in September
2008.
|
|
|
|
(3)
|
|
For the three months ended
March 31, 2009, MFA recognized other-than-temporary
impairment charges of $1.5 million against certain
non-Agency MBS (none of which were Senior MBS) that had an
amortized cost of $1.7 million. During 2008, MFA recognized
other-than-temporary impairment charges of $5.1 million, of
which $4.9 million reflected a full write-off of two
unrated investment securities and $183,000 was an impairment
charge against one non-Agency MBS that was rated BB. For 2005,
as part of the repositioning of its MBS portfolio, at
December 31, 2005, MFA determined that it no longer had the
intent to continue to hold certain MBS that were in an
unrealized loss position. As a result, MFA recognized
other-than-temporary charges of $20.7 million against
certain MBS with an amortized cost of $842.2 million. The
subsequent sale of these securities during 2006 resulted in a
gain/recovery of $1.6 million.
|
|
|
|
(4)
|
|
Results of operations for real
estate sold has been reclassified to discontinued operations for
each of the prior periods presented.
|
|
|
|
(5)
|
|
MFA generally declares dividends on
its common stock in the month subsequent to the end of each
calendar quarter, with the exception of the fourth quarter
dividend which is typically declared during the fourth calendar
quarter for tax purposes.
|
|
|
|
(6)
|
|
On April 1, 2009, MFA declared
a $0.220 dividend per common share for the first quarter of
2009. The dividend was paid on April 30, 2009 to
stockholders of record as of April 13, 2009.
|
|
|
|
(7)
|
|
Reflects the aggregate liquidation
preference on the 3,840,000 outstanding shares of 8.50%
Series A Cumulative Redeemable preferred stock, par value
$0.01 per share. MFAs preferred stock is redeemable
exclusively at its option at $25.00 per share plus accrued
interest and unpaid dividends (whether or not declared)
commencing on April 27, 2009. No dividends may be paid on
MFAs common stock unless full cumulative dividends have
been paid on MFAs preferred stock. From the date of
MFAs original issuance in April 2004 through
December 31, 2008, MFA has paid full quarterly dividends on
its preferred stock.
|
For 2008, MFA had net income available to its common
stockholders of $37.6 million, or $0.21 per common share,
compared to net income of $22.1 million, or $0.24 per
share, for 2007. During 2008 and 2007, MFA repositioned its MBS
portfolio, realizing net losses on the sale of MBS of
$24.5 million and $21.8 million, respectively.
Interest income from MFAs cash investments increased by
$3.2 million to $7.7 million for 2008 from
$4.5 million for 2007. MFAs average cash investments
increased by $228.6 million to $322.0 million for 2008
compared to $93.4 million for 2007 and yielded 2.40% for
2008 compared to 4.81% for 2007.
MFAs borrowings under repurchase agreements increased in
2008 primarily as a result of its leveraging of multiple equity
capital raises. The average amount outstanding under MFAs
repurchase agreements increased by $2.424 billion, or
38.9%, to $8.653 billion for 2008 from $6.229 billion
for 2007. MFA experienced a 120 basis point decrease in its
effective cost of borrowing to 3.96% for 2008 from 5.16% for
2007. This decrease in rate paid on MFAs borrowings
reflects the lower market rates paid on incremental borrowings
and repurchase agreements that matured during 2008. MFAs
interest expense for 2008 increased by 6.7% to
$342.7 million, from $321.3 million for 2007,
reflecting a significant increase in MFAs borrowings,
partially offset by a significant decrease in the interest rates
it paid on such borrowings reflecting the decrease in market
interest rates.
For 2008, net interest income of MFA increased by
$121.3 million, or 191.0%, to $184.8 million, from
$63.5 million for 2007. This increase reflects the growth
in MFAs interest-earning assets and an improvement in its
net interest spread, as MBS yields relative to its cost of
funding widened. For 2008, MFAs net interest spread and
margin increased to 1.32% and 1.85%, respectively, from 0.35%
and 0.91%, respectively, for 2007.
Recent financial market events have led to a contraction in
market liquidity for mortgage-related assets. This illiquidity
has negatively affected both the terms and availability of
financing for most mortgage-related assets, including non-Agency
MBS. In connection with repurchase agreements, financing rates
and haircut levels have 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.
In response to these events, MFA, over the later part of 2007
and in the first quarter of 2008, took steps to adjust its
balance sheet strategy. MFA modified its leverage strategy in
March 2008, to reduce risk in light of the significant
disruptions in the credit markets, by decreasing its target
debt-to-equity multiple range from 8x to 9x to 7x to 9x. To
74
effect this change in leverage strategy, MFA sold assets and
used the proceeds from such sales to reduce borrowings. In
particular, MFA sold MBS with an amortized cost of
$1.876 billion in March 2008 at a realized aggregate net
loss of approximately $24.5 million. Concurrently, MFA
terminated repurchase agreements at no cost to it and
approximately $1.637 billion of associated interest rate
swap agreement at a cash cost of approximately
$91.5 million.
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 engage in the business of investing, reinvesting,
owning, holding or trading in securities and owns or proposes to
acquire investment securities having a value exceeding 40% of
the value of the issuers total assets (exclusive of
U.S. government securities and cash items) on an
unconsolidated basis. Excluded from the term investment
securities, among other things, are U.S. government
securities and securities issued by majority-owned subsidiaries
that are not themselves investment companies and are not relying
on the exception from the definition of investment company set
forth in Section 3(c)(1) or Section 3(c)(7) of the
1940 Act. Because we are organized as a holding company that
conducts its businesses primarily through our LLC Subsidiary and
its majority-owned subsidiaries, the securities issued to our
LLC Subsidiary by these subsidiaries that are excepted from the
definition of investment company in
Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with
any other investment securities we may own, may not have a value
in excess of 40% of the value of our total assets on an
unconsolidated basis. We will monitor our holdings to ensure
continuing and ongoing compliance with this test. In addition,
we believe our company will not be considered an investment
company under Section 3(a)(1)(A) of the 1940 Act because we
will not engage primarily or hold ourselves out as being engaged
primarily in the business of investing, reinvesting or trading
in securities. Rather, through our majority-owned subsidiaries,
we are primarily engaged in the business of our subsidiaries.
If the value of our LLC Subsidiarys investments in its
subsidiaries that are excepted from the definition of
investment company by Section 3(c)(1) or
3(c)(7) of the 1940 Act, together with any other investment
securities it owns, exceeds 40% of its total assets on an
unconsolidated basis, or if one or more of such subsidiaries
fails to maintain their exceptions or exemptions from the 1940
Act, we may have to register under the 1940 Act and could become
subject to substantial regulation with respect to our capital
structure (including our ability to use leverage), management,
operations, transactions with affiliated persons (as defined in
the 1940 Act), portfolio composition, including restrictions
with respect to diversification and industry concentration, and
other matters.
75
In addition, certain of our subsidiaries, including MFR
Asset I, LLC, intend to qualify for an exemption from the
definition of investment company under
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 means
that at least 55% of such subsidiarys portfolio must be
comprised of qualifying assets and at least 80% of each of their
portfolios must be comprised of qualifying assets and real
estate-related assets under the 1940 Act. Qualifying assets for
this purpose include mortgage loans and other assets, such as
whole pool Agency MBS, that are considered the functional
equivalent of mortgage loans for the purposes of the 1940 Act.
Although we intend to monitor our portfolio periodically and
prior to each acquisition, there can be no assurance that we
will be able to maintain this exemption from registration.
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.
Licensing
We may be required to be licensed to purchase and sell
previously originated residential mortgage loans in certain
jurisdictions (including the District of Columbia) in which we
will conduct our business. We are currently in the process of
obtaining those licenses, if required. Our failure to obtain or
maintain licenses will restrict our investment options. We may
consummate this offering even if we have not yet obtained such
licenses. Once we are fully licensed to purchase and sell
mortgage loans in each of the states in which we become
licensed, we expect that we will acquire previously originated
residential loans in those states.
Competition
In acquiring our Target Assets, we will compete with a variety
of institutional investors, including other REITs, public and
private funds, 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 of the types and
classes which we will seek to acquire may lead to the price of
such assets increasing, which may further limit our ability to
generate desired risk-adjusted returns for our stockholders.
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 Business We operate in a highly
competitive market for investment opportunities and competition
may limit our ability to acquire desirable investments.
76
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 MFA or its affiliates. We will have no employees
upon completion of this offering. See Our Manager and the
Management Agreement Management Agreement.
Legal
Proceedings
Neither we nor our Manager is currently subject to any legal
proceedings which it considers to be material.
77
OUR
MANAGER AND THE MANAGEMENT AGREEMENT
General
We are externally advised and managed by our Manager. All of our
officers are employees of MFA or its affiliates. The executive
offices of our Manager are located at 350 Park Avenue,
21st Floor, New York, New York 10022, and the telephone
number of our Managers executive offices is
(212) 207-6400.
Executive
Officers of MFA
The following table sets forth certain information with respect
to each of the executive officers of MFA:
|
|
|
|
|
|
|
Executive Officer
|
|
Age
|
|
Position Held with MFA
|
|
Stewart Zimmerman
|
|
|
64
|
|
|
Chairman of the Board and Chief Executive Officer
|
William S. Gorin
|
|
|
50
|
|
|
President and Chief Financial Officer
|
Ronald A. Freydberg
|
|
|
48
|
|
|
Executive Vice President and Chief Investment Officer
|
Timothy W. Korth
|
|
|
43
|
|
|
General Counsel, Senior Vice President Business
Development and Corporate Secretary
|
Teresa D. Covello
|
|
|
43
|
|
|
Senior Vice President, Chief Accounting Officer and Treasurer
|
Craig L. Knutson
|
|
|
50
|
|
|
Senior Vice President Chief Risk Officer
|
Kathleen A. Hanrahan
|
|
|
43
|
|
|
Senior Vice President Accounting
|
Stewart Zimmerman
serves as MFAs Chairman of the
Board and Chief Executive Officer. He has served as MFAs
Chief Executive Officer and a Director since 1997 and was
appointed Chairman of the Board in March 2003. He served as
MFAs president from 1997 to 2008. He is also serving as
our Chairman of the Board and Chief Executive Officer. From 1989
through 1997, he initially served as a consultant to The America
First Companies and became Executive Vice President of America
First Companies, L.L.C. During this time, he held a number of
positions: President and Chief Operating Officer of America
First REIT, Inc. and President of several mortgage funds,
including America First Participating/Preferred Equity Mortgage
Fund, America First PREP Fund 2, America First PREP
Fund II Pension Series L.P., Capital Source L.P.,
Capital Source II L.P.-A, America First Tax Exempt Mortgage
Fund Limited Partnership and America First Tax Exempt
Fund 2-Limited
Partnership. Previously, Mr. Zimmerman held various
progressive positions with other companies, including Security
Pacific Merchant Bank, E.F. Hutton & Company, Inc.,
Lehman Brothers, Bankers Trust Company and Zenith Mortgage
Company. Mr. Zimmerman holds a Bachelors of Arts degree
from Michigan State University.
William S. Gorin
serves as MFAs President and Chief
Financial Officer. He was appointed Chief Financial Officer and
Treasurer in 2001 and was appointed President in 2008. He served
as Executive Vice President from 1997 to 2008. He is also
serving as our President, Principal Financial Officer and a
Director. From 1998 to 2001, Mr. Gorin served as Executive
Vice President and Secretary. From 1989 to 1997, Mr. Gorin
held various positions with PaineWebber Incorporated/Kidder,
Peabody & Co. Incorporated, serving as a First Vice
President in the Research Department. Prior to that position,
Mr. Gorin was Senior Vice President in the Special Products
Group. From 1982 to 1988, Mr. Gorin was employed by
Shearson Lehman Hutton, Inc./E.F. Hutton & Company,
Inc. in various positions in corporate finance and direct
investments. Mr. Gorin has a Masters of Business
Administration degree from Stanford University and a Bachelor of
Arts degree in Economics from Brandeis University.
Ronald A. Freydberg
serves as MFAs Executive Vice
President and Chief Investment Officer. He was appointed
Executive Vice President in 2001 and Chief Investment Officer in
2008. He served as Chief Portfolio Officer from 2001 to 2008.
From 1997 to 2001, he served as Senior Vice President. He is
also serving as our Chief Investment Officer and Executive Vice
President. From 1995 to 1997, Mr. Freydberg served as a
Vice President of Pentalpha Capital, in Greenwich, Connecticut,
where he was a fixed-income quantitative analysis and
structuring specialist. From 1988 to 1995, Mr. Freydberg
held various positions with J.P. Morgan & Co.
From 1994 to 1995, he was with the Global Markets Group. In that
position, he was involved in commercial mortgage-backed
securitization and sale of distressed commercial real estate,
including structuring, due diligence and marketing. From
78
1985 to 1988, Mr. Freydberg was employed by Citicorp.
Mr. Freydberg holds a Masters of Business Administration
degree in Finance from George Washington University and a
Bachelor of Arts degree from Muhlenberg College.
Timothy W. Korth II
serves as MFAs General
Counsel, Senior Vice President Business Development
and Corporate Secretary, which positions he has held since July
2003. He holds similar positions with us. From 2001 to 2003,
Mr. Korth was a Counsel at the law firm of Clifford Chance
US LLP, where he specialized in corporate and securities
transactions involving REITs and other real estate companies,
and, prior to such time, had practiced law with that firm and
its predecessor, Rogers & Wells LLP, since 1992.
Mr. Korth is admitted as an attorney in the State of New
York and has a Juris Doctorate and a Bachelor of Business
Administration degree in Finance from the University of Notre
Dame.
Teresa D. Covello
serves as MFAs Senior Vice
President, Chief Accounting Officer and Treasurer, which
positions she was appointed to in 2003. From 2001 to 2003,
Ms. Covello served as MFAs Senior Vice President and
Controller. She is also serving as our Senior Vice
President Accounting. From 2000 until joining MFA in
2001, Ms. Covello was a self-employed financial consultant,
concentrating in investment banking within the financial
services sector. From 1990 to 2000, she was the Director of
Financial Reporting and served on the Strategic Planning Team
for JSB Financial, Inc. Ms. Covello began her career in
public accounting in 1987 with KPMG Peat Marwick (predecessor to
KPMG LLP), participating in and supervising financial statement
audits, compliance examinations, public debt and equity
offerings. Ms. Covello currently serves as a member of the
board of directors of Commerce Plaza, Inc., a not-for-profit
organization. Ms. Covello is a Certified Public Accountant
and has a Bachelor of Science degree in Public Accounting from
Hofstra University.
Craig L. Knutson
serves as MFAs Senior Vice
President Chief Risk Officer, which position he
has held since March 2008. He is also serving as our Senior Vice
President Portfolio Manager. From 2004 to 2007,
Mr. Knutson served as Senior Executive Vice President of
CBA Commercial, LLC, an acquirer and securitizer of small
balance commercial mortgages. From 2001 to 2004,
Mr. Knutson served as President and Chief Operating Officer
of ARIASYS Inc. From 1986 to 1999, Mr. Knutson held various
progressive positions in the mortgage trading departments of
First Boston Corporation (later Credit Suisse), Smith Barney and
Morgan Stanley. In these capacities, Mr. Knutson traded
agency and private label MBS as well as whole loans
(unsecuritized mortgages). From 1981 to 1984, Mr. Knutson
served as an Analyst and then Associate in the Investment
Banking Department of E.F. Hutton & Company Inc.
Mr. Knutson holds a Masters of Business Administration
degree from Harvard University and a Bachelor of Arts degree in
Economics and French from Hamilton College.
Kathleen A. Hanrahan
serves as MFAs Senior Vice
President Accounting, which position she has held
since May 2008. She also holds a similar position with us. From
2007 until joining MFA in 2008, Ms. Hanrahan was Vice
President Financial Reporting with Arbor Commercial
Mortgage LLC. From 1997 to 2006, she was the First Vice
President of Financial Reporting and served on the Disclosure,
Corporate Benefits and Sarbanes-Oxley Committees for
Independence Community Bank Corp. From 1992 to 1997,
Ms. Hanrahan held various positions, including Controller,
with North Side Savings Bank. Ms. Hanrahan began her career
in public accounting with KPMG Peat Marwick (predecessor to KPMG
LLP). Ms. Hanrahan is a Certified Public Accountant and has
a Bachelor of Business Administration degree in Public
Accounting from Pace University.
Investment
Committee
Our Manager has an Investment Committee comprised of our
Managers professionals, Messrs. Zimmerman, Gorin,
Freydberg and Knutson. For biographical information on the
members of the Investment Committee, see
Executive Officers of MFA. 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
Before the 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.
79
The management agreement requires our Manager to manage our
business affairs in conformity with the investment guidelines
and other policies that are approved and monitored by our board
of directors. Our Managers role as manager is under the
supervision and direction of our board of directors. Our Manager
will be responsible for (i) the selection, purchase and
sale of our portfolio investments, (ii) our financing
activities, and (iii) providing us with investment advisory
services. Our Manager will be responsible for our day-to-day
operations and performs (or causes to be performed) such
services and activities relating to our assets and operations as
may be appropriate, which may include, without limitation, the
following:
(i) serving as our consultant with respect to the periodic
review of the investment guidelines and other parameters for our
investments, financing activities and operations, any
modification to which will be approved by a majority of our
independent directors;
(ii) investigating, analyzing and selecting possible
investment opportunities and acquiring, financing, retaining,
selling, restructuring or disposing of investments consistent
with the investment guidelines;
(iii) with respect to prospective purchases, sales or
exchanges of investments, conducting negotiations on our behalf
with sellers, purchasers and brokers and, if applicable, their
respective agents and representatives;
(iv) negotiating and entering into, on our behalf,
repurchase agreements, credit finance agreements,
securitizations, agreements relating to borrowings under
temporary programs established by the U.S. government,
commercial papers, interest rate swap agreements and other
hedging instruments, warehouse facilities and all other
agreements and engagements required for us to conduct our
business;
(v) engaging and supervising, on our behalf and at our
expense, independent contractors which provide investment
banking, securities brokerage, mortgage brokerage, other
financial services, due diligence services, underwriting review
services, legal and accounting services, and all other services
as may be required relating to our investments;
(vi) 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;
(vii) providing executive and administrative personnel,
office space and office services required in rendering services
to us;
(viii) 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;
(ix) 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;
(x) counseling us in connection with policy decisions to be
made by our board of directors;
(xi) 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 the
investment guidelines;
(xii) 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;
(xiii) 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;
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(xiv) assisting us in developing criteria for asset
purchase commitments that are specifically tailored to our
investment objectives and making available to us its knowledge
and experience with respect to MBS, mortgage loans, real estate,
real estate-related securities, other real estate-related assets
and non-real estate-related assets;
(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
to conduct quarterly compliance reviews with respect thereto;
(xix) assisting us in qualifying to do business in all
applicable jurisdictions and to obtain and maintain all
appropriate licenses;
(xx) assisting us in complying with all regulatory
requirements applicable to us in respect of our business
activities, including preparing or causing to be prepared all
financial statements required under applicable regulations and
contractual undertakings and all reports and documents, if any,
required under the Exchange Act, the Securities Act, or by the
NYSE;
(xxi) assisting us in taking all necessary action to enable
us to make required tax filings and reports, including
soliciting 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 the 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 the Manager of 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) representing and making recommendations to us in
connection with the purchase and finance of, and commitment to
purchase and finance, MBS, mortgage loans (including on a
portfolio basis), real estate, real estate-related securities,
other real estate-related assets and non-real estate-related
assets, and the sale and commitment to sell such assets;
(xxvi) advising us with respect to obtaining appropriate
repurchase agreements, warehouse facilities or other secured and
unsecured forms of borrowing for our assets;
(xxvii) 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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(xxviii) 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;
(xxix) 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
(xxx) using commercially reasonable efforts to cause us to
comply with all applicable laws.
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 the Manager and any
person providing sub-advisory services to the 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 members, its officers and its other personnel with respect
to all expenses, losses, damages, liabilities, demands, charges
and claims arising from acts of our Manager not constituting bad
faith, willful misconduct, gross negligence, or reckless
disregard of duties, performed in good faith in accordance with
and pursuant to the management agreement. Our Manager has agreed
to indemnify us, our directors and officers 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. For the avoidance of doubt, our
Manager will not be liable for trade errors that may result from
ordinary negligence, such as errors in the investment decision
making process (
e.g.
, a transaction was effected in
violation of our investment guidelines) or in the trade process
(
e.g.
, a buy order was entered instead of a sell order,
or the wrong security was purchased or sold, or 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 the offering.
Pursuant to the terms of the management agreement, our Manager
is required to provide us with our management team, including a
president, chief executive officer, chief investment officer,
and principal financial officer along with appropriate support
personnel, to provide the management services to be provided by
our Manager to us.
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 third 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 or by a vote
of the holders of a majority of the outstanding shares of our
common stock (other than those shares held by MFA or its
affiliates), based upon (1) unsatisfactory performance that
is materially detrimental to us or (2) our determination
that the management fees payable to our Manager are not fair,
subject to our Managers right to prevent such termination
due to unfair fees by accepting a reduction of management fees
agreed to by at least two-thirds of our independent directors.
We must provide 180 days prior notice of any such
termination. Unless terminated for cause, our Manager will be
paid a termination fee equal to three times the sum of the
average annual management fee during the
24-month
period immediately preceding such termination, calculated as of
the end of the most recently completed fiscal quarter before the
date of termination.
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We may also terminate the management agreement at any time,
including during the initial term, without the payment of any
termination fee, with 30 days prior written notice from our
board of directors for cause, which is defined as:
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our Managers continued material breach of any provision of
the management agreement following a period of 30 days
after written notice thereof (or 45 days after written
notice of such breach if our Manager, under certain
circumstances, has taken steps to cure such breach within
30 days of the written notice);
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our Managers fraud, misappropriation of funds, or
embezzlement against us;
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our Managers gross negligence of duties under the
management agreement;
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the occurrence of certain events with respect to the bankruptcy
or insolvency of our Manager, including an order for relief in
an involuntary bankruptcy case or our Manager authorizing or
filing a voluntary bankruptcy petition;
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our Manager is convicted (including a plea of
nolo
contendere
) of a felony; and
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the dissolution of our Manager.
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Our Manager may generally only assign the management agreement
with the written approval of a majority of our independent
directors. Our Manager, however, may assign the management
agreement to any of its affiliates without the approval of our
independent directors.
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 the Manager
upon our breach, we would be required to pay our Manager the
termination fee described above.
Management
Fees, Expense Reimbursements and Termination Fee
We do not maintain an office or employ personnel. Instead we
rely on the facilities and resources of our Manager to manage
our day-to-day operations. Expense reimbursements to our Manager
are made in cash on a monthly basis following the end of each
month.
Management
Fee
We will pay our Manager a management fee in an amount equal to
1.5% per annum, calculated and payable quarterly in arrears, of
our stockholders equity. 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 for repurchases of 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 than the amount of stockholders equity shown on
our financial statements. 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 will be reduced, but not below zero, by our
proportionate share of any securitization base management fees
that MFA receives in connection with securitizations in which we
invest, based on the percentage of equity we hold in such
securitization.
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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.
Reimbursement
of Expenses
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 repurchase agreements, warehouse facilities and other
secured and unsecured forms of borrowings (including commitment
fees, accounting fees, legal fees, closing and other similar
costs) or any of our securities offerings;
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expenses in connection with the application for, and
participation in, programs established by the
U.S. government;
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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, warehouse facilities, borrowings under temporary
programs established by the U.S. government, such as the
TALF and the PPIP, other secured and unsecured forms of
borrowings 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 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 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 for the allocable share of
the compensation of our Principal Financial Officer and
personnel hired by our Manager as in-house accounting, legal and
back-office resources, based on the time they spend on our
affairs. Our Manager will be responsible for the compensation of
our Chief Executive Officer, Executive Vice President and Chief
Investment Officer, Executive Vice President, Senior Vice
Presidents, Vice Presidents and our Managers investment
professionals.
In addition, we will 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. These expenses will be allocated between our Manager
and us based on the ratio of our proportion of gross assets
compared to all remaining gross assets managed or held by MFA or
managed by our Manager as calculated at each quarter end. We and
our Manager will modify this allocation methodology, subject to
our independent directors approval if the allocation
becomes inequitable (
i.e.
, if we become very highly
leveraged compared to MFA or other managed accounts or funds).
Termination
Fee
A termination fee will be payable in the event that the
management agreement is terminated without cause upon the
affirmative vote two-thirds of our independent directors or the
holders of a majority of our outstanding common stock (other
than those shares held by MFA and its affiliates), based upon
unsatisfactory performance by our Manager that is materially
detrimental to us or a determination that the compensation
payable to our manager under the management agreement is not
fair, unless our Manager agrees to compensation that two-thirds
of our independent directors determine is fair. The termination
fee will be equal to three times the sum of the average annual
management fee earned by our Manager during the prior
24-month
period immediately preceding the date of termination, calculated
as of the end of the most recently completed fiscal quarter
prior to the date of termination.
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Grants of
Equity Compensation to Our Manager, Its Personnel and Its
Affiliates
Under our 2009 equity incentive plan, our board of directors is
authorized to approve grants of equity-based awards to our
Manager, its personnel and its affiliates. To date, our board of
directors has approved an initial grant of equity awards to our
executive officers and our Managers personnel in an amount
equal to % of the initial
$ of capital raised by us in
offerings of our securities. See Management
2009 Equity Incentive Plan. Thereafter, during the term of
the management agreement with our Manager, the management
agreement provides that any grants of equity compensation made
by us to our Manager, MFA or their respective employees shall be
made only to our Manager and its designees.
Shared
Facilities and Services Agreement
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. 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 Manager will enter into a shared facilities and services
agreement with affiliates of our Manager, pursuant to which they
will provide our Manager with access to, among other things,
their information technology, office space, personnel and other
resources necessary to enable our Manager to perform its
obligations under the management agreement. The shared
facilities and services agreement is intended to provide us
access to MFAs pipeline of assets and its personnels
experience in capital markets, credit analysis, debt structuring
and risk and asset management, as well as assistance with
corporate operations, legal and compliance functions. MFA, and
as a result, our Manager have well respected and established
portfolio management resources for our Target Assets and a
sophisticated infrastructure supporting those resources,
including investment professionals focusing on non-Agency MBS,
Agency MBS, residential mortgage loans and other ABS. We also
expect to benefit from our Managers finance and
administration functions, which address legal, compliance,
investor relations and operational matters, including portfolio
management, trade allocation and execution, securities
valuation, risk management and information technologies in
connection with the performance of its duties.
We have no employees and we do not pay any of our officers or
our Managers officers or personnel any cash compensation.
Rather, we pay our Manager a management fee pursuant to the
terms of the management agreement.
86
MANAGEMENT
Our
Directors and Executive Officers
Upon completion of the offering, our board of directors will
comprise five members. We currently have two directors. Our two
directors will nominate three additional persons to be
directors. Our board of directors has determined that 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 and executive officers:
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Name
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Age
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Position Held with us
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Stewart Zimmerman
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Chairman of the Board and Chief Executive Officer
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William S. Gorin
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50
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President, Principal Financial Officer and Director
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Craig L. Knutson
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50
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Executive Vice President and Chief Investment Officer
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Ronald A. Freydberg
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Executive Vice President
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Timothy W. Korth
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General Counsel, Senior Vice President and Corporate Secretary
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Kathleen A. Hanrahan
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43
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Senior Vice President Accounting
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Teresa D. Covello
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43
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Senior Vice President Accounting
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Sunil Yadav
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Vice President
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Alvin Sarabanchong
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33
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Vice President
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John H. Cassidy
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57
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Director Nominee
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F. Allen Graham
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77
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Director Nominee
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Lawrence S. Wizel
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65
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Director Nominee
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Biographical
Information
Directors,
Director Nominees and Executive Officers
For biographical information on Messrs. Zimmerman and Gorin
and our other executive officers, see Our Manager and the
Management Agreement Executive Officers of MFA.
Sunil Yadav
serves as a Vice President with us.
Mr. Yadav joined MFA in 2007 and serves as MFAs Vice
President in the Investments Group. From 2005 to 2007,
Mr. Yadav was an associate in the MBS Trading Strategy
Group at Banc of America Securities. In that position, he worked
closely with traders and clients and was responsible for
identifying relative value trading opportunities in Agency and
non-Agency MBS. Previously, Mr. Yadav has held
progressively more senior positions at Fermilab and Caltech.
Mr. Yadav holds an MBA with Honors in Finance from the
Wharton School of Business. He is an alumnus of the Indian
Institute of Technology, Kanpur, and holds a Ph.D. in
Engineering from The Johns Hopkins University.
Alvin Sarabanchong
serves as a Vice President with us.
Mr. Sarabanchong joined MFA in 2008 and serves as
MFAs Vice President and Assistant Portfolio Manager for
Senior MBS. From 2003 to 2008, Mr. Sarabanchong served as
Vice President and senior whole loan trader at Morgan Stanley.
From 2001 to 2003, Mr. Sarabanchong served as an Associate
of UBS Investment Bank where he traded whole loans.
John H. Cassidy
, 57, is a nominee to be one of our
directors. In April 2008, Mr. Cassidy became President of
Beacon Residential. Mr. Cassidy was named President and
Chief Executive Officer of America First Apartment Investors,
Inc. in September 2003 and served in that capacity until
September 2007 when America First Apartment Investors, Inc.
merged with and into Sentinel White Plains LLC, a Delaware
limited liability company and a wholly-owned subsidiary of
Sentinel Omaha LLC. From 2006 until September 2007,
Mr. Cassidy was also a Director of America First Apartment
Investors, Inc. Before being named President and Chief Executive
Officer of America
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First Apartment Investors, Inc., Mr. Cassidy had been
employed by America First Companies L.L.C. since 1988 and had
served in a number of capacities with respect to the public real
estate partnerships sponsored by America First Companies L.L.C.
From 2001 to 2003, Mr. Cassidy served as Managing Director
of America First Tax Exempt Investors LP, a publicly held
limited partnership. From 1992 to 2002, Mr. Cassidy was
President of America First Properties Management Company, Inc.,
the property management subsidiary of America First Companies
L.L.C. From 1988 to 1992, Mr. Cassidy served as an asset
manager with America First Companies. From 1982 to 1988,
Mr. Cassidy served as a Vice President of E.F.
Hutton & Company. From 1978 to 1980, Mr. Cassidy
was an Assistant Vice President with Bank of America.
Mr. Cassidy holds a Masters of Business Administration
degree in Finance from Columbia University and a Bachelor of
Arts degree in Economics from Georgetown University.
F. Allen Graham
, 76, is a nominee to be one of our
directors. Since 1991, Mr. Graham has worked as a mortgage
banking consultant and expert witness. From 1987 to 1991,
Mr. Graham served as President of D&N Mortgage
Corporation. From 1984 to 1987, Mr. Graham served as
President and Chief Operating Officer of Bloomfield Savings
Association and as Chairman and Chief Executive Officer of
Bloomfield Mortgage Corporation. From 1983 to 1984,
Mr. Graham served as Senior Vice President of Murray
Financial Corporation and Vice Chairman of the Board of Murray
Investment Corporation. From January 1983 to April 1983,
Mr. Graham served as President of Lambrecht Realty Company.
From 1959 to 1983, Mr. Graham served as President of Graham
Mortgage Corporation. Mr. Graham is a Certified Mortgage
Banker and a graduate of Northwestern Universitys School
of Mortgage Banking. Mr. Graham holds a Juris Doctorate
from the Detroit College of Law/Michigan State University and a
Bachelor of Arts degree from the University of Michigan.
Lawrence S. Wizel
, 65, is a nominee to be one of our
directors. Since June 2006, Mr. Wizel has served as a
member of the board and chairman of the audit committee of three
companies, one of which is traded on the NYSE. From 1965 to June
2006, Mr. Wizel held various progressive positions with
Deloitte & Touche LLP. From 2002 until his retirement
in June 2006, Mr. Wizel served as Deputy Professional
Practice Director in Deloitte & Touches New York
office and as Northeast Region China Service Group Leader. From
2002 to 2004, Mr. Wizel was the
Partner-In-Charge
of the U.S. Offering Service. From 1980 (when he was
admitted to the partnership) to 2002, Mr. Wizel was a
leader in the Technology Group of Deloitte &
Touches New York office. Mr. Wizel holds a Bachelor
of Science degree from Michigan State University.
Executive
and Director Compensation
Compensation
of Directors
We will pay a $50,000 annual directors fee to each of our
independent directors. In addition, we will pay an annual fee of
$10,000 to the chair of the audit committee of our board of
directors and an annual fee of $5,000 to each of the chairs of
the compensation committee and the nominating and corporate
governance committee of our board of directors. Fees to our
independent directors will be paid in cash or shares of our
common stock at the election of each independent director. We
will also reimburse all members of our board of directors for
their travel expenses incurred in connection with their
attendance at full board and committee meetings.
Our independent directors will also be eligible to receive
restricted common stock, options and other stock-based awards
under our 2009 equity incentive plan. In addition, each of our
independent directors will receive 3,000 shares of
restricted common stock, which will fully vest
on ,
2009, upon completion of this offering.
We will pay directors fees only to those directors who are
independent under the NYSE listing standards. We have not made
any payments to our independent director nominees in 2009.
Executive
Compensation
Because our management agreement provides that our Manager is
responsible for managing our affairs, our executive officers,
who are employees of MFA, do not receive cash compensation from
us for serving as our executive officers. In their capacities as
officers or personnel of our Manager or its affiliates, they
will devote such portion of their time to our affairs as is
necessary to enable us to operate our business.
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Except for certain equity grants, 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 a 2009 equity incentive plan to provide incentive
compensation to 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 2009 Equity Incentive
Plan for detailed description of our 2009 equity incentive
plan.
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 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 attendance at
meetings of our board and its committees and through
supplemental reports and communications. Our independent
directors meet regularly in executive sessions without the
presence of our corporate officers or non-independent directors.
Upon completion of this offering, our board of directors will
form an audit committee, a compensation committee and a
nominating and corporate governance committee and adopt charters
for each of these committees. Each of these committees will have
three directors and will be composed exclusively of independent
directors, as defined by the listing standards of the NYSE.
Moreover, the compensation committee will be composed
exclusively of individuals intended to be, to the extent
provided by
Rule 16b-3
of the Exchange Act, non-employee directors and will, at such
times as we are subject to Section 162(m) of the Internal
Revenue Code, qualify as outside directors for purposes of
Section 162(m) of the Internal Revenue Code.
Audit
Committee
The audit committee will comprise Messrs. Wizel, Cassidy
and Graham, each of whom will be an independent director and
financially literate under the rules of the NYSE.
Mr. Wizel will chair our audit committee and serve as our
audit committee financial expert, as that term is defined by the
SEC. The audit committee will be responsible for engaging
independent certified public accountants, preparing audit
committee reports, reviewing with the independent certified
public accountants the plans and results of the audit
engagement, approving professional services provided by the
independent certified public accountants, reviewing the
independence of the independent certified public accountants,
considering the range of audit and non-audit fees and reviewing
the adequacy of our internal accounting controls.
Compensation
Committee
The compensation committee will be comprised of
Messrs. Cassidy, Graham and Wizel, each of whom will be an
independent director. Mr. Cassidy will chair our
compensation committee. The principal functions of the
compensation committee will be to (1) evaluate the
performance of our officers, (2) review the compensation
payable to our officers, (3) evaluate the performance of
our Manager, (4) review the compensation and fees payable
to our Manager under the management agreement, (5) prepare
compensation committee reports and (6) administer the
issuance of any common stock issued to the personnel of our
Manager who provide services to us.
Nominating
and Corporate Governance Committee
The nominating and corporate governance committee will be
comprised of Messrs. Graham, Cassidy and Wizel, each of
whom will be an independent director. Mr. Graham will chair
our nominating and corporate governance committee. The
nominating and corporate governance committee will be
responsible for seeking, considering and recommending to the
board qualified candidates for election as directors and will
approve and recommend to the full board of directors the
appointment of each of our executive officers.
It also will periodically prepare and submit to the board of
directors for adoption the committees selection criteria
for director nominees. It will review and make recommendations
on matters involving general operation of the board and our
corporate governance and will annually recommend to the board of
directors nominees for each
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committee of the board. In addition, the committee will annually
facilitate the assessment of the board of directors
performance as a whole and of the individual directors and
report thereon to the board.
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. Our
officers and our non-independent directors also serve as
employees of MFA. 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
they had been negotiated at arms length with an
unaffiliated third party. In addition, the ability of our
Manager and its officers and personnel to engage in other
business activities may reduce the time our Manager and its
officers and personnel spend managing us.
Our Managers parent, MFA, manages a large portfolio
consisting primarily of Agency MBS and, to a lesser extent,
Senior MBS. We may compete directly with MFA or other current
and future clients of MFA or our Manager for investment
opportunities in Agency MBS, Senior MBS and our other Target
Assets. We may also compete with MFA
and/or
other
clients of MFA or our Manager for the same borrowing sources.
Our Manager has an investment allocation policy in place that is
intended to enable us to share equitably with MFA and other
clients of our Manager and MFA in all investment opportunities
that may be suitable for us, MFA and such other clients.
Pursuant to this policy, we will have the right to participate
in all investment opportunities that our Manager determines are
appropriate for us in view of our investment objectives,
policies and strategies and other relevant factors. Our Manager
allocates investments among eligible accounts, including us,
based on current demand according to the market value of the
account (which is the amount of available capital that,
consistent with such accounts investment parameters, may
be invested in a proposed investment). For certain transactions
that cannot be allocated on a
pro rata
basis, such as in
the case of whole pool Agency MBS, our Manager will
endeavor to allocate such purchases over time in a fair and
equitable manner. If the investment cannot fulfill the
pro
rata
allocation or be allocated in marketable portions, the
investment is allocated on a rotational basis. Our
Managers policy also requires a fair and equitable
allocation of financing opportunities over time among us MFA and
other clients of our Manager and MFA. These allocation policies
may be amended by our Manager at any time without our consent.
To the extent our Managers, MFAs or our business
evolves in such a way as to give rise to conflicts not currently
addressed by our Managers allocation policies, our Manager
may need to refine its policies to handle any such situations.
Our independent directors will review our Managers
compliance with its allocation policies. In addition, to avoid
any actual or perceived conflicts of interest with our Manager,
prior to an investment in any security structured or issued by
an entity managed by our Manager or MFA, such investment will be
approved by a majority of our independent directors. Further,
although we do not expect that assets will be traded among MFA,
another account managed by
90
MFA or us, to the extent that such transactions do occur, all
such trades will be executed, without specific independent
director approval, at fair market value based on information
available to us from third-party pricing services or other
sources.
We have agreed to pay our Manager a management fee that is not
tied to our performance. Since the management fee is paid
regardless of our performance, it may not provide sufficient
incentive to our Manager to seek to achieve attractive
risk-adjusted returns for our investment portfolio.
2009
Equity Incentive Plan
Prior to the completion of this offering, we will adopt a 2009
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. The 2009 equity incentive
plan is administered by the compensation committee appointed by
our board of directors. The 2009 equity incentive plan will
permit the granting of share options, restricted shares of
common stock, phantom shares, dividend equivalent rights and
other equity-based awards. Prior to the completion of this
offering, we have not issued any equity-based compensation.
Administration
The 2009 equity incentive plan is administered by the
compensation committee. The compensation committee, appointed by
our board of directors, has the full authority to administer and
interpret the 2009 equity incentive plan, to authorize the
granting of awards, to determine the eligibility 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, to determine the number of shares of common stock to
be covered by each award (subject to the individual participant
limitations provided in the 2009 equity incentive plan), to
determine the terms, provisions and conditions of each award
(which may not be inconsistent with the terms of the 2009 equity
incentive plan), to prescribe the form of instruments evidencing
awards and to take any other actions and make all other
determinations that it deems necessary or appropriate in
connection with the 2009 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 2009 equity incentive plan will be
administered by a compensation committee consisting of two or
more 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. References
below to the compensation committee include a reference to the
board for those periods in which the board is acting.
Available
Shares
Our 2009 equity incentive plan provides for grants of restricted
common stock and other equity-based awards up to an aggregate of
8% of the issued and outstanding shares of our common stock (on
a fully diluted basis and including shares to be sold to MFA
concurrently with this offering and shares to be sold pursuant
to the underwriters exercise of their overallotment
option) at the time of the award, subject to a ceiling of
40,000,000 shares available for issuance under the plan.
The maximum number of shares that may underlie awards, other
than options, in any one year to any eligible person, may not
exceed 1,000,000. In addition, subject to adjustment upon
certain corporate transactions or events, options for more than
1,000,000 shares of common stock over the life of the 2009
equity incentive plan may not be granted. If an option or other
award granted under the 2009 equity incentive plan expires or
terminates, the shares subject to any portion of the award that
expires or terminates without having been exercised or paid, as
the case may be, will again become available for the issuance of
additional awards. Unless previously terminated by our board of
directors, no new award may be granted under the 2009 equity
incentive plan after the tenth anniversary of the date that such
plan was initially approved by our board of directors. No award
may be granted under our 2009 equity incentive plan to any
person who, assuming exercise of all options and payment of all
awards held by such person would own or be deemed to own more
than 9.8% of the outstanding
91
shares of our common stock. To date, our board of directors has
approved an initial grant of equity awards to our executive
officers and our Managers personnel in an amount equal
to % of the initial
$ of capital raised by us in
offerings of our securities. Thereafter, during the term of the
management agreement with our Manager, the management agreement
provides that any grants of equity compensation made by us to
our Manager, MFA or their respective employees shall be made
only to our Manager and its designees. See Our Manager and
the Management Agreement.
Awards
Under the Plan
Share Options.
The terms of specific options,
including whether options shall constitute incentive stock
options for purposes of Section 422(b) of the
Internal Revenue Code, shall be determined by the committee. The
exercise price of an option shall be determined by the committee
and reflected in the applicable award agreement. The exercise
price with respect to incentive stock options may not be lower
than 100% (110% in the case of an incentive stock option granted
to a 10% stockholder, if permitted under the plan) of the fair
market value of our shares of common stock on the date of grant.
Each option will be exercisable after the period or periods
specified in the award agreement, which will generally not
exceed ten years from the date of grant (or five years in the
case of an incentive stock option granted to a 10% stockholder,
if permitted under the plan). Options will be exercisable at
such times and subject to such terms as determined by the
committee.
Restricted Shares of Common Stock.
A
restricted share award is an award of shares of common stock
that is subject to restrictions on transferability and such
other restrictions, if any, as our board of directors or
committee may impose at the date of grant. Grants of restricted
shares of common stock will be subject to vesting schedules as
determined by the compensation committee. The restrictions may
lapse separately or in combination at such times, under such
circumstances, including, without limitation, a specified period
of employment or the satisfaction of pre-established criteria,
in such installments or otherwise, as the compensation committee
of our board of directors may determine. Except to the extent
restricted under the award agreement relating to the restricted
shares of common stock, a participant granted restricted shares
of common stock has all of the rights of a stockholder,
including, without limitation, the right to vote and the right
to receive dividends on the restricted shares of common stock.
Although dividends may be paid on restricted shares of common
stock, whether or not vested, at the same rate and on the same
date as on our shares of common stock, holders of restricted
shares of common stock are prohibited from selling such shares
until they vest.
Phantom Shares.
Phantom shares, when issued,
will reduce the number of shares available for grant under the
2009 equity incentive plan and will vest as provided in the
applicable award agreement. A phantom share represents a right
to receive the fair market value of a share of common stock, or,
if provided by the committee, the right to receive the fair
market value of a share of common stock in excess of a base
value established by the committee at the time of grant. Phantom
shares may generally be settled in cash or by transfer of shares
of common stock (as may be elected by the participant or the
committee, as may be provided by the committee at grant). The
committee may, in its discretion and under certain
circumstances, permit a participant to receive as settlement of
the phantom shares installments over a period not to exceed ten
years.
LTIP Units.
We may issue LTIP units, which are
a special class of membership interests in our LLC Subsidiary.
Each LTIP unit awarded will be deemed equivalent to an award of
one share of common stock under our 2009 equity incentive plan,
reducing the availability for other equity awards on a
one-for-one basis. The vesting period for LTIP units, if any,
will be determined at the time of issuance.
Dividend Equivalents.
A dividend equivalent is
a right to receive (or have credited) the equivalent value (in
cash or shares of common stock) of dividends paid on shares of
common stock otherwise subject to an award. The committee may
provide that amounts payable with respect to dividend
equivalents shall be converted into cash or additional shares of
common stock. The committee will establish all other limitations
and conditions of awards of dividend equivalents as it deems
appropriate.
Other Share-Based Awards.
The 2009 equity
incentive plan authorizes the granting of other awards based
upon shares of our common stock (including the grant of
securities convertible into shares of common stock and share
appreciation rights), subject to terms and conditions
established at the time of grant.
92
Change
in Control
Upon a change in control (as defined in the 2009 equity
incentive plan), the committee may make such adjustments as it,
in its discretion, determines are necessary or appropriate in
light of the change in control, but only if the committee
determines that the adjustments do not have an adverse economic
impact on the participants (as determined at the time of the
adjustments).
Our board of directors may amend, alter or discontinue the 2009
equity incentive plan but cannot take any action that would
impair the rights of a participant without such
participants consent. To the extent necessary and
desirable, the board of directors must obtain approval of our
stockholders for any amendment that would:
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other than through adjustment as provided in the 2009 equity
incentive plan, increase the total number of shares of common
stock reserved for issuance under the 2009 equity incentive
plan; or
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change the class of officers, directors, employees, consultants
and advisors eligible to participate in the 2009 equity
incentive plan.
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The compensation committee or our board of directors may amend
the terms of any award granted under the 2009 equity incentive
plan, prospectively or retroactively, but, generally may not
impair the rights of any participant without his or her consent.
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, real estate investment trust, 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, 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, real estate investment trust, 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 employee 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 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
93
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 to the corporation or in
respect to any proceeding in which the director or officer was
adjudged to be 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.
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PRINCIPAL
STOCKHOLDERS
Immediately prior to the completion of this offering, there will
be 1,000 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 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, 350 Park Avenue,
21
st
Floor,
New York, New York 10022.
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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(1)
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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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Stewart Zimmerman
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*
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*
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William S. Gorin
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*
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*
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Craig L. Knutson
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*
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*
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Ronald A. Freydberg
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*
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*
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Timothy W. Korth
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*
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*
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Kathleen A. Hanrahan
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*
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*
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Teresa D. Covello
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*
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*
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Sunil Yadav
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*
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*
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Alvin Sarabanchong
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*
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*
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John H. Cassidy
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3,000
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**
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F. Allen Graham
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3,000
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**
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Lawrence S. Wizel
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3,000
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**
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MFA Financial, Inc.(2)
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1,000
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100
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9.8
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%
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All Directors, Director Nominees and Executive Officers as a
Group
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%
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(1)
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Assumes issuance
of shares
offered
hereby,
shares of common stock sold to MFA in the concurrent private
offering
and shares
of restricted common stock to be granted to our executive
officers, our independent directors and personnel of our Manager
pursuant to our 2009 equity incentive plan. Does not
reflect shares
of common stock reserved for issuance upon exercise of the
underwriters overallotment option in full
and shares
of restricted common stock to be granted under our 2009 equity
incentive plan to our executive officers and our Managers
personnel upon exercise of the underwriters overallotment
option in full.
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(2)
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MFA Financial, Inc. owns our Manager. We will repurchase the
1,000 shares currently owned by MFA acquired in connection
with our formation.
Includes shares
of common stock.
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*
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The allocation of
the shares
of restricted common stock to be granted to the indicated
persons is subject to further action by our board of directors.
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95
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Management
Agreement and Shared Facilities and Services Agreement
Prior to the completion of this offering, we will enter into a
management agreement with MFA Spartan Manager, LLC, 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 three-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 MFA. As a result,
the management agreement between us and our Manager was
negotiated between related parties, and the terms, including
fees and other amounts payable, may not be as favorable to us as
if they had been negotiated with an unaffiliated third party.
See Management Conflicts of Interest and
Risk Factors Risks Associated with Our
Management and Relationship with Our Manager There
are conflicts of interest in our relationship with our Manager
and MFA, which could result in decisions that are not in the
best interests of our stockholders.
In addition, our Manager will enter into a shared facilities and
services agreement with certain affiliates of our Manager,
pursuant to which those affiliates will provide our Manager with
access to office space, equipment, personnel, credit analysis
and risk management expertise and processes, information
technology and other resources. See Our Manager and the
Management Agreement Shared Facilities and Services
Agreement.
Our management agreement and the shared facilities and services
agreement are intended to provide us with access to MFAs
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.
Restricted
Common Stock and Other Equity-Based Awards
Our 2009 equity incentive plan provides for grants of restricted
common stock and other equity-based awards up to an aggregate of
8% of the issued and outstanding shares of our common stock (on
a fully diluted basis and including shares to be sold to MFA
concurrently with this offering and shares to be sold pursuant
to the underwriters exercise of their overallotment
option) at the time of the award, subject to a ceiling of
40,000,000 shares available for issuance under the plan.
Each independent director will receive 3,000 shares of our
restricted common stock upon completion of this offering. In
addition, our executive officers and our Managers
personnel will receive shares of our restricted common stock
under our 2009 equity incentive plan in an amount equal
to % of the initial
$ of capital raised by us in
offerings of our securities. See Management
2009 Equity Incentive Plan. Thereafter, during
the term of the management agreement with our Manager, the
management agreement provides that any grants of equity
compensation made by us to our Manager, MFA or their respective
employees shall be made only to our Manager and its designees.
See Our Manager and the Management Agreement. The
shares of restricted common stock to be granted to our executive
officers and our Managers personnel shall vest in equal
installments on the first business day of each fiscal quarter
over a period of five years expected to begin
on ,
2009 and the shares of restricted common stock to be granted to
our independent directors shall fully vest
on ,
2009. We will not make distributions on shares of restricted
common stock to be granted to our independent directors and the
personnel of our Manager upon completion of the offering which
have not vested.
Purchases
of Common Stock by Affiliates
MFA has agreed to purchase in the concurrent private offering a
number of shares of our common stock equal to 9.8% of our
outstanding shares of common stock after giving effect to the
shares sold in this offering, excluding shares sold pursuant to
the underwriters exercise of their overallotment option.
We plan to invest the net proceeds
96
of this offering and the concurrent private offering in
accordance with our investment objectives and the strategies
described in this prospectus.
Indemnification
and Limitation of Directors and Officers
Liability
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (1) actual
receipt of an improper benefit or profit in money, property or
services or (2) active and deliberate dishonesty
established by a final judgment as being material to the cause
of action. Our charter contains such a provision that limits
such liability to the maximum extent permitted by Maryland law.
The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made or threatened to be made a party by reason of their
service in those or other capacities unless it is established
that:
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the act or omission of the director or officer was material to
the matter giving rise to the proceeding and (1) was
committed in bad faith or (2) was the result of active and
deliberate dishonesty;
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the director or officer actually received an improper personal
benefit in money, property or services; or
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in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was
unlawful.
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However, under the MGCL, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of
the corporation in which the director or officer was adjudged
liable to the corporation or in respect to any proceeding in
which the director or officer was adjudged to be liable on the
basis that personal benefit was improperly received. A court may
order indemnification if it determines that the director or
officer is fairly and reasonably entitled to indemnification,
even though the director or officer did not meet the prescribed
standard of conduct or was adjudged liable on the basis that
personal benefit was improperly received. However,
indemnification for an adverse judgment in a suit by us or in
our right, or for a judgment of liability on the basis that
personal benefit was improperly received, is limited to expenses.
In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the
corporations receipt of:
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a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation; and
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a written undertaking by the director or officer or on the
directors or officers behalf to repay the amount
paid or reimbursed by the corporation if it is ultimately
determined that the director or officer did not meet the
standard of conduct.
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Our charter authorizes us to obligate ourselves and our bylaws
obligate us, to the maximum extent permitted by Maryland law in
effect from time to time, to indemnify and, without requiring a
preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to:
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any present or former director or officer of our company who is
made or threatened to be made a party to the proceeding by
reason of his or her service in that capacity; or
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any individual who, while a director or officer of our company
and at our request, serves or has served another corporation,
REIT, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or
trustee of such corporation, REIT, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made
or threatened to be made a party to the proceeding by reason of
his or her service in that capacity.
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97
Our charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of ours in any
of the capacities described above and to any employee or agent
of our company or a predecessor of our company.
We expect to enter into indemnification agreements with each of
our directors and executive officers that provide for
indemnification to the maximum extent permitted by Maryland law.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability
arising under the Securities Act, we have been informed that, in
the opinion of the SEC, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Registration
Rights
Pursuant to the registration rights agreement between us and
MFA, subject to certain conditions, we must prepare a
registration statement to be filed with the SEC to register the
resale by MFA of the shares of our common stock purchased by MFA
in the concurrent private placement. The registration statement
must be filed no later than 37 months following the date of
this prospectus (which is 30 days following the expiration
of the
lock-up
agreement to which MFA is a party) and during a period of time
that we are eligible to use a registration statement on
Form S-3.
We must use our commercially reasonable efforts to have the
registration statement declared effective as soon thereafter as
is practicable. Generally, we will not become eligible to use
Form S-3
for the resale of our securities until (1) we have been
subject to the periodic reporting requirements of
Section 13 of the Exchange Act for a period of 12
consecutive months and have timely filed all required reports
with the SEC during the period and (2) our securities are
listed and registered on a national securities exchange or
quoted on the automated quotation system of a national
securities association. Pursuant to the registration rights
agreement, we will agree to use all reasonable efforts to keep
any shelf registration statement effective until the second
anniversary of the date on which the registration statement
becomes effective. We will have the right to delay the filing or
amendment of the registration statement prior to its
effectiveness or, if effective, to suspend its effectiveness for
a reasonable length of time and from time to time,
provided
that we may exercise such delay or suspension right only if
we plan to engage in a public offering within a
90-day
period, or if a majority of the independent directors has
reasonably and in good faith determined that a registration or
continued effectiveness would materially interfere with any of
our material transactions. We may exercise such delay or
suspension right up to four times during the effectiveness of
the registration statement. We will bear all expenses incurred
in connection with any registration statement filed pursuant to
the registration rights agreement, except for out-of-pocket
expenses of MFA, transfer taxes and underwriting or brokerage
discounts and commissions, which will be borne by MFA.
98
DESCRIPTION
OF CAPITAL STOCK
The following summary description of our capital stock does
not purport to be complete and is subject to and qualified in
its entirety by reference to the MGCL and our charter and our
bylaws, copies of which will be available before the closing of
this offering from us upon request. See Where You Can Find
More Information.
General
Our charter provides that we may issue up to
450,000,000 shares of common stock, $0.01 par value
per share, and 50,000,000 shares of preferred stock,
$0.01 par value per share. Our charter authorizes our board
of directors to amend our charter to increase or decrease the
aggregate number of authorized shares of stock or the number of
shares of stock of any class or series without stockholder
approval. After giving effect to this offering and the other
transactions described in this
prospectus, shares of common stock
will be issued and outstanding on a fully diluted basis
( if the underwriters
overallotment option is exercised in full), and no preferred
shares will be issued and outstanding. Under Maryland law,
stockholders are not generally liable for our debts or
obligations.
Shares of
Common Stock
All shares of common stock offered by this prospectus will be
duly authorized, validly issued, fully paid and nonassessable.
Subject to the preferential rights of any other class or series
of shares of stock and to the provisions of our charter
regarding the restrictions on transfer of shares of stock,
holders of shares of common stock are entitled to receive
dividends on such shares of common stock out of assets legally
available therefore if, as and when authorized by our board of
directors and declared by us, and the holders of our shares of
common stock are entitled to share ratably in our assets legally
available for distribution to our stockholders in the event of
our liquidation, dissolution or winding up after payment of or
adequate provision for all our known debts and liabilities.
The shares of common stock that we are offering will be issued
by us and do not represent any interest in or obligation of MFA
or any of its affiliates. Further, the shares are not a deposit
or other obligation of any bank, are not an insurance policy of
any insurance company and are not insured or guaranteed by the
Federal Deposit Insurance Company, any other governmental agency
or any insurance company. The shares of common stock will not
benefit from any insurance guaranty association coverage or any
similar protection.
Subject to the provisions of our charter regarding the
restrictions on transfer of shares of stock and except as may
otherwise be specified in the terms of any class or series of
shares of common stock, each outstanding share of common stock
entitles the holder to one vote on all matters submitted to a
vote of stockholders, including the election of directors, and,
except as provided with respect to any other class or series of
shares of stock, the holders of such shares of common stock will
possess the exclusive voting power. There is no cumulative
voting in the election of our board of directors, which means
that the holders of a majority of the outstanding shares of
common stock can elect all of the directors then standing for
election, and the holders of the remaining shares will not be
able to elect any directors.
Holders of shares of common stock have no preference,
conversion, exchange, sinking fund, redemption or appraisal
rights and have no preemptive rights to subscribe for any
securities of our company. Subject to the provisions of our
charter regarding the restrictions on transfer of shares of
stock, shares of common stock will have equal dividend,
liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot
dissolve, amend its charter, merge with another entity or engage
in similar transactions outside the ordinary course of business
unless approved by the affirmative vote of stockholders holding
at least two-thirds of the votes entitled to be cast on the
matter unless a lesser percentage (but not less than a majority
of all of the votes entitled to be cast on the matter) is set
forth in the corporations charter. Our charter provides
that these matters (other than certain amendments to the
provisions of our charter related to the removal of directors
and the restrictions on ownership and transfer of our shares of
stock) may be approved by a majority of all of the votes
entitled to be cast on the matter. Our charter also provides
that we may sell or transfer all or substantially all of our
assets if approved by our board of directors and by the
affirmative vote of not less than a majority of all the votes
entitled to be cast on the matter.
99
Power to
Reclassify Our Unissued Shares of Stock
Our charter authorizes our board of directors to classify and
reclassify any unissued shares of common or preferred stock into
other classes or series of shares of stock. Prior to issuance of
shares of each class or series, our board of directors is
required by Maryland law and by our charter to set, subject to
our charter restrictions on transfer of shares of stock, the
terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption for each class or series. Therefore, our board could
authorize the issuance of shares of common or preferred stock
with terms and conditions that could have the effect of
delaying, deferring or preventing a change in control or other
transaction that might involve a premium price for our shares of
common stock or otherwise be in the best interest of our
stockholders. No shares of preferred stock are presently
outstanding, and we have no present plans to issue any shares of
preferred stock.
Power to
Increase or Decrease Authorized Shares of Common Stock and Issue
Additional Shares of Common and Preferred Stock
We believe that the power of our board of directors to amend our
charter to increase or decrease the number of authorized shares
of stock, to issue additional authorized but unissued shares of
common or preferred stock and to classify or reclassify unissued
shares of common or preferred stock and thereafter to issue such
classified or reclassified shares of stock will provide us with
increased flexibility in structuring possible future financings
and acquisitions and in meeting other needs that might arise.
The additional classes or series, as well as the shares of
common stock, will be available for issuance without further
action by our stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or
traded. Although our board of directors does not intend to do
so, it could authorize us to issue a class or series that could,
depending upon the terms of the particular class or series,
delay, defer or prevent a change in control or other transaction
that might involve a premium price for our shares of common
stock or otherwise be in the best interest of our stockholders.
Restrictions
on Ownership and Transfer
In order for us to qualify as a REIT under the Internal Revenue
Code, our shares of stock must be owned by 100 or more persons
during at least 335 days of a taxable year of
12 months (other than the first year for which an election
to be a REIT has been made) or during a proportionate part of a
shorter taxable year. Also, not more than 50% of the value of
the outstanding shares of stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities) during the
last half of a taxable year (other than the first year for which
an election to be a REIT has been made).
Our charter contains restrictions on the ownership and transfer
of our shares of common stock and other outstanding shares of
stock. The relevant sections of our charter provide that,
subject to the exceptions described below, no person or entity
may own, or be deemed to own, by virtue of the applicable
constructive ownership provisions of the Internal Revenue Code,
more than 9.8% by value or number of shares, whichever is more
restrictive, of our outstanding shares of common stock (the
common share ownership limit), or 9.8% by value or number of
shares, whichever is more restrictive, of our outstanding
capital stock (the aggregate share ownership limit). We refer to
the common share ownership limit and the aggregate share
ownership limit collectively as the ownership
limits. A person or entity that becomes subject to the
ownership limit by virtue of a violative transfer that results
in a transfer to a trust, as set forth below, is referred to as
a purported beneficial transferee if, had the
violative transfer been effective, the person or entity would
have been a record owner and beneficial owner or solely a
beneficial owner of our shares of stock, or is referred to as a
purported record transferee if, had the violative
transfer been effective, the person or entity would have been
solely a record owner of our shares of stock.
The constructive ownership rules under the Internal Revenue Code
are complex and may cause shares of stock owned actually or
constructively by a group of related individuals
and/or
entities to be owned constructively by one individual or entity.
As a result, the acquisition of less than 9.8% by value or
number of shares, whichever is more restrictive, of our
outstanding shares of common stock, or 9.8% by value or number
of shares, whichever is more restrictive, of our outstanding
capital stock (or the acquisition of an interest in an entity
that owns, actually or
100
constructively, our shares of stock by an individual or entity),
could, nevertheless, cause that individual or entity, or another
individual or entity, to own constructively in excess of 9.8% by
value or number of shares, whichever is more restrictive, of our
outstanding shares of common stock, or 9.8% by value or number
of shares, whichever is more restrictive, of our outstanding
capital stock and thereby subject the shares of common stock or
total shares of stock to the applicable ownership limit.
Our board of directors may, in its sole discretion, exempt a
person from the above-referenced ownership limits. However, the
board of directors may not exempt any person whose ownership of
our outstanding stock would result in our being closely
held within the meaning of Section 856(h) of the Code
or otherwise would result in our failing to qualify as a REIT.
In order to be considered by the board of directors for
exemption, a person also must not own, directly or indirectly,
an interest in our tenant (or a tenant of any entity which we
own or control) that would cause us to own, directly or
indirectly, more than a 9.9% interest in the tenant. The person
seeking an exemption must represent to the satisfaction of our
board of directors that it will not violate these two
restrictions. The person also must agree that any violation or
attempted violation of these restrictions will result in the
automatic transfer of the shares of stock causing the violation
to a trust for a charitable beneficiary. As a condition of its
waiver, our board of directors may require an opinion of counsel
or IRS ruling satisfactory to our board of directors with
respect to our qualification as a REIT. Our board of directors
has exempted MFA from the ownership limit. The ownership limit
for MFA, which our board of directors has approved, will allow
MFA and certain of its affiliates, as an excepted holder, to
hold up to 12.0% by value or number of shares, whichever is more
restrictive, of our outstanding shares of common stock, or 12.0%
by value or number of shares, whichever is more restrictive, of
our outstanding capital stock.
In connection with the waiver of the ownership limit or at any
other time, our board of directors may from time to time
increase or decrease the ownership limit for all other persons
and entities;
provided
,
however
, that any decrease
may be made only prospectively as to existing holders (other
than a decrease as a result of a retroactive change in existing
law, in which case the decrease will be effective immediately);
and
provided further
that the ownership limit may not be
increased if, after giving effect to such increase, five or
fewer individuals could own or constructively own in the
aggregate, more than 49.9% in value of the shares then
outstanding. Prior to the modification of the ownership limit,
our board of directors may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary
or advisable in order to determine or ensure our qualification
as a REIT. A reduced ownership limit will not apply to any
person or entity whose percentage ownership in our shares of
common stock or total shares of stock, as applicable, is in
excess of such decreased ownership limit until such time as such
persons or entitys percentage of our shares of
common stock or total shares of stock, as applicable, equals or
falls below the decreased ownership limit, but any further
acquisition of our shares of common stock or total shares of
stock, as applicable, in excess of such percentage ownership of
our shares of common stock or total shares of stock will be in
violation of the ownership limit.
Our charter provisions further prohibit:
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any person from beneficially or constructively owning, applying
certain attribution rules of the Internal Revenue Code, our
shares of stock that would result in our being closely
held under Section 856(h) of the Internal Revenue
Code or otherwise cause us to fail to qualify as a REIT; and
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any person from transferring our shares of stock if such
transfer would result in our shares of stock being owned by
fewer than 100 persons (determined without reference to any
rules of attribution).
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Any person who acquires or attempts or intends to acquire
beneficial or constructive ownership of our shares of stock that
will or may violate any of the foregoing restrictions on
transferability and ownership will be required to give at least
15 days prior written notice to us and provide us with such
other information as we may request in order to determine the
effect of such transfer on our qualification as a REIT. The
foregoing provisions on transferability and ownership will not
apply if our board of directors determines that it is no longer
in our best interests to attempt to qualify, or to continue to
qualify, as a REIT.
Pursuant to our charter, if any transfer of our shares of stock
would result in our shares of stock being owned by fewer than
100 persons, such transfer will be null and void and the
intended transferee will acquire no rights in such shares. In
addition, if any purported transfer of our shares of stock or
any other event would otherwise result in any
101
person violating the ownership limits or such other limit
established by our board of directors or in our being
closely held under Section 856(h) of the
Internal Revenue Code or otherwise failing to qualify as a REIT,
then that number of shares (rounded up to the nearest whole
share) that would cause us to violate such restrictions will be
automatically transferred to, and held by, a trust for the
exclusive benefit of one or more charitable organizations
selected by us and the intended transferee will acquire no
rights in such shares. The automatic transfer will be effective
as of the close of business on the business day prior to the
date of the violative transfer or other event that results in a
transfer to the trust. Any dividend or other distribution paid
to the purported record transferee, prior to our discovery that
the shares had been automatically transferred to a trust as
described above, must be repaid to the trustee upon demand for
distribution to the beneficiary by the trust. If the transfer to
the trust as described above is not automatically effective, for
any reason, to prevent violation of the applicable ownership
limit or our being closely held under
Section 856(h) of the Internal Revenue Code or otherwise
failing to qualify as a REIT, then our charter provides that the
transfer of the shares will be void.
Shares of stock transferred to the trustee are deemed offered
for sale to us, or our designee, at a price per share equal to
the lesser of (1) the price paid by the purported record
transferee for the shares (or, if the event that resulted in the
transfer to the trust did not involve a purchase of such shares
of stock at market price, the last reported sales price reported
on the NYSE (or other applicable exchange) on the day of the
event which resulted in the transfer of such shares of stock to
the trust) and (2) the market price on the date we, or our
designee, accepts such offer. We have the right to accept such
offer until the trustee has sold the shares of stock held in the
trust pursuant to the clauses discussed below. Upon a sale to
us, the interest of the charitable beneficiary in the shares
sold terminates, the trustee must distribute the net proceeds of
the sale to the purported record transferee and any dividends or
other distributions held by the trustee with respect to such
shares of stock will be paid to the charitable beneficiary.
If we do not buy the shares, the trustee must, within
20 days of receiving notice from us of the transfer of
shares to the trust, sell the shares to a person or entity
designated by the trustee who could own the shares without
violating the ownership limit or such other limit as established
by our board of directors. After that, the trustee must
distribute to the purported record transferee an amount equal to
the lesser of (1) the price paid by the purported record
transferee for the shares (or, if the event which resulted in
the transfer to the trust did not involve a purchase of such
shares at market price, the last reported sales price reported
on the NYSE (or other applicable exchange) on the day of the
event which resulted in the transfer of such shares of stock to
the trust) and (2) the sales proceeds (net of commissions
and other expenses of sale) received by the trust for the
shares. Any net sales proceeds in excess of the amount payable
to the purported record transferee will be immediately paid to
the beneficiary, together with any dividends or other
distributions thereon. In addition, if prior to discovery by us
that shares of stock have been transferred to a trust, such
shares of stock are sold by a purported record transferee, then
such shares will be deemed to have been sold on behalf of the
trust and to the extent that the purported record transferee
received an amount for or in respect of such shares that exceeds
the amount that such purported record transferee was entitled to
receive, such excess amount will be paid to the trustee upon
demand. The purported beneficial transferee or purported record
transferee has no rights in the shares held by the trustee.
The trustee will be designated by us and will be unaffiliated
with us and with any purported record transferee or purported
beneficial transferee. Prior to the sale of any shares by the
trust, the trustee will receive, in trust for the beneficiary,
all dividends and other distributions paid by us with respect to
the shares held in trust and may also exercise all voting rights
with respect to the shares held in trust. These rights will be
exercised for the exclusive benefit of the charitable
beneficiary. Any dividend or other distribution paid prior to
our discovery that shares of stock have been transferred to the
trust will be paid by the recipient to the trustee upon demand.
Any dividend or other distribution authorized but unpaid will be
paid when due to the trustee.
Subject to Maryland law, effective as of the date that the
shares have been transferred to the trust, the trustee will have
the authority, at the trustees sole discretion:
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to rescind as void any vote cast by a purported record
transferee prior to our discovery that the shares have been
transferred to the trust; and
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to recast the vote in accordance with the desires of the trustee
acting for the benefit of the beneficiary of the trust.
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However, if we have already taken irreversible action, then the
trustee may not rescind and recast the vote.
In addition, if our board of directors or other permitted
designees determine in good faith that a proposed transfer would
violate the restrictions on ownership and transfer of our shares
of stock set forth in our charter, our board of directors or
other permitted designees will take such action as it deems or
they deem advisable to refuse to give effect to or to prevent
such transfer, including, but not limited to, causing us to
redeem the shares of stock, refusing to give effect to the
transfer on our books or instituting proceedings to enjoin the
transfer.
Every owner of more than 5% (or such lower percentage as
required by the Code or the regulations promulgated thereunder)
of our stock, within 30 days after the end of each taxable
year, is required to give us written notice, stating his name
and address, the number of shares of each class and series of
our stock which he beneficially owns and a description of the
manner in which the shares are held. Each such owner shall
provide us with such additional information as we may request in
order to determine the effect, if any, of his beneficial
ownership on our status as a REIT and to ensure compliance with
the ownership limits. In addition, each stockholder shall upon
demand be required to provide us with such information as we may
request in good faith in order to determine our status as a REIT
and to comply with the requirements of any taxing authority or
governmental authority or to determine such compliance.
These ownership limits could delay, defer or prevent a
transaction or a change in control that might involve a premium
price for the common stock or otherwise be in the best interest
of the stockholders.
Transfer
Agent and Registrar
We expect the transfer agent and registrar for our shares of
common stock to be BNY Mellon Shareowner Services.
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SHARES
ELIGIBLE FOR FUTURE SALE
After giving effect to this offering and the other transactions
described in this prospectus, we will
have shares
of common stock outstanding on a fully diluted basis. Our shares
of common stock are newly issued securities for which there is
no established trading market. No assurance can be given as to
(1) the likelihood that an active market for our shares of
common stock will develop, (2) the liquidity of any such
market, (3) the ability of the stockholders to sell the
shares or (4) the prices that stockholders may obtain for
any of the shares. No prediction can be made as to the effect,
if any, that future sales of shares or the availability of
shares for future sale will have on the market price prevailing
from time to time. Sales of substantial amounts of shares of
common stock, or the perception that such sales could occur, may
affect adversely prevailing market prices of the shares of
common stock. See Risk Factors Risks Related
to Our Common Stock.
For a description of certain restrictions on transfers of our
shares of common stock held by certain of our stockholders, see
Description of Capital Stock Restrictions on
Ownership and Transfer.
Securities
Convertible into Shares of Common Stock
Upon completion of this offering, we will have reserved for
issuance up to an aggregate of 8% of the issued and outstanding
shares of our common stock (on a fully diluted basis and
including shares to be sold to MFA concurrently with this
offering and shares to be sold pursuant to the
underwriters exercise of their overallotment option) at
the time of award, subject to a ceiling of
40,000,000 shares, for future awards under our 2009 equity
incentive plan. In connection with this offering, our board of
directors has approved an aggregate
of shares
of our restricted common stock
(or shares
if the underwriters exercise their overallotment option in full)
to be granted to our executive officers, our independent
director nominees and personnel of our Manager under our 2009
equity incentive plan.
Rule 144
of
our shares of common stock that will be outstanding after giving
effect to this offering and the transactions described in this
prospectus on a fully-diluted basis will be
restricted securities under the meaning of
Rule 144 under the Securities Act, and may not be sold in
the absence of registration under the Securities Act unless an
exemption from registration is available, including the
exemption provided by Rule 144.
In general, under Rule 144 under the Securities Act, a
person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the
three months preceding a sale, and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months (including any period of consecutive ownership
of preceding non-affiliated holders) would be entitled to sell
those shares, subject only to the availability of current public
information about us. A non-affiliated person who has
beneficially owned restricted securities within the meaning of
Rule 144 for at least one year would be entitled to sell
those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed
to be an affiliate of ours and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our
common stock or the average weekly trading volume of our common
stock during the four calendar weeks preceding such sale. Such
sales are also subject to certain manner of sale provisions,
notice requirements and the availability of current public
information about us (which requires that we are current in our
periodic reports under the Exchange Act).
Lock-Up
Agreements
Each of our executive officers, directors, Manager and MFA has
agreed, subject to specified exceptions, not to, directly or
indirectly,
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offer, pledge, sell or contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, lend or
otherwise dispose of or transfer or request or demand that we
file a registration statement related to our common stock or any
securities convertible or
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exercisable, redeemable or exchangeable for shares of our common
stock; or sell, agree to offer or sell, solicit offers to
purchase, grant any call option or purchase any put option with
respect to, pledge, borrow or otherwise dispose of any shares of
common stock, any of our or our subsidiaries other equity
securities or any securities convertible into or exercisable or
exchangeable for shares of common stock or any such equity
securities; or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or
otherwise for a period of 180 days after the date of this
prospectus without the prior written consent of the
representatives of the underwriters.
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This restriction terminates after the close of trading of the
shares of common stock on and including the 180th day after
the date of this prospectus. However, if (1) during the
last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs, or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions imposed by this agreement shall
continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event. However, the
representatives of the underwriters may, in their sole
discretion and at any time or from time to time before the
termination of the
180-day
period, without notice, release all or any portion of the
securities subject to
lock-up
agreements. There are no other existing agreements between the
underwriters and any officer or director who has executed a
lock-up
agreement providing consent to the sale of shares prior to the
expiration of the
lock-up
period.
In addition, we have agreed that, for 180 days after the
date of this prospectus, we will not, without the prior written
consent of the representatives of the underwriters, issue, sell,
contract to sell, or otherwise dispose of, any shares of common
stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than our sale of
shares in this offering and the concurrent private offering or
the issuance of options or shares of common stock under existing
stock option and incentive plans for our executive officers and
directors. We also have agreed that we will not consent to the
disposition of any shares held by officers, directors, our
Manager or MFA subject to
lock-up
agreements prior to the expiration of their respective
lock-up
periods unless pursuant to an exception to those agreements or
with the consent of the representatives of the underwriters.
MFA has agreed to extend its restricted
lock-up
period as set forth above to the earlier of:
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the date which is three years following the date of this
prospectus; or
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the termination date of the management agreement.
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CERTAIN
PROVISIONS OF THE MARYLAND GENERAL
CORPORATION LAW AND OUR CHARTER AND BYLAWS
The following description of the terms of our stock and of
certain provisions of Maryland law is only a summary. For a
complete description, we refer you to the MGCL, our charter and
our bylaws, copies of which will be available before the closing
of this offering from us upon request.
Our Board
of Directors
Our bylaws and charter provide that the number of directors we
have may be established by our board of directors but may not be
more than 15. Our bylaws currently provide that any vacancy may
be filled by a majority of the remaining directors. Any
individual elected to fill such vacancy will serve until the
next annual meeting of stockholders and until a successor is
duly elected and qualifies.
Pursuant to our bylaws and the MGCL, each of our directors is
elected by our common stockholders entitled to vote to serve
until the next annual meeting and until his or her successor is
duly elected and qualifies. Holders of shares of common stock
will have no right to cumulative voting in the election of
directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the shares of common stock entitled
to vote will be able to elect all of our directors.
Removal
of Directors
Our charter provides that a director may be removed with or
without cause and only by the affirmative vote of at least
two-thirds of the votes of common stockholders entitled to be
cast generally in the election of directors. This provision,
when coupled with the power of our board of directors to fill
vacancies on our board of directors, precludes stockholders from
(1) removing incumbent directors except upon a substantial
affirmative vote and (2) filling the vacancies created by
such removal with their own nominees.
Business
Combinations
Under the MGCL, certain business combinations
(including a merger, consolidation, share exchange or, in
certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland
corporation and an interested stockholder (defined generally as
any person who beneficially owns, directly or indirectly, 10% or
more of the voting power of the corporations shares or an
affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the
then outstanding voting shares of stock of the corporation) or
an affiliate of such an interested stockholder are prohibited
for five years after the most recent date on which the
interested stockholder becomes an interested stockholder.
Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled
to be cast by holders of outstanding voting shares of stock of
the corporation and (b) two-thirds of the votes entitled to
be cast by holders of voting shares of common stock of the
corporation other than shares held by the interested stockholder
with whom (or with whose affiliate) the business combination is
to be effected or held by an affiliate or associate of the
interested stockholder, unless, among other conditions, the
corporations common stockholders receive a minimum price
(as defined in the MGCL) for their shares and the consideration
is received in cash or in the same form as previously paid by
the interested stockholder for its shares. A person is not an
interested stockholder under the statute if the board of
directors approved in advance the transaction by which the
person otherwise would have become an interested stockholder.
Our board of directors may provide that its approval is subject
to compliance with any terms and conditions determined
by it.
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 (1) between us and MFA or its affiliates and
(2) between us and any person,
provided
that such
business combination is first approved by our board of directors
(including a majority of our directors who are not affiliates or
associates of such person). Consequently, the five-year
prohibition and the supermajority vote requirements will not
apply to business combinations between us and any person
described above. As a result, any person described above may be
able
106
to enter into business combinations with us that may not be in
the best interest of our stockholders without compliance by our
company with the supermajority vote requirements and other
provisions of the statute.
The business combination statute may discourage others from
trying to acquire control of us and increase the difficulty of
consummating any offer.
Control
Share Acquisitions
The MGCL provides that control shares of a Maryland
corporation acquired in a control share acquisition
have no voting rights except to the extent approved at a special
meeting of stockholders by the affirmative vote of two-thirds of
the votes entitled to be cast on the matter, excluding shares of
stock in a corporation in respect of which any of the following
persons is entitled to exercise or direct the exercise of the
voting power of such shares in the election of directors:
(1) a person who makes or proposes to make a control share
acquisition, (2) an officer of the corporation or
(3) an employee of the corporation who is also a director
of the corporation. Control shares are voting shares
of stock which, if aggregated with all other such shares of
stock previously acquired by the acquirer, or in respect of
which the acquirer is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy),
would entitle the acquirer to exercise voting power in electing
directors within one of the following ranges of voting power:
(A) one-tenth or more but less than one-third;
(B) one-third or more but less than a majority; or
(C) a majority or more of all voting power. Control shares
do not include shares that the acquiring person is then entitled
to vote as a result of having previously obtained stockholder
approval. A control share acquisition means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses and making an acquiring
person statement as described in the MGCL), may compel our
board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders
meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person
statement as required by the statute, then, subject to
certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined,
without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by
the acquirer or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders
meeting and the acquirer becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for
purposes of such appraisal rights may not be less than the
highest price per share paid by the acquirer in the control
share acquisition.
The control share acquisition statute does not apply to
(a) shares acquired in a merger, consolidation or share
exchange if the corporation is a party to the transaction or
(b) acquisitions approved or exempted by the charter or
bylaws of the corporation.
Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of
our shares of stock. There is no assurance that such provision
will not be amended or eliminated at any time in the future.
Subtitle
8
Subtitle 8 of Title 3 of the MGCL permits a Maryland
corporation with a class of equity securities registered under
the Exchange Act and at least three independent directors to
elect to be subject, by provision in its charter or bylaws or a
resolution of its board of directors and notwithstanding any
contrary provision in the charter or bylaws, to any or all of
five provisions:
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a classified board;
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a two-thirds vote requirement for removing a director;
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a requirement that the number of directors be fixed only by vote
of the directors;
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a requirement that a vacancy on the board be filled only by the
remaining directors in office and for the remainder of the full
term of the class of directors in which the vacancy
occurred; and
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a majority requirement for the calling of a special meeting of
stockholders.
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Our charter provides that, at such time as we are able to make a
Subtitle 8 election, vacancies on our board may be filled only
by the remaining directors and for the remainder of the full
term of the directorship in which the vacancy occurred. Through
provisions in our charter and bylaws unrelated to Subtitle 8, we
already (1) require the affirmative vote of the holders of
not less than two-thirds of all of the votes entitled to be cast
on the matter for the removal of any director from the board,
which removal will be allowed with or without cause,
(2) vest in the board the exclusive power to fix the number
of directorships and (3) require, unless called by our
chairman of the board, chief executive officer, president or the
board of directors, the written request of stockholders of not
less than a majority of all votes entitled to be cast at such a
meeting to call a special meeting.
Meetings
of Stockholders
Pursuant to our bylaws, a meeting of our stockholders for the
election of directors and the transaction of any business will
be held annually on a date and at the time set by our board of
directors during May of each year beginning with 2010. In
addition, the chairman of our board of directors, chief
executive officer, president or board of directors may call a
special meeting of our stockholders. Subject to the provisions
of our bylaws, a special meeting of our stockholders will also
be called by our secretary upon the written request of the
stockholders entitled to cast not less than a majority of all
the votes entitled to be cast at the meeting.
Amendment
to Our Charter and Bylaws
Except for amendments related to removal of directors and the
restrictions on ownership and transfer of our shares of stock
(each of which require the affirmative vote of the holders of
not less than two-thirds of all the votes entitled to be cast on
the matter and the approval of our board of directors), our
charter may be amended only with the approval of our board of
directors and the affirmative vote of the holders of not less
than a majority of all of the votes entitled to be cast on the
matter.
Our board of directors has the exclusive power to adopt, alter
or repeal any provision of our bylaws and to make new bylaws.
Dissolution
of Our Company
The dissolution of our company must be approved by a majority of
our entire board of directors and the affirmative vote of the
holders of not less than a majority of all of the votes entitled
to be cast on the matter.
Advance
Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of
stockholders, nominations of individuals for election to our
board of directors and the proposal of business to be considered
by stockholders may be made only (1) pursuant to our notice
of the meeting, (2) by or at the direction of our board of
directors or (3) by a stockholder who is entitled to vote
at the meeting and has complied with the advance notice
provisions set forth in our bylaws.
With respect to special meetings of stockholders, only the
business specified in our notice of meeting may be brought
before the meeting. Nominations of individuals for election to
our board of directors may be made only (1) pursuant to our
notice of the meeting, (2) by or at the direction of our
board of directors or (3)
provided
that our board of
directors has determined that directors will be elected at such
meeting, by a stockholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in
our bylaws.
Anti-takeover
Effect of Certain Provisions of Maryland Law and of Our Charter
and Bylaws
Our charter and bylaws and Maryland law contain provisions that
may delay, defer or prevent a change in control or other
transaction that might involve a premium price for our shares of
common stock or otherwise be in the best interests of our
stockholders, including business combination provisions,
supermajority vote requirements
108
and advance notice requirements for director nominations and
stockholder proposals. Likewise, if the provision in the bylaws
opting out of the control share acquisition provisions of the
MGCL were rescinded or if we were to opt in to the classified
board or other provisions of Subtitle 8, these provisions of the
MGCL could have similar anti-takeover effects.
Indemnification
and Limitation of Directors and Officers
Liability
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from actual receipt of an
improper benefit or profit in money, property or services or
active and deliberate dishonesty established by a final judgment
as being material to the cause of action. Our charter contains
such a provision that eliminates such liability to the maximum
extent permitted by Maryland law.
The MGCL requires us (unless our charter provides otherwise,
which our charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason
of his service in that capacity. The MGCL permits a corporation
to indemnify its present and former directors and officers,
among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made or threatened to
be made a party by reason of their service in those or other
capacities unless it is established that:
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the act or omission of the director or officer was material to
the matter giving rise to the proceeding and (1) was
committed in bad faith or (2) was the result of active and
deliberate dishonesty;
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the director or officer actually received an improper personal
benefit in money, property or services; or
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in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was
unlawful.
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However, under the MGCL, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of
the corporation in which the director or officer was adjudged
liable to the corporation or in respect to any proceeding in
which the director or officer was adjudged to be liable on the
basis that personal benefit was improperly received. A court may
order indemnification if it determines that the director or
officer is fairly and reasonably entitled to indemnification,
even though the director or officer did not meet the prescribed
standard of conduct or was adjudged liable on the basis that
personal benefit was improperly received. However,
indemnification for an adverse judgment in a suit by us or in
our right, or for a judgment of liability on the basis that
personal benefit was improperly received, is limited to expenses.
In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the
corporations receipt of:
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a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation; and
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a written undertaking by the director or officer or on the
directors or officers behalf to repay the amount
paid or reimbursed by the corporation if it is ultimately
determined that the director or officer did not meet the
standard of conduct.
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Our charter authorizes us to obligate ourselves and our bylaws
obligate us, to the fullest extent permitted by Maryland law in
effect from time to time, to indemnify and, without requiring a
preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to:
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any present or former director or officer who is made or
threatened to be made a party to the proceeding by reason of his
or her service in that capacity; or
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any individual who, while a director or officer of our company
and at our request, serves or has served another corporation,
REIT, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or
trustee of such corporation, REIT, partnership, joint venture,
trust, employee
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benefit plan or other enterprise and who is made or threatened
to be made a party to the proceeding by reason of his or her
service in that capacity.
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Our charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of ours in any
of the capacities described above and to any employee or agent
of our company or a predecessor of our company.
We expect to enter into indemnification agreements with each of
our directors and executive officers that provide for
indemnification to the maximum extent permitted by Maryland law.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability
arising under the Securities Act, we have been informed that, in
the opinion of the SEC, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
REIT
Qualification
Our charter provides that our board of directors may revoke or
otherwise terminate our REIT election, without approval of our
stockholders, if it determines that it is no longer in our best
interests to continue to qualify as a REIT.
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U.S.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal
income tax considerations relating to our qualification and
taxation as a REIT and the acquisition, holding, and disposition
of our common stock. For purposes of this section, references to
we, our, us or our
company mean only MFResidential Investments, Inc. and not
our subsidiaries or other lower-tier entities, except as
otherwise indicated. This summary is based upon the Internal
Revenue Code, the regulations promulgated by the
U.S. Treasury Department (or the Treasury regulations),
current administrative interpretations and practices of the IRS
(including administrative interpretations and practices
expressed in private letter rulings which are binding on the IRS
only with respect to the particular taxpayers who requested and
received those rulings) and judicial decisions, all as currently
in effect and all of which are subject to differing
interpretations or to change, possibly with retroactive effect.
No assurance can be given that the IRS would not assert, or that
a court would not sustain, a position contrary to any of the tax
consequences described below. No advance ruling has been or will
be sought from the IRS regarding any matter discussed in this
summary. The summary is also based upon the assumption that the
operation of our company, and of its subsidiaries and other
lower-tier and affiliated entities will, in each case, be in
accordance with its applicable organizational documents. This
summary is for general information only, and does not purport to
discuss all aspects of U.S. federal income taxation that
may be important to a particular stockholder in light of its
investment or tax circumstances or to stockholders subject to
special tax rules, such as:
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U.S. expatriates;
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persons who mark-to-market our common stock;
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subchapter S corporations;
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U.S. stockholders (as defined below) whose functional
currency is not the U.S. dollar;
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financial institutions;
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insurance companies;
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broker-dealers;
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regulated investment companies (or RICs);
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trusts and estates;
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holders who receive our common stock through the exercise of
employee stock options or otherwise as compensation;
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persons holding our common stock as part of a
straddle, hedge, conversion
transaction, synthetic security or other
integrated investment;
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persons subject to the alternative minimum tax provisions of the
Internal Revenue Code;
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persons holding their interest through a partnership or similar
pass-through entity;
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persons holding a 10% or more (by vote or value) beneficial
interest in us;
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tax-exempt organizations; and
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non-U.S. stockholders
(as defined below).
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This summary assumes that stockholders will hold our common
stock as capital assets, which generally means as property held
for investment.
THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR
COMMON STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT
AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL
INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE
AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING OUR
COMMON STOCK TO ANY PARTICULAR STOCKHOLDER WILL DEPEND ON THE
STOCKHOLDERS PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED
TO CONSULT YOUR TAX ADVISOR
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REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN
INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR
PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING,
HOLDING, AND DISPOSING OF OUR COMMON STOCK.
Taxation
of Our Company General
We intend to elect to be taxed as a REIT under Sections 856
through 859 of the Internal Revenue Code, commencing with our
taxable year ending December 31, 2009. We believe that we
have been organized and we intend to operate in a manner that
allows us to qualify for taxation as a REIT under the Internal
Revenue Code.
The law firm of Clifford Chance US LLP has acted as our counsel
in connection with this offering. We have received an opinion of
Clifford Chance US LLP to the effect that, commencing with our
taxable year ending December 31, 2009, we have been
organized in conformity with the requirements for qualification
and taxation as a REIT under the Internal Revenue Code, and our
proposed method of operation will enable us to meet the
requirements for qualification and taxation as a REIT under the
Internal Revenue Code. It must be emphasized that the opinion of
Clifford Chance US LLP is based on various assumptions relating
to our organization and operation, including that all factual
representations and statements set forth in all relevant
documents, records and instruments are true and correct, all
actions described in this prospectus are completed in a timely
fashion and that we will at all times operate in accordance with
the method of operation described in our organizational
documents and this prospectus. Additionally, the opinion of
Clifford Chance US LLP is conditioned upon factual
representations and covenants made by our management and
affiliated entities, regarding our organization, assets, present
and future conduct of our business operations and other items
regarding our ability to meet the various requirements for
qualification as a REIT, and assumes that such representations
and covenants are accurate and complete and that we will take no
action inconsistent with our qualification as a REIT. In
addition, to the extent we make certain investments, such as
investments in preferred equity securities of REITs, or whole
loan mortgage securitizations, the accuracy of such opinion will
also depend on the accuracy of certain opinions rendered to us
in connection with such transactions. While we believe that we
are organized and intend to operate so that we will qualify as a
REIT, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations and the
possibility of future changes in our circumstances or applicable
law, no assurance can be given by Clifford Chance US LLP or us
that we will so qualify for any particular year. Clifford Chance
US LLP will have no obligation to advise us or the holders of
our shares of common stock of any subsequent change in the
matters stated, represented or assumed or of any subsequent
change in the applicable law. You should be aware that opinions
of counsel are not binding on the IRS, and no assurance can be
given that the IRS will not challenge the conclusions set forth
in such opinions.
Qualification and taxation as a REIT depends on our ability to
meet, on a continuing basis, through actual results of
operations, distribution levels, diversity of share ownership
and various qualification requirements imposed upon REITs by the
Internal Revenue Code, the compliance with which will not be
reviewed by Clifford Chance US LLP. In addition, our ability to
qualify as a REIT may depend in part upon the operating results,
organizational structure and entity classification for
U.S. federal income tax purposes of certain entities in
which we invest, which could include entities that have made
elections to be taxed as REITs, the qualification of which will
not have been reviewed by Clifford Chance US LLP. Our ability to
qualify as a REIT also requires that we satisfy certain asset
and income tests, some of which depend upon the fair market
values of assets directly or indirectly owned by us or which
serve as security for loans made by us. Such values may not be
susceptible to a precise determination. Accordingly, no
assurance can be given that the actual results of our operations
for any taxable year will satisfy the requirements for
qualification and taxation as a REIT.
Taxation
of REITs in General
As indicated above, qualification and taxation as a REIT depends
upon our ability to meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Internal
Revenue Code. The material qualification requirements are
summarized below, under Requirements for
Qualification as a REIT. While we believe that we will
operate so that we qualify as a REIT, no assurance can be given
that the IRS will not challenge our qualification as a REIT or
that we will be able to operate in accordance with the REIT
requirements in the future. See Failure to
Qualify.
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Provided that we qualify as a REIT, we will generally be
entitled to a deduction for dividends that we pay and,
therefore, will not be subject to U.S. federal corporate
income tax on our net taxable income that is currently
distributed to our stockholders. This treatment substantially
eliminates the double taxation at the corporate and
stockholder levels that results generally from investment in a
corporation. Rather, income generated by a REIT generally is
taxed only at the stockholder level, upon a distribution of
dividends by the REIT.
For tax years through 2010, stockholders who are individual
U.S. stockholders (as defined below) are generally taxed on
corporate dividends at a maximum rate of 15% (the same as
long-term capital gains), thereby substantially reducing, though
not completely eliminating, the double taxation that has
historically applied to corporate dividends.
With limited exceptions, however, dividends received by
individual U.S. stockholders from us or from other entities
that are taxed as REITs will continue to be taxed at rates
applicable to ordinary income, which will be as high as 35%
through 2010. Net operating losses, foreign tax credits and
other tax attributes of a REIT generally do not pass through to
the stockholders of the REIT, subject to special rules for
certain items, such as capital gains, recognized by REITs. See
Taxation of Taxable
U.S. Stockholders.
Even if we qualify for taxation as a REIT, however, we will be
subject to U.S. federal income taxation as follows:
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We will be taxed at regular corporate rates on any undistributed
income, including undistributed net capital gains.
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We may be subject to the alternative minimum tax on
our items of tax preference, if any.
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If we have net income from prohibited transactions, which are,
in general, sales or other dispositions of property held
primarily for sale to customers in the ordinary course of
business, other than foreclosure property, such income will be
subject to a 100% tax. See Prohibited
Transactions and Foreclosure
Property below.
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If we elect to treat property that we acquire in connection with
a foreclosure of a mortgage loan or from certain leasehold
terminations as foreclosure property, we may thereby
avoid (a) the 100% tax on gain from a resale of that
property (if the sale would otherwise constitute a prohibited
transaction) and (b) the inclusion of any income from such
property not qualifying for purposes of the REIT gross income
tests discussed below, but the income from the sale or operation
of the property may be subject to corporate income tax at the
highest applicable rate (currently 35%).
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If we fail to satisfy the 75% gross income test or the 95% gross
income test, as discussed below, but nonetheless maintain our
qualification as a REIT because other requirements are met, we
will be subject to a 100% tax on an amount equal to (a) the
greater of (1) the amount by which we fail the 75% gross
income test or (2) the amount by which we fail the 95%
gross income test, as the case may be, multiplied by (b) a
fraction intended to reflect our profitability.
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If we fail to satisfy any of the REIT asset tests, as described
below, other than a failure of the 5% or 10% REIT asset tests
that do not exceed a statutory
de minimis
amount as
described more fully below, but our failure is due to reasonable
cause and not due to willful neglect and we nonetheless maintain
our REIT qualification because of specified cure provisions, we
will be required to pay a tax equal to the greater of $50,000 or
the highest corporate tax rate (currently 35%) of the net income
generated by the nonqualifying assets during the period in which
we failed to satisfy the asset tests.
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If we fail to satisfy any provision of the Internal Revenue Code
that would result in our failure to qualify as a REIT (other
than a gross income or asset test requirement) and the violation
is due to reasonable cause, we may retain our REIT qualification
but we will be required to pay a penalty of $50,000 for each
such failure.
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If we fail to distribute during each calendar year at least the
sum of (a) 85% of our REIT ordinary income for such year,
(b) 95% of our REIT capital gain net income for such year
and (c) any undistributed taxable income from prior periods
(or the required distribution), we will be subject to a 4%
excise tax on the excess
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of the required distribution over the sum of (1) the
amounts actually distributed (taking into account excess
distributions from prior years), plus (2) retained amounts
on which income tax is paid at the corporate level.
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We may be required to pay monetary penalties to the IRS in
certain circumstances, including if we fail to meet
record-keeping requirements intended to monitor our compliance
with rules relating to the composition of our stockholders, as
described below in Requirements for
Qualification as a REIT.
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A 100% excise tax may be imposed on some items of income and
expense that are directly or constructively paid between us and
any taxable REIT subsidiaries (or TRSs) we may own if and to the
extent that the IRS successfully adjusts the reported amounts of
these items.
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If we acquire appreciated assets from a corporation that is not
a REIT in a transaction in which the adjusted tax basis of the
assets in our hands is determined by reference to the adjusted
tax basis of the assets in the hands of the non-REIT
corporation, we will be subject to tax on such appreciation at
the highest corporate income tax rate then applicable if we
subsequently recognize gain on a disposition of any such assets
during the
10-year
period following their acquisition from the non-REIT
corporation. The results described in this paragraph assume that
the non-REIT corporation will not elect, in lieu of this
treatment, to be subject to an immediate tax when the asset is
acquired by us.
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We will generally be subject to tax on the portion of any excess
inclusion income derived from an investment in residual
interests in real estate mortgage investment conduits or REMICs
to the extent our stock is held by specified tax-exempt
organizations not subject to tax on unrelated business taxable
income. Similar rules will apply if we own an equity interest in
a taxable mortgage pool. To the extent that we own a REMIC
residual interest or a taxable mortgage pool through a TRS, we
will not be subject to this tax. For a discussion of
excess inclusion income, see
Effect of Subsidiary Entities
Taxable Mortgage Pools and Excess
Inclusion Income.
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We may elect to retain and pay income tax on our net long-term
capital gain. In that case, a stockholder would include its
proportionate share of our undistributed long-term capital gain
(to the extent we make a timely designation of such gain to the
stockholder) in its income, would be deemed to have paid the tax
that we paid on such gain, and would be allowed a credit for its
proportionate share of the tax deemed to have been paid, and an
adjustment would be made to increase the stockholders
basis in our common stock.
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We may have subsidiaries or own interests in other lower-tier
entities that are subchapter C corporations, the earnings of
which could be subject to U.S. federal corporate income tax.
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In addition, we may be subject to a variety of taxes other than
U.S. federal income tax, including payroll taxes and state,
local, and foreign income, franchise property and other taxes.
We could also be subject to tax in situations and on
transactions not presently contemplated.
Requirements
for Qualification as a REIT
The Internal Revenue Code defines a REIT as a corporation, trust
or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of
beneficial interest;
(3) that would be taxable as a domestic corporation but for
the special Internal Revenue Code provisions applicable to REITs;
(4) that is neither a financial institution nor an
insurance company subject to specific provisions of the Internal
Revenue Code;
(5) the beneficial ownership of which is held by 100 or
more persons during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year
of less than 12 months;
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(6) in which, during the last half of each taxable year,
not more than 50% in value of the outstanding stock is owned,
directly or indirectly, by five or fewer individuals
(as defined in the Internal Revenue Code to include specified
entities);
(7) which meets other tests described below, including with
respect to the nature of its income and assets and the amount of
its distributions; and
(8) that makes an election to be a REIT for the current
taxable year or has made such an election for a previous taxable
year that has not been terminated or revoked.
The Internal Revenue Code provides that conditions
(1) through (4) must be met during the entire taxable
year, and that condition (5) must be met during at least
335 days of a taxable year of 12 months, or during a
proportionate part of a shorter taxable year. Conditions
(5) and (6) do not need to be satisfied for the first
taxable year for which an election to become a REIT has been
made. Our charter provides restrictions regarding the ownership
and transfer of its shares, which are intended, among other
purposes to assist in satisfying the share ownership
requirements described in conditions (5) and
(6) above. For purposes of condition (6), an
individual generally includes a supplemental
unemployment compensation benefit plan, a private foundation or
a portion of a trust permanently set aside or used exclusively
for charitable purposes, but does not include a qualified
pension plan or profit sharing trust.
To monitor compliance with the share ownership requirements, we
are generally required to maintain records regarding the actual
ownership of our shares. To do so, we must demand written
statements each year from the record holders of significant
percentages of our shares of stock, in which the record holders
are to disclose the actual owners of the shares (
i.e.
,
the persons required to include in gross income the dividends
paid by us). A list of those persons failing or refusing to
comply with this demand must be maintained as part of our
records. Failure by us to comply with these record-keeping
requirements could subject us to monetary penalties. If we
satisfy these requirements and after exercising reasonable
diligence would not have known that condition (6) is not
satisfied, we will be deemed to have satisfied such condition. A
stockholder that fails or refuses to comply with the demand is
required by Treasury Regulations to submit a statement with its
tax return disclosing the actual ownership of the shares and
other information.
In addition, a corporation generally may not elect to become a
REIT unless its taxable year is the calendar year. We satisfy
this requirement.
Effect of
Subsidiary Entities
Ownership
of Partner Interests
In the case of a REIT that is a partner in a partnership,
Treasury regulations provide that the REIT is deemed to own its
proportionate share of the partnerships assets and to earn
its proportionate share of the partnerships gross income
based on its
pro rata
share of capital interests in the
partnership for purposes of the asset and gross income tests
applicable to REITs, as described below. However, solely for
purposes of the 10% value test, described below, the
determination of a REITs interest in partnership assets
will be based on the REITs proportionate interest in any
securities issued by the partnership, excluding for these
purposes, certain excluded securities as described in the
Internal Revenue Code. In addition, the assets and gross income
of the partnership generally are deemed to retain the same
character in the hands of the REIT. Thus, our proportionate
share of the assets and items of income of partnerships in which
we own an equity interest is treated as assets and items of
income of our company for purposes of applying the REIT
requirements described below. Consequently, to the extent that
we directly or indirectly hold a preferred or other equity
interest in a partnership, the partnerships assets and
operations may affect our ability to qualify as a REIT, even
though we may have no control or only limited influence over the
partnership.
Disregarded
Subsidiaries
If a REIT owns a corporate subsidiary that is a qualified
REIT subsidiary, that subsidiary is disregarded for
U.S. federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and items of
income, deduction and credit of the REIT itself, including for
purposes of the gross income and asset tests applicable to
REITs, as summarized below. A qualified REIT
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subsidiary is any corporation, other than a TRS, that is
wholly-owned by a REIT, by other disregarded subsidiaries or by
a combination of the two. Single member limited liability
companies that are wholly-owned by a REIT are also generally
disregarded as separate entities for U.S. federal income
tax purposes, including for purposes of the REIT gross income
and asset tests. Disregarded subsidiaries, along with
partnerships in which we hold an equity interest, are sometimes
referred to herein as pass-through subsidiaries.
In the event that a disregarded subsidiary ceases to be
wholly-owned by us (for example, if any equity interest in the
subsidiary is acquired by a person other than us or another
disregarded subsidiary of us), the subsidiarys separate
existence would no longer be disregarded for U.S. federal
income tax purposes. Instead, it would have multiple owners and
would be treated as either a partnership or a taxable
corporation. Such an event could, depending on the
circumstances, adversely affect our ability to satisfy the
various asset and gross income tests applicable to REITs,
including the requirement that REITs generally may not own,
directly or indirectly, more than 10% of the value or voting
power of the outstanding securities of another corporation. See
Asset Tests and Gross
Income Tests.
Taxable
REIT Subsidiaries
A REIT, in general, may jointly elect with a subsidiary
corporation, whether or not wholly owned, to treat the
subsidiary corporation as a TRS. The separate existence of a TRS
or other taxable corporation, unlike a disregarded subsidiary as
discussed above, is not ignored for U.S. federal income tax
purposes. Accordingly, such an entity would generally be subject
to corporate income tax on its earnings, which may reduce the
cash flow generated by us and our subsidiaries in the aggregate
and our ability to make distributions to our stockholders.
We anticipate that we will likely make TRS elections with
respect to certain domestic entities and
non-U.S. entities
we may form in the future. The Internal Revenue Code and the
Treasury regulations promulgated thereunder provide a specific
exemption from U.S. federal income tax to
non-U.S. corporations
that restrict their activities in the United States to trading
in stock and securities (or any activity closely related
thereto) for their own account whether such trading (or such
other activity) is conducted by the corporation or its employees
through a resident broker, commission agent, custodian or other
agent. Certain U.S. shareholders of such a
non-U.S. corporation
are required to include in their income currently their
proportionate share of the earnings of such a corporation,
whether or not such earnings are distributed. We may invest in
certain
non-U.S. corporations
with which we will jointly make a TRS election which will be
organized as Cayman Islands companies and will either rely on
such exemption or otherwise operate in a manner so that they
will not be subject to U.S. federal income tax on their net
income. Therefore, despite such contemplated entities
status as TRSs, such entities should generally not be subject to
U.S. federal corporate income tax on their earnings.
However, we will likely be required to include in our income, on
a current basis, the earnings of any such TRSs. This could
affect our ability to comply with the REIT income tests and
distribution requirement. See Gross Income
Tests and Annual Distribution
Requirements.
A REIT is not treated as holding the assets of a TRS or other
taxable subsidiary corporation or as receiving any income that
the subsidiary earns. Rather, the stock issued by the subsidiary
is an asset in the hands of the REIT, and the REIT generally
recognizes as income the dividends, if any, that it receives
from the subsidiary. This treatment can affect the gross income
and asset test calculations that apply to the REIT, as described
below. Because a parent REIT does not include the assets and
income of such subsidiary corporations in determining the
parents compliance with the REIT requirements, such
entities may be used by the parent REIT to undertake indirectly
activities that the REIT rules might otherwise preclude it from
doing directly or through pass-through subsidiaries or render
commercially unfeasible (for example, activities that give rise
to certain categories of income such as non-qualifying hedging
income or inventory sales). If dividends are paid to us by one
or more domestic TRSs we may own, then a portion of the
dividends that we distribute to stockholders who are taxed at
individual rates generally will be eligible for taxation at
preferential qualified dividend income tax rates rather than at
ordinary income rates. See Taxation of Taxable
U.S. Stockholders and Annual
Distribution Requirements.
Certain restrictions imposed on TRSs are intended to ensure that
such entities will be subject to appropriate levels of
U.S. federal income taxation. First, a TRS may not deduct
interest payments made in any year to an affiliated REIT to the
extent that such payments exceed, generally, 50% of the
TRSs adjusted taxable income for
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that year (although the TRS may carry forward to, and deduct in,
a succeeding year the disallowed interest amount if the 50% test
is satisfied in that year). In addition, if amounts are paid to
a REIT or deducted by a TRS due to transactions between a REIT,
its tenants
and/or
the
TRS, that exceed the amount that would be paid to or deducted by
a party in an arms-length transaction, the REIT generally
will be subject to an excise tax equal to 100% of such excess.
Rents we receive that include amounts for services furnished by
one of our TRSs to any of our tenants will not be subject to the
excise tax if such amounts qualify for the safe harbor
provisions contained in the Internal Revenue Code. Safe harbor
provisions are provided where: (1) amounts are excluded
from the definition of impermissible tenant service income as a
result of satisfying the 1%
de minimis
exception;
(2) a TRS renders a significant amount of similar services
to unrelated parties and the charges for such services are
substantially comparable; (3) rents paid to us by tenants
that are not receiving services from the TRS are substantially
comparable to the rents paid by our tenants leasing comparable
space that are receiving such services from the TRS and the
charge for the services is separately stated; or (4) the
TRSs gross income from the service is not less than 150%
of the TRSs direct cost of furnishing the service.
Taxable
Mortgage Pools
An entity, or a portion of an entity, is classified as a taxable
mortgage pool under the Internal Revenue Code if:
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substantially all of its assets consist of debt obligations or
interests in debt obligations;
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more than 50% of those debt obligations are real estate mortgage
loans or interests in real estate mortgage loans as of specified
testing dates;
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the entity has issued debt obligations that have two or more
maturities; and
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the payments required to be made by the entity on its debt
obligations bear a relationship to the payments to
be received by the entity on the debt obligations that it holds
as assets.
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Under Treasury regulations, if less than 80% of the assets of an
entity (or a portion of an entity) consist of debt obligations,
these debt obligations are considered not to comprise
substantially all of its assets, and therefore the
entity would not be treated as a taxable mortgage pool.
We may enter into transactions that could result in us or a
portion of our assets being treated as a taxable mortgage
pool for U.S. federal income tax purposes.
Specifically, we may securitize MBS that we acquire and such
securitizations will likely result in us owning interests in a
taxable mortgage pool, in which case we will be precluded from
selling to outside investors equity interests in such
securitizations or from selling any debt securities issued in
connection with such securitizations that might be considered to
be equity interests for U.S. federal income tax purposes.
A taxable mortgage pool generally is treated as a corporation
for U.S. federal income tax purposes. However, special
rules apply to a REIT, a portion of a REIT, or a qualified REIT
subsidiary that is a taxable mortgage pool. If a REIT owns
directly, or indirectly through one or more qualified REIT
subsidiaries or other entities that are disregarded as a
separate entity for U.S. federal income tax purposes, 100%
of the equity interests in the taxable mortgage pool, the
taxable mortgage pool will be a qualified REIT subsidiary and,
therefore, ignored as an entity separate from the REIT for
U.S. federal income tax purposes and would not generally
affect the tax qualification of the REIT. Rather, the
consequences of the taxable mortgage pool classification would
generally, except as described below, be limited to the
REITs stockholders. See Excess Inclusion
Income.
If we own less than 100% of the ownership interests in a
subsidiary that is a taxable mortgage pool, the foregoing rules
would not apply. Rather, the subsidiary would be treated as a
corporation for U.S. federal income tax purposes, and would
be subject to corporate income tax. In addition, this
characterization would alter our income and asset test
calculations and could affect our compliance with the REIT
requirements. We do not expect that we would form any subsidiary
that would become a taxable mortgage pool, in which we own some,
but less than all, of the ownership interests, and we intend to
monitor the structure of any taxable mortgage pools in which we
have an interest to ensure that they will not adversely affect
our qualification as a REIT.
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Gross
Income Tests
In order to maintain our qualification as a REIT, we annually
must satisfy two gross income tests. First, at least 75% of our
gross income for each taxable year, excluding gross income from
sales of inventory or dealer property in prohibited
transactions and certain hedging and foreign currency
transactions, must be derived from investments relating to real
property or mortgages on real property, including rents
from real property, dividends received from and gains from
the disposition of other shares of REITs, interest income
derived from mortgage loans secured by real property (including
certain types of MBS), and gains from the sale of real estate
assets, as well as income from certain kinds of temporary
investments. Second, at least 95% of our gross income in each
taxable year, excluding gross income from prohibited
transactions and certain hedging and foreign currency
transactions, must be derived from some combination of income
that qualifies under the 75% income test described above, as
well as other dividends, interest, and gain from the sale or
disposition of stock or securities, which need not have any
relation to real property.
For purposes of the 75% and 95% gross income tests, a REIT is
deemed to have earned a proportionate share of the income earned
by any partnership, or any limited liability company treated as
a partnership for U.S. federal income tax purposes, in
which it owns an interest, which share is determined by
reference to its capital interest in such entity, and is deemed
to have earned the income earned by any qualified REIT
subsidiary.
Interest
Income
Interest income constitutes qualifying mortgage interest for
purposes of the 75% gross income test to the extent that the
obligation is secured by a mortgage on real property. If we
receive interest income with respect to a mortgage loan that is
secured by both real property and other property and the highest
principal amount of the loan outstanding during a taxable year
exceeds the fair market value of the real property on the date
that we acquired the mortgage loan, the interest income will be
apportioned between the real property and the other property,
and our income from the arrangement will qualify for purposes of
the 75% gross income test only to the extent that the interest
is allocable to the real property. Even if a loan is not secured
by real property or is undersecured, the income that it
generates may nonetheless qualify for purposes of the 95% gross
income test. If we acquire or originate a construction loan, for
purposes of the foregoing apportionment, the fair market value
of the real property includes the fair market value of the land
plus the reasonably estimated cost of improvement or
developments (other than personal property) which secure the
construction loan.
To the extent that the terms of a loan provide for contingent
interest that is based on the cash proceeds realized upon the
sale of the property securing the loan (or a shared appreciation
provision), income attributable to the participation feature
will be treated as gain from sale of the underlying property,
which generally will be qualifying income for purposes of both
the 75% and 95% gross income tests,
provided
that the
property is not inventory or dealer property in the hands of the
borrower or us.
To the extent that we derive interest income from a loan where
all or a portion of the amount of interest payable is
contingent, such income generally will qualify for purposes of
the gross income tests only if it is based upon the gross
receipts or sales and not the net income or profits of any
person. This limitation does not apply, however, to a mortgage
loan where the borrower derives substantially all of its income
from the property from the leasing of substantially all of its
interest in the property to tenants, to the extent that the
rental income derived by the borrower would qualify as rents
from real property had it been earned directly by us.
Any amount includible in our gross income with respect to a
regular or residual interest in a REMIC generally is treated as
interest on an obligation secured by a mortgage on real
property. If, however, less than 95% of the assets of a REMIC
consists of real estate assets (determined as if we held such
assets), we will be treated as receiving directly our
proportionate share of the income of the REMIC for purposes of
determining the amount which is treated as interest on an
obligation secured by a mortgage on real property.
Among the assets we may hold are certain mezzanine loans secured
by equity interests in a pass-through entity that directly or
indirectly owns real property, rather than a direct mortgage on
the real property. The IRS issued Revenue Procedure
2003-65,
which provides a safe harbor pursuant to which a mezzanine loan,
if it meets each of
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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 it will be treated
as qualifying mortgage interest for purposes of the 75% gross
income test (described above). Although the Revenue Procedure
provides a safe harbor on which taxpayers may rely, it does not
prescribe rules of substantive tax law. The mezzanine loans that
we acquire may not meet all of the requirements for reliance on
this safe harbor. Hence, there can be no assurance that the IRS
will not challenge the qualification of such assets as real
estate assets or the interest generated by these loans as
qualifying income under the 75% gross income test (described
above). To the extent we make corporate mezzanine loans, such
loans will not qualify as real estate assets and interest income
with respect to such loans will not be qualifying income for the
75% gross income test (described above).
We believe that the interest, original issue discount, and
market discount income that we receive from our mortgage-related
securities generally will be qualifying income for purposes of
both gross income tests. However, to the extent that we own
non-REMIC collateralized mortgage obligations or other debt
instruments secured by mortgage loans (rather than by real
property) or secured by non-real estate assets, or debt
securities that are not secured by mortgages on real property or
interests in real property, the interest income received with
respect to such securities generally will be qualifying income
for purposes of the 95% gross income test, but not the 75% gross
income test. In addition, the loan amount of a mortgage loan
that we own may exceed the value of the real property securing
the loan. In that case, income from the loan will be qualifying
income for purposes of the 95% gross income test, but the
interest attributable to the amount of the loan that exceeds the
value of the real property securing the loan will not be
qualifying income for purposes of the 75% gross income test.
Fee
Income
We may receive various fees in connection with our operations.
The fees will be qualifying income for purposes of both the 75%
and 95% gross income tests if they are received in consideration
for entering into an agreement to make a loan secured by real
property and the fees are not determined by income and profits.
Other fees are not qualifying income for purposes of either
gross income test. Any fees earned by a TRS will not be included
for purposes of the gross income tests.
Dividend
Income
We may receive distributions from TRSs or other corporations
that are not REITs or qualified REIT subsidiaries. These
distributions are generally classified as dividend income to the
extent of the earnings and profits of the distributing
corporation. Such distributions generally constitute qualifying
income for purposes of the 95% gross income test, but not the
75% gross income test. Any dividends received by us from a REIT
is qualifying income in our hands for purposes of both the 95%
and 75% gross income tests.
Income inclusions from equity investments in a foreign TRS or
other
non-U.S. corporations
in which we hold an equity interest are technically neither
dividends nor any of the other enumerated categories of income
specified in the 95% gross income test for U.S. federal
income tax purposes, and there is no other clear precedent with
respect to the qualification of such income. However, based on
advice of counsel, we intend to treat such income inclusions, to
the extent distributed by a foreign TRS or other
non-U.S. corporation
in which we hold an equity interest in the year accrued, as
qualifying income for purposes of the 95% gross income test.
Nevertheless, because this income does not meet the literal
requirements of the REIT provisions, it is possible that the IRS
could successfully take the position that such income is not
qualifying income. We do not currently expect such income
together with any other nonqualifying income that we receive for
purposes of the 95% gross income test to be in excess of 5% of
our annual gross income. In the event that such income, together
with any other nonqualifying income for purposes of the 95%
gross income test was in excess of 5% of our annual gross income
and was determined not to qualify for the 95% gross income test,
we would be subject to a penalty tax with respect to such income
to the extent it and our other nonqualifying income exceeds 5%
of our gross income
and/or
we
could fail to qualify as a REIT. See Failure
to Satisfy the Gross Income Tests and
Failure to Qualify. In addition, if such
income was determined not to qualify for the 95% gross income
test, we would need to invest in sufficient qualifying assets,
or sell some of our interests in any foreign TRSs or other
non-U.S. corporations
in which we hold an equity interest to ensure that the income
recognized by us from our foreign TRSs or such other
corporations does not exceed 5% of our gross income.
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Foreign
Investments
To the extent that we hold or acquire foreign investments, such
investments may generate foreign currency gains and losses.
Foreign currency gains are generally treated as income that does
not qualify under the 95% or 75% gross income tests. However, in
general, if foreign currency gain is recognized with respect to
income which otherwise qualifies for purposes of the 95% or 75%
gross income tests, then such foreign currency gain will not
constitute gross income for purposes of either the 95% or 75%
gross income tests, respectively. No assurance can be given that
any foreign currency gains recognized by us directly or through
pass-through subsidiaries will not adversely affect our ability
to satisfy the REIT qualification requirements.
Hedging
Transactions
We may enter into hedging transactions with respect to one or
more of our assets or liabilities. Hedging transactions could
take a variety of forms, including interest rate swap
agreements, interest rate cap agreements, options, futures
contracts, forward rate agreements or similar financial
instruments. Except to the extent provided by Treasury
regulations, any income from a hedging transaction we enter into
(1) in the normal course of our business primarily to
manage risk of interest rate or price changes or currency
fluctuations with respect to borrowings made or to be made, or
ordinary obligations incurred or to be incurred, to acquire or
carry real estate assets, which is clearly identified as
specified in Treasury regulations before the close of the day on
which it was acquired, originated, or entered into, including
gain from the sale or disposition of such a transaction, or
(2) primarily to manage risk of currency fluctuations with
respect to any item of income or gain that would be qualifying
income under the 75% or 95% income tests which is clearly
identified as such before the close of the day on which it was
acquired, originated, or entered into, will not constitute gross
income for purposes of the 75% or 95% gross income test. To the
extent that we enter into other types of hedging transactions,
the income from those transactions is likely to be treated as
non-qualifying income for purposes of both of the 75% and 95%
gross income tests. We intend to structure any hedging
transactions in a manner that does not jeopardize our
qualification as a REIT.
Rents
from Real Property
To the extent that we own real property or interests therein,
rents we receive qualify as rents from real property
in satisfying the gross income tests described above, only if
several conditions are met, including the following. If rent
attributable to personal property leased in connection with real
property is greater than 15% of the total rent received under
any particular lease, then all of the rent attributable to such
personal property will not qualify as rents from real property.
The determination of whether an item of personal property
constitutes real or personal property under the REIT provisions
of the Internal Revenue Code is subject to both legal and
factual considerations and is therefore subject to different
interpretations.
In addition, in order for rents received by us to qualify as
rents from real property, the rent must not be based
in whole or in part on the income or profits of any person.
However, an amount will not be excluded from rents from real
property solely by being based on a fixed percentage or
percentages of sales or if it is based on the net income of a
tenant which derives substantially all of its income with
respect to such property from subleasing of substantially all of
such property, to the extent that the rents paid by the
subtenants would qualify as rents from real property, if earned
directly by us. Moreover, for rents received to qualify as
rents from real property, we generally must not
operate or manage the property or furnish or render certain
services to the tenants of such property, other than through an
independent contractor who is adequately compensated
and from which we derive no income or through a TRS. We are
permitted, however, to perform services that are usually
or customarily rendered in connection with the rental of
space for occupancy only and are not otherwise considered
rendered to the occupant of the property. In addition, we may
directly or indirectly provide non-customary services to tenants
of our properties without disqualifying all of the rent from the
property if the payment for such services does not exceed 1% of
the total gross income from the property. In such a case, only
the amounts for non-customary services are not treated as rents
from real property and the provision of the services does not
disqualify the related rent.
Rental income will qualify as rents from real property only to
the extent that we do not directly or constructively own,
(1) in the case of any tenant which is a corporation, stock
possessing 10% or more of the
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total combined voting power of all classes of stock entitled to
vote, or 10% or more of the total value of shares of all classes
of stock of such tenant, or (2) in the case of any tenant
which is not a corporation, an interest of 10% or more in the
assets or net profits of such tenant.
Failure
to Satisfy the Gross Income Tests
We intend to monitor our sources of income, including any
non-qualifying income received by us, so as to ensure our
compliance with the gross income tests. If we fail to satisfy
one or both of the 75% or 95% gross income tests for any taxable
year, we may still qualify as a REIT for the year if we are
entitled to relief under applicable provisions of the Internal
Revenue Code. These relief provisions will generally be
available if the failure of our company to meet these tests was
due to reasonable cause and not due to willful neglect and,
following the identification of such failure, we set forth a
description of each item of our gross income that satisfies the
gross income tests in a schedule for the taxable year filed in
accordance with the Treasury regulation. It is not possible to
state whether we would be entitled to the benefit of these
relief provisions in all circumstances. If these relief
provisions are inapplicable to a particular set of circumstances
involving us, we will not qualify as a REIT. As discussed above
under Taxation of REITs in General, even
where these relief provisions apply, a tax would be imposed upon
the profit attributable to the amount by which we fail to
satisfy the particular gross income test.
Asset
Tests
We, at the close of each calendar quarter, must also satisfy
four tests relating to the nature of our assets. First, at least
75% of the value of our total assets must be represented by some
combination of real estate assets, cash, cash items,
U.S. government securities and, under some circumstances,
stock or debt instruments purchased with new capital. For this
purpose, real estate assets include interests in real property,
such as land, buildings, leasehold interests in real property,
stock of other corporations that qualify as REITs and certain
kinds of MBS and mortgage loans. A regular or residual interest
in a REMIC is generally treated as a real estate asset. If,
however, less than 95% of the assets of a REMIC consists of real
estate assets (determined as if we held such assets), we will be
treated as owning our proportionate share of the assets of the
REMIC. Assets that do not qualify for purposes of the 75% test
are subject to the additional asset tests described below.
Second, the value of any one issuers securities owned by
us may not exceed 5% of the value of our gross assets. Third, we
may not own more than 10% of any one issuers outstanding
securities, as measured by either voting power or value. Fourth,
the aggregate value of all securities of TRSs held by us may not
exceed 25% of the value of our gross assets.
The 5% and 10% asset tests do not apply to securities of TRSs
and qualified REIT subsidiaries. The 10% value test does not
apply to certain straight debt and other excluded
securities, as described in the Internal Revenue Code, including
but not limited to any loan to an individual or an estate, any
obligation to pay rents from real property and any security
issued by a REIT. In addition, (a) a REITs interest
as a partner in a partnership is not considered a security for
purposes of applying the 10% value test; (b) any debt
instrument issued by a partnership (other than straight debt or
other excluded security) will not be considered a security
issued by the partnership if at least 75% of the
partnerships gross income is derived from sources that
would qualify for the 75% REIT gross income test; and
(c) any debt instrument issued by a partnership (other than
straight debt or other excluded security) will not be considered
a security issued by the partnership to the extent of the
REITs interest as a partner in the partnership.
For purposes of the 10% value test, straight debt
means a written unconditional promise to pay on demand on a
specified date a sum certain in money if (i) the debt is
not convertible, directly or indirectly, into stock,
(ii) the interest rate and interest payment dates are not
contingent on profits, the borrowers discretion, or
similar factors other than certain contingencies relating to the
timing and amount of principal and interest payments, as
described in the Internal Revenue Code and (iii) in the
case of an issuer which is a corporation or a partnership,
securities that otherwise would be considered straight debt will
not be so considered if we, and any of our controlled
taxable REIT subsidiaries as defined in the Internal
Revenue Code, hold any securities of the corporate or
partnership issuer which (a) are not straight debt or other
excluded securities (prior to the application of this rule), and
(b) have an aggregate value greater than 1% of the
issuers outstanding securities (including, for the
purposes of a partnership issuer, our interest as a partner in
the partnership).
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After initially meeting the asset tests at the close of any
quarter, we will not lose our qualification as a REIT for
failure to satisfy the asset tests at the end of a later quarter
solely by reason of changes in asset values (including a failure
caused solely by change in the foreign currency exchange rate
used to value a foreign asset). If we fail to satisfy the asset
tests because we acquire securities during a quarter, we can
cure this failure by disposing of sufficient non-qualifying
assets within 30 days after the close of that quarter. If
we fail the 5% asset test, or the 10% vote or value asset tests
at the end of any quarter and such failure is not cured within
30 days thereafter, we may dispose of sufficient assets
(generally within six months after the last day of the quarter
in which our identification of the failure to satisfy these
asset tests occurred) to cure such a violation that does not
exceed the lesser of 1% of our assets at the end of the relevant
quarter or $10,000,000. If we fail any of the other asset tests
or our failure of the 5% and 10% asset tests is in excess of the
de minimis
amount described above, as long as such
failure was due to reasonable cause and not willful neglect, we
are permitted to avoid disqualification as a REIT, after the
30 day cure period, by taking steps including the
disposition of sufficient assets to meet the asset test
(generally within six months after the last day of the quarter
in which our identification of the failure to satisfy the REIT
asset test occurred) and paying a tax equal to the greater of
$50,000 or the highest corporate income tax rate (currently 35%)
of the net income generated by the non-qualifying assets during
the period in which we failed to satisfy the asset test.
We expect that the assets and mortgage-related securities that
we own generally will be qualifying assets for purposes of the
75% asset test. However, to the extent that we own non-REMIC
collateralized mortgage obligations or other debt instruments
secured by mortgage loans (rather than by real property) or
secured by non-real estate assets, or debt securities issued by
C corporations that are not secured by mortgages on real
property, those securities may not be qualifying assets for
purposes of the 75% asset test. We believe that our holdings of
securities and other assets will be structured in a manner that
will comply with the foregoing REIT asset requirements and
intend to monitor compliance on an ongoing basis. Moreover,
values of some assets may not be susceptible to a precise
determination and are subject to change in the future.
Furthermore, the proper classification of an instrument as debt
or equity for U.S. federal income tax purposes may be
uncertain in some circumstances, which could affect the
application of the REIT asset tests. As an example, if we were
to acquire equity securities of a REIT issuer that were
determined by the IRS to represent debt securities of such
issuer, such securities would also not qualify as real estate
assets. Accordingly, there can be no assurance that the IRS will
not contend that our interests in subsidiaries or in the
securities of other issuers (including REIT issuers) cause a
violation of the REIT asset tests.
In addition, we may enter into repurchase agreements under which
we will nominally sell certain of our assets to a counterparty
and simultaneously enter into an agreement to repurchase the
sold assets. We believe that we will be treated for
U.S. federal income tax purposes as the owner of the assets
that are the subject of any such agreement notwithstanding that
we may transfer record ownership of the assets to the
counterparty during the term of the agreement. It is possible,
however, that the IRS could assert that we did not own the
assets during the term of the repurchase agreement, in which
case we could fail to qualify as a REIT.
Annual
Distribution Requirements
In order to qualify as a REIT, we are required to distribute
dividends, other than capital gain dividends, to our
stockholders in an amount at least equal to:
(a) the sum of:
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90% of our REIT taxable income (computed without
regard to our deduction for dividends paid and our net capital
gains); and
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90% of the net income (after tax), if any, from foreclosure
property (as described below); minus
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(b) the sum of specified items of non-cash income that
exceeds a percentage of our income.
These distributions must be paid in the taxable year to which
they relate or in the following taxable year if such
distributions are declared in October, November or December of
the taxable year, are payable to stockholders of record on a
specified date in any such month and are actually paid before
the end of January of the following year. Such distributions are
treated as both paid by us and received by each stockholder on
December 31 of the year in which they are declared. In addition,
at our election, a distribution for a taxable year may be
declared before we timely file our tax return for the year and
be paid with or before the first regular dividend payment after
such
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declaration,
provided
that such payment is made during
the
12-month
period following the close of such taxable year. These
distributions are taxable to our stockholders in the year in
which paid, even though the distributions relate to our prior
taxable year for purposes of the 90% distribution requirement.
In order for distributions to be counted towards our
distribution requirement and to give rise to a tax deduction by
us, they must not be preferential dividends. A
dividend is not a preferential dividend if it is
pro rata
among all outstanding shares of stock within a particular
class and is in accordance with the preferences among different
classes of stock as set forth in the organizational documents.
To the extent that we distribute at least 90%, but less than
100%, of our REIT taxable income, as adjusted, we
will be subject to tax at ordinary corporate tax rates on the
retained portion. In addition, we may elect to retain, rather
than distribute, our net long-term capital gains and pay tax on
such gains. In this case, we could elect to have our
stockholders include their proportionate share of such
undistributed long-term capital gains in income and receive a
corresponding credit for their proportionate share of the tax
paid by us. Our stockholders would then increase the adjusted
basis of their stock in us by the difference between the
designated amounts included in their long-term capital gains and
the tax deemed paid with respect to their proportionate shares.
If we fail to distribute during each calendar year at least the
sum of (a) 85% of our REIT ordinary income for such year,
(b) 95% of our REIT capital gain net income for such year
and (c) any undistributed taxable income from prior
periods, we will be subject to a 4% excise tax on the excess of
such required distribution over the sum of (x) the amounts
actually distributed (taking into account excess distributions
from prior periods) and (y) the amounts of income retained
on which we have paid corporate income tax. We intend to make
timely distributions so that we are not subject to the 4% excise
tax.
It is possible that we, from time to time, may not have
sufficient cash to meet the distribution requirements due to
timing differences between (a) the actual receipt of cash,
including receipt of distributions from our subsidiaries and
(b) the inclusion of items in income by us for
U.S. federal income tax purposes. For example, we may
acquire debt instruments or notes whose face value may exceed
its issue price as determined for U.S. federal income tax
purposes (such excess, original issue discount, or
OID), such that we will be required to include in our income a
portion of the OID each year that the instrument is held before
we receive any corresponding cash. In the event that such timing
differences occur, in order to meet the distribution
requirements, it might be necessary to arrange for short-term,
or possibly long-term, borrowings or to pay dividends in the
form of taxable in-kind distributions of property, including
taxable stock dividends. In the case of a taxable stock
dividend, stockholders would be required to include the dividend
as income and would be required to satisfy the tax liability
associated with the distribution with cash from other sources
including sales of our common stock. Both a taxable stock
distribution and sale of common stock resulting from such
distribution could adversely affect the price of our common
stock.
We may be able to rectify a failure to meet the distribution
requirements for a year by paying deficiency
dividends to stockholders in a later year, which may be
included in our deduction for dividends paid for the earlier
year. In this case, we may be able to avoid losing our
qualification as a REIT or being taxed on amounts distributed as
deficiency dividends. However, we will be required to pay
interest and a penalty based on the amount of any deduction
taken for deficiency dividends.
Recordkeeping
Requirements
We are required to maintain records and request on an annual
basis information from specified stockholders. These
requirements are designed to assist us in determining the actual
ownership of our outstanding stock and maintaining our
qualifications as a REIT.
Excess
Inclusion Income
If we acquire a residual interest in a REMIC, we may realize
excess inclusion income. If we are deemed to have issued debt
obligations having two or more maturities, the payments on which
correspond to payments on mortgage loans owned by us, such
arrangement will be treated as a taxable mortgage pool for
U.S. federal income tax purposes. See
Effect of Subsidiary Entities
Taxable Mortgage Pools. We may securitize MBS that we
acquire and such securitizations will likely result in us owning
interests in a taxable mortgage pool. We will be
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precluded from selling to outside investors equity interests in
such securitizations or from selling any debt securities issued
in connection with such securitizations that might be considered
to be equity interests for U.S. federal income tax
purposes. We are taxed at the highest corporate income tax rate
on a portion of the income, referred to as excess
inclusion income, arising from a taxable mortgage pool
that is allocable to the percentage of our shares held in record
name by disqualified organizations, which are
generally certain cooperatives, governmental entities and
tax-exempt organizations that are exempt from tax on unrelated
business taxable income. To the extent that common stock owned
by disqualified organizations is held in record name
by a broker/dealer or other nominee, the broker/dealer or other
nominee would be liable for the corporate level tax on the
portion of our excess inclusion income allocable to the common
stock held by the broker/dealer or other nominee on behalf of
the disqualified organizations. We expect that
disqualified organizations own our stock. Because this tax would
be imposed on us, all of our investors, including investors that
are not disqualified organizations, will bear a portion of the
tax cost associated with the classification of us or a portion
of our assets as a taxable mortgage pool. A RIC or other
pass-through entity owning our common stock in record name will
be subject to tax at the highest corporate tax rate on any
excess inclusion income allocated to their owners that are
disqualified organizations.
In addition, if we realize excess inclusion income and allocate
it to stockholders, this income cannot be offset by net
operating losses of our stockholders. If the stockholder is a
tax-exempt entity and not a disqualified organization, then this
income is fully taxable as unrelated business taxable income
under Section 512 of the Internal Revenue Code. If the
stockholder is a foreign person, it would be subject to
U.S. federal income tax withholding on this income without
reduction or exemption pursuant to any otherwise applicable
income tax treaty. If the stockholder is a REIT, a RIC, common
trust fund or other pass-through entity, our allocable share of
our excess inclusion income could be considered excess inclusion
income of such entity. Accordingly, such investors should be
aware that a significant portion of our income may be considered
excess inclusion income. Finally, if we fail to qualify as a
REIT, our taxable mortgage pool securitizations will be treated
as separate taxable corporations for U.S. federal income
tax purposes that could not be included in any consolidated
corporate tax return.
Prohibited
Transactions
Net income we derive from a prohibited transaction is subject to
a 100% tax. The term prohibited transaction
generally includes a sale or other disposition of property
(other than foreclosure property) that is held as inventory or
primarily for sale to customers, in the ordinary course of a
trade or business by a REIT, by a lower-tier partnership in
which the REIT holds an equity interest or by a borrower that
has issued a shared appreciation mortgage or similar debt
instrument to the REIT. We intend to conduct our operations so
that no asset owned by us or our pass-through subsidiaries will
be held as inventory or primarily for sale to customers, and
that a sale of any assets owned by us directly or through a
pass-through subsidiary will not be in the ordinary course of
business. However, whether property is held as inventory or
primarily for sale to customers in the ordinary course of
a trade or business depends on the particular facts and
circumstances. No assurance can be given that any particular
asset in which we hold a direct or indirect interest will not be
treated as property held as inventory or primarily for sale to
customers or that certain safe harbor provisions of the Internal
Revenue Code that prevent such treatment will apply. The 100%
tax will not apply to gains from the sale of property that is
held through a TRS or other taxable corporation, although such
income will be subject to tax in the hands of the corporation at
regular corporate income tax rates.
Foreclosure
Property
Foreclosure property is real property and any personal property
incident to such real property (1) that is acquired by a
REIT as a result of the REIT having bid on the property at
foreclosure or having otherwise reduced the property to
ownership or possession by agreement or process of law after
there was a default (or default was imminent) on a lease of the
property or a mortgage loan held by the REIT and secured by the
property, (2) for which the related loan or lease was
acquired by the REIT at a time when default was not imminent or
anticipated and (3) for which such REIT makes a proper
election to treat the property as foreclosure property. REITs
generally are subject to tax at the maximum corporate rate
(currently 35%) on any net income from foreclosure property,
including any gain from the disposition of the foreclosure
property, other than income that would otherwise be qualifying
income for purposes of the 75% gross income test. Any gain from
the sale of property for which a foreclosure property election
has been made will not be subject to the 100% tax on gains from
prohibited transactions described above,
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even if the property would otherwise constitute inventory or
dealer property in the hands of the selling REIT. We do not
anticipate that we will receive any income from foreclosure
property that is not qualifying income for purposes of the 75%
gross income test, but, if we do receive any such income, we
intend to elect to treat the related property as foreclosure
property.
Failure
to Qualify
In the event that we violate a provision of the Internal Revenue
Code that would result in our failure to qualify as a REIT, we
may nevertheless continue to qualify as a REIT under specified
relief provisions will be available to us to avoid such
disqualification if (1) the violation is due to reasonable
cause and not due to willful neglect, (2) we pay a penalty
of $50,000 for each failure to satisfy a requirement for
qualification as a REIT and (3) the violation does not
include a violation under the gross income or asset tests
described above (for which other specified relief provisions are
available). This cure provision reduces the instances that could
lead to our disqualification as a REIT for violations due to
reasonable cause. If we fail to qualify for taxation as a REIT
in any taxable year and none of the relief provisions of the
Internal Revenue Code apply, we will be subject to tax,
including any applicable alternative minimum tax, on our taxable
income at regular corporate rates. Distributions to our
stockholders in any year in which we are not a REIT will not be
deductible by us, nor will they be required to be made. In this
situation, to the extent of current and accumulated earnings and
profits, and, subject to limitations of the Internal Revenue
Code, distributions to our stockholders will generally be
taxable in the case of our stockholders who are individual
U.S. stockholders (as defined below), at a maximum rate of
15% (through 2010), and dividends in the hands of our corporate
U.S. stockholders may be eligible for the dividends
received deduction. Unless we are entitled to relief under the
specific statutory provisions, we will also be disqualified from
re-electing to be taxed as a REIT for the four taxable years
following a year during which qualification was lost. It is not
possible to state whether, in all circumstances, we will be
entitled to statutory relief.
Taxation
of Taxable U.S. Stockholders
This section summarizes the taxation of U.S. stockholders
that are not tax-exempt organizations. For these purposes, a
U.S. stockholder is a beneficial owner of our common stock
that for U.S. federal income tax purposes is:
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a citizen or resident of the U.S.;
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a corporation (including an entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the U.S. or of a political subdivision
thereof (including the District of Columbia);
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an estate whose income is subject to U.S. federal income
taxation regardless of its source; or
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any trust if (1) a U.S. court is able to exercise
primary supervision over the administration of such trust and
one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) it has a valid
election in place to be treated as a U.S. person.
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If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds our stock, the
U.S. federal income tax treatment of a partner generally
will depend upon the status of the partner and the activities of
the partnership. A partner of a partnership holding our common
stock should consult its own tax advisor regarding the
U.S. federal income tax consequences to the partner of the
acquisition, ownership and disposition of our stock by the
partnership.
Distributions
Provided that we qualify as a REIT, distributions made to our
taxable U.S. stockholders out of our current and
accumulated earnings and profits, and not designated as capital
gain dividends, will generally be taken into account by them as
ordinary dividend income and will not be eligible for the
dividends received deduction for corporations. In determining
the extent to which a distribution with respect to our common
stock constitutes a dividend for U.S. federal income tax
purposes, our earnings and profits will be allocated first to
distributions with respect to our preferred stock, if any, and
then to our common stock. Dividends received from REITs are
generally not eligible to
125
be taxed at the preferential qualified dividend income rates
applicable (through 2010) to individual
U.S. stockholders who receive dividends from taxable
subchapter C corporations.
In addition, distributions from us that are designated as
capital gain dividends will be taxed to U.S. stockholders
as long-term capital gains, to the extent that they do not
exceed the actual net capital gain of our company for the
taxable year, without regard to the period for which the
U.S. stockholder has held its stock. To the extent that we
elect under the applicable provisions of the Internal Revenue
Code to retain our net capital gains, U.S. stockholders
will be treated as having received, for U.S. federal income
tax purposes, our undistributed capital gains as well as a
corresponding credit for taxes paid by us on such retained
capital gains. U.S. stockholders will increase their
adjusted tax basis in our common stock by the difference between
their allocable share of such retained capital gain and their
share of the tax paid by us. Corporate U.S. stockholders
may be required to treat up to 20% of some capital gain
dividends as ordinary income. Long-term capital gains are
generally taxable at maximum federal rates of 15% (through
2010) in the case of U.S. stockholders who are
individuals, and 35% for corporations. Capital gains
attributable to the sale of depreciable real property held for
more than 12 months are subject to a 25% maximum
U.S. federal income tax rate for individual
U.S. stockholders who are individuals, to the extent of
previously claimed depreciation deductions.
Distributions in excess of our current and accumulated earnings
and profits will not be taxable to a U.S. stockholder to
the extent that they do not exceed the adjusted tax basis of the
U.S. stockholders shares in respect of which the
distributions were made, but rather will reduce the adjusted tax
basis of these shares. To the extent that such distributions
exceed the adjusted tax basis of an individual
U.S. stockholders shares, they will be included in
income as long-term capital gain, or short-term capital gain if
the shares have been held for one year or less. In addition, any
dividend declared by us in October, November or December of any
year and payable to a U.S. stockholder of record on a
specified date in any such month will be treated as both paid by
us and received by the U.S. stockholder on December 31 of
such year,
provided
that the dividend is actually paid by
us before the end of January of the following calendar year.
With respect to U.S. stockholders who are taxed at the
rates applicable to individuals, we may elect to designate a
portion of our distributions paid to such U.S. stockholders
as qualified dividend income. A portion of a
distribution that is properly designated as qualified dividend
income is taxable to non-corporate U.S. stockholders as
capital gain,
provided
that the U.S. stockholder has
held the common stock with respect to which the distribution is
made for more than 60 days during the
121-day
period beginning on the date that is 60 days before the
date on which such common stock became ex-dividend with respect
to the relevant distribution. The maximum amount of our
distributions eligible to be designated as qualified dividend
income for a taxable year is equal to the sum of:
(a) the qualified dividend income received by us during
such taxable year from non-REIT C corporations (including any
TRS in which we may own an interest);
(b) the excess of any undistributed REIT
taxable income recognized during the immediately preceding year
over the U.S. federal income tax paid by us with respect to
such undistributed REIT taxable income; and
(c) the excess of any income recognized during the
immediately preceding year attributable to the sale of a
built-in-gain
asset that was acquired in a carry-over basis transaction from a
non-REIT C corporation over the U.S. federal income tax
paid by us with respect to such built-in gain.
Generally, dividends that we receive will be treated as
qualified dividend income for purposes of (a) above if the
dividends are received from a domestic C corporation (other than
a REIT or a RIC), any TRS we may form, or a qualifying
foreign corporation and specified holding period
requirements and other requirements are met.
To the extent that we have available net operating losses and
capital losses carried forward from prior tax years, such losses
may reduce the amount of distributions that must be made in
order to comply with the REIT distribution requirements. See
Taxation of Our Company
General and Annual Distribution
Requirements. Such losses, however, are not passed through
to U.S. stockholders and do not offset income of
U.S. stockholders from other sources, nor do they affect
the character of any distributions that are actually made by us,
which are generally subject to tax in the hands of
U.S. stockholders to the extent that we have current or
accumulated earnings and profits.
126
Dispositions
of Our Common Stock
In general, a U.S. stockholder will realize gain or loss
upon the sale, redemption or other taxable disposition of our
common stock in an amount equal to the difference between the
sum of the fair market value of any property and the amount of
cash received in such disposition and the
U.S. stockholders adjusted tax basis in the common
stock at the time of the disposition. In general, a
U.S. stockholders adjusted tax basis will equal the
U.S. stockholders acquisition cost, increased by the
excess of net capital gains deemed distributed to the
U.S. stockholder (discussed above) less tax deemed paid on
it and reduced by returns of capital. In general, capital gains
recognized by individuals and other non-corporate
U.S. stockholders upon the sale or disposition of shares of
our common stock will be subject to a maximum U.S. federal
income tax rate of 15% for taxable years through 2010, if our
common stock is held for more than 12 months, and will be
taxed at ordinary income rates (of up to 35% through
2010) if our common stock is held for 12 months or
less. Gains recognized by U.S. stockholders that are
corporations are subject to U.S. federal income tax at a
maximum rate of 35%, whether or not classified as long-term
capital gains. The IRS has the authority to prescribe, but has
not yet prescribed, regulations that would apply a capital gain
tax rate of 25% (which is generally higher than the long-term
capital gain tax rates for non-corporate holders) to a portion
of capital gain realized by a non-corporate holder on the sale
of REIT stock or depositary shares that would correspond to the
REITs unrecaptured Section 1250 gain.
Holders are advised to consult with their tax advisors with
respect to their capital gain tax liability. Capital losses
recognized by a U.S. stockholder upon the disposition of
our common stock held for more than one year at the time of
disposition will be considered long-term capital losses, and are
generally available only to offset capital gain income of the
U.S. stockholder but not ordinary income (except in the
case of individuals, who may offset up to $3,000 of ordinary
income each year). In addition, any loss upon a sale or exchange
of shares of our common stock by a U.S. stockholder who has
held the shares for six months or less, after applying holding
period rules, will be treated as a long-term capital loss to the
extent of distributions received from us that were required to
be treated by the U.S. stockholder as long-term capital
gain.
Passive
Activity Losses and Investment Interest
Limitations
Distributions made by us and gain arising from the sale or
exchange by a U.S. stockholder of our common stock will not
be treated as passive activity income. As a result,
U.S. stockholders will not be able to apply any
passive losses against income or gain relating to
our common stock. Distributions made by us, to the extent they
do not constitute a return of capital, generally will be treated
as investment income for purposes of computing the investment
interest limitation. A U.S. stockholder that elects to
treat capital gain dividends, capital gains from the disposition
of stock or qualified dividend income as investment income for
purposes of the investment interest limitation will be taxed at
ordinary income rates on such amounts.
Taxation
of Tax-Exempt U.S. Stockholders
U.S. tax-exempt entities, including qualified employee
pension and profit sharing trusts and individual retirement
accounts, generally are exempt from U.S. federal income
taxation. However, they are subject to taxation on their
unrelated business taxable income, which we refer to in this
prospectus as UBTI. While many investments in real estate may
generate UBTI, the IRS has ruled that dividend distributions
from a REIT to a tax-exempt entity do not constitute UBTI. Based
on that ruling, and
provided
that (1) a tax-exempt
U.S. stockholder has not held our common stock as
debt financed property within the meaning of the
Internal Revenue Code (
i.e.
, where the acquisition or
holding of the property is financed through a borrowing by the
tax-exempt stockholder), (2) our common stock is not
otherwise used in an unrelated trade or business and (3) we
do not hold an asset that gives rise to excess inclusion
income (see Effect of Subsidiary
Entities, and Excess Inclusion
Income), distributions from us and income from the sale of
our common stock generally should not give rise to UBTI to a
tax-exempt U.S. stockholder. As previously noted, we expect
to engage in transactions that would result in a portion of our
dividend income being considered excess inclusion
income, and accordingly, it is likely that a portion of
our dividends received by a tax-exempt stockholder will be
treated as UBTI.
Tax-exempt U.S. stockholders that are social clubs,
voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services
plans exempt from U.S. federal income taxation
127
under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Internal Revenue Code, respectively, are subject to
different UBTI rules, which generally will require them to
characterize distributions from us as UBTI.
In certain circumstances, a pension trust (1) that is
described in Section 401(a) of the Internal Revenue Code,
(2) is tax exempt under Section 501(a) of the Internal
Revenue Code, and (3) that owns more than 10% of our stock
could be required to treat a percentage of the dividends from us
as UBTI if we are a pension-held REIT. We will not
be a pension-held REIT unless (1) either (A) one
pension trust owns more than 25% of the value of our stock, or
(B) a group of pension trusts, each individually holding
more than 10% of the value of our stock, collectively owns more
than 50% of such stock; and (2) we would not have qualified
as a REIT but for the fact that Section 856(h)(3) of the
Internal Revenue Code provides that stock owned by such trusts
shall be treated, for purposes of the requirement that not more
than 50% of the value of the outstanding stock of a REIT is
owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code
to include certain entities), as owned by the beneficiaries of
such trusts. Certain restrictions on ownership and transfer of
our stock should generally prevent a tax-exempt entity from
owning more than 10% of the value of our stock, or us from
becoming a pension-held REIT.
Tax-exempt U.S. stockholders are urged to consult their tax
advisors regarding the U.S. federal, state, local and
foreign tax consequences of owning our stock.
Taxation
of
Non-U.S.
Stockholders
The following is a summary of certain U.S. federal income
tax consequences of the acquisition, ownership and disposition
of our common stock applicable to
non-U.S. stockholders
of our common stock. For purposes of this summary, a
non-U.S. stockholder
is a beneficial owner of our common stock that is not a
U.S. stockholder or an entity that is treated as a
partnership for U.S. federal income tax purposes. The
discussion is based on current law and is for general
information only. It addresses only selective and not all
aspects of U.S. federal income taxation.
Ordinary
Dividends
The portion of dividends received by
non-U.S. stockholders
payable out of our earnings and profits that are not
attributable to gains from sales or exchanges of U.S. real
property interests and which are not effectively connected with
a U.S. trade or business of the
non-U.S. stockholder
will generally be subject to U.S. federal withholding tax
at the rate of 30%, unless reduced or eliminated by an
applicable income tax treaty. Under some treaties, however,
lower rates generally applicable to dividends do not apply to
dividends from REITs. In addition, any portion of the dividends
paid to
non-U.S. stockholders
that are treated as excess inclusion income will not be eligible
for exemption from the 30% withholding tax or a reduced treaty
rate. As previously noted, we expect to engage in transactions
that result in a portion of our dividends being considered
excess inclusion income, and accordingly, it is likely that a
portion of our dividend income will not be eligible for
exemption from the 30% withholding rate or a reduced treaty
rate. In the case of a taxable stock dividend with respect to
which any withholding tax is imposed, we may have to withhold or
dispose of part of the shares otherwise distributable in such
dividend and use such shares or the proceeds of such disposition
to satisfy the withholding tax imposed.
In general,
non-U.S. stockholders
will not be considered to be engaged in a U.S. trade or
business solely as a result of their ownership of our stock. In
cases where the dividend income from a
non-U.S. stockholders
investment in our common stock is, or is treated as, effectively
connected with the
non-U.S. stockholders
conduct of a U.S. trade or business, the
non-U.S. stockholder
generally will be subject to U.S. federal income tax at
graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such dividends, and may also be
subject to the 30% branch profits tax on the income after the
application of the income tax in the case of a
non-U.S. stockholder
that is a corporation.
Non-Dividend
Distributions
Unless (A) our common stock constitutes a U.S. real
property interest (or USRPI) or (B) either (1) the
non-U.S. stockholders
investment in our common stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder
(in which case the
non-U.S. stockholder
will be subject to the same treatment as U.S. stockholders
with respect to such gain) or (2) the
non-U.S. stockholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the
128
U.S. (in which case the
non-U.S. stockholder
will be subject to a 30% tax on the individuals net
capital gain for the year), distributions by us which are not
dividends out of our earnings and profits will not be subject to
U.S. federal income tax. If it cannot be determined at the
time at which a distribution is made whether or not the
distribution will exceed current and accumulated earnings and
profits, the distribution will be subject to withholding at the
rate applicable to dividends. However, the
non-U.S. stockholder
may seek a refund from the IRS of any amounts withheld if it is
subsequently determined that the distribution was, in fact, in
excess of our current and accumulated earnings and profits. If
our common stock constitutes a USRPI, as described below,
distributions by us in excess of the sum of our earnings and
profits plus the
non-U.S. stockholders
adjusted tax basis in our common stock will be taxed under the
Foreign Investment in Real Property Tax Act of 1980 (or FIRPTA)
at the rate of tax, including any applicable capital gains
rates, that would apply to a U.S. stockholder of the same
type (
e.g.
, an individual or a corporation, as the case
may be), and the collection of the tax will be enforced by a
refundable withholding at a rate of 10% of the amount by which
the distribution exceeds the stockholders share of our
earnings and profits.
Capital
Gain Dividends
Under FIRPTA, a distribution made by us to a
non-U.S. stockholder,
to the extent attributable to gains from dispositions of USRPIs
held by us directly or through pass-through subsidiaries (or
USRPI capital gains), will be considered effectively connected
with a U.S. trade or business of the
non-U.S. stockholder
and will be subject to U.S. federal income tax at the rates
applicable to U.S. stockholders, without regard to whether
the distribution is designated as a capital gain dividend. In
addition, we will be required to withhold tax equal to 35% of
the amount of capital gain dividends to the extent the dividends
constitute USRPI capital gains. Distributions subject to FIRPTA
may also be subject to a 30% branch profits tax in the hands of
a
non-U.S. holder
that is a corporation. However, the 35% withholding tax will not
apply to any capital gain dividend with respect to any class of
our stock which is regularly traded on an established securities
market located in the U.S. if the
non-U.S. stockholder
did not own more than 5% of such class of stock at any time
during the taxable year. Instead any capital gain dividend will
be treated as a distribution subject to the rules discussed
above under Taxation of
Non-U.S. Stockholders
Ordinary Dividends. Also, the branch profits tax will not
apply to such a distribution. A distribution is not a USRPI
capital gain if we held the underlying asset solely as a
creditor, although the holding of a shared appreciation mortgage
loan would not be solely as a creditor. Capital gain dividends
received by a
non-U.S. stockholder
from a REIT that are not USRPI capital gains are generally not
subject to U.S. federal income or withholding tax, unless
either (1) the
non-U.S. stockholders
investment in our common stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder
(in which case the
non-U.S. stockholder
will be subject to the same treatment as U.S. stockholders
with respect to such gain) or (2) the
non-U.S. stockholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the U.S. (in which case the
non-U.S. stockholder
will be subject to a 30% tax on the individuals net
capital gain for the year).
Dispositions
of Our Common Stock
Unless our common stock constitutes a USRPI, a sale of the stock
by a
non-U.S. stockholder
generally will not be subject to U.S. federal income
taxation under FIRPTA. The stock will not be treated as a USRPI
if less than 50% of our assets throughout a prescribed testing
period consist of interests in real property located within the
U.S., excluding, for this purpose, interests in real property
solely in a capacity as a creditor. We do not expect that more
than 50% of our assets will consist of interests in real
property located in the U.S.
Even if our shares of common stock otherwise would be a USRPI
under the foregoing test, our shares of common stock will not
constitute a USRPI if we are a domestically controlled
REIT. A domestically controlled REIT is a REIT in which,
at all times during a specified testing period (generally the
lesser of the five year period ending on the date of disposition
of our shares of common stock or the period of our existence),
less than 50% in value of its outstanding shares of common stock
is held directly or indirectly by
non-U.S. stockholders.
We believe we will be a domestically controlled REIT and,
therefore, the sale of our common stock should not be subject to
taxation under FIRPTA. However, because our stock will be widely
held, we cannot assure our investors that we will be a
domestically controlled REIT. Even if we do not qualify as a
domestically controlled REIT, a
non-U.S. stockholders
sale of our common stock nonetheless will generally not be
subject to tax under FIRPTA as a sale of a
129
USRPI,
provided
that (a) our common stock owned is
of a class that is regularly traded, as defined by
the applicable Treasury regulation, on an established securities
market, and (b) the selling
non-U.S. stockholder
owned, actually or constructively, 5% or less of our outstanding
stock of that class at all times during a specified testing
period.
If gain on the sale of our common stock were subject to taxation
under FIRPTA, the
non-U.S. stockholder
would be subject to the same treatment as a
U.S. stockholder with respect to such gain, subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals, and
the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Gain from the sale of our common stock that would not otherwise
be subject to FIRPTA will nonetheless be taxable in the
U.S. to a
non-U.S. stockholder
in two cases: (a) if the
non-U.S. stockholders
investment in our common stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder,
the
non-U.S. stockholder
will be subject to the same treatment as a U.S. stockholder
with respect to such gain, or (b) if the
non-U.S. stockholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the U.S., the nonresident alien
individual will be subject to a 30% tax on the individuals
capital gain.
Backup
Withholding and Information Reporting
We will report to our U.S. stockholders and the IRS the
amount of dividends paid during each calendar year and the
amount of any tax withheld. Under the backup withholding rules,
a U.S. stockholder may be subject to backup withholding
with respect to dividends paid unless the holder is a
corporation or comes within other exempt categories and, when
required, demonstrates this fact or provides a taxpayer
identification number or social security number, certifies as to
no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding
rules. A U.S. stockholder that does not provide his or her
correct taxpayer identification number or social security number
may also be subject to penalties imposed by the IRS. Backup
withholding is not an additional tax. In addition, we may be
required to withhold a portion of capital gain distribution to
any U.S. stockholder who fails to certify their non-foreign
status.
We must report annually to the IRS and to each
non-U.S. stockholder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. stockholder
resides under the provisions of an applicable income tax treaty.
A
non-U.S. stockholder
may be subject to backup withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of our common stock within the
U.S. is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties
of perjury that it is a
non-U.S. stockholder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a U.S. person) or the holder
otherwise establishes an exemption. Payment of the proceeds of a
sale of our common stock conducted through certain
U.S. related financial intermediaries is subject to
information reporting (but not backup withholding) unless the
financial intermediary has documentary evidence in its records
that the beneficial owner is a
non-U.S. stockholder
and specified conditions are met or an exemption is otherwise
established.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or a credit against such holders U.S. federal
income tax liability provided the required information is
furnished to the IRS.
State,
Local and Foreign Taxes
We and our stockholders may be subject to state, local or
foreign taxation in various jurisdictions, including those in
which it or they transact business, own property or reside. The
state, local or foreign tax treatment of our company and our
stockholders may not conform to the U.S. federal income tax
treatment discussed above. Any foreign taxes incurred by us
would not pass through to stockholders as a credit against their
U.S. federal income tax
130
liability. Prospective stockholders should consult their tax
advisors regarding the application and effect of state, local
and foreign income and other tax laws on an investment in our
companys common stock.
Legislative
or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are
constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Treasury Department. No
assurance can be given as to whether, when, or in what form,
U.S. federal income tax laws applicable to us and our
stockholders may be enacted. Changes to the U.S. federal
income tax laws and interpretations of U.S. federal income
tax laws could adversely affect an investment in our shares of
common stock.
131
UNDERWRITING
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. Morgan
Stanley & Co. Incorporated and Deutsche Bank
Securities Inc. are the representatives of the underwriters. We,
the LLC Subsidiary and our Manager have entered into an
underwriting agreement with the representatives. Subject to the
terms and conditions of the underwriting agreement, each of the
underwriters has severally agreed to purchase the number of
shares of our common stock listed next to its name in the
following table:
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Number of
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Underwriters
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Shares
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Morgan Stanley & Co. Incorporated
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Deutsche Bank Securities Inc.
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Total
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The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters overallotment option described
below.
Our common stock is offered subject to a number of conditions,
including:
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receipt and acceptance of the common stock by the
underwriters, and
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the underwriters right to reject orders in whole or in
part.
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In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
Sales of shares made outside of the United States may be made by
affiliates of the underwriters.
Overallotment
Option
We have granted the underwriters an option to buy up
to additional shares of our common
stock. The underwriters may exercise this option solely for the
purpose of covering overallotments, if any, made in connection
with this offering. The underwriters have 30 days from the
date of this prospectus to exercise this option. If the
underwriters exercise this option, they will each purchase
additional shares approximately in proportion to the amounts
specified in the table above.
Commissions
and Discounts
Shares sold by the underwriters to the public will initially be
offered at the offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to
$ per share from the public
offering price. Any of these securities dealers may resell any
shares purchased from the underwriters to other brokers or
dealers at a discount of up to $
per share from the public offering price. If all the shares are
not sold at the initial public offering price, the
representatives may change the offering price and the other
selling terms. The underwriters have informed us that they do
not expect discretionary sales to
exceed % of the shares of common
stock to be offered.
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters,
assuming both no exercise and full exercise of the
underwriters option to purchase up to an
additional
shares:
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Per Share
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Without Option
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With Option
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Public offering price
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$
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$
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$
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Underwriting discounts and commissions
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$
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$
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$
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Proceeds, before expenses, to us
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$
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$
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$
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We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately $1.0 million.
132
No Sales
of Similar Securities
Each of our executive officers, directors, Manager and MFA has
agreed, subject to specified exceptions, not to, directly or
indirectly,
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offer, pledge, sell or contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, lend or
otherwise dispose of or transfer or request or demand that we
file a registration statement related to our common stock or any
securities convertible or exercisable, redeemable or
exchangeable for shares of our common stock; or sell, agree to
offer or sell, solicit offers to purchase, grant any call option
or purchase any put option with respect to, pledge, borrow or
otherwise dispose of any shares of common stock, any of our or
our subsidiaries other equity securities or any securities
convertible into or exercisable or exchangeable for shares of
common stock or any such equity securities; or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or
otherwise for a period of 180 days after the date of this
prospectus without the prior written consent of the
representatives of the underwriters.
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This restriction terminates after the close of trading of the
shares of common stock on and including the 180th day after
the date of this prospectus. However, if (1) during the
last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs, or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions imposed by this agreement shall
continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event. However, the
representatives of the underwriters may, in their sole
discretion and at any time or from time to time before the
termination of the
180-day
period, without notice, release all or any portion of the
securities subject to
lock-up
agreements. There are no other existing agreements between the
underwriters and any officer or director who has executed a
lock-up
agreement providing consent to the sale of shares prior to the
expiration of the
lock-up
period.
In addition, we have agreed that, for 180 days after the
date of this prospectus, we will not, without the prior written
consent of the representatives of the underwriters, issue, sell,
contract to sell, or otherwise dispose of, any shares of common
stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than our sale of
shares in this offering and the concurrent private offering or
the issuance of options or shares of common stock under existing
stock option and incentive plans for our executive officers and
directors. We also have agreed that we will not consent to the
disposition of any shares held by officers, directors, our
Manager or MFA subject to
lock-up
agreements prior to the expiration of their respective
lock-up
periods unless pursuant to an exception to those agreements or
with the consent of the representatives of the underwriters.
MFA has agreed to extend its restricted
lock-up
period as set forth above to the earlier of:
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the date which is three years following the date of this
prospectus; or
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the termination date of the management agreement.
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Indemnification
and Contribution
We have agreed to indemnify the underwriters and their
controlling persons against certain liabilities, including
liabilities under the Securities Act. If we are unable to
provide this indemnification, we will contribute to payments the
underwriters and their controlling persons may be required to
make in respect of those liabilities.
New York
Stock Exchange Listing
We intend to apply to have our common stock listed on the NYSE
under the symbol MFR. To meet the requirements for
listing on the NYSE, the underwriters will undertake to sell
lots of 100 or more shares to a
133
minimum of 400 U.S. beneficial holders and thereby
establish at least 1,100,000 publicly held shares outstanding in
the U.S. having an aggregate market value of at least
$60 million.
Price
Stabilization, Short Positions
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
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stabilizing transactions;
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short sales;
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purchases to cover positions created by short sales;
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imposition of penalty bids; and
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syndicate covering transactions.
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Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering. Short sales may be covered
short sales, which are short positions in an amount not
greater than the underwriters overallotment option
referred to above, or may be naked short sales,
which are short positions in excess of that amount.
The underwriters may close out any covered short position either
by exercising their overallotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market compared to the price at which they may purchase shares
through the overallotment option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
that could adversely affect investors who purchased in this
offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on the NYSE, in the
over-the-counter market or otherwise.
Determination
of Offering Price
Prior to this offering, there was no public market for our
common stock. The initial public offering price will be
determined by negotiation by us and the representatives of the
underwriters. The principal factors to be considered in
determining the initial public offering price include:
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the information set forth in this prospectus and otherwise
available to the representatives;
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our history and prospects and the history of, and prospectus
for, the industry in which we compete;
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our past and present financial performance and an assessment of
our management;
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our prospects for future earnings and the present state of our
development;
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the general condition of the securities markets at the time of
this offering;
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the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies; and
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other factors deemed relevant by the underwriters and us.
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134
Affiliations
In the ordinary course of their business, certain of the
underwriters
and/or
their
affiliates have in the past performed for MFA, and may in the
future perform for us and MFA, investment banking,
broker-dealer, lending, financial advisory or other services for
us for which they have received, or may receive, customary
compensation. For example, MFA has repurchase arrangements with
Morgan Stanley & Co. Incorporated and Deutsche Bank
Securities Inc.
and/or
their
respective affiliates.
LEGAL
MATTERS
Certain legal matters relating to this offering will be passed
upon for us by Clifford Chance US LLP, New York, New York. In
addition, the description of U.S. federal income tax
consequences contained in the section of the prospectus entitled
U.S. Federal Income Tax Considerations is based
on the opinion of Clifford Chance US LLP. Certain legal matters
relating to this offering will be passed upon for the
underwriters by Sullivan & Cromwell LLP, New York, New
York. As to certain matters of Maryland law, Clifford Chance US
LLP may rely on the opinion of Venable LLP, Baltimore, Maryland.
EXPERTS
The balance sheet of MFResidential Investments, Inc. at
May 7, 2009 appearing in this prospectus and registration
statement has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and is included
in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-11,
including exhibits and schedules filed with the registration
statement of which this prospectus is a part, under the
Securities Act of 1933, as amended, with respect to the shares
of common stock to be sold in this offering. This prospectus
does not contain all of the information set forth in the
registration statement and exhibits and schedules to the
registration statement. For further information with respect to
us and the shares of common stock to be sold in this offering,
reference is made to the registration statement, including the
exhibits and schedules to the registration statement. Copies of
the registration statement, including the exhibits and schedules
to the registration statement, may be examined without charge at
the public reference room of the Securities and Exchange
Commission, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information about the operation of
the public reference room may be obtained by calling the
Securities and Exchange Commission at
1-800-SEC-0300.
Copies of all or a portion of the registration statement may be
obtained from the public reference room of the Securities and
Exchange Commission upon payment of prescribed fees. Our
Securities and Exchange Commission filings, including our
registration statement, are also available to you, free of
charge, on the Securities and Exchange Commissions website
at
www.sec.gov
.
As a result of this offering, we will become subject to the
information and reporting requirements of the Securities
Exchange Act of 1934, as amended, and will file periodic
reports, proxy statements and will make available to our
stockholders annual reports containing audited financial
information for each year and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim
financial information.
135
INDEX TO
FINANCIAL STATEMENTS
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MFResidential Investments, Inc.:
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F-2
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Audited Financial Statements:
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F-3
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F-4
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F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
MFResidential Investments, Inc.
We have audited the accompanying balance sheet of MFResidential
Investments, Inc. (the Company) as of May 7,
2009. This balance sheet is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of
material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting.
Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of
MFResidential Investments, Inc. at May 7, 2009, in
conformity with U.S. generally accepted accounting
principles.
New York, New York
May 12, 2009
F-2
MFRESIDENTIAL
INVESTMENTS, INC.
MAY
7, 2009
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ASSETS
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Cash
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$
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1,000
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Total Assets
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$
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1,000
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STOCKHOLDERS EQUITY
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Stockholders Equity
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Common stock (par value $.01, 1,000 shares authorized,
issued and outstanding)
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$
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10
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Additional
Paid-in-capital
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990
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Total stockholders equity
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$
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1,000
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See accompanying notes to the Balance Sheet.
F-3
MFRESIDENTIAL
INVESTMENTS, INC.
NOTES TO
BALANCE SHEET
MAY 7, 2009
MFResidential Investments, Inc. (the Company) was
organized in Maryland on February 1, 2008. Under the
Articles of Incorporation, the Company is authorized to issue up
to 1,000 shares of common stock, par value $0.01 per share.
The Company has not commenced operations.
On February 5, 2008, MFA Financial, Inc. (MFA),
a publicly traded real estate investment trust (or REIT),
acquired all of the capital stock of the Company for $1,000 and
is the sole stockholder of the Company. MFAs common stock
is listed on the New York Stock Exchange under the symbol MFA.
The Company and MFA are also related parties as a result of
common management.
The Company intends to elect and qualify to be taxed as a REIT
for U.S. federal income tax purposes commencing with its
taxable period ending on December 31, 2009. In order to
maintain its tax status as a REIT, the Company plans to
distribute at least 90% of its taxable income in the form of
qualifying distributions to stockholders.
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2.
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THE
COMPANY/INITIAL PUBLIC OFFERING
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The Company intends to conduct an initial public offering of
common stock, which it expects to complete during the second
calendar quarter of 2009. It is expected that proceeds from the
offering will primarily be used to invest in residential
mortgage-backed securities (MBS), residential
mortgage loans and other real estate-related financial assets.
The Company will be externally managed and advised by MFA
Spartan Manager, LLC, a Delaware limited liability company (the
Manager). The Manager is a wholly-owned subsidiary
of MFA.
Pursuant to the management agreement between the Company and the
Manager, the Company will pay the Manager, upon the commencement
of operations, a management fee quarterly in arrears in an
amount equal to 1.5% per annum, calculated quarterly, of the
Companys stockholders equity.
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3.
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SIGNIFICANT
ACCOUNTING POLICIES
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Use of
Estimates
The preparation of the balance sheet in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the balance sheet. Actual results could differ from those
estimates.
Underwriting
Commissions and Costs
Underwriting commissions and costs to be incurred in connection
with the Companys stock offering will be reflected as a
reduction of additional
paid-in-capital.
Organization
Costs
Costs incurred to organize the Company will be expensed as
incurred.
F-4
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.
Shares
Common Stock
PROSPECTUS
Morgan Stanley
Deutsche Bank
Securities
,
2009
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 31.
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Other
Expenses of Issuance and Distribution.
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The following table shows the fees and expenses, other than
underwriting discounts and commissions, to be paid by us in
connection with the sale and distribution of the securities
being registered hereby. All amounts except the SEC registration
fee are estimated.
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Securities and Exchange Commission registration fee
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$
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9,825
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Financial Industry Regulatory Authority, Inc. filing fee
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$
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25,500
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NYSE listing fee
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$
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150,000
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Legal fees and expenses (including Blue Sky fees)
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$
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550,000
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Accounting fees and expenses
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$
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100,000
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Printing and engraving expenses
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$
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135,000
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Transfer agent fees and expenses
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$
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10,000
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Miscellaneous
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$
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19,675
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Total
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$
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1,000,000
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Item 32.
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Sales
to Special Parties.
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None.
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Item 33.
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Recent
Sales of Unregistered Securities.
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MFA, an affiliate of our Manager, has purchased
1,000 shares of our common stock for a purchase price of
$1,000 in a private offering. Such issuance was exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) thereof.
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Item 34.
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Indemnification
of Directors and Officers.
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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 eliminates
such liability to the maximum extent permitted by Maryland law.
The MGCL requires us (unless our charter provides otherwise,
which our charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason
of his service in that capacity. The MGCL permits a corporation
to indemnify its present and former directors and officers,
among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made or threatened to
be made a party by reason of their service in those or other
capacities unless it is established that:
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the act or omission of the director or officer was material to
the matter giving rise to the proceeding and (1) was
committed in bad faith or (2) was the result of active and
deliberate dishonesty;
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the director or officer actually received an improper personal
benefit in money, property or services; or
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in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was
unlawful.
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However, under the MGCL, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of
the corporation in which the director or officer was adjudged
liable to the corporation or in respect to any proceeding in
which the director or officer was adjudged to be liable on the
basis that personal benefit was improperly received. A court may
order indemnification if it determines that the director or
officer is fairly and
II-1
reasonably entitled to indemnification, even though the director
or officer did not meet the prescribed standard of conduct or
was adjudged liable on the basis that personal benefit was
improperly received. However, indemnification for an adverse
judgment in a suit by us or in our right, or for a judgment of
liability on the basis that personal benefit was improperly
received, is limited to expenses.
In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the
corporations receipt of:
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a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation; and
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a written undertaking by the director or officer or on the
directors or officers behalf to repay the amount
paid or reimbursed by the corporation if it is ultimately
determined that the director or officer did not meet the
standard of conduct.
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Our charter authorizes us to obligate ourselves and our bylaws
obligate us, to the fullest extent permitted by Maryland law in
effect from time to time, to indemnify and, without requiring a
preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to:
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any present or former director or officer who is made or
threatened to be made a party to the proceeding by reason of his
or her service in that capacity; or
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any individual who, while a director or officer of our company
and at our request, serves or has served another corporation,
REIT, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or
trustee of such corporation, REIT, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made
or threatened to be made a party to the proceeding by reason of
his or her service in that capacity.
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Our charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of ours in any
of the capacities described above and to any employee or agent
of our company or a predecessor of our company.
We expect to enter into indemnification agreements with each of
our directors and executive officers that provide for
indemnification to the maximum extent permitted by Maryland law.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability
arising under the Securities Act, we have been informed that, in
the opinion of the SEC, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
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Item 35.
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Treatment
of Proceeds from Stock Being Registered.
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None of the proceeds will be credited to an account other than
the appropriate capital share account.
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Item 36.
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Financial
Statements and Exhibits.
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(a)
Financial Statements.
See
page F-1
for an index to the financial statements included in the
registration statement.
(b)
Exhibits.
The following is a complete
list of exhibits filed as part of the registration statement,
which are incorporated herein:
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Exhibit
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Number
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Exhibit Description
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1
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.1*
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Form of Underwriting Agreement among MFResidential Investments,
Inc., MFA Spartan Manager, LLC and the underwriters named
therein.
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1
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.2*
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Form of Stock Purchase Agreement between MFResidential
Investments, Inc. and MFA Financial, Inc.
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3
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.1**
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Articles of Amendment and Restatement of MFResidential
Investments, Inc.
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II-2
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Exhibit
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Number
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Exhibit Description
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3
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.2**
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Bylaws of MFResidential Investments, Inc.
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4
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.1**
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Specimen Common Stock Certificate of MFResidential Investments,
Inc.
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5
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.1*
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Opinion of Clifford Chance US LLP (including consent of such
firm)
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8
|
.1*
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Tax Opinion of Clifford Chance US LLP (including consent of such
firm)
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10
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.1*
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Form of Management Agreement between MFResidential Investments,
Inc. and MFA Spartan Manager, LLC
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10
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.3*
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Form of MFResidential Investments, Inc. 2009 Equity Incentive
Plan
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10
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.4*
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Form of Restricted Stock Award Agreement
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10
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.5*
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Form of Incentive Stock Option Award Agreement
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10
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.6*
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Form of Non-Qualified Stock Option Award Agreement
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10
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.7*
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Form of Phantom Share Award Agreement
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10
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.8*
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Form of Registration Rights Agreement by and among MFResidential
Investments, Inc. and certain persons listed on Schedule 1
thereto.
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23
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.1
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Consent of Ernst & Young LLP
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23
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.2*
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Consent of Clifford Chance US LLP (included in Exhibit 5.1)
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23
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.3*
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Consent of Clifford Chance US LLP (included in Exhibit 8.1)
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99
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.1**
|
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Consent of John H. Cassidy to being named as a director nominee
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99
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.2**
|
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Consent of F. Allen Graham to being named as a director nominee
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99
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.4**
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Consent of Lawrence S. Wizel to being named as a director
nominee
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*
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To be filed by amendment.
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**
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Previously filed.
|
(a) The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended, or the Securities
Act, may be permitted to directors, officers or controlling
persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
II-3
(c) The undersigned registrant hereby further undertakes
that:
(1) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance under Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-11
and has duly caused this Amendment No. 6 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York,
State of New York, on May 15, 2009.
MFResidential Investments, Inc.
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By:
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/s/ Stewart
Zimmerman
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Stewart Zimmerman
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 6 to the Registration Statement has been
signed below by the following persons in the capacities and on
the date indicated.
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Signatures
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Title
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Date
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/s/ Stewart
Zimmerman
Stewart
Zimmerman
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Chairman of the Board and
Chief Executive Officer
(principal executive officer)
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May 15, 2009
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/s/ William
S. Gorin
William
S. Gorin
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President, Principal Financial Officer and Director
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May 15, 2009
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II-5
EXHIBIT INDEX
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Exhibit
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Number
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Exhibit Description
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1
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.1*
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Form of Underwriting Agreement among MFResidential Investments,
Inc., MFA Spartan Manager, LLC and the underwriters named therein
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1
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.2*
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Form of Stock Purchase Agreement between MFResidential
Investments, Inc. and MFA Financial, Inc.
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3
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.1**
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Articles of Amendment and Restatement of MFResidential
Investments, Inc.
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3
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.2**
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Bylaws of MFResidential Investments, Inc.
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4
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.1**
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Specimen Common Stock Certificate of MFResidential Investments,
Inc.
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5
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.1*
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Opinion of Clifford Chance US LLP (including consent of such
firm)
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8
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.1*
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Tax Opinion of Clifford Chance US LLP (including consent of such
firm).
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10
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.1*
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Form of Management Agreement between MFResidential Investments,
Inc. and MFA Spartan Manager, LLC
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10
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.3*
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Form of MFResidential Investments, Inc. 2009 Equity Incentive
Plan
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10
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.4*
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Form of Restricted Stock Award Agreement
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10
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.5*
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Form of Incentive Stock Option Award Agreement
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10
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.6*
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Form of Non-Qualified Stock Option Award Agreement
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10
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.7*
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Form of Phantom Share Award Agreement
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10
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.8*
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Form of Registration Rights Agreement by and among MFResidential
Investments, Inc. and certain persons listed on Schedule 1
thereto.
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23
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.1
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Consent of Ernst & Young, LLP
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23
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.2*
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Consent of Clifford Chance US LLP (included in Exhibit 5.1)
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23
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.3*
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Consent of Clifford Chance US LLP (included in Exhibit 8.1)
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99
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.1**
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Consent of John H. Cassidy to being named as a director nominee
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99
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.2**
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Consent of F. Allen Graham to being named as a director nominee
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99
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.4**
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Consent of Lawrence S. Wizel to being named as a director
nominee
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*
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To be filed by amendment.
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**
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Previously filed.
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II-6
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