Table of Contents
As filed with the Securities and Exchange
Commission on July 21, 2011
Registration
No. 333-173890
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Amendment No. 3
to
Form S-11
FOR REGISTRATION UNDER THE
SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
ORCHID ISLAND CAPITAL,
INC.
(Exact name of registrant as
specified in its governing instruments)
3305 Flamingo Drive, Vero Beach, Florida 32963
(772) 231-1400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
(772) 231-1400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Robert E. Cauley
Chairman and Chief Executive Officer
Orchid Island Capital, Inc.
3305 Flamingo Drive, Vero Beach, Florida 32963
(772) 231-1400
(Name, address, including zip code and telephone number, including area code, of agent for service)
Chairman and Chief Executive Officer
Orchid Island Capital, Inc.
3305 Flamingo Drive, Vero Beach, Florida 32963
(772) 231-1400
(Name, address, including zip code and telephone number, including area code, of agent for service)
copies to:
|
S. Gregory Cope Hunton & Williams LLP Riverfront Plaza, East Tower 951 East Byrd Street Richmond, VA 23219 (804) 788-8388 (804) 343-4833 (facsimile) |
Bonnie A. Barsamian Valerie Ford Jacob Fried, Frank, Harris, Shriver & Jacobson LLP One New York Plaza New York, New York 10004 (212) 859-8226 (212) 859-4000 (facsimile) |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(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 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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|
The
information in this 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 prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted. |
Subject to Completion, dated
July 21, 2011
PROSPECTUS
5,200,000 Shares
Common Stock
Orchid Island Capital, Inc., a Maryland corporation, invests in
residential mortgage-backed securities the principal and
interest payments of which are guaranteed by a
U.S. Government agency or a U.S. Government-sponsored
entity. We will be externally managed and advised by Bimini
Advisors, Inc., or our Manager, a wholly-owned subsidiary of
Bimini Capital Management, Inc., or Bimini. Bimini is an
existing real estate investment trust for U.S. federal
income tax purposes, or REIT, incorporated in Maryland whose
common stock is traded on the OTC Bulletin Board under the
symbol “BMNM.”
This is our initial public offering. We are offering
5,200,000 shares of our common stock. We currently expect
the initial public offering price of our common stock to be
$8.00 per share. Prior to this offering, there has been no
public market for our common stock. We have applied to have our
common stock listed on the NYSE Amex, under the symbol
“ORC.”
Concurrently with this offering, we intend to sell in a separate
private placement to Bimini warrants to purchase an aggregate of
2,655,000 shares of our common stock. The aggregate
purchase price of such warrants will be $1,248,000. Each warrant
will be exercisable into one share of our common stock at an
exercise price of 110% of the price per share of the common
stock sold in this offering, subject to certain adjustments. See
“Description of Securities — Warrants.” The
warrants will become exercisable upon the completion of this
offering and will expire at the close of business
on ,
2018.
We are organized and intend to conduct our operations to qualify
as a REIT. To assist us in qualifying as a REIT, among other
purposes, ownership of our stock by any person is generally
limited to 9.8% in value or number of shares, whichever is more
restrictive, of any class or series of our stock, except that
Bimini may own up to 44% of our common stock so long as Bimini
continues to qualify as a REIT. Our charter also contains
various other restrictions on the ownership and transfer of our
common stock, see “Description of Securities —
Restrictions on Ownership and Transfer.”
Investing in our
common stock involves risks. See “Risk Factors”
beginning on page 25 of this prospectus.
| Per Share | Total | |||||||
|
Price to the public
|
$ | $ | ||||||
|
Underwriting discounts and
commissions(1)
|
$ | $ | ||||||
|
Proceeds to us (before
expenses)(2)
|
$ | $ | ||||||
| (1) | Upon the completion of this offering, the underwriters will be entitled to receive $ per share from us for the shares sold in this offering. Our Manager will pay the underwriters the remaining $ per share for the shares sold in this offering on a deferred basis after the completion of this offering. | |
| (2) | Our obligation to pay for the expenses of this offering will be capped at 1.0% of the total gross proceeds from this offering. Our Manager will pay any offering expenses incurred above this 1.0% cap. |
We have granted the underwriters the option to purchase 780,000
additional shares of common stock on the same terms and
conditions set forth above within 30 days after the date of
this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Barclays Capital, on behalf of the underwriters, expects to
deliver the shares on or
about ,
2011.
| Barclays Capital | JMP Securities |
| Cantor Fitzgerald & Co. | Oppenheimer & Co. | |||
| Lazard Capital Markets | Sterne Agee |
Prospectus
dated ,
2011
TABLE OF
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| EX-23.1 | ||||||||
You should rely only on the information contained in this
prospectus and any free writing prospectus that we authorize to
be delivered to you. We have not, and the underwriters have not,
authorized any other person to provide you with any additional
or different information. If anyone provides you with
additional, 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 is accurate only as of
the date on the front cover of this prospectus or another date
specified herein. Our business, financial condition and
prospects may have changed since such dates.
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PROSPECTUS
SUMMARY
This section summarizes information contained elsewhere in
this prospectus. It is not complete and may not contain all of
the information that you may want to consider before making an
investment in our common stock. You should read this entire
prospectus carefully, including the section titled “Risk
Factors” and our financial statements and related notes,
before making an investment in our common stock. As used in this
prospectus, “Orchid,” “Company,”
“we,” “our,” and “us” refer to
Orchid Island Capital, Inc., except where the context otherwise
requires. References to “our Manager” refer to Bimini
Advisors, Inc., a wholly-owned subsidiary of Bimini Capital
Management, Inc. References to “Bimini” and
“Bimini Capital” refer to Bimini Capital Management,
Inc. Unless otherwise indicated, the information in this
prospectus assumes (i) the underwriters will not exercise
their option to purchase up to 780,000 additional shares of our
common stock, and (ii) that the shares of our common stock
to be sold in this offering will be sold at $8.00 per share.
Unless otherwise indicated or the context requires, all
information in this prospectus relating to the number of shares
of common stock to be outstanding after the completion of this
offering reflects a stock dividend of 6.0922 shares for each
share of common stock that we will effect immediately prior to
the completion of this offering. See “Description of
Securities — General.”
Our
Company
Orchid Island Capital, Inc. is a specialty finance company that
invests in residential mortgage-backed securities, or RMBS. The
principal and interest payments of these RMBS are guaranteed by
the Federal National Mortgage Association, or Fannie Mae, the
Federal Home Loan Mortgage Corporation, or Freddie Mac, or the
Government National Mortgage Association, or Ginnie Mae, and are
backed by primarily single-family residential mortgage loans. We
refer to these types of RMBS as Agency RMBS. Our investment
strategy focuses on, and our portfolio consists of, two
categories of Agency RMBS: (i) traditional pass-through
Agency RMBS and (ii) structured Agency RMBS, such as
collateralized mortgage obligations, or CMOs, interest only
securities, or IOs, inverse interest only securities, or IIOs,
and principal only securities, or POs, among other types of
structured Agency RMBS.
Our business objective is to provide attractive risk-adjusted
total returns to our investors over the long term through a
combination of capital appreciation and the payment of regular
quarterly distributions. We intend to achieve this objective by
investing in and strategically allocating capital between the
two categories of Agency RMBS described above. We seek to
generate income from (i) the net interest margin, which is
the spread or difference between the interest income we earn on
our assets and the interest cost of our related borrowing and
hedging activities, on our leveraged pass-through Agency RMBS
portfolio and the leveraged portion of our structured Agency
RMBS portfolio, and (ii) the interest income we generate
from the unleveraged portion of our structured Agency RMBS
portfolio. We intend to fund our pass-through Agency RMBS and
certain of our structured Agency RMBS, such as fixed and
floating rate tranches of CMOs and POs, through short-term
borrowings structured as repurchase agreements. However, we do
not intend to employ leverage on the securities in our
structured Agency RMBS portfolio that have no principal balance,
such as IOs and IIOs. We do not intend to use leverage in these
instances because these securities contain structural leverage.
Pass-through Agency RMBS and structured Agency RMBS typically
exhibit materially different sensitivities to movements in
interest rates. Declines in the value of one portfolio may be
offset by appreciation in the other. The percentage of capital
that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the
level of income generated by the combined portfolios, the
stability of that income stream and the stability of the value
of the combined portfolios. We believe that this strategy will
enhance our liquidity, earnings, book value stability and asset
selection opportunities in various interest rate environments.
We were formed by Bimini in August 2010. We commenced operations
on November 24, 2010, and through March 31, 2011,
Bimini had contributed approximately $7.5 million in cash
to us. Since then, Bimini contributed an additional $7.5 million
in cash to us pursuant to a subscription agreement
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to purchase additional shares of our common stock. Bimini is
currently our sole stockholder. Bimini has managed our portfolio
since inception by utilizing the same investment strategy that
we expect our Manager and its experienced RMBS investment team
to continue to employ after completion of this offering. As of
March 31, 2011, our Agency RMBS portfolio had a fair value
of approximately $28.9 million and was comprised of
approximately 83.5%
pass-through
Agency RMBS and 16.5% structured Agency RMBS. Our net asset
value as of March 31, 2011 was approximately
$7.5 million.
We intend to qualify and will elect to be taxed as a REIT under
the Internal Revenue Code of 1986, as amended, or the Code,
commencing with our short taxable year ending December 31,
2011. We generally will not be subject to U.S. federal
income tax to the extent that we annually distribute all of our
REIT taxable income to our stockholders and qualify as a REIT.
Our
Manager
We are currently managed by Bimini. Upon completion of this
offering, we will be externally managed and advised by Bimini
Advisors, Inc., or our Manager, pursuant to the terms of a
management agreement. Our Manager is a newly-formed Maryland
corporation and wholly-owned subsidiary of Bimini. Our Manager
will be responsible for administering our business activities
and
day-to-day
operations, subject to the supervision and oversight of our
Board of Directors. Members of Bimini’s and our
Manager’s senior management team will also serve as our
executive officers. We will not have any employees.
Bimini is a mortgage REIT that has operated since 2003 and, as
of March 31, 2011, had approximately $117 million of
pass-through Agency RMBS and structured Agency RMBS. Bimini has
employed its investment strategy with its own portfolio since
the third quarter of 2008 and with our portfolio since our
inception. We expect that our Manager will continue to employ
this strategy after the completion of this offering. We were
formed and have been managed by Bimini as a vehicle through
which Bimini could employ its same investment strategy and
pursue growth and capital-raising opportunities. As a result of
the adverse impact of its legacy mortgage origination business,
Bimini has been unable to raise capital on attractive terms to
finance the growth of its own portfolio. Bimini may seek to
raise capital in the future if and when it is able to do so. For
additional information regarding Bimini, see
“— About Bimini.”
Our Investment
and Capital Allocation Strategy
Our Investment
Strategy
Our business objective is to provide attractive risk-adjusted
total returns to our investors over the long term through a
combination of capital appreciation and the payment of regular
quarterly distributions. We intend to achieve this objective by
investing in and strategically allocating capital between
pass-through Agency RMBS and structured Agency RMBS. We seek to
generate income from (i) the net interest margin on our
leveraged pass-through Agency RMBS portfolio and the leveraged
portion of our structured Agency RMBS portfolio, and
(ii) the interest income we generate from the unleveraged
portion of our structured Agency RMBS portfolio. We also seek to
minimize the volatility of both the net asset value of, and
income from, our portfolio through a process which emphasizes
capital allocation, asset selection, liquidity and active
interest rate risk management.
We intend to fund our pass-through Agency RMBS and certain of
our structured Agency RMBS, such as fixed and floating rate
tranches of CMOs and POs, through repurchase agreements.
However, we do not intend to employ leverage on our structured
Agency RMBS that have no principal balance, such as IOs and
IIOs. We do not intend to use leverage in these instances
because the securities contain structural leverage.
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Our target asset categories and the principal assets in which we
intend to invest are as follows:
|
Asset Categories
|
Principal Assets
|
|
|
Pass-through Agency RMBS
|
Residential Mortgage Pass-Through Certificates. Residential mortgage pass-through certificates are securities representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. Pass-through certificates can be divided into various categories based on the characteristics of the underlying mortgages, such as the term or whether the interest rate is fixed or variable. | |
| The principal and interest payments of these Agency RMBS are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and are backed by primarily single-family residential mortgage loans. We intend to invest in pass-through certificates with the three following types of underlying loans: | ||
|
• Fixed-Rate
Mortgages. Fixed-rate mortgages are mortgages
for which the borrower pays an interest rate that is constant
throughout the term of the loan.
|
||
|
• Adjustable-Rate Mortgages
(ARMs). ARMs are mortgages for which the
borrower pays an interest rate that varies over the term of the
loan.
|
||
|
• Hybrid ARMs. Hybrid ARMs
are mortgages that have a fixed-rate for the first few years of
the loan, often three, five or seven years, and thereafter reset
periodically like a traditional ARM.
|
||
|
Structured Agency RMBS
|
Collateralized Mortgage Obligations. CMOs are securities that are structured from residential mortgage pass-through certificates, which receive monthly payments of principal and interest. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of residential mortgage pass-through securities issued directly by or under the auspices of Fannie Mae, Freddie Mac or Ginnie Mae. CMOs divide the cash flows which come from the underlying residential mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying residential mortgage pass-through certificates. | |
| Interest Only Securities. IOs are securities that are structured from residential mortgage pass-through certificates, which receive monthly payments of interest only. IOs represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. The value of IOs depends primarily on two factors, which are prepayments and interest rates. | ||
| Inverse Interest Only Securities. IIOs are IOs that have interest rates that move in the opposite direction of an interest rate index, such as LIBOR. The value of IIOs depends primarily on three factors, which are prepayments, LIBOR and term interest rates. | ||
| Principal Only Securities. POs are securities that are structured from residential mortgage pass-through certificates, which receive monthly payments of principal only and are, therefore, similar to zero coupon bonds. The value of POs depends primarily on two factors, which are prepayments and interest rates. |
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Our investment strategy consists of the following components:
| • | investing in pass-through Agency RMBS and certain structured Agency RMBS, such as fixed and floating rate tranches of CMOs and POs, on a leveraged basis to increase returns on the capital allocated to this portfolio; | |
| • | investing in certain structured Agency RMBS, such as IOs and IIOs, on an unleveraged basis in order to (i) increase returns due to the structural leverage contained in such securities, (ii) enhance liquidity due to the fact that these securities will be unencumbered and (iii) diversify portfolio interest rate risk due to the different interest rate sensitivity these securities have compared to pass-through Agency RMBS; | |
| • | investing in Agency RMBS in order to minimize credit risk; | |
| • | investing in assets that will cause us to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act; and | |
| • | investing in assets that will allow us to qualify and maintain our qualification as a REIT. |
Our Manager will make investment decisions based on various
factors, including, but not limited to, relative value, expected
cash yield, supply and demand, costs of hedging, costs of
financing, liquidity requirements, expected future interest rate
volatility and the overall shape of the U.S. Treasury and
interest rate swap yield curves. We do not attribute any
particular quantitative significance to any of these factors,
and the weight we give to these factors depends on market
conditions and economic trends. We believe that this strategy,
combined with our Manager’s experienced RMBS investment
team, will enable us to provide attractive long-term returns to
our stockholders.
Capital
Allocation Strategy
The percentage of capital invested in our two asset categories
will vary and will be managed in an effort to maintain the level
of income generated by the combined portfolios, the stability of
that income stream and the stability of the value of the
combined portfolios. Typically, pass-through Agency RMBS and
structured Agency RMBS exhibit materially different
sensitivities to movements in interest rates. Declines in the
value of one portfolio may be offset by appreciation in the
other, although we cannot assure you that this will be the case.
Additionally, our Manager will seek to maintain adequate
liquidity as it allocates capital.
During periods of rising interest rates, refinancing
opportunities available to borrowers typically decrease because
borrowers are not able to refinance their current mortgage loans
with new mortgage loans at lower interest rates. In such
instances, securities that are highly sensitive to refinancing
activity, such as IOs and IIOs, typically increase in value. Our
capital allocation strategy allows us to redeploy our capital
into such securities when and if we believe interest rates will
be higher in the future, thereby allowing us to hold securities
the value of which we believe is likely to increase as interest
rates rise. Also, by being able to re-allocate capital into
structured Agency RMBS, such as IOs, during periods of rising
interest rates, we may be able to offset the likely decline in
the value of our pass-through Agency RMBS, which are negatively
impacted by rising interest rates.
Competitive
Strengths
We believe that our competitive strengths include:
| • | Ability to Successfully Allocate Capital between Pass-Through and Structured Agency RMBS. We seek to maximize our risk-adjusted returns by investing exclusively in Agency RMBS, which has limited credit risk due to the guarantee of principal and interest payments on such securities by Fannie Mae, Freddie Mac or Ginnie Mae. Our Manager will allocate capital between pass-through Agency RMBS and structured Agency RMBS. The percentage of our capital we allocate to our two asset categories will vary and will be actively managed |
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| in an effort to maintain the level of income generated by the combined portfolios, the stability of that income stream and the stability of the value of the combined portfolios. We believe this strategy will enhance our liquidity, earnings, book value stability and asset selection opportunities in various interest rate environments and provide us with a competitive advantage over other REITs that invest in only pass-through Agency RMBS. This is because, among other reasons, our investment and capital allocation strategies allow us to move capital out of pass-through Agency RMBS and into structured Agency RMBS in a rising interest rate environment, which will protect our portfolio from excess margin calls on our pass-through Agency RMBS portfolio and reduced net interest margins, and allow us to invest in securities, such as IOs, that have historically performed well in a rising interest rate environment. |
| • | Experienced RMBS Investment Team. Robert Cauley, our Chief Executive Officer and co-founder of Bimini, and Hunter Haas, our Chief Investment Officer, have 19 and ten years of experience, respectively, in analyzing, trading and investing in Agency RMBS. Additionally, Messrs. Cauley and Haas each have over seven years of experience managing Bimini, which is a publicly-traded REIT that has invested in Agency RMBS since its inception in 2003. Messrs. Cauley and Haas managed Bimini through the recent housing market collapse and the related adverse effects on the banking and financial system, repositioning Bimini’s portfolio in response to adverse market conditions. We believe this experience has enabled them to recognize portfolio risk in advance, hedge such risk accordingly and manage liquidity and borrowing risks during adverse market conditions. We believe that Messrs. Cauley’s and Haas’s experience will provide us with a competitive advantage over other management teams that may not have experience managing a publicly-traded mortgage REIT or managing a business similar to ours during various interest rate and credit cycles, including the recent housing market collapse. | |
| • | Clean Balance Sheet With an Implemented Investment Strategy. As a recently-formed entity, we intend to build on our existing investment portfolio. As of March 31, 2011, our Agency RMBS portfolio had a fair value of approximately $28.9 million and was comprised of approximately 83.5% pass-through Agency RMBS and 16.5% structured Agency RMBS. Our net asset value as of March 31, 2011 was approximately $7.5 million. Bimini has managed our portfolio since inception by utilizing the same investment strategy that we expect our Manager and its experienced RMBS investment team to continue to employ after the completion of this offering. |
| • | Alignment of Interests. Upon completion of this offering, Bimini will own 1,063,830 shares of our common stock. Concurrently with this offering, we intend to sell to Bimini warrants to purchase an aggregate of 2,655,000 shares of our common stock in a separate private placement for an aggregate purchase price of $1,248,000. Upon completion of this offering, Bimini will own common stock representing approximately 16.98% of the outstanding shares of our common stock (or 15.10% if the underwriters exercise their option to purchase additional shares in full). Bimini has agreed that, for a period of 365 days after the date of this prospectus, it will not, without the prior written consent of Barclays Capital Inc., dispose of or hedge any of (i) its shares of our common stock, including any shares of our common stock issuable upon the exercise of the warrants it intends to purchase in the concurrent private placement, (ii) the warrants that it intends to purchase in the concurrent private placement or (iii) any shares of common stock that it may acquire after the completion of this offering, subject to certain exceptions and extensions. We believe that Bimini’s ownership of our common stock will align our Manager’s interests with our interests. |
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Summary Risk
Factors
An investment in our common stock involves material risks. Each
prospective purchaser of our common stock should consider
carefully the matters discussed under “Risk Factors”
beginning on page 25 before investing in our common stock.
Some of the risks include:
| • | The federal 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 U.S. Government, may adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | Continued adverse developments in the broader residential mortgage market have adversely affected Bimini and may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | Interest rate mismatches between our Agency RMBS and our borrowings may reduce our net interest margin during periods of changing interest rates, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our stockholders in the future. | |
| • | Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our Agency RMBS, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | Increased levels of prepayments on the mortgages underlying our Agency RMBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | We invest in structured Agency RMBS, including CMOs, IOs, IIOs and POs. Although structured Agency RMBS are generally subject to the same risks as our pass-through Agency RMBS, certain types of risks may be enhanced depending on the type of structured Agency RMBS in which we invest. | |
| • | Our use of leverage could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | Adverse market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | Hedging against interest rate exposure may not completely insulate us from interest rate risk and could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. | |
| • | The management agreement was not negotiated on an arm’s-length basis and the terms, including fees payable and our inability to terminate, or our election not to renew, the management agreement based on our Manager’s poor performance without paying our Manager a significant termination fee, may not be as favorable to us as if it were negotiated with an unaffiliated third party. | |
| • | We are completely dependent upon our Manager and certain key personnel of Bimini who provide services to us through the management agreement, and we may not find suitable |
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| replacements for our Manager and these personnel if the management agreement is terminated or such key personnel are no longer available to us. |
| • | There are various conflicts of interest in our relationship with our Manager and Bimini, which could result in decisions that are not in the best interest of our stockholders, including possible conflicts created by our Manager’s compensation whereby it is entitled to receive a management fee that is not tied to the performance of our portfolio and possible conflicts of duties that may result from the fact that all of our Manager’s officers are also employees of Bimini. | |
| • | Loss of our exemption from regulation under the Investment Company Act would negatively affect the value of shares of our common stock and our ability to pay distributions to our stockholders. | |
| • | Our failure to qualify, or maintain our qualification, as a REIT would subject us to U.S. federal income tax, which could adversely affect the value of the shares of our common stock and would substantially reduce the cash available for distribution to our stockholders. |
Our
Portfolio
As of March 31, 2011, our portfolio consisted of Agency
RMBS with an aggregate fair value of approximately
$28.9 million, a weighted average coupon of 4.22% and a net
weighted average borrowing cost of 0.33%. The following table
summarizes our portfolio as of March 31, 2011:
|
Weighted |
||||||||||||||||||||||||||||||||||||
|
Percentage |
Weighted |
Average |
Weighted |
Weighted |
||||||||||||||||||||||||||||||||
|
of |
Weighted |
Average |
Coupon |
Average |
Average |
Weighted |
||||||||||||||||||||||||||||||
|
Entire |
Average |
Maturity in |
Longest |
Reset in |
Lifetime |
Periodic |
Average |
|||||||||||||||||||||||||||||
|
Asset Category
|
Fair Value | Portfolio | Coupon | Months | Maturity | Months | Cap | Cap | CPR(1) | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
|
Pass-through Agency RMBS backed by:
|
||||||||||||||||||||||||||||||||||||
|
Adjustable-Rate Mortgages
|
$ | 7,721 | 26.7 | % | 2.53 | % | 288 | April 2035 | 5.03 | 9.55 | % | 2.00 | % | 0.11 | % | |||||||||||||||||||||
|
Fixed-Rate Mortgages
|
16,418 | 56.8 | % | 4.54 | % | 171 | November 2025 | N/A | N/A | N/A | 0.75 | % | ||||||||||||||||||||||||
|
Hybrid Adjustable-Rate Mortgages
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total/Weighted Average Whole-pool Mortgage Pass-through Agency
RMBS
|
$ | 24,139 | 83.5 | % | 3.90 | % | 208 | April 2035 | 5.03 | 9.55 | % | 2.00 | % | 0.54 | % | |||||||||||||||||||||
|
Structured Agency RMBS:
|
||||||||||||||||||||||||||||||||||||
|
CMOs
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
IOs
|
966 | 3.3 | % | 4.50 | % | 163 | October 2024 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
IIOs
|
3,799 | 13.2 | % | 6.22 | % | 297 | April 2037 | N/A | N/A | N/A | 19.73 | % | ||||||||||||||||||||||||
|
POs
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total/Weighted Average Structured Agency RMBS
|
4,765 | 16.5 | % | 5.87 | % | 270 | April 2037 | N/A | N/A | N/A | 19.73 | % | ||||||||||||||||||||||||
|
Total/Weighted Average
|
$ | 28,904 | 100 | % | 4.22 | % | 218 | April 2037 | 5.03 | 9.55 | % | 2.00 | % | 5.67 | % | |||||||||||||||||||||
| (1) | CPR refers to Constant Prepayment Rate, which is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the constant prepayment rate in the chart above represents the three month prepayment rate of the securities in the respective asset category. |
Our Financing
Strategy
We intend to fund our pass-through Agency RMBS and certain of
our structured Agency RMBS, such as fixed and floating rate
tranches of CMOs and POs, through short-term repurchase
agreements. However, we do not intend to employ leverage on our
structured Agency RMBS that have
7
Table of Contents
no principal balance, such as IOs and IIOs. We do not intend to
use leverage in these instances because the securities contain
structural leverage. Our borrowings currently consist of
short-term repurchase agreements. We may use other sources of
leverage, such as secured or unsecured debt or issuances of
preferred stock. We do not have a policy limiting the amount of
leverage we may incur. However, we generally expect that the
ratio of our total liabilities compared to our equity, which we
refer to as our leverage ratio, will be less than 12 to 1. Our
amount of leverage may vary depending on market conditions and
other factors that we deem relevant. As of March 31, 2011,
our portfolio leverage ratio was approximately 3.0 to 1. As of
March 31, 2011, we had entered into master repurchase
agreements with two counterparties and had funding in place with
one such counterparty, as described below. We have since entered
into master repurchase agreements with three additional
counterparties (for a total of five) and are currently
negotiating, and intend to enter into, additional master
repurchase agreements with additional counterparties after the
completion of this offering to attain additional lending
capacity and to diversify counterparty credit risk. However, we
cannot assure you that we will enter into such additional master
repurchase agreements on favorable terms, or at all.
|
Net |
Weighted Average |
|||||||||||||||||||
|
Weighted |
Maturity of |
|||||||||||||||||||
|
Percent of |
Average |
Repurchase |
||||||||||||||||||
|
Total |
Borrowing |
Agreements |
Amount |
|||||||||||||||||
|
Counterparty
|
Balance | Borrowings | Cost | in Days | at Risk(1) | |||||||||||||||
|
MF Global Inc.
|
$ | 22,530,842 | 100 | % | 0.33 | % | 77 | $ | 1,673,153 | |||||||||||
| (1) | Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense. |
During the three months ended March 31, 2011, the average
balance of our repurchase agreement financing was $22,680,448.
Risk
Management
We invest in Agency RMBS to mitigate credit risk. Additionally,
our Agency RMBS are backed by a diversified base of mortgage
loans to mitigate geographic, loan originator and other types of
concentration risks.
Interest Rate
Risk Management
We believe that the risk of adverse interest rate movements
represents the most significant risk to our portfolio. This risk
arises because (i) the interest rate indices used to
calculate the interest rates on the mortgages underlying our
assets may be different from the interest rate indices used to
calculate the interest rates on the related borrowings, and
(ii) interest rate movements affecting our borrowings may
not be reasonably correlated with interest rate movements
affecting our assets. We attempt to mitigate our interest rate
risk by using the following techniques:
Agency RMBS Backed by ARMs. We seek to
minimize the differences between interest rate indices and
interest rate adjustment periods of our Agency RMBS backed by
ARMs and related borrowings. At the time of funding, we
typically align (i) the underlying interest rate index used
to calculate interest rates for our Agency RMBS backed by ARMs
and the related borrowings and (ii) the interest rate
adjustment periods for our Agency RMBS backed by ARMs and the
interest rate adjustment periods for our related borrowings. As
our borrowings mature or are renewed, we may adjust the index
used to calculate interest expense, the duration of the reset
periods and the maturities of our borrowings.
Agency RMBS Backed by Fixed-Rate
Mortgages. As interest rates rise, our
borrowing costs increase; however, the income on our Agency RMBS
backed by fixed-rate mortgages remains unchanged. Subject to
qualifying and maintaining our qualification as a REIT, we may
seek to limit increases to our borrowing costs through the use
of interest rate swap or cap agreements, options, put
8
Table of Contents
or call agreements, futures contracts, forward rate agreements
or similar financial instruments to effectively convert our
floating-rate borrowings into fixed-rate borrowings.
Agency RMBS Backed by Hybrid
ARMs. During the fixed-rate period of our
Agency RMBS backed by hybrid ARMs, the security is similar to
Agency RMBS backed by fixed-rate mortgages. During this period,
subject to qualifying and maintaining our qualification as a
REIT, we may employ the same hedging strategy that we employ for
our Agency RMBS backed by fixed-rate mortgages. Once our Agency
RMBS backed by hybrid ARMs convert to floating rate securities,
we may employ the same hedging strategy as we employ for our
Agency RMBS backed by ARMs.
Additionally, our structured Agency RMBS generally exhibit
sensitivities to movements in interest rates different than our
pass-through Agency RMBS. To the extent they do so, our
structured Agency RMBS may protect us against declines in the
market value of our combined portfolio that result from adverse
interest rate movements, although we cannot assure you that this
will be the case.
Prepayment
Risk Management
The risk of mortgage prepayments is another significant risk to
our portfolio. When prevailing interest rates fall below the
coupon rate of a mortgage, mortgage prepayments are likely to
increase. Conversely, when prevailing interest rates increase
above the coupon rate of a mortgage, mortgage prepayments are
likely to decrease.
When prepayment rates increase, we may not be able to reinvest
the money received from prepayments at yields comparable to
those of the securities prepaid. Also, some ARMs and hybrid ARMs
which back our Agency RMBS may bear initial “teaser”
interest rates that are lower than their fully-indexed interest
rates. If these mortgages are prepaid during this
“teaser” period, we may lose the opportunity to
receive interest payments at the higher, fully-indexed rate over
the expected life of the security. Additionally, some of our
structured Agency RMBS, such as IOs and IIOs, may be negatively
affected by an increase in prepayment rates because their value
is wholly contingent on the underlying mortgage loans having an
outstanding principal balance.
A decrease in prepayment rates may also have an adverse effect
on our portfolio. For example, if we invest in POs, the purchase
price of such securities will be based, in part, on an assumed
level of prepayments on the underlying mortgage loan. Because
the returns on POs decrease the longer it takes the principal
payments on the underlying loans to be paid, a decrease in
prepayment rates could decrease our returns on these securities.
Prepayment risk also affects our hedging activities. When an
Agency RMBS backed by a fixed-rate mortgage or hybrid ARM is
acquired with borrowings, we may cap or fix our borrowing costs
for a period close to the anticipated average life of the
fixed-rate portion of the related Agency RMBS. If prepayment
rates are different than our projections, the term of the
related hedging instrument may not match the fixed-rate portion
of the security, which could cause us to incur losses.
Because our business may be adversely affected if prepayment
rates are different than our projections, we seek to invest in
Agency RMBS backed by mortgages with well-documented and
predictable prepayment histories. To protect against increases
in prepayment rates, we invest in Agency RMBS backed by
mortgages that we believe are less likely to be prepaid. For
example, we invest in Agency RMBS backed by mortgages
(i) with loan balances low enough such that a borrower
would likely have little incentive to refinance,
(ii) extended to borrowers with credit histories weak
enough to not be eligible to refinance their mortgage loans,
(iii) that are newly originated fixed-rate or hybrid ARMs
or (iv) that have interest rates low enough such that a
borrower would likely have little incentive to refinance. To
protect against decreases in prepayment rates, we may also
invest in Agency RMBS backed by mortgages with characteristics
opposite to those described above, which would typically be more
likely to be refinanced. We may also invest in certain types of
structured Agency RMBS as a means of mitigating our
portfolio-wide prepayment risks. For example, certain tranches
of
9
Table of Contents
CMOs are less sensitive to increases in prepayment rates, and we
may invest in those tranches as a means of hedging against
increases in prepayment rates.
Liquidity
Management Strategy
Because of our use of leverage, we manage liquidity to meet our
lenders’ margin calls using the following measures:
| • | Maintaining cash balances or unencumbered assets well in excess of anticipated margin calls; and | |
| • | Making margin calls on our lenders when we have an excess of collateral pledged against our borrowings. |
We also attempt to minimize the number of margin calls we
receive by:
| • | Deploying capital from our leveraged Agency RMBS portfolio to our unleveraged Agency RMBS portfolio; | |
| • | Investing in Agency RMBS backed by mortgages that we believe are less likely to be prepaid to decrease the risk of excessive margin calls when monthly prepayments are announced. Prepayments are declared, and the market value of the related security declines, before the receipt of the related cash flows. Prepayment declarations give rise to a temporary collateral deficiency and generally results in margin calls by lenders; | |
| • | Obtaining funding arrangements which defer or waive prepayment-related margin requirements in exchange for payments to the lender tied to the dollar amount of the collateral deficiency and a pre-determined interest rate; and | |
| • | Reducing our overall amount of leverage. |
Our Management
Agreement
We are currently a party to a management agreement with Bimini.
Upon completion of this offering, we will terminate our
management agreement with Bimini and enter into a new management
agreement with our Manager that will govern the relationship
between us and our Manager and will describe the services to be
provided by our Manager and its compensation for those services.
Under the management agreement, our Manager, subject to the
supervision of our Board of Directors, will be required to
oversee our business affairs in conformity with our operating
policies and our investment guidelines that are proposed by the
investment committee of our Manager and approved by our Board of
Directors. Our Manager’s obligations and responsibilities
under the management agreement will include asset selection,
asset and liability management and investment portfolio risk
management.
The management agreement will have an initial term expiring
on ,
2014, and will automatically be renewed for one-year terms
thereafter unless terminated by us for cause or by us or our
Manager upon at least
180-days’
notice prior to the end of the initial term or any automatic
renewal term.
10
Table of Contents
The following table summarizes the fees that will be payable to
our Manager pursuant to the management agreement:
|
Fee
|
Summary Description
|
|
|
Management Fee
|
The management fee will be payable monthly in arrears in an amount equal to 1/12th of (a) 1.50% of the first $250,000,000 of our equity (as defined below), (b) 1.25% of our equity that is greater than $250,000,000 and less than or equal to $500,000,000, and (c) 1.00% of our equity that is greater than $500,000,000. | |
| “Equity” equals our month-end stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or other comprehensive income (loss), as computed in accordance with accounting principles generally accepted in the United States, or GAAP. | ||
| Under our existing management agreement with Bimini, which will be terminated upon the completion of this offering and replaced by a new management agreement with our Manager, we paid Bimini aggregate management fees of $5,500 for the period beginning on November 24, 2010 (date operations commenced) to December 31, 2010, and we paid Bimini aggregate management fees of $20,900 for the three months ended March 31, 2011. | ||
|
Stock-Based Compensation
|
Our Manager’s officers and employees will be eligible to receive stock awards pursuant to our 2011 Equity Incentive Plan. | |
|
Expense Reimbursement
|
We will reimburse any expenses directly related to our operations incurred by our Manager, but excluding personnel-related expenses of our Manager or of Bimini (other than the compensation of our Chief Financial Officer), which include services provided to us pursuant to the management agreement. We will reimburse our Manager for our allocable share of the compensation of our Chief Financial Officer based on our percentage of the aggregate amount of our Manager’s assets under management and Bimini’s assets. We will also reimburse our pro rata portion of our Manager’s and Bimini’s overhead expenses based on our percentage of the aggregate amount of our Manager’s assets under management and Bimini’s assets. Our obligation to pay for the expenses incurred in connection with this offering will be capped at 1.0% of the total gross proceeds from this offering (or approximately $ , and approximately $ if the underwriters exercise their overallotment option). Our Manager will pay the expenses incurred above this 1.0% cap. | |
| Under our existing management agreement with Bimini, which will be terminated upon the completion of this offering and replaced by a new management agreement with our Manager, we reimbursed Bimini an aggregate of $7,200 in expenses for the period beginning on November 24, 2010 (date operations commenced) to December 31, 2010, and we reimbursed Bimini an aggregate of $21,600 in expenses for the three months ended March 31, 2011. | ||
|
Termination Fee
|
The termination fee, payable for non-renewal of the management agreement without cause, 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 most recently completed calendar quarter prior to the effective date of termination. |
Assuming aggregate net proceeds from this offering and the
concurrent private placement of warrants for approximately $41.2
million and no additional increases or decreases in our
stockholders’
11
Table of Contents
equity, we will pay our Manager management fees equal to
approximately $843,000 during the first 12 months after the
completion of this offering and the concurrent private placement.
Overhead Sharing
Agreement
Our Manager will enter into an overhead sharing agreement with
Bimini effective upon the closing of this offering. Pursuant to
this agreement, our Manager will be provided with access to,
among other things, Bimini’s portfolio management, asset
valuation, risk management and asset management services as well
as administration services addressing accounting, financial
reporting, legal, compliance, investor relations and information
technologies necessary for the performance of our Manager’s
duties in exchange for a reimbursement of the Manager’s
allocable cost for these services. The reimbursement paid by our
Manager pursuant to this agreement will not constitute an
expense under the management agreement.
Conflicts of
Interest; Equitable Allocation of Opportunities
Bimini invests solely in Agency RMBS and, because it is
internally-managed, does not pay a management fee. Additionally,
Bimini currently receives management fees from us and, as the
sole stockholder of our Manager, will indirectly receive the
management fees earned by our Manager through reimbursement
payments under the overhead sharing agreement and our
Manager’s payment of dividends to Bimini. Our Manager may
in the future manage other funds, accounts and investment
vehicles that have strategies that are similar to our strategy,
although our Manager currently does not manage any other funds,
accounts or investment vehicles. Our Manager and Bimini make
available to us opportunities to acquire assets that they
determine, in their reasonable and good faith judgment, based on
our objectives, policies and strategies, and other relevant
factors, are appropriate for us in accordance with their written
investment allocation procedures and policies, subject to the
exception that we might not be offered each such opportunity,
but will on an overall basis equitably participate with Bimini
and our Manager’s other accounts in all such opportunities
when considered together. Bimini and our Manager have agreed not
to sponsor another REIT that has substantially the same
investment strategy as Bimini or us prior to the earlier of
(i) the termination or expiration of the management
agreement or (ii) our Manager no longer being a subsidiary
or affiliate of Bimini.
Because many of our targeted assets are typically available only
in specified quantities and because many of our targeted assets
are also targeted assets for Bimini and may be targeted assets
for other accounts our Manager may manage in the future, neither
Bimini nor our Manager may be able to buy as much of any given
asset as required to satisfy the needs of Bimini, us and any
other account our Manager may manage in the future. In these
cases, our Manager’s and Bimini’s investment
allocation procedures and policies will typically allocate such
assets to multiple accounts in proportion to their needs and
available capital. The policies will permit departure from such
proportional allocation when (i) allocating purchases of
whole-pool Agency RMBS, because those securities cannot be
divided into multiple parts to be allocated among various
accounts, and (ii) such allocation would result in an
inefficiently small amount of the security being purchased for
an account. In these cases, the policy allows for a protocol of
allocating assets so that, on an overall basis, each account is
treated equitably. Specifically, our investment allocation
procedures and policies stipulate that we will base our
allocation of investment opportunities on the following factors:
| • | the primary investment strategy and the stage of portfolio development of each account; | |
| • | the effect of the potential investment on the diversification of each account’s portfolio by coupon, purchase price, size, prepayment characteristics and leverage; | |
| • | the cash requirements of each account; | |
| • | the anticipated cash flow of each account’s portfolio; and | |
| • | the amount of funds available to each account and the length of time such funds have been available for investment. |
12
Table of Contents
We intend for our independent directors to conduct quarterly
reviews with our Manager of its allocation decisions, if any,
and discuss with our Manager the portfolio needs of each account
for the next quarter and whether such needs will give rise to an
asset allocation conflict and, if so, the potential resolution
of such conflict.
Other policies that our Manager will apply to the management of
the Company include controls for cross transactions
(transactions between managed accounts (including us)),
principal transactions (transactions between Bimini or our
Manager and a managed account (including us)) and split price
executions. To date we have not entered into any cross
transactions but we have entered into one principal transaction
and have conducted split price executions. See “Our Manager
and the Management Agreement — Conflicts of Interest;
Equitable Allocation of Opportunities” and “Certain
Relationships and Related Transactions” for a more detailed
description of these types of transactions, the principal
transaction we have entered into with Bimini and the policies of
Bimini and our Manager that govern these types of transactions.
We currently do not anticipate that we will enter into any cross
transactions or principal transactions after the completion of
this offering.
We are entirely dependent on our Manager for our
day-to-day
management and do not have any independent officers. Our
executive officers are also executive officers of Bimini and our
Manager, and none of them will devote his time to us
exclusively. We compete with Bimini and will compete with any
other account managed by our Manager or other RMBS investment
vehicles that may be sponsored by Bimini in the future for
access to these individuals.
John B. Van Heuvelen, one of our independent director
nominees, owns shares of common stock of Bimini.
Mr. Cauley, our Chief Executive Officer and Chairman of our
Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of
common stock of Bimini. Mr. Haas, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our
Board of Directors, also serves as the Chief Financial Officer,
Chief Investment Officer and Treasurer of Bimini and owns shares
of common stock of Bimini. Accordingly,
Messrs. Van Heuvelen, Cauley and Haas may have a
conflict of interest with respect to actions by our Board of
Directors that relate to Bimini or our Manager.
Because our executive officers are also officers of our Manager,
the terms of our management agreement, including fees payable,
were not negotiated on an arm’s-length basis, and its terms
may not be as favorable to us as if it was negotiated with an
unaffiliated party.
The management fee we will pay to our Manager will be paid
regardless of our performance and it may not provide sufficient
incentive to our Manager to seek to achieve attractive
risk-adjusted returns for our investment portfolio.
Our Formation and
Structure
We were formed by Bimini as a Maryland corporation in August
2010. Concurrently with this offering, we intend to sell to
Bimini in a separate private placement warrants to purchase an
aggregate of 2,655,000 shares of our common stock. Upon
completion of this offering, Bimini will own approximately
16.98% of our outstanding common stock, or 15.10% if the
underwriters exercise their option to purchase additional shares
in full. The following chart illustrates our ownership structure
immediately after completion of this offering.
13
Table of Contents
| (1) | Includes 1,063,830 shares of our common stock issued to Bimini prior to completion of this offering (after giving effect to the stock dividend that we will effect prior to the completion of this offering). Does not include 2,655,000 shares of our common stock issuable upon exercise of the warrants Bimini intends to purchase in the concurrent private placement. See “Description of Securities — General.” |
About
Bimini
Bimini is a mortgage REIT that has operated since 2003 and had
approximately $117 million of pass-through Agency RMBS and
structured Agency RMBS as of March 31, 2011. Bimini has
employed this strategy with its own portfolio since the third
quarter of 2008 and with our portfolio since our inception. The
following table shows Bimini’s returns on invested capital
since employing our investment strategy in the third quarter of
2008. The returns on Bimini’s invested capital provided
below are net of the interest paid pursuant to Bimini’s
repurchase agreements but does not give effect to the cost of
Bimini’s other long-term financing costs as described below.
|
Quarterly |
Cumulative |
|||||||
|
Return on |
Return on |
|||||||
|
Invested |
Invested |
|||||||
|
Three Months Ended
|
Capital(1) | Capital(1)(2) | ||||||
|
September 30, 2008
|
2.5 | % | 2.5 | % | ||||
|
December 31, 2008
|
8.9 | % | 11.7 | % | ||||
|
March 31, 2009
|
13.2 | % | 26.4 | % | ||||
|
June 30, 2009
|
14.0 | % | 44.0 | % | ||||
|
September 30, 2009
|
10.7 | % | 59.4 | % | ||||
|
December 31, 2009
|
7.0 | % | 70.6 | % | ||||
|
March 31, 2010
|
(0.3 | )% | 70.1 | % | ||||
|
June 30, 2010
|
9.4 | % | 86.0 | % | ||||
|
September 30, 2010
|
3.0 | % | 91.6 | % | ||||
|
December 31, 2010
|
8.0 | % | 106.9 | % | ||||
|
March 31, 2011
|
6.2 | % | 119.7 | % | ||||
|
Annualized Return on Invested
Capital(3)
|
33.1 | % | ||||||
| (1) | Returns on invested capital are calculated by dividing (i) the sum of (A) net interest income, before interest on junior subordinated notes (which equals the difference between interest income and interest expense), and (B) gains/losses on trading securities by (ii) invested capital. Invested capital consists of the sum of: (i) mortgage-backed securities — pledged to counterparties (less repurchase agreements and unsettled security transactions), (ii) mortgage-backed securities — unpledged (which consists of structured Agency RMBS and unpledged pass-through Agency RMBS less any unsettled |
14
Table of Contents
| Agency RMBS), (iii) cash and cash equivalents and (iv) restricted cash. The components of invested capital and returns on invested capital are based entirely on information contained in the SEC filings of Bimini Capital Management, Inc., which are publicly available through the SEC’s website at www.sec.gov. The information contained in the SEC filings of Bimini Capital Management, Inc. do not constitute a part of this prospectus or any amendment or supplement thereto. | ||
| (2) | Cumulative return on invested capital represents the return on invested capital assuming the reinvestment of all prior period returns beginning on July 1, 2008. For example, the cumulative return on invested capital as of December 31, 2008 was calculated as follows: ((1+0.0252)*(1+0.0891))-1. | |
| (3) | Calculated by annualizing the total cumulative return on invested capital for the periods presented above. |
We believe that this method of calculating returns described
above provides a useful means to measure the performance of
Bimini’s portfolio because (i) it is based on actual
capital invested in Bimini’s portfolio (including cash and
cash equivalents and restricted cash that could be used to
satisfy margin calls) instead of overall stockholders’
equity, which takes into account Bimini’s accumulated
deficit and other factors unrelated to the portfolio, and (ii)
it shows Bimini’s quarterly and cumulative returns on its
Agency RMBS portfolio taking into account the repurchase
agreement financing costs typical to manage this type of
portfolio, but without taking into account its entity-level
capital by excluding from the returns the effects of interest
due on Bimini’s junior subordinated debt, which is related
to Bimini’s trust preferred securities. Because of the
terms of its trust preferred securities (which include the
long-term nature of the underlying junior subordinated debt and
the fact that such debt is not held directly by outside
investors, but indirectly through preferred equity securities of
an intervening trust that holds such debt), Bimini characterizes
its trust preferred securities (and the related junior
subordinated debt) as a form of capital, rather than as a form
of financing for Bimini’s portfolio, when calculating
returns on invested capital.
Our results may differ from Bimini’s results and will
depend on a variety of factors, some of which are beyond our
control
and/or are
difficult to predict, including changes in interest rates,
changes in prepayment speeds and other changes in market
conditions and economic trends. In addition, Bimini’s
portfolio results above do not include other expenses necessary
to operate a public company and that we will incur following the
completion of this offering, including the management fee we
will pay to our Manager. Therefore, you should not assume that
Bimini’s portfolio’s performance will be indicative of
the performance of our portfolio or the Company.
In 2005, Bimini acquired Opteum Financial Services, LLC, or OFS,
an originator of residential mortgages. At the time OFS was
acquired, Bimini managed an Agency RMBS portfolio with a fair
value of approximately $3.5 billion. OFS operated in
46 states and originated residential mortgages through
three production channels. OFS did not have the capacity to
retain the mortgages it originated, and relied on the ability to
sell loans as they were originated as either whole loans or
through off-balance sheet securitizations. When the residential
housing market in the United States started to collapse in late
2006 and early 2007, the ability to successfully execute this
strategy was quickly impaired as whole loan prices plummeted and
the securitization markets closed. Bimini’s management
closed a majority of the mortgage origination operations in
early 2007, with the balance sold by June 30, 2007.
Additional losses were incurred after June 30, 2007 as the
remaining assets were sold or became impaired, and by
December 31, 2009, OFS had an accumulated deficit of
approximately $278 million. The losses generated by OFS
required Bimini to slowly liquidate its Agency RMBS portfolio as
capital was reduced and the operations of OFS drained
Bimini’s cash resources. On November 5, 2007, Bimini
was delisted by the NYSE. By December 31, 2008,
Bimini’s Agency RMBS portfolio was reduced to approximately
$172 million and, as a result of the reduced capital
remaining and the financial crisis, Bimini had limited access to
repurchase agreement funding. Bimini and its subsidiaries are
subject to a number of ongoing legal proceedings. Those
proceedings or any future proceedings may divert the time and
attention of our Manager and certain key personnel of our
Manager from us and our investment strategy. The diversion of
time of our Manager and certain key personnel of our Manager may
have a material adverse effect on our reputation, business
operations, financial condition and results of operations and
our ability to pay distributions to our stockholders. See
“Risk Factors— Legal proceedings involving Bimini
and certain of its subsidiaries have adversely affected Bimini,
may materially adversely affect Bimini’s ability to
effectively manage our business and could materially
15
Table of Contents
adversely affect our reputation, business operations, financial
condition and results of operations and our ability to pay
distributions to our stockholders.”
Although our and Bimini’s Chief Executive Officer,
Mr. Cauley, and Chief Investment Officer and Chief
Financial Officer, Mr. Haas, both worked at Bimini during
the time it owned OFS (Mr. Cauley was the Chief Investment
Officer and Chief Financial Officer and Mr. Haas was the
Head of Research and Trading), their primary focus and
responsibilities were the management of Bimini’s securities
portfolio, not the management of OFS. In addition,
Mr. Cauley is the only director still serving on
Bimini’s board of directors that served when OFS was
acquired. Bimini’s current investment strategy was
implemented in the third quarter of 2008, the first full quarter
of operations after Mr. Cauley become the Chief Executive
Officer of Bimini and Mr. Haas became the Chief Investment
Officer and Chief Financial Officer of Bimini.
Messrs. Cauley and Haas were appointed to these respective
roles on April 14, 2008.
Tax
Structure
We will elect and intend to qualify to be taxed as a REIT
commencing with our short taxable year ending December 31,
2011. Our qualification as a REIT, and the maintenance of such
qualification, will depend upon our ability to meet, on a
continuing basis, various complex requirements under the Code
relating to, among other things, the sources of our gross
income, the composition and values of our assets, our
distribution levels and the concentration of ownership of our
capital stock. We believe that we will be organized in
conformity with the requirements for qualification and taxation
as a REIT under the Code, and we intend to operate in a manner
that will enable us to meet the requirements for qualification
and taxation as a REIT commencing with our short taxable year
ending December 31, 2011. In connection with this offering,
we will receive an opinion from Hunton & Williams LLP
to the effect that we will be organized in conformity with the
requirements for qualification and taxation as a REIT under the
Code, and that our intended method of operation will enable us
to meet the requirements for qualification and taxation as a
REIT.
As a REIT, we generally will not be subject to U.S. federal
income tax on the REIT taxable income that we currently
distribute to our stockholders, but taxable income generated by
any taxable REIT subsidiary, or TRS, that we may form or acquire
will be subject to federal, state and local income tax. Under
the Code, REITs are subject to numerous organizational and
operational requirements, including a requirement that they
distribute annually at least 90% of their REIT taxable income,
determined without regard to the deduction for dividends paid
and excluding any net capital gains. If we fail to qualify as a
REIT in any calendar year and do not qualify for certain
statutory relief provisions, our income would be subject to
U.S. federal income tax (and any applicable state and local
taxes), and we would likely be precluded from qualifying for
treatment as a REIT until the fifth calendar year following the
year in which we failed to qualify. Even if we qualify as a
REIT, we may still be subject to certain federal, state and
local taxes on our income and assets and to U.S. federal
income and excise taxes on our undistributed income.
Our Distribution
Policy
To qualify as a REIT, we must distribute annually to our
stockholders an amount at least equal to 90% of our REIT taxable
income, determined without regard to the deduction for dividends
paid and excluding any net capital gain. We will be subject to
income tax on our taxable income that is not distributed and to
an excise tax to the extent that certain percentages of our
taxable income are not distributed by specified dates. See
“Material U.S. Federal Income Tax
Considerations.” Income as computed for purposes of the
foregoing tax rules will not necessarily correspond to our
income as determined for financial reporting purposes. Our cash
available for distribution may be less than the amount required
to meet the distribution requirements for REITs under the Code,
and we may be required to borrow money, sell assets or make
taxable distributions of our capital stock or debt securities to
satisfy the distribution requirements. Additionally, we may pay
future distributions from the proceeds from this offering or
other securities offerings, and thus all or a portion of such
16
Table of Contents
distributions may constitute a return of capital for
U.S. federal income tax purposes. We do not currently
intend to pay future distributions from the proceeds of this
offering.
Any distributions that we make on our common stock will be
authorized by and at the discretion of our Board of Directors
and declared by us based upon a variety of factors deemed
relevant by our directors, which may include among other things,
our actual results of operations, restrictions under applicable
law, our capital requirements and the REIT requirements of the
Code. We have not established a minimum payment distribution
level, and we cannot assure you of our ability to make
distributions to our stockholders in the future.
Distributions to stockholders generally will be taxable to our
stockholders as ordinary income, although a portion of such
distributions may be designated by us as long-term capital gain
or qualified dividend income 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 U.S. federal income tax treatment. For a
discussion of the U.S. federal income tax treatment of our
distributions, see “Material U.S. Federal Income Tax
Considerations.”
Restrictions on
Ownership and Transfer of Our Capital Stock
Due to limitations on the concentration of ownership of REIT
stock imposed by the Code, effective upon the completion of this
offering and subject to certain exceptions, our charter will
provide that no person may beneficially or constructively own
more than 9.8% in value or in number of shares, whichever is
more restrictive, of the outstanding shares of any class or
series of our capital stock, except that Bimini may own up to
44% of our common stock so long as Bimini continues to qualify
as a REIT. See “Description of Securities —
Restrictions on Ownership and Transfer.”
Our charter will also prohibit any person from, among other
matters:
| • | beneficially or constructively owning or transferring shares of our capital stock if such ownership or transfer would result in our being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT; and | |
| • | transferring shares of our capital stock if such transfer would result in our capital stock being owned by less than 100 persons. |
Our Board of Directors may, in its sole discretion, exempt
(prospectively or retroactively) a person from the 9.8%
ownership limit and other restrictions in our charter and may
establish or increase an excepted holder percentage limit for
such person if our Board of Directors obtains such
representations, covenants and undertakings as it deems
appropriate in order to conclude that granting the exemption
and/or
establishing or increasing the excepted holder percentage limit
will not cause us to lose our qualification as a REIT.
Our charter will also provide that any ownership or purported
transfer of our capital stock in violation of the foregoing
restrictions will result in the shares owned or transferred in
such violation being automatically transferred to a charitable
trust for the benefit of a charitable beneficiary and the
purported owner or transferee acquiring no rights in such
shares, except that any transfer that results in the violation
of the restriction relating to shares of our capital stock being
beneficially owned by fewer than 100 persons will be void
ab initio. Additionally, if the transfer to the trust is
ineffective for any reason to prevent a violation of the
restriction, the transfer that would have resulted in such
violation will be void ab initio.
Investment
Company Act Exemption
We operate our business so that we are exempt from registration
under the Investment Company Act. We rely on the exemption
provided by Section 3(c)(5)(C) of the Investment Company
Act. We monitor our portfolio periodically and prior to each
investment to confirm that we continue to qualify for the
exemption. To qualify for the exemption, we make investments so
that at least 55% of
17
Table of Contents
the assets we own on an unconsolidated basis consist of
qualifying mortgages and other liens on and interests in real
estate, which we refer to as qualifying real estate assets, and
so that at least 80% of the assets we own on an unconsolidated
basis consist of real estate-related assets, including our
qualifying real estate assets.
We treat whole-pool pass-through Agency RMBS as qualifying real
estate assets based on no-action letters issued by the Staff of
the Securities and Exchange Commission, or the SEC. To the
extent that the SEC publishes new or different guidance with
respect to these matters, we may fail to qualify for this
exemption. Our Manager intends to manage our pass-through Agency
RMBS portfolio such that we will have sufficient whole-pool
pass-through Agency RMBS to ensure we retain our exemption from
registration under the Investment Company Act. At present, we
generally do not expect that our investments in structured
Agency RMBS will constitute qualifying real estate assets but
will constitute real estate-related assets for purposes of the
Investment Company Act.
Lock-Up
Agreements
We and each of our Manager, our directors and executive officers
will agree that, for a period of 180 days after the date of
this prospectus, without the prior written consent of Barclays
Capital Inc., we and they will not sell, dispose of or hedge any
shares of our common stock, subject to certain exceptions and
extensions in certain circumstances. Additionally, Bimini will
agree that, for a period of 365 days after the date of this
prospectus, it will not, without the prior written consent of
Barclays Capital Inc., dispose of or hedge any of (i) its
shares of our common stock, including any shares of our common
stock issuable upon the exercise of the warrants it intends to
purchase in the concurrent private placement, (ii) the
warrants that it intends to purchase in the concurrent private
placement or (iii) any shares of our common stock that it
may acquire after completion of this offering, subject to
certain exceptions and extensions.
Our Corporate
Information
Our offices are located at 3305 Flamingo Drive, Vero Beach,
Florida 32963, and the telephone number of our offices is
(772) 231-1400.
Our internet address is www.orchidislandcapital.com. Our
internet site and the information contained therein or connected
thereto do not constitute a part of this prospectus or any
amendment or supplement thereto.
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Table of Contents
The
Offering
| Common stock offered by us in this offering | 5,200,000 shares(1) |
| Common stock to be outstanding after this offering | 6,263,830 shares(1)(2)(3) |
| Common stock to be outstanding after this offering and the concurrent private placement of warrants, on a fully-diluted basis | 8,918,830 shares(1)(2)(4) |
| Use of proceeds | We estimate that the net proceeds from this offering and the concurrent private placement will be approximately $41.2 million (or approximately $47.2 million if the underwriters fully exercise their option to purchase additional shares), after deducting the portion of the underwriting discount and commissions payable by us of approximately $1.3 million (or approximately $1.4 million if the underwriters fully exercise their option to purchase additional shares) and estimated offering expenses of approximately $416,000 payable by us. Our obligation to pay for the expenses of this offering will be capped at 1.0% of the total gross proceeds from this offering. |
| Our Manager will (i) pay the underwriters $ per share with respect to each share of common stock sold in this offering on a deferred basis after the completion of this offering and (ii) pay the offering expenses related to this offering that exceed an amount equal to 1.0% of the total gross proceeds from this offering. | ||
| We intend to invest the net proceeds of this offering and the concurrent private placement in (i) pass-through Agency RMBS backed by hybrid ARMs, ARMs and fixed-rate mortgage loans and (ii) structured Agency RMBS. Specifically, we intend to invest the net proceeds of this offering as follows: | ||
|
• approximately 0% to 50% in pass-through Agency RMBS
backed by fixed-rate mortgage loans;
|
||
|
• approximately 0% to 50% in pass-through Agency RMBS
backed by ARMs;
|
||
|
• approximately 0% to 50% in pass-through Agency RMBS
backed by hybrid ARMs; and
|
||
|
• approximately 25% to 75% in structured Agency RMBS.
|
||
| We expect to borrow against the pass-through Agency RMBS and certain of our structured Agency RMBS that we purchase with the net proceeds of this offering and the concurrent private placement through repurchase agreements and use the proceeds of the borrowings to acquire additional pass-through Agency RMBS and structured Agency RMBS in accordance with a similar targeted allocation. We reserve the right to |
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Table of Contents
| change our targeted allocation depending on prevailing market conditions, including, among others, the pricing and supply of pass-through Agency RMBS and structured Agency RMBS, the performance of our portfolio and the availability and terms of financing. | ||
| Distribution Policy | To qualify as a REIT, U.S. federal income tax law generally requires that we distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates on any undistributed REIT taxable income. We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our stockholders in the future. In connection with these requirements, we intend to make regular quarterly distributions of all or substantially all of our net taxable income to our stockholders. Any distributions we make will be authorized by and at the discretion of our Board of Directors and will depend upon a variety of factors deemed relevant by our directors, which may include among other things, our actual results of operations, restrictions under applicable law, our capital requirements and the REIT requirements of the Code. For more information, please see “Distribution Policy” and “Material U.S. Federal Income Tax Considerations.” |
| Proposed NYSE Amex symbol | “ORC” |
| Ownership and transfer restrictions | To assist us in qualifying as a REIT, among other purposes, our charter will generally limit beneficial and constructive ownership by any person to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock, except that Bimini may own up to 44% of our common stock so long as Bimini continues to qualify as a REIT. In addition, our charter will contain various other restrictions on the ownership and transfer of our common stock. See “Description of Securities — Restrictions on Ownership and Transfer.” | |
| Risk factors | Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 25. |
| (1) | Assumes the underwriters’ option to purchase up to an additional 780,000 shares of our common stock is not exercised. |
| (2) | Includes (i) 150,000 shares of common stock issued to Bimini prior to completion of this offering (which will increase to 1,063,830 shares of common stock after giving effect to the stock dividend that we will effect prior to the completion of this offering as described in “Description of Securities — General”) and (ii) 5,200,000 shares of common stock to be sold in this offering. Excludes a maximum of 4,000,000 shares of common stock reserved for issuance pursuant to our 2011 Equity Incentive Plan, with grants under such plan subject to a cap of an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully diluted basis) at the time of each award. |
| (3) | Excludes shares issuable upon the exercise of warrants. | |
| (4) | Assumes that all of the shares of our common stock issuable upon exercise of the warrants we intend to sell to Bimini in the concurrent private placement have been issued and are outstanding upon the completion of this offering. |
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Table of Contents
Summary Selected
Financial Data
The following table presents summary selected financial data as
of March 31, 2011, for the three months ended
March 31, 2011 and for the period beginning on
November 24, 2010 (date operations commenced) to
December 31, 2010. The statement of operations data for the
period beginning on November 24, 2010 (date operations
commenced) to December 31, 2010 has been derived from our
audited financial statements. The statement of operations and
balance sheet data as of March 31, 2011 and for the three
months ended March 31, 2011 has been derived from our
interim unaudited financial statements. These interim unaudited
financial statements have been prepared on substantially the
same basis as our audited financial statements and reflect all
adjustments which are, in the opinion of management, necessary
to provide a fair statement of our financial position as of
March 31, 2011 and the results of operations for the three
months ended March 31, 2011. All such adjustments are of a
normal recurring nature. These results are not necessarily
indicative of our results for the full fiscal year.
Because the information presented below is only a summary and
does not provide all of the information contained in our
historical financial statements, including the related notes,
you should read it in conjunction with the more detailed
information contained in our financial statements and related
notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included
elsewhere in this prospectus.
|
Period from |
||||||||
|
November 24, 2010 |
||||||||
|
Three Months |
(Date Operations |
|||||||
|
Ended |
Commenced) to |
|||||||
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
| (unaudited) | ||||||||
|
Statement of Operations Data:
|
||||||||
|
Revenues:
|
||||||||
|
Interest income
|
$ | 307,764 | $ | 69,340 | ||||
|
Interest expense
|
(18,942 | ) | (5,186 | ) | ||||
|
Net interest income
|
288,822 | 64,154 | ||||||
|
Losses on trading
securities(1)
|
(168,532 | ) | (55,307 | ) | ||||
|
Gains on futures contracts
|
10,875 | — | ||||||
|
Net portfolio income
|
131,165 | 8,847 | ||||||
|
Total expenses
|
115,093 | 39,001 | ||||||
|
Net income (loss)
|
$ | 16,072 | $ | (30,154 | ) | |||
|
Basic and diluted income (loss) per share of
common stock(2)
|
$ | 0.21 | $ | (0.68 | ) | |||
|
As of |
||||
| March 31, 2011 | ||||
| (unaudited) | ||||
|
Balance Sheet Data:
|
||||
|
Total mortgage-backed securities
|
$ | 28,903,656 | ||
|
Total assets
|
30,101,395 | |||
|
Repurchase agreements
|
22,530,842 | |||
|
Total liabilities
|
22,615,477 | |||
|
Total stockholder’s equity
|
7,485,918 | |||
|
Book value per share of our common
stock(2)
|
$ | 99.81 | ||
| (1) | Because all of our Agency RMBS have been classified as “held for trading” securities, all changes in the fair values of our Agency RMBS are reflected in our statement of operations, as opposed to a component of other comprehensive income in our statement of stockholder’s equity if they were instead classified as “available for sale” securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Mortgage-Backed Securities.” |
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| (2) | On March 31, 2011 and December 31, 2010, no shares of common stock were outstanding; however, on March 31, 2011 and December 31, 2010, 75,000 shares and 44,050 shares of our common stock had been subscribed for by Bimini, respectively. On April 29, 2011, we issued 75,000 shares of our common stock to Bimini, which consisted of the 44,050 shares subscribed for as of December 31, 2010, 17,950 shares subscribed for on March 28, 2011 and 13,000 shares subscribed for on March 31, 2011. |
Core
Earnings
We classify our Agency RMBS as “held for trading.” We
do not intend to elect GAAP hedge accounting for any derivative
financial instruments that we may utilize. Securities held for
trading and hedging instruments, for which hedge accounting has
not been elected, are recorded at estimated fair value, with
changes in the fair value recorded as unrealized gains or losses
through the statement of operations. Many other publicly-traded
REITs that invest in Agency RMBS classify their Agency RMBS as
“available for sale.” Unrealized gains and losses in
the fair value of securities classified as available for sale
are recorded as a component of other comprehensive income in the
statement of stockholders’ equity. As a result, investors
may not be able to readily compare our results of operations to
those of many of our competitors. We believe that the
presentation of our Core Earnings is useful to investors because
it provides a means of comparing our results of operations to
those of our competitors. Core Earnings represents a non-GAAP
financial measure and is defined as net income (loss) excluding
unrealized gains (losses) on trading securities and hedging
instruments and net interest income (expense) on hedging
instruments. Management utilizes Core Earnings because it allows
management to: (i) isolate the net interest income plus
other expenses of the Company over time, free of all
mark-to-market
adjustments and net payments associated with our hedging
instruments and (ii) assess the effectiveness of our
funding and hedging strategies, our capital allocation decisions
and our asset allocation performance. Our funding and hedging
strategies, capital allocation and asset selection are integral
to our risk management strategy, and therefore critical to our
Manager’s management of our portfolio.
Our presentation of Core Earnings may not be comparable to
similarly-titled measures of other companies, who may use
different calculations. As a result, Core Earnings should not be
considered as a substitute for our GAAP net income (loss) as a
measure of our financial performance or any measure of our
liquidity under GAAP.
|
For the Period |
||||||||
|
Three Months |
from November 24, 2010 |
|||||||
|
Ended |
(Date Operations |
|||||||
|
March 31, |
Commenced) through |
|||||||
| 2011 | December 31, 2010 | |||||||
|
Non-GAAP Reconciliation (unaudited):
|
||||||||
|
Net income (loss)
|
$ | 16,072 | $ | (30,154 | ) | |||
|
Unrealized (gains) losses on trading securities
|
168,532 | 55,307 | ||||||
|
Gains on futures contracts
|
(10,875 | ) | — | |||||
|
Net interest (income) expense on hedging instruments
|
— | — | ||||||
|
Core Earnings
|
$ | 173,729 | $ | 25,153 | ||||
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Table of Contents
SPECIAL
NOTE REGARDING 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,” “intend,” “should,”
“may,” “plans,” “projects,”
“will,” or similar expressions, or the negative of
these words, we intend to identify forward-looking statements.
Statements regarding the following subjects are forward-looking
by their nature:
| • | our business and investment strategy; | |
| • | our ability to deploy effectively and timely the net proceeds of this offering; | |
| • | our expected operating results; | |
| • | our ability to acquire investments on attractive terms; | |
| • | the effect of the U.S. Federal Reserve’s and the U.S. Treasury’s recent actions on the liquidity of the capital markets; | |
| • | the federal 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 U.S. Government; | |
| • | mortgage loan modification programs and future legislative action; | |
| • | our ability to access the capital markets; | |
| • | our ability to obtain future financing arrangements; |
| • | our ability to successfully hedge the interest rate risk and prepayment risk associated with our portfolio; |
| • | the assumptions used to value the warrants we intend to sell to Bimini in the concurrent private placement; | |
| • | our ability to make distributions to our stockholders in the future; | |
| • | our understanding of our competition and our ability to compete effectively; | |
| • | our ability to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes; |
| • | our ability to maintain our exemption from registration under the Investment Company Act; |
| • | market trends; | |
| • | expected capital expenditures; and | |
| • | the impact of technology on our operations and business. |
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. Although
we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
These beliefs, assumptions and expectations can change as a
result of many possible events or factors, not all of which are
known to us. If a change occurs, our business, financial
condition, liquidity and results of operations may vary
materially from those expressed in our forward-looking
statements. We are not obligated to update or revise any
forward-looking statements after the date of this prospectus,
whether as a result of new information, future events or
otherwise.
When considering forward-looking statements, you should keep in
mind the risks and other cautionary statements set forth in this
prospectus, including those contained in “Risk
Factors.” Readers
23
Table of Contents
are cautioned not to place undue reliance on any of these
forward-looking statements, which reflect our views as of the
date of this prospectus. You should carefully consider these
risks when you make a decision concerning an investment in our
common stock, along with the following factors, among others,
that may cause actual results to vary from our forward-looking
statements:
| • | general volatility of the securities markets in which we invest and the market price of our common stock; | |
| • | our limited operating history; | |
| • | changes in our business or investment strategy; | |
| • | changes in interest rate spreads or the yield curve; | |
| • | availability, terms and deployment of debt and equity capital; | |
| • | availability of qualified personnel; | |
| • | the degree and nature of our competition; | |
| • | increased prepayments of the mortgage loans underlying our Agency RMBS; | |
| • | risks associated with our hedging activities; | |
| • | changes in governmental regulations, tax rates and similar matters; and | |
| • | defaults on our investments. |
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Table of Contents
RISK
FACTORS
You should carefully consider the risks described below
before making an investment decision. Our business, financial
condition or results of operations could be harmed by any of
these risks. Similarly, these risks could cause the market price
of our common stock to decline and you might lose all or part of
your investment. Our forward-looking statements in this
prospectus are subject to the following risks and uncertainties.
Our actual results could differ materially from those
anticipated by our forward-looking statements as a result of the
risk factors below.
Risks Related to
Our Business
The federal
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 U.S. Government, may adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
The payments we receive on the Agency RMBS in which we invest
are guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Ginnie
Mae is part of a U.S. Government agency and its guarantees
are backed by the full faith and credit of the United States.
Fannie Mae and Freddie Mac are U.S. Government sponsored
entities, or GSEs, but their guarantees are not backed by the
full faith and credit of the United States.
On September 7, 2008, in response to the deterioration in
the financial condition of Fannie Mae and Freddie Mac, the
Federal Housing Finance Authority, or FHFA, placed Fannie Mae
and Freddie Mac into conservatorship, which is a statutory
process pursuant to which the FHFA will operate Fannie Mae and
Freddie Mac as conservator in an effort to stabilize the
entities. The FHFA, together with the U.S. Treasury and the
U.S. Federal Reserve, also has undertaken actions designed
to boost investor confidence in Fannie Mae and Freddie Mac,
support the availability of mortgage financing and protect
taxpayers. In addition, the U.S. Treasury has taken steps
to capitalize and provide financing to Fannie Mae and Freddie
Mac and agreed to purchase direct obligations and Agency RMBS
issued or guaranteed by Fannie Mae or Freddie Mac.
Shortly after Fannie Mae and Freddie Mac were placed in federal
conservatorship, the Secretary of the U.S. Treasury, in
announcing the actions, noted that the guarantee structure of
Fannie Mae and Freddie Mac required examination and that changes
in the structures of the entities were necessary to reduce risk
to the financial system. In February 2011, the U.S. Treasury and
the Department of Housing and Urban Development released a White
Paper titled “Reforming America’s Housing Finance
Market”, or the Housing Report, in which they proposed to
reduce or eliminate the role of GSEs in mortgage financing. The
Housing Report calls for phasing in increased pricing of Fannie
Mae and Freddie Mac guarantees to help level the playing field
for the private sector to take back market share, reducing
conforming loan limits by allowing the temporary increase in
Fannie Mae’s and Freddie Mac’s conforming loan limits
to reset as scheduled on October 1, 2011 to the lower
levels set in the Housing and Economic Recovery Act of 2008 and
continuing to wind down Fannie Mae’s and Freddie Mac’s
investment portfolio at an annual rate of no less than 10% per
year. The future roles of Fannie Mae and Freddie Mac could be
significantly reduced and the nature of their guarantees could
be eliminated or considerably limited relative to historical
measurements.
If Fannie Mae or Freddie Mac were eliminated, or their
structures were to change radically, we may not be able to
acquire Agency RMBS from these companies, which would
drastically reduce the amount and type of Agency RMBS available
for investment, which would increase the price of these assets.
Additionally, the current credit support provided by the
U.S. Treasury to Fannie Mae and Freddie Mac, and any
additional credit support it may provide in the future, could
have the effect of lowering the interest rate we receive from
Agency RMBS, thereby tightening the spread between the interest
we earn on our portfolio and our financing costs. Additionally,
the U.S. Government could elect to stop providing credit
support of any kind to the mortgage market. If any of these
risks were to occur, our business, financial condition and
results of operations and our ability to pay distributions to
our stockholders could be materially adversely affected.
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Continued
adverse developments in the broader residential mortgage market
have adversely affected Bimini and may materially adversely
affect our business, financial condition and results of
operations and our ability to pay distributions to our
stockholders.
The residential mortgage market in the United States has
experienced a variety of difficulties and changed economic
conditions, including defaults, credit losses and liquidity
concerns. In addition, certain commercial banks, investment
banks and insurance companies announced extensive losses from
exposure to the residential mortgage market. These losses
reduced financial industry capital, leading to reduced liquidity
for some institutions. These factors have impacted investor
perception of the risk associated with real estate-related
assets, including Agency RMBS. As a result, values for RMBS,
including some Agency RMBS and other AAA-rated RMBS assets, have
been negatively impacted. Further increased volatility and
deterioration in the broader residential mortgage and RMBS
markets may adversely affect the performance and market value of
the Agency RMBS in which we intend to invest.
In 2005, Bimini Capital acquired Opteum Financial Services, LLC,
or OFS, an originator of residential mortgage loans. At the time
OFS was acquired, Bimini managed an Agency RMBS portfolio with a
fair value of approximately $3.5 billion. OFS operated in
46 states and originated residential mortgages through
three production channels. OFS did not have the capacity to
retain the mortgages it originated, and relied on the ability to
sell loans as they were originated as either whole loans or
through off-balance sheet securitizations. When the residential
housing market in the United States started to collapse in late
2006 and early 2007, the ability to execute this strategy was
quickly impaired as whole loan prices plummeted and the
securitization markets closed. Bimini’s management closed a
majority of the mortgage origination operations in early 2007,
with the balance sold by June 30, 2007. Additional losses
were incurred after June 30, 2007 as the remaining assets
were sold or became impaired, and by December 31, 2009, OFS
had an accumulated deficit of approximately $278 million.
The losses generated by OFS required Bimini to slowly liquidate
its Agency RMBS portfolio as capital was reduced and the
operations of OFS drained cash resources. On November 5,
2007, Bimini was delisted by the NYSE. By December 31,
2008, Bimini’s Agency RMBS portfolio was reduced to
approximately $172 million and, as a result of the reduced
capital remaining and the financial crisis, Bimini had limited
access to repurchase agreement funding.
We will need to rely on our Agency RMBS as collateral for our
financings. Any decline in their value, or perceived market
uncertainty about their value, would likely make it difficult
for us to obtain financing on favorable terms or at all, or
maintain our compliance with terms of any financing arrangements
already in place. Additionally, our Agency RMBS are classified
for accounting purposes as “held for trading” and,
therefore, will be reported on our financial statements at fair
value, with unrealized gains and losses included in earnings. If
market conditions result in a decline in the value of our Agency
RMBS, our business, financial position and results of operations
and our ability to pay distributions to our stockholders could
be materially adversely affected.
Interest rate
mismatches between our Agency RMBS and our borrowings may reduce
our net interest margin during periods of changing interest
rates, which could materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
Our portfolio includes Agency RMBS backed by ARMs, hybrid ARMs
and fixed-rate mortgages, and the mix of these securities in the
portfolio may be increased or decreased over time. Additionally,
the interest rates on ARMs and hybrid ARMs may vary over time
based on changes in a short-term interest rate index, of which
there are many.
We finance our acquisitions of pass-through Agency RMBS with
short-term financing. During periods of rising short-term
interest rates, the income we earn on these securities will not
change (with respect to Agency RMBS backed by fixed-rate
mortgage loans) or will not increase at the same rate (with
respect to Agency RMBS backed by ARMs and hybrid ARMs) as our
related financing costs, which may reduce our net interest
margin or result in losses.
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Interest rate fluctuations will also cause variances in the
yield curve, which illustrates the relationship between
short-term and longer-term interest rates. If short-term
interest rates rise disproportionately relative to longer-term
interest rates (a flattening of the yield curve) or exceed
long-term interest rates (an inversion of the yield curve), our
borrowing costs may increase more rapidly than the interest
income earned on the related Agency RMBS because the related
Agency RMBS may bear interest based on longer-term rates than
our borrowings. Consequently, a flattening or inversion of the
yield curve may reduce our net interest margin or result in
losses.
Additionally, to the extent cash flows from Agency RMBS are
reinvested in new Agency RMBS, the spread between the yields of
the new Agency RMBS and available borrowing rates may decline,
which could reduce our net interest margin or result in losses.
Any one of the foregoing risks could materially adversely affect
our business, financial condition and results of operations and
our ability to pay distributions to our stockholders.
Mortgage loan
modification programs and future legislative action may
adversely affect the value of, and the returns on, our Agency
RMBS, which could materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
During the second half of 2008, the U.S. Government
commenced programs designed to provide homeowners with
assistance in avoiding residential mortgage loan foreclosures.
The programs involve, among other things, the modification of
mortgage loans to reduce the principal amount of the loans or
the rate of interest payable on the loans, or to extend the
payment terms of the loans.
In addition, in February 2008, the U.S. Treasury announced
the Homeowner Affordability and Stability Plan, or HASP, which
is a multi-faceted plan intended to prevent residential mortgage
foreclosures by, among other things:
| • | allowing certain homeowners whose homes are encumbered by Fannie Mae or Freddie Mac conforming mortgages to refinance those mortgages into lower interest rate mortgages with either Fannie Mae or Freddie Mac; | |
| • | creating the Homeowner Stability Initiative, which is intended to utilize various incentives for banks and mortgage servicers to modify residential mortgage loans with the goal of reducing monthly mortgage principal and interest payments for certain qualified homeowners; and | |
| • | allowing judicial modifications of Fannie Mae and Freddie Mac conforming residential mortgages loans during bankruptcy proceedings. |
It is likely that loan modifications would result in increased
prepayments on some Agency RMBS. These loan modification
programs, as well as legislative or regulatory actions,
including amendments to the bankruptcy laws that result in the
modification of outstanding mortgage loans, may adversely affect
the value of, and the returns on, the Agency RMBS in which we
invest, which could materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders. Furthermore, if Fannie
Mae and Freddie Mac were to modify or end their repurchase
programs or if the U.S. Government modified its loan
modification programs to modify non-delinquent mortgage loans,
our investment portfolio could be materially adversely affected.
We invest in
structured Agency RMBS, including CMOs, IOs, IIOs and POs.
Although structured Agency RMBS are generally subject to the
same risks as our pass-through Agency RMBS, certain types of
risks may be enhanced depending on the type of structured Agency
RMBS in which we invest.
The structured Agency RMBS in which we invest are
securitizations (i) issued by Fannie Mae, Freddie Mac or
Ginnie Mae, (ii) that are collateralized by Agency RMBS and
(iii) that are divided into various tranches that have
different characteristics (such as different maturities or
different coupon payments). These securities may carry greater
risk than an investment in pass-through Agency RMBS. For
example, certain types of structured Agency RMBS, such as
IOs, IIOs and POs, are more sensitive
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to prepayment risks than pass-through Agency RMBS. If we were to
invest in structured Agency RMBS that were more sensitive to
prepayment risks relative to other types of structured Agency
RMBS or pass-through Agency RMBS, we may increase our
portfolio-wide prepayment risk.
Increased
levels of prepayments on the mortgages underlying our Agency
RMBS might decrease net interest income or result in a net loss,
which could materially adversely affect our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise. Prepayment rates also may be
affected by other factors, including, without limitation,
conditions in the housing and financial markets, general
economic conditions and the relative interest rates on ARMs,
hybrid ARMs and fixed-rate mortgage loans. With respect to
pass-through Agency RMBS,
faster-than-expected
prepayments could also materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders in various ways, including
the following:
| • | A portion of our pass-through Agency RMBS backed by ARMs and hybrid ARMs may initially bear interest at rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If a pass-through Agency RMBS backed by ARMs or hybrid ARMs is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that Agency RMBS while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate over the remainder of its expected life. | |
| • | If we are unable to acquire new Agency RMBS to replace the prepaid Agency RMBS, our returns on capital may be lower than if we were able to quickly acquire new Agency RMBS. |
When we acquire structured Agency RMBS, we anticipate that the
underlying mortgages will prepay at a projected rate, generating
an expected yield. When the prepayment rates on the mortgages
underlying our structured Agency RMBS are higher than expected,
our returns on those securities may be materially adversely
affected. For example, the value of our IOs and IIOs are
extremely sensitive to prepayments because holders of these
securities do not have the right to receive any principal
payments on the underlying mortgages. Therefore, if the mortgage
loans underlying our IOs and IIOs are prepaid, such securities
would cease to have any value, which, in turn, could materially
adversely affect our business, financial condition and results
of operations and our ability to pay distributions to our
stockholders.
While we seek to minimize prepayment risk, we must balance
prepayment risk against other risks and the potential returns of
each investment. No strategy can completely insulate us from
prepayment or other such risks.
A decrease in
prepayment rates on the mortgages underlying our Agency RMBS
might decrease net interest income or result in a net loss,
which could materially adversely affect our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
Certain of our structured Agency RMBS may be adversely affected
by a decrease in prepayment rates. For example, because POs are
similar to zero-coupon bonds, our expected returns on such
securities will be contingent on our receiving the principal
payments of the underlying mortgage loans at expected intervals,
which assume a certain prepayment rate. If prepayment rates are
lower than expected, we will not receive principal payments as
quickly as we anticipated and, therefore, our expected returns
on these securities will be adversely affected, which, in turn,
could materially adversely affect our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
While we seek to minimize prepayment risk, we must balance
prepayment risk against other risks and the potential returns of
each investment. No strategy can completely insulate us from
prepayment or other such risks.
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The U.S.
Government’s pressing for refinancing of certain loans may
affect prepayment rates for mortgage loans underlying our Agency
RMBS.
In addition to the increased pressure upon residential mortgage
loan investors and servicers to engage in loss mitigation
activities, the U.S. Government is pressing for refinancing
of certain loans, and this encouragement may affect prepayment
rates for mortgage loans underlying our Agency RMBS. To the
extent these and other economic stabilization or stimulus
efforts are successful in increasing prepayment speeds for
residential mortgage loans, such as those in Agency RMBS, our
income and operating results could be harmed, particularly in
connection with our IOs and IIOs, which, in turn, could
materially adversely affect our business, financial condition
and results of operations and our ability to pay distributions
to our stockholders.
Interest rate
caps on the ARMs and hybrid ARMs backing our Agency RMBS may
reduce our net interest margin during periods of rising interest
rates, which could materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
ARMs and hybrid ARMs are typically subject to periodic and
lifetime interest rate caps. Periodic interest rate caps limit
the amount an interest rate can increase during any given
period. Lifetime interest rate caps limit the amount an interest
rate can increase through the maturity of the loan. Our
borrowings typically are not subject to similar restrictions.
Accordingly, in a period of rapidly increasing interest rates,
our financing costs could increase without limitation while caps
could limit the interest we earn on the ARMs and hybrid ARMs
backing our Agency RMBS. This problem is magnified for ARMs and
hybrid ARMs that are not fully indexed because such periodic
interest rate caps prevent the coupon on the security from fully
reaching the specified rate in one reset. Further, some ARMs and
hybrid ARMs may be subject to periodic payment caps that result
in a portion of the interest being deferred and added to the
principal outstanding. As a result, we may receive less cash
income on Agency RMBS backed by ARMs and hybrid ARMs than
necessary to pay interest on our related borrowings. Interest
rate caps on Agency RMBS backed by ARMs and hybrid ARMs could
reduce our net interest margin if interest rates were to
increase beyond the level of the caps, which could materially
adversely affect our business, financial condition and results
of operations and our ability to pay distributions to our
stockholders.
We have a
limited operating history and may not be able to operate our
business successfully or generate sufficient revenue to make or
sustain distributions to our stockholders.
We commenced operations in November 2010 and have a limited
operating history. We cannot assure you that we will be able to
operate our business successfully or implement our operating
policies and strategies. The results of our operations depend on
several factors, including the availability of opportunities for
the acquisition of target 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. Our revenues will depend, in large part, on our
ability to acquire assets at favorable spreads over our
borrowing costs. If we are unable to acquire assets that
generate favorable spreads, our results of operations may be
materially adversely affected, which could materially adversely
affect our ability to make or sustain distributions to our
stockholders.
We rely on
analytical models and other data to analyze potential asset
acquisition and disposition opportunities and to manage our
portfolio. Such models and other data may be incorrect,
misleading or incomplete, which could cause us to purchase
assets that do not meet our expectations or to make asset
management decisions that are not in line with our
strategy.
We rely on analytical models, and information and data supplied
by third parties. These models and data may be used to value
assets or potential asset acquisitions and dispositions and also
in connection with our asset management activities. If our
models and data prove to be incorrect, misleading or incomplete,
any decisions made in reliance thereon could expose us to
potential risks.
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Our reliance on models and data may induce us to purchase
certain assets at prices that are too high, to sell certain
other assets at prices that are too low or to miss favorable
opportunities altogether. Similarly, any hedging activities that
are based on faulty models and data may prove to be unsuccessful.
Some models, such as prepayment models, may be predictive in
nature. The use of predictive models has inherent risks. For
example, such models may incorrectly forecast future behavior,
leading to potential losses. In addition, the predictive models
used by us may differ substantially from those models used by
other market participants, with the result that valuations based
on these predictive models may be substantially higher or lower
for certain assets than actual market prices. Furthermore,
because predictive models are usually constructed based on
historical data supplied by third parties, the success of
relying on such models may depend heavily on the accuracy and
reliability of the supplied historical data, and, in the case of
predicting performance in scenarios with little or no historical
precedent (such as extreme broad-based declines in home prices,
or deep economic recessions or depressions), such models must
employ greater degrees of extrapolation, and are therefore more
speculative and of more limited reliability.
All valuation models rely on correct market data input. If
incorrect market data is entered into even a well-founded
valuation model, the resulting valuations will be incorrect.
However, even if market data is inputted correctly, “model
prices” will often differ substantially from market prices,
especially for securities with complex characteristics or whose
values are particularly sensitive to various factors. If our
market data inputs are incorrect or our model prices differ
substantially from market prices, our business, financial
condition and results of operations and our ability to make
distributions to our stockholders could be materially adversely
affected.
Valuations of
some of our assets are inherently uncertain, may be based on
estimates, may fluctuate over short periods of time and may
differ from the values that would have been used if a ready
market for these assets existed. As a result, the values of some
of our assets are uncertain.
While in many cases our determination of the fair value of our
assets is based on valuations provided by third-party dealers
and pricing services, we can and do value assets based upon our
judgment and such valuations may differ from those provided by
third-party dealers and pricing services. Valuations of certain
assets are often difficult to obtain or are unreliable. In
general, dealers and pricing services heavily disclaim their
valuations. Additionally, dealers may claim to furnish
valuations only as an accommodation and without special
compensation, and so they may disclaim any and all liability for
any direct, incidental or consequential damages arising out of
any inaccuracy or incompleteness in valuations, including any
act of negligence or breach of any warranty. Depending on the
complexity and illiquidity of an asset, valuations of the same
asset can vary substantially from one dealer or pricing service
to another. The valuation process has been particularly
difficult recently because market events have made valuations of
certain assets more difficult and unpredictable and the
disparity of valuations provided by third-party dealers has
widened.
Our business, financial condition and results of operations and
our ability to make distributions to our stockholders could be
materially adversely affected if our fair value determinations
of these assets were materially higher than the values that
would exist if a ready market existed for these assets.
An increase in
interest rates may cause a decrease in the volume of newly
issued, or investor demand for, Agency RMBS, which could
materially adversely affect our ability to acquire assets that
satisfy our investment objectives and our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
Rising interest rates generally reduce the demand for consumer
credit, including mortgage loans, due to the higher cost of
borrowing. A reduction in the volume of mortgage loans may
affect the volume of Agency RMBS available to us, which could
affect our ability to acquire assets that satisfy our investment
objectives. Rising interest rates may also cause Agency RMBS
that were issued prior to
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an interest rate increase to provide yields that exceed
prevailing market interest rates. If rising interest rates cause
us to be unable to acquire a sufficient volume of Agency RMBS or
Agency RMBS with a yield that exceeds our borrowing costs, our
ability to satisfy our investment objectives and to generate
income and pay dividends, our business, financial condition and
results of operations and our ability to pay distributions to
our stockholders may be materially adversely affected.
Because the
assets that we acquire might experience periods of illiquidity,
we might be prevented from selling our Agency RMBS at favorable
times and prices, which could materially adversely affect our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders.
Agency RMBS generally experience periods of illiquidity. Such
conditions are more likely to occur for structured Agency RMBS
because such securities are generally traded in markets much
less liquid than the pass-through Agency RMBS market. As a
result, we may be unable to dispose of our Agency RMBS at
advantageous times and prices or in a timely manner. The lack of
liquidity might result from the absence of a willing buyer or an
established market for these assets, as well as legal or
contractual restrictions on resale. The illiquidity of Agency
RMBS could materially adversely affect our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
Our use of
leverage could materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
Under normal market conditions, we generally expect our leverage
ratio to be less than 12 to 1, although at times our borrowings
may be above or below this level. We incur this indebtedness by
borrowing against a substantial portion of the market value of
our pass-through Agency RMBS and a portion of our structured
Agency RMBS. Our total indebtedness, however, is not expressly
limited by our policies and will depend on our and our
prospective lenders’ estimates of the stability of our
portfolio’s cash flow. As a result, there is no limit on
the amount of leverage that we may incur. We face the risk that
we might not be able to meet our debt service obligations or a
lender’s margin requirements from our income and, to the
extent we cannot, we might be forced to liquidate some of our
Agency RMBS at unfavorable prices. Our use of leverage could
materially adversely affect our business, financial condition
and results of operation and our ability to pay distributions to
our stockholders. For example:
| • | Our borrowings are secured by our pass-through Agency RMBS and a portion of our structured Agency RMBS under repurchase agreements. A decline in the market value of the pass-through Agency RMBS or structured Agency RMBS used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency RMBS under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency RMBS, we would experience losses. |
| • | To the extent we are compelled to liquidate qualifying real estate assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of gross income could be negatively affected, which could jeopardize our qualification as a REIT. Losing our REIT qualification would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income and would decrease profitability and cash available for distributions to stockholders. |
If we experience losses as a result of our use of leverage, such
losses could materially adversely affect our business, results
of operations and financial condition and our ability to make
distributions to our stockholders.
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We may incur
increased borrowing costs, which could materially adversely
affect our business, financial condition and results of
operations and our ability to pay distributions to our
stockholders.
Our borrowing costs under repurchase agreements are generally
adjustable and correspond to short-term interest rates, such as
LIBOR or a short-term U.S. Treasury index, plus or minus a
margin. The margins on these borrowings over or under short-term
interest rates may vary depending upon a number of factors,
including, without limitation:
| • | the movement of interest rates; | |
| • | the availability of financing in the market; and | |
| • | the value and liquidity of our Agency RMBS. |
All of our current borrowings are collateralized borrowings in
the form of repurchase agreements. If the interest rates on
these repurchase agreements increase, our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders could be materially adversely
affected.
Failure to
procure adequate repurchase agreement financing, or to renew or
replace existing repurchase agreement financing as it matures,
could materially adversely affect our business, financial
condition and results of operations and our ability to make
distributions to our stockholders.
We currently have master repurchase agreements with five
counterparties. We cannot assure you that any, or sufficient,
repurchase agreement financing will be available to us in the
future on terms that are acceptable to us. Any decline in the
value of Agency RMBS, or perceived market uncertainty about
their value, would make it more difficult for us to obtain
financing on favorable terms or at all, or maintain our
compliance with the terms of any financing arrangements already
in place. Additionally, our lenders may have owned or financed
RMBS that have declined in value and caused the lender to suffer
losses as a result of the recent downturn in the residential
mortgage market. If these conditions persist, these institutions
may be forced to exit the repurchase market, become insolvent or
further tighten lending standards or increase the amount of
equity capital, or haircuts, required to obtain financing, and
in such event, could make it more difficult for us to obtain
financing on favorable terms or at all. Additionally, we may be
unable to diversify the credit risk associated with our lenders.
In the event that we cannot obtain sufficient funding on
acceptable terms, our business, financial condition and results
of operations and our ability to pay distributions to our
stockholders may be materially adversely effected.
Furthermore, because we intend to rely primarily on short-term
borrowings, our ability to achieve our investment objective will
depend not only on our ability to borrow money in sufficient
amounts and on favorable terms, but also on our ability to renew
or replace on a continuous basis our maturing short-term
borrowings. If we are not able to renew or replace maturing
borrowings, we will have to sell some or all of our assets,
possibly under adverse market conditions. In addition, if the
regulatory capital requirements imposed on our lenders change,
they may be required to significantly increase the cost of the
financing that they provide to us. Our lenders also may revise
their eligibility requirements for the types of assets they are
willing to finance or the terms of such financings, based on,
among other factors, the regulatory environment and their
management of perceived risk.
Adverse market
developments could cause our lenders to require us to pledge
additional assets as collateral. If our assets were insufficient
to meet these collateral requirements, we might be compelled to
liquidate particular assets at inopportune times and at
unfavorable prices, which could materially adversely affect our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders.
Adverse market developments, including a sharp or prolonged rise
in interest rates, a change in prepayment rates or increasing
market concern about the value or liquidity of one or more types
of Agency RMBS, might reduce the market value of our portfolio,
which might cause our lenders to
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initiate margin calls. A margin call means that the lender
requires us to pledge additional collateral to re-establish the
ratio of the value of the collateral to the amount of the
borrowing. The specific collateral value to borrowing ratio that
would trigger a margin call is not set in the master repurchase
agreements and not determined until we engage in a repurchase
transaction under these agreements. Our fixed-rate Agency RMBS
generally are more susceptible to margin calls as increases in
interest rates tend to more negatively affect the market value
of fixed-rate securities. If we are unable to satisfy margin
calls, our lenders may foreclose on our collateral. The threat
or occurrence of a margin call could force us to sell either
directly or through a foreclosure our Agency RMBS under adverse
market conditions. Because of the significant leverage we expect
to have, we may incur substantial losses upon the threat or
occurrence of a margin call, which could materially adversely
affect our business, financial condition and results of
operations and our ability to pay distributions to our
stockholders. Additionally, the liquidation of collateral may
jeopardize our ability to qualify or maintain our qualification
as a REIT, as we must comply with requirements regarding our
assets and our sources of gross income. If we are compelled to
liquidate our Agency RMBS, we may be unable to comply with these
requirements, ultimately jeopardizing our ability to qualify or
maintain our qualification as a REIT. Our failure to qualify as
a REIT or maintain our qualification would cause us to be
subject to U.S. federal income tax (and any applicable
state and local taxes) on all of our income.
Our use of
repurchase agreements may give our lenders greater rights in the
event that either we or any of our lenders file for bankruptcy,
which may make it difficult for us to recover our collateral in
the event of a bankruptcy filing.
Our borrowings under repurchase agreements may qualify for
special treatment under the bankruptcy code, giving our lenders
the ability to avoid the automatic stay provisions of the
bankruptcy code and to take possession of and liquidate our
collateral under the repurchase agreements without delay if we
file for bankruptcy. Furthermore, the special treatment of
repurchase agreements under the bankruptcy code may make it
difficult for us to recover our pledged assets in the event that
any of our lenders files for bankruptcy. Thus, the use of
repurchase agreements exposes our pledged assets to risk in the
event of a bankruptcy filing by either our lenders or us. In
addition, if the lender is a broker or dealer subject to the
Securities Investor Protection Act of 1970, or an insured
depository institution subject to the Federal Deposit Insurance
Act, our ability to exercise our rights to recover our
investment under a repurchase agreement or to be compensated for
any damages resulting from the lender’s insolvency may be
further limited by those statutes.
If we fail to
maintain our relationship with AVM, L.P. or if we do not
establish relationships with other repurchase agreement trading,
clearing and administrative service providers, our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders could be materially
adversely affected.
We have engaged AVM, L.P. to provide us with certain repurchase
agreement trading, clearing and administrative services. If we
are unable to maintain our relationship with AVM, L.P. or we are
unable to establish successful relationships with other
repurchase agreement trading, clearing and administrative
service providers, our business, financial condition and results
of operations and our ability to pay distributions to our
stockholders could be materially adversely affected.
If our lenders
default on their obligations to resell the Agency RMBS back to
us at the end of the repurchase transaction term, or if the
value of the Agency RMBS has declined by the end of the
repurchase transaction term or if we default on our obligations
under the repurchase transaction, we will lose money on these
transactions, which, in turn, may materially adversely affect
our business, financial condition and results of operations and
our ability to pay distributions to our
stockholders.
When we engage in a repurchase transaction, we initially sell
securities to the financial institution under one of our master
repurchase agreements in exchange for cash and our counterparty
is obligated to resell the securities to us at the end of the
term of the transaction, which is typically from 24 to
90 days, but which may have terms up to 364 days or
more. The cash we receive when we
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initially sell the securities is less than the value of those
securities, which is referred to as the haircut. Many financial
institutions from whom we may obtain repurchase agreement
financing have increased their haircuts in the past, and may do
so again in the future. As of March 31, 2011, our haircuts
were approximately 7.0% on average, which means that we will be
required to pledge Agency RMBS the value of which equals
approximately 107% of the principal amount of the borrowings. If
these haircuts are increased, we will be required to post
additional cash or securities as collateral for our Agency RMBS.
If our counterparty defaults on its obligation to resell the
securities 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). We would also lose money on a
repurchase transaction if the value of the underlying securities
has declined as of the end of the transaction term, as we would
have to repurchase the securities for their initial value but
would receive securities worth less than that amount. Any losses
we incur on our repurchase transactions could materially
adversely affect our business, financial condition and results
of operations and our ability to pay distributions to our
stockholders.
If we default on one of our obligations under a repurchase
transaction, the counterparty can terminate the transaction and
cease entering into any other repurchase transactions with us.
In that case, we would likely need to establish a replacement
repurchase facility with another financial institution in order
to continue to leverage our portfolio and carry out our
investment strategy. There is no assurance we would be able to
establish a suitable replacement facility on acceptable terms or
at all.
Hedging
against interest rate exposure may not completely insulate us
from interest rate risk and could materially adversely affect
our business, financial condition and results of operations and
our ability to pay distributions to our
stockholders.
To the extent consistent with qualifying and maintaining our
qualification as a REIT, we may enter into interest rate cap or
swap agreements or pursue other hedging strategies, including
the purchase of puts, calls or other options and futures
contracts in order to hedge the interest rate risk of our
portfolio. In general, our hedging strategy depends on our view
of our entire portfolio consisting of assets, liabilities and
derivative instruments, in light of prevailing market
conditions. We could misjudge the condition of our investment
portfolio or the market. Our hedging activity will vary in scope
based on the level and volatility of interest rates and
principal prepayments, the type of Agency RMBS we hold and other
changing market conditions. Hedging may fail to protect or could
adversely affect us because, among other things:
| • | hedging can be expensive, particularly during periods of rising and volatile interest rates; | |
| • | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; | |
| • | the duration of the hedge may not match the duration of the related liability; | |
| • | certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge; | |
| • | the amount of gross income that a REIT may earn from certain hedging transactions is limited by federal income tax provisions governing REITs; | |
| • | the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and | |
| • | the counterparty in the hedging transaction may default on its obligation to pay. |
There are no perfect hedging strategies, and interest rate
hedging may fail to protect us from loss. Alternatively, we may
fail to properly assess a risk to our investment portfolio or
may fail to recognize a risk entirely, leaving us exposed to
losses without the benefit of any offsetting hedging activities.
The derivative financial instruments we select may not have the
effect of reducing our interest rate risk. The nature and timing
of hedging transactions may influence the effectiveness of these
strategies. Poorly designed strategies or improperly executed
transactions could actually increase our risk and losses. In
addition, hedging activities could result in losses if the event
against which we hedge does not occur.
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Because of the foregoing risks, our hedging activity could
materially adversely affect our business, financial condition
and results of operation and our ability to pay distributions to
our stockholders.
Our use of
certain hedging techniques may expose us to counterparty
risks.
If an interest rate swap counterparty cannot perform under the
terms of the interest rate swap, we may not receive payments due
under that swap, and thus, we may lose any unrealized gain
associated with the interest rate swap. The hedged liability
could cease to be hedged by the interest rate swap.
Additionally, we may also risk the loss of any collateral we
have pledged to secure our obligations under the interest rate
swap if the counterparty becomes insolvent or files for
bankruptcy. Similarly, if an interest rate cap counterparty
fails to perform under the terms of the interest rate cap
agreement, we may not receive payments due under that agreement
that would off-set our interest expense and then could incur a
loss for the then remaining fair market value of the interest
rate cap.
Hedging
instruments often are not traded on regulated exchanges,
guaranteed by an exchange or a clearing house, or regulated by
any U.S. or foreign governmental authorities and involve risks
and costs.
The cost of using hedging instruments increases as the period
covered by the instrument increases and during periods of rising
and volatile interest rates. We may increase our hedging
activity and thus increase our hedging costs during periods when
interest rates are volatile or rising and hedging costs have
increased.
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. While the recently enacted Dodd-Frank
Wall Street Reform and Consumer Protection Act, or the
Dodd-Frank Act, among other current or proposed pieces of
legislation, may add regulatory oversight or reduce counterparty
risk among market participants, little of such oversight
currently exists. 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 derivative 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 most likely will result in a default.
Default by a hedging counterparty may result in the loss of
unrealized profits and force us to cover our resale commitments,
if any, at the then current market price. In addition, we may
not always be able 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 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 materially adversely affect our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
Our ability to
achieve our investment objectives will depend on our ability to
manage future growth effectively.
Our ability to achieve our investment objectives will depend on
our ability to grow, which will depend, in turn, on our
Manager’s ability to identify and invest in securities that
meet our investment criteria. Accomplishing this result on a
cost-effective basis largely will be a function of our
Manager’s structuring and implementation of the investment
process, its ability to provide competent, attentive and
efficient services to us and our access to financing on
acceptable terms. Our Manager has substantial responsibilities,
and, in order to grow, needs to hire, train, supervise and
manage new employees successfully. Any failure to manage our
future growth effectively could have a material adverse effect
on our business, financial condition and results of operations
and our ability to pay distributions to our stockholders.
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We may change
our investment strategy, investment guidelines and asset
allocation without notice or stockholder consent, which may
result in riskier investments. In addition, our charter will
provide that our Board of Directors may revoke or otherwise
terminate our REIT election, without the approval of our
stockholders.
Our Board of Directors has the authority to change our
investment strategy or asset allocation at any time without
notice to or consent from our stockholders. To the extent that
our investment strategy changes in the future, we may make
investments that are different from, and possibly riskier than,
the investments described in this prospectus. A change in our
investment strategy may increase our exposure to interest rate
and real estate market fluctuations. Furthermore, a change in
our asset allocation could result in our allocating assets in a
different manner than as described in this prospectus.
In addition, our charter will provide that our Board of
Directors may revoke or otherwise terminate our REIT election,
without the approval of our stockholders, if it determines that
it is no longer in our best interests to qualify as a REIT.
These changes could materially adversely affect our business,
financial condition, results of operations, the market value of
our common stock and our ability to make distributions to our
stockholders.
Competition
might prevent us from acquiring Agency RMBS at favorable yields,
which could materially adversely affect our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
We operate in a highly competitive market for investment
opportunities. Our net income largely depends on our ability to
acquire Agency RMBS at favorable spreads over our borrowing
costs. In acquiring Agency RMBS, we compete with a variety of
institutional investors, including other REITs, investment
banking firms, savings and loan associations, banks, insurance
companies, mutual funds, other lenders and other entities that
purchase Agency RMBS, many of which have 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. Additionally, many of our competitors are
not subject to REIT tax compliance or required to maintain an
exemption from the Investment Company 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. Furthermore, competition for investments
in Agency RMBS may lead the price of such investments to
increase, which may further limit our ability to generate
desired returns. As a result, we may not be able to acquire
sufficient Agency RMBS at favorable spreads over our borrowing
costs, which would materially adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
The recent
actions of the U.S. Government for the purpose of stabilizing
the financial markets may adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
The U.S. Government, through the Federal Reserve, the
U.S. Treasury, the SEC, the Federal Housing Administration,
or FHA, the Federal Deposit Insurance Corporation, or FDIC, and
other governmental and regulatory bodies have taken or are
considering taking various actions to address the financial
crisis. For example, on July 21, 2010, President Obama
signed into law the Dodd-Frank Act. Many aspects of the
Dodd-Frank Act are subject to rulemaking and will take effect
over several years, making it difficult to anticipate the
overall financial impact on us and, more generally, the
financial services and mortgage industries. Additionally, we
cannot predict whether there will be additional proposed laws or
reforms that would affect us, whether or when such changes may
be adopted, how such changes may be interpreted and enforced or
how such changes may affect us. However, the costs of complying
with any additional laws or regulations could have a material
adverse
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effect on our business, financial condition and results of
operations and our ability to pay distributions to our
stockholders.
In addition to the foregoing, the U.S. Congress
and/or
various state and local legislatures may enact additional
legislation or regulatory action designed to address the current
economic crisis or for other purposes that could have a material
adverse effect on our ability to execute our business
strategies. To the extent the market does not respond favorably
to these initiatives or they do not function as intended, our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders could be
materially adversely affected.
We will be
subject to the requirements of the Sarbanes-Oxley Act of
2002.
After becoming a public company, 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 the Sarbanes-Oxley Act.
Section 404 of the Sarbanes-Oxley Act may require our
auditors to deliver an attestation report on the 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 this 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 Section 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 expense to remediate any material
weaknesses that may be discovered and may not be able to
remediate any material weakness 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 investors to lose confidence in our reported financial
information, all of which could lead to a decline in the trading
price of our common stock.
Terrorist
attacks and other acts of violence or war may materially
adversely affect our business, financial condition and results
of operations and our ability to pay distributions to our
stockholders.
We cannot assure you that there will not be further terrorist
attacks against the United States or U.S. businesses. These
attacks or armed conflicts may directly impact the property
underlying our Agency RMBS or the securities markets in general.
Losses resulting from these types of events are uninsurable.
More generally, any of these events could cause consumer
confidence and spending to decrease or result in increased
volatility in the United States and worldwide financial markets
and economies. They also could result in economic uncertainty in
the United States or abroad. Adverse economic conditions could
harm the value of the property underlying our Agency RMBS or the
securities markets in general, which could materially adversely
affect our business, financial condition and results of
operations and our ability to pay distributions to our
stockholders.
We are highly
dependent on communications and information systems operated by
third parties, and systems failures could significantly disrupt
our business, which may, in turn, adversely affect our business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
Our business is highly dependent on communications and
information systems that allow us to monitor, value, buy, sell,
finance and hedge our investments. These systems are operated by
third parties and, as a result, we have limited ability to
ensure their continued operation. In the event of a systems
failure or interruption, we will have limited ability to affect
the timing and success of systems restoration. Any failure or
interruption of our systems could cause delays or other problems
in our
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securities trading activities, including Agency RMBS trading
activities, which could have a material adverse effect on our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders.
If we issue
debt securities, our operations may be restricted and we will be
exposed to additional risk.
If we decide to issue debt securities in the future, it is
likely that such securities will be governed by an indenture or
other instrument containing covenants restricting our operating
flexibility. Additionally, any convertible or exchangeable
securities that we issue in the future may have rights,
preferences and privileges more favorable than those of our
common stock. We, and indirectly our stockholders, will bear the
cost of issuing and servicing such securities. Holders of debt
securities may be granted specific rights, including but not
limited to, 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 approve the sale of assets. Such additional
restrictive covenants and operating restrictions could have a
material adverse effect on our business, financial condition and
results of operations and our ability to pay distributions to
our stockholders.
Risks Related to
Conflicts of Interest in Our Relationship with Our Manager and
Bimini
The management
agreement was not negotiated on an arm’s-length basis and
the terms, including fees payable and our inability to
terminate, or our election not to renew, the management
agreement based on our Manager’s poor performance without
paying our Manager a significant termination fee, may not be as
favorable to us as if it were negotiated with an unaffiliated
third party.
The management agreement was negotiated between related parties,
and we did not have the benefit of arm’s-length
negotiations of the type normally conducted with an unaffiliated
third party. The terms of the management agreement, including
fees payable and our inability to terminate, or our election not
to renew, the management agreement based on our Manager’s
poor performance without paying our Manager a significant
termination fee, may not reflect the terms we may have received
if it was negotiated with an unrelated third party. In addition,
as a result of the relationship with our Manager, we may choose
not to enforce, or to enforce less vigorously, our rights under
the management agreement because of our desire to maintain our
ongoing relationship with our Manager.
We have no
employees and our Manager will be responsible for making all of
our investment decisions. None of our or our Manager’s
officers are required to devote any specific amount of time to
our business and each of them may provide their services to
Bimini which could result in conflicts of
interest.
Our Manager will be responsible for making all of our
investments. We do not have any employees, and we are completely
reliant on our Manager to provide us with investment advisory
services. Each of our and our Manager’s officers is an
employee of Bimini and none of them will devote their time to us
exclusively. Each of Messrs. Cauley and Haas, who will be
the initial members of our Manager’s investment committee,
is an officer of Bimini and has significant responsibilities to
Bimini. Due to the fact that each of our officers is responsible
for providing services to Bimini, they may not devote sufficient
time to the management of our business operations. At times when
there are turbulent conditions in the mortgage markets or
distress in the credit markets or other times when we will need
focused support and assistance from our executive officers and
our Manager, Bimini and its affiliates will likewise require
greater focus and attention from them. In such situations, we
may not receive the level of support and assistance that we
otherwise would likely have received if we were internally
managed or if such executives were not otherwise committed to
provide support to Bimini.
We expect our Board of Directors to adopt investment guidelines
that will require that any investment transaction between us and
Bimini or any affiliate of Bimini receives the prior approval of
a majority of our independent directors. See “Our Manager
and the Management Agreement — Conflicts of Interest;
Equitable Allocation of Opportunities.” However, this
policy will not eliminate the conflicts
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of interest that our officers will face in making investment
decisions on behalf of Bimini and us. Further, we do not have
any agreement or understanding with Bimini that would give us
any priority over Bimini or any of its affiliates. Accordingly,
we may compete for access to the benefits that we expect our
relationship with our Manager and Bimini to provide.
We are
completely dependent upon our Manager and certain key personnel
of Bimini who provide services to us through the management
agreement, and we may not find suitable replacements for our
Manager and these personnel if the management agreement is
terminated or such key personnel are no longer available to
us.
We are completely dependent on our Manager to conduct our
operations pursuant to the management agreement. Because we do
not have any employees or separate facilities, we are reliant on
our Manager to provide us with the personnel, services and
resources necessary to carry out our
day-to-day
operations. Our management agreement does not require our
Manager to dedicate specific personnel to our operations or a
specific amount of time to our business. Additionally, because
we will be affiliated with Bimini, we may be negatively impacted
by an event or factors, including ongoing and potential legal
proceedings against Bimini and its subsidiaries, that negatively
impacts or could negatively impact Bimini’s business or
financial condition.
After the initial term of the management agreement, which
expires
on ,
2014, or upon the expiration of any automatic renewal term, our
Manager may elect not to renew the management agreement without
cause, and without penalty, on
180-days’
prior written notice to us. If we elect not to renew the
management agreement without cause, we would have to pay a
termination fee equal to three times the average annual
management fee earned by our Manager during the prior 24-month
period immediately preceding the most recently completed
calender quarter prior to the effective date of termination.
During the term of the management agreement and for two years
after its expiration or termination, we may not, without the
consent of our Manager, employ any employee of the Manager or
any of its affiliates or any person who has been employed by our
Manager or any of its affiliates at any time within the two year
period immediately preceding the date on which the person
commences employment with us. We do not have retention
agreements with any of our officers. We believe that the
successful implementation of our investment and financing
strategies depends to a significant extent upon the experience
of Bimini’s executive officers. None of these
individuals’ continued service is guaranteed. If the
management agreement is terminated or these individuals leave
Bimini, we may be unable to execute our business plan.
Legal
proceedings involving Bimini and certain of its subsidiaries
have adversely affected Bimini, may materially adversely affect
Bimini’s ability to effectively manage our business and
could materially adversely affect our reputation, business,
financial condition and results of operations and our ability to
pay distributions to our stockholders.
Bimini and its subsidiaries are currently subject to a number of
ongoing legal proceedings and could be subject to further legal
proceedings in the future. Bimini is vigorously defending itself
in these proceedings. Most of these legal proceedings arise out
of the mortgage-related operations of Bimini’s mortgage
origination subsidiary that discontinued operations in 2007. In
the past, Bimini and certain of its subsidiaries have been
subject to similar actions, including proceedings alleging
violations of the federal securities laws and for breach of duty
arising from the sale of certain mortgage-related securities,
which have now been satisfactorily resolved, but Bimini and its
subsidiaries could be subject to similar actions in the future.
Because all of our Manager’s officers are also officers of
Bimini, any legal proceedings or regulatory inquiries involving
Bimini and its subsidiaries, whether meritorious or not, may
divert the time and attention of our Manager and certain key
personnel of our Manager from us and our investment strategy and
may negatively affect Bimini’s business operations and
financial condition. In addition, due to our relationship with
Bimini and our Manager, such events could result in a material
adverse effect on our reputation, business, financial condition
and results of operations and our ability to pay distributions
to our stockholders. Furthermore, if these legal proceedings
were to result in a bankruptcy of Bimini or our Manager, we may
not terminate the management agreement with our
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Manager until 30 days after we provide written notice of
termination to the Manager and could experience difficulty in
finding another manager or hiring personnel to conduct our
business. Alternatively, a bankruptcy court could prevent us
from exercising such termination right, regardless of the
provisions of the management agreement.
We, Bimini and
other accounts managed by our Manager may compete for
opportunities to acquire assets, which are allocated in
accordance with the Investment Allocation Agreement by and among
Bimini, our Manager and us.
Bimini and our Manager may, from time to time, simultaneously
seek to purchase the same or similar assets for us (through our
Manager) that it is seeking to purchase for Bimini and other
accounts that may be managed by our Manager in the future, and
our Manager has no duty to allocate such opportunities in a
manner that preferentially favors us. Bimini and our Manager
make available to us opportunities to acquire assets that they
determine, in their reasonable and good faith judgment, based on
our objectives, policies and strategies, and other relevant
factors, are appropriate for us in accordance with the
Investment Allocation Agreement.
Because many of our targeted assets are typically available only
in specified quantities and because many of our targeted assets
are also targeted assets for Bimini and may be targeted assets
for other accounts our Manager may manage in the future, neither
Bimini nor our Manager may be able to buy as much of any given
asset as required to satisfy the needs of Bimini, us and any
other account our Manager may manage in the future. In these
cases, the Investment Allocation Agreement will require the
allocation of such assets to multiple accounts in proportion to
their needs and available capital. The Investment Allocation
Agreement will permit departure from such proportional
allocation when (i) allocating purchases of whole-pool Agency
RMBS, because those securities cannot be divided into multiple
parts to be allocated among various accounts, and (ii) such
allocation would result in an inefficiently small amount of the
security being purchased for an account. In that case, the
Investment Allocation Agreement allows for a protocol of
allocating assets so that, on an overall basis, each account is
treated equitably.
There are
conflicts of interest in our relationships with our Manager and
Bimini, 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 Bimini and our Manager. All of our executive
officers are employees of Bimini. As a result, our officers may
have conflicts between their duties to us and their duties to
Bimini or our Manager.
We may acquire or sell assets in which Bimini or its affiliates
have or may have an interest. Similarly, Bimini or its
affiliates may acquire or sell assets in which we have or may
have an interest. Although such acquisitions or dispositions may
present conflicts of interest, we nonetheless may pursue and
consummate such transactions. Additionally, we may engage in
transactions directly with Bimini or its affiliates, including
the purchase and sale of all or a portion of a portfolio asset.
For example, on March 31, 2011, we purchased Agency RMBS
from Bimini for a purchase price of approximately
$1.1 million.
Acquisitions made for entities with similar objectives may be
different from those made on our behalf. Bimini may have
economic interests in or other relationships with others in
whose obligations or securities we may acquire. In particular,
such persons may make
and/or hold
an investment in securities that we acquire that may be pari
passu, senior or junior in ranking to our interest in the
securities or in which partners, security holders, officers,
directors, agents or employees of such persons serve on the
board of directors or otherwise have ongoing relationships. Each
of such ownership and other relationships may result in
securities laws restrictions on transactions in such securities
and otherwise create conflicts of interest. In such instances,
our Manager may, in its sole discretion, make recommendations
and decisions regarding such securities for other entities that
may be the same as or different from those made to or for us
with respect to such securities and may take actions (or omit to
take actions) in the context of these other economic interests
or relationships the consequences of which may be adverse to our
interests.
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The officers of Bimini and our Manager devote as much time to us
as Bimini and our Manager deem appropriate. However, these
officers may have conflicts in allocating their time and
services among us and Bimini and our Manager. 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’s and Bimini’s employees,
Bimini and other entities for which our Manager may serve as a
manager in the future, will likewise require greater focus and
attention, placing our Manager’s and Bimini’s
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.
We, directly or through Bimini or our Manager, may obtain
confidential information about the companies or securities in
which we have invested or may invest. If we do possess
confidential information about such companies or securities,
there may be restrictions on our ability to dispose of, increase
the amount of, or otherwise take action with respect to the
securities of such companies. Our Manager’s management of
other accounts could create a conflict of interest to the extent
our Manager or Bimini is aware of material non-public
information concerning potential investment decisions. We have
implemented compliance procedures and practices designed to
ensure that investment decisions are not made while in
possession of material non-public information. We cannot assure
you, however, that these procedures and practices will be
effective. In addition, this conflict and these procedures and
practices may limit the freedom of our Manager to make
potentially profitable investments, which could have an adverse
effect on our operations. These limitations imposed by access to
confidential information could therefore materially adversely
affect our business, financial condition and results of
operations and our ability to make distributions to our
stockholders.
John B. Van Heuvelen, one of our independent director
nominees, owns shares of common stock of Bimini.
Mr. Cauley, our Chief Executive Officer and Chairman of our
Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of
common stock of Bimini. Mr. Haas, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our
Board of Directors, also serves as the Chief Financial Officer,
Chief Investment Officer and Treasurer of Bimini and owns shares
of common stock of Bimini. Accordingly,
Messrs. Van Heuvelen, Cauley and Haas may have a
conflict of interest with respect to actions by our Board of
Directors that relate to Bimini or our Manager.
Bimini will own 16.98% of our outstanding shares of common stock
upon completion of this offering. In evaluating opportunities
for us and other management strategies, this may lead our
Manager to emphasize certain asset acquisition, disposition or
management objectives over others, such as balancing risk or
capital preservation objectives against return objectives. This
could increase the risks, or decrease the returns, of your
investment.
If we elect to
not renew the management agreement without cause, we would be
required to pay our Manager a substantial termination fee. These
and other provisions in our management agreement make
non-renewal of our management agreement difficult and
costly.
Electing not to renew the management agreement without cause
would be difficult and costly for us. With the consent of the
majority of our independent directors, we may elect not to renew
our management agreement after the initial term of the
management agreement, which expires
on ,
2014, or upon the expiration of any automatic renewal term, both
upon
180-days’
prior written notice. If we elect to not renew the agreement
because of a decision by our Board of Directors that the
management fee is unfair, our Manager has the right to
renegotiate a mutually agreeable management fee. If we elect to
not renew the management agreement without cause, we are
required to pay our Manager a termination fee equal to three
times the average annual management fee earned by our Manager
during the prior
24-month
period immediately preceding the most recently completed
calendar quarter prior to the effective date of termination.
These provisions may increase the effective cost to us of
electing to not renew the management agreement, thereby
adversely affecting our inclination to end our relationship with
our Manager even if we believe our Manager’s performance is
unsatisfactory.
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Our
Manager’s management fee is payable regardless of our
performance.
Our Manager is entitled to receive a management fee from us that
is based on the amount of our equity (as defined in the
management agreement), regardless of the performance of our
investment portfolio. See “Prospectus Summary —
Our Management Agreement.” For example, we would pay our
Manager a management fee for a specific period even if we
experienced a net loss during the same period. Our
Manager’s entitlement to substantial nonperformance-based
compensation may reduce its incentive to devote sufficient time
and effort to seeking investments that provide attractive
risk-adjusted returns for our investment portfolio. This in turn
could materially adversely affect our business, financial
condition and results of operations and our ability to make
distributions to our stockholders.
Our Manager
will not be liable to us for any acts or omissions performed in
accordance with the management agreement, including with respect
to the performance of our investments.
Our Manager has not assumed any responsibility other than to
render the services called for under the management agreement in
good faith and is not responsible for any action of our Board of
Directors in following or declining to follow its advice or
recommendations, including as set forth in the investment
guidelines. Our Manager and its affiliates, and the directors,
officers, employees, members and stockholders of our Manager and
its affiliates, will not be liable to us, our Board of Directors
or our stockholders for any acts or omissions performed in
accordance with and pursuant to the management agreement, except
by reason of acts constituting bad faith, willful misconduct,
gross negligence or reckless disregard of their respective
duties under the management agreement. We have agreed to
indemnify our Manager and its affiliates, and the directors,
officers, employees, members and stockholders of our Manager and
its affiliates, with respect to all expenses, losses, damages,
liabilities, demands, charges and claims in respect of or
arising from any acts or omissions of our Manager, its
affiliates, and the directors, officers, employees, members and
stockholders of our Manager and its affiliates, performed in
good faith under the management agreement and not constituting
bad faith, willful misconduct, gross negligence, or reckless
disregard of their respective duties. Therefore, you will have
no recourse against our Manager with respect to the performance
of investments made in accordance with the management agreement.
Risks Related to
Our Common Stock
Investing in
our common stock may involve a high degree of
risk.
The investments we make in accordance with our investment
objectives may result in a high amount of risk when compared to
alternative investment options and volatility or loss of
principal. Our investments may be highly speculative and
aggressive, and therefore an investment in our common stock may
not be suitable for someone with a lower risk tolerance.
There may not
be an active market for our common stock, which may cause our
common stock to trade at a discount and make it difficult to
sell the common stock you purchase.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price for our common
stock will be determined by negotiations between the
underwriters and us. The initial public offering price may not
correspond to the price at which our common stock will trade in
the public market subsequent to this offering and the price of
our shares available in the public market may not reflect our
actual financial performance.
We have applied to have our common stock approved for listing on
the NYSE Amex under the symbol “ORC.” Trading on the
NYSE Amex will not ensure that an actual market will develop for
our common stock. Accordingly, no assurance can be given as to:
| • | the likelihood that an actual market for our common stock will develop; | |
| • | the liquidity of any such market; | |
| • | the ability of any holder to sell shares of our common stock; or | |
| • | the prices that may be obtained for our common stock. |
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We have not
established a minimum distribution payment level, and we cannot
assure you of our ability to make distributions to our
stockholders in the future.
We intend to make quarterly distributions to our stockholders in
amounts such that we distribute all or substantially all of our
taxable income in each year, subject to certain adjustments. We
have not established a minimum distribution payment level, and
our ability to make distributions might be harmed by the risk
factors described in this prospectus. All distributions will be
made at the discretion of our Board of Directors out of funds
legally available therefor and will depend on our earnings, our
financial condition, qualifying and maintaining our
qualification as a REIT and such other factors as our Board of
Directors may deem relevant from time to time. We cannot assure
you that we will have the ability to make distributions to our
stockholders in the future. To the extent that we decide to pay
distributions from the proceeds from this offering or other
securities offerings, such distributions would generally be
considered a return of capital for U.S. federal income tax
purposes. A return of capital reduces the basis of a
stockholder’s investment in our common stock to the extent
of such basis and is treated as capital gain thereafter.
The issuance
of common stock issuable upon exercise of the warrants we intend
to sell to Bimini in the concurrent private placement may
substantially dilute your holdings and may, therefore, reduce
the value of our common stock.
We intend to sell to Bimini in a concurrent private placement
warrants to purchase 2,655,000 shares of our common stock. These
warrants likely will be exercised if the market price of our
common stock equals or exceeds the exercise price of the
warrants. The issuance of shares of our common stock to Bimini
pursuant to the exercise of its warrants may substantially
dilute your holdings as follows: (i) the issuance of shares
of common stock to Bimini may decrease our earnings per share,
(ii) the issuance of shares of common stock to Bimini may
decrease our book value per share, and (iii) the issuance
of shares of common stock to Bimini will dilute your voting
interests. These dilutive events could cause a significant
reduction in the value of our common stock.
Future
offerings of debt securities, which would be senior to our
common stock upon liquidation, or equity securities, which would
dilute our existing stockholders and may be senior to our common
stock for the purposes of distributions, may harm the value of
our common stock.
In the future, we may attempt to increase our capital resources
by making additional offerings of debt or equity securities,
including commercial paper, medium-term notes, senior or
subordinated notes and classes of preferred stock or common
stock, as well as warrants to purchase shares of common stock or
convertible preferred stock. Upon the liquidation of the
Company, holders of our debt securities and shares of preferred
stock and lenders with respect to other borrowings will receive
a distribution of our available assets prior to the holders of
our common stock. Additional equity offerings by us may dilute
the holdings of our existing stockholders or reduce the market
value of our common stock, or both. Our preferred stock, if
issued, would have a preference on distributions that could
limit our ability to make distributions to the holders of our
common stock. Because our decision to issue securities in any
future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future offerings. Our
stockholders are therefore subject to the risk of our future
securities offerings reducing the market price of our common
stock and diluting their common stock.
The market
value of our common stock may be volatile following this
offering.
The market value of shares of our common stock may be based
primarily upon current and future cash dividends, and the market
price of shares of our common stock will be influenced by the
dividends on those shares relative to market interest rates.
Rising interest rates may lead potential buyers of our common
stock to expect a higher dividend rate, which would adversely
affect the market price of shares of our common stock. As a
result, the market price of our common stock may be highly
volatile and subject to wide price fluctuations. In addition,
the trading volume in our common
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stock may fluctuate and cause significant price variations to
occur. Some of the factors that could negatively affect the
share price or trading volume of our common stock include:
| • | actual or anticipated variations in our quarterly operating results or distributions; | |
| • | changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry; | |
| • | increases in market interest rates that lead purchasers of our common stock to demand a higher dividend yield; | |
| • | the exercise of the warrants we intend to sell to Bimini in the concurrent private placement; | |
| • | changes in market valuations of similar companies; | |
| • | adverse market reaction to any increased indebtedness we incur in the future; | |
| • | a change in our Manager or additions or departures of key management personnel; | |
| • | actions by institutional stockholders; | |
| • | speculation in the press or investment community; and | |
| • | general market and economic conditions. |
If the market price of our common stock declines significantly,
you may be unable to resell your shares at or above the offering
price. We cannot assure you that the market price of our common
stock will not fluctuate or decline significantly in the future.
Broad market
fluctuations could harm the market price of our common
stock.
The stock market has experienced extreme price and volume
fluctuations in the past 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. These broad market fluctuations could occur again
and could reduce the market price of our common stock.
Furthermore, 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 harm the market price of our common
stock.
Shares of our
common stock eligible for future sale may harm our share
price.
We cannot predict the effect, if any, of future sales of shares
of our common stock, or the availability of shares for future
sales, on the market price of our common stock. Sales of
substantial amounts of these shares of our common stock, or the
perception that these sales could occur, may harm prevailing
market prices for our common stock. Prior to the completion of
this offering, Bimini will own 1,063,830 shares of our
common stock (after giving effect to the stock dividend we
intend to effect prior to the completion of this offering) and,
upon completion of this offering and the concurrent private
placement, we intend to sell to Bimini warrants to purchase
2,655,000 shares of our common stock. The 2011 Equity
Incentive Plan provides for grants up to an aggregate of 10% of
the issued and outstanding shares of our common stock (on a
fully diluted basis) at the time of the award, subject to a
maximum aggregate number of shares of common stock that may be
issued under the 2011 Equity Incentive Plan of
4,000,000 shares of common stock. Pursuant to the
registration rights agreement, upon the first anniversary of the
completion of this offering, we will grant to (i) Bimini
and its transferees demand registration rights to have its
shares of our common stock, including shares of our common stock
issuable upon the exercise of the warrants we intend to sell to
Bimini in the concurrent private placement, registered for
resale, provided that no holder may request more than two demand
registrations, and, (ii) solely Bimini, in certain
circumstances, the right to “piggy-back” these shares
in registration statements we might file in connection with any
future public offering, so long as Bimini holds these shares. If
Bimini sells a large number of our securities in the public
market, the sale could reduce the market price of our common
stock and could impede our ability to raise future capital.
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You should not
rely on
lock-up
agreements in connection with this offering to limit the amount
of common stock sold into the market.
We and each of our Manager, our directors and executive officers
will agree that, for a period of 180 days after the date of
this prospectus, without the prior written consent of Barclays
Capital Inc., we and they will not sell, dispose of or hedge any
shares of our common stock, subject to certain exceptions and
extensions in certain circumstances. Bimini will agree that, for
a period of 365 days after the date of this prospectus, it
will not, without the prior written consent of Barclays Capital
Inc., dispose of or hedge any of (i) its shares of our common
stock, including any shares of our common stock issuable upon
the exercise of the warrants it intends to purchase in the
concurrent private placement, (ii) the warrants that it intends
to purchase in the concurrent private placement or (iii) any
shares of our common stock that it may acquire after completion
of this offering, subject to certain exceptions and extension in
certain circumstances.
There are no present agreements between Barclays Capital Inc.
and any of Bimini, our Manager, our directors, our executive
officers or us to release any of them or us from these
lock-up
agreements. However, we cannot predict the circumstances or
timing under which Barclays Capital Inc. may waive these
restrictions. These sales or a perception that these sales may
occur could reduce the market price of our common stock.
An increase in
market interest rates may cause a material decrease in the
market price of our common stock.
One of the factors that investors may consider in deciding
whether to buy or sell shares of our common stock is our
distribution rate as a percentage of our share price relative to
market interest rates. If the market price of our common stock
is based primarily on the earnings and return that we derive
from our investments and income with respect to our investments
and our related distributions to stockholders, and not from the
market value of the investments themselves, then interest rate
fluctuations and capital market conditions are likely to
adversely affect the market price of our common stock. For
instance, if market rates rise without an increase in our
distribution rate, the market price of our common stock could
decrease as potential investors may require a higher
distribution yield on our common stock or seek other securities
paying higher distributions or interest. In addition, rising
interest rates would result in increased interest expense on our
variable rate debt, thereby reducing cash flow and our ability
to service our indebtedness and pay distributions.
Risks Related to
Our Organization and Structure
Loss of our
exemption from regulation under the Investment Company Act would
negatively affect the value of shares of our common stock and
our ability to pay distributions to our
stockholders.
We have operated and intend to continue to operate our business
so as to be exempt from registration under the Investment
Company Act because we are “primarily engaged in the
business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate.” Specifically,
we invest and intend to continue to invest so that at least 55%
of the assets that we own on an unconsolidated basis consist of
qualifying mortgages and other liens and interests in real
estate, which are collectively referred to as “qualifying
real estate assets,” and so that at least 80% of the assets
we own on an unconsolidated basis consist of real estate related
assets (including our qualifying real estate assets). We treat
Fannie Mae, Freddie Mac and Ginnie Mae whole-pool residential
mortgage pass-through securities issued with respect to an
underlying pool of mortgage loans in which we hold all of the
certificates issued by the pool as qualifying real estate assets
based on no-action letters issued by the SEC. To the extent that
the SEC publishes new or different guidance with respect to
these matters, we may fail to qualify for this exemption.
If we fail to qualify for this exemption, we could be required
to restructure our activities in a manner that, or at a time
when, we would not otherwise choose to do so, which could
negatively affect the value of shares of our common stock and
our ability to distribute dividends. For example, if the market
value of our investments in CMOs or structured Agency RMBS,
neither of which are qualifying real estate
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assets, were to increase by an amount that resulted in less than
55% of our assets being invested in pass-through Agency RMBS, we
might have to sell CMOs or structured Agency RMBS in order to
maintain our exemption from the Investment Company Act. The sale
could occur during adverse market conditions, and we could be
forced to accept a price below that which we believe is
acceptable.
Alternatively, if we fail to qualify for this exemption, we may
have to register under the Investment Company 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 Investment Company Act), portfolio composition,
including restrictions with respect to diversification and
industry concentration, and other matters.
We may be required at times to adopt less efficient methods of
financing certain of our securities, and we may be precluded
from acquiring certain types of higher yielding securities. The
net effect of these factors would be to lower our net interest
income. If we fail to qualify for an exemption from registration
as an investment company or an exclusion from the definition of
an investment company, our ability to use leverage would be
substantially reduced, and we would not be able to conduct our
business as described in this prospectus. Our business will be
materially and adversely affected if we fail to qualify for and
maintain an exemption from regulation pursuant to the Investment
Company Act.
Our ownership
limitations and certain other provisions of applicable law and
our charter and bylaws may restrict business combination
opportunities that would otherwise be favorable to our
stockholders.
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 common
stock or otherwise be in the best interests of our stockholders,
including business combination provisions, supermajority vote
and cause requirements for removal of directors, provisions that
vacancies on our Board of Directors may be filled only by the
remaining directors, for the full term of the directorship in
which the vacancy occurred, the power of our Board of Directors
to increase or decrease the aggregate number of authorized
shares of stock or the number of shares of any class or series
of stock, to cause us to issue additional shares of stock of any
class or series and to fix the terms of one or more classes or
series of stock without stockholder approval, the restrictions
on ownership and transfer of our stock and advance notice
requirements for director nominations and stockholder proposals.
Upon the closing of this offering, to assist us in qualifying as
a REIT, among other purposes, ownership of our stock by any
person will generally be limited to 9.8% in value or number of
shares, whichever is more restrictive, of any class or series of
our stock, except that Bimini may own up to 44% of our common
stock so long as Bimini continues to qualify as a REIT.
Additionally, our charter will prohibit beneficial or
constructive ownership of our stock that would otherwise result
in our failure to qualify as a REIT. The ownership rules in our
charter are complex and may cause the outstanding stock owned by
a group of related individuals or entities to be deemed to be
owned by one individual or entity. As a result, these ownership
rules could cause an individual or entity to unintentionally own
shares beneficially or constructively in excess of our ownership
limits. Any attempt to own or transfer shares of our common or
preferred stock in excess of our ownership limits without the
consent of our Board of Directors will result in such shares
being transferred to a charitable trust. These provisions may
inhibit market activity and the resulting opportunity for our
stockholders to receive a premium for their stock that might
otherwise exist if any person were to attempt to assemble a
block of shares of our stock in excess of the number of shares
permitted under our charter and which may be in the best
interests of our security holders.
Our Board of Directors may, without stockholder approval, amend
our charter to increase or decrease the aggregate number of our
shares or the number of shares of any class or series that we
have the authority to issue and to classify or reclassify any
unissued shares of common stock or preferred stock, and set the
preferences, rights and other terms of the classified or
reclassified shares. As a result, our Board of Directors may
take actions with respect to our common or preferred stock that
may have the effect of delaying or preventing a change in
control, including transactions at a premium over the market
price of our shares, even if stockholders believe that a change
in control is in their interest. These provisions, along with
the restrictions on ownership and transfer contained in our
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charter and certain provisions of Maryland law described below,
could discourage unsolicited acquisition proposals or make it
more difficult for a third party to gain control of us, which
could adversely affect the market price of our securities. See
“Certain Provisions of Maryland Law and of Our Charter and
Bylaws.”
Our rights and
the rights of our stockholders to take action against our
directors and officers are limited, which could limit your
recourse in the event of actions not in your best
interests.
Our charter will limit the liability of our directors and
officers to us and our stockholders for money damages, except
for liability resulting from:
| • | actual receipt of an improper benefit or profit in money, property or services; or | |
| • | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated. |
We will enter into indemnification agreements with our directors
and executive officers that obligate us to indemnify them to the
maximum extent permitted by Maryland law. In addition, our
charter will authorize the Company to obligate itself to
indemnify our present and former directors and officers for
actions taken by them in those and other capacities to the
maximum extent permitted by Maryland law. Our bylaws will
require us, to the maximum extent permitted by Maryland law, to
indemnify each present and former director or officer in the
defense of any proceeding to which he or she is made, or
threatened to be made, a party by reason of his or her service
to us. In addition, we may be obligated to advance the defense
costs incurred by our directors and officers. As a result, we
and our stockholders may have more limited rights against our
directors and officers than might otherwise exist absent the
provisions in our charter, bylaws and indemnification agreements
or that might exist with other companies. See “Certain
Provisions of Maryland Law and of our Charter and
Bylaws — Limitation of Directors’ and
Officers’ Liability and Indemnification.”
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 inhibiting a third party from
making a proposal to acquire us or impeding a change of control
under circumstances that otherwise could provide our
stockholders with the opportunity to realize a premium over the
then-prevailing market price of our common stock, including:
| • | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and | |
| • | “control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror 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,” subject to certain exceptions) generally have no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
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We will elect to opt-out of these provisions of the MGCL, in the
case of the business combination provisions of the MGCL, by
resolution of our Board of Directors (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), and in the case of the
control share provisions of the MGCL, pursuant to a provision in
our bylaws. However, our Board of Directors may by resolution
elect to repeal the foregoing opt-out from the business
combination provisions of the MGCL, and we may, by amendment to
our bylaws, opt in to the control share provisions of the MGCL
in the future.
We may be
subject to adverse legislative or regulatory changes that could
reduce the market price of our common stock.
At any time, laws or regulations, or the administrative
interpretations of those laws or regulations, that impact our
business and Maryland corporations may be amended. In addition,
the markets for RMBS and derivatives, including interest rate
swaps, have been the subject of intense scrutiny in recent
months. We cannot predict when or if any new law, regulation or
administrative interpretation, or any amendment to any existing
law, regulation or administrative interpretation, will be
adopted or promulgated or will become effective. Additionally,
revision to these laws, regulations or administrative
interpretations could cause us to change our investments. We
could be materially adversely affected by any such change to any
existing, or any new, law, regulation or administrative
interpretation, which could reduce the market price of our
common stock.
U.S. Federal
Income Tax Risks
Your
investment has various U.S. federal income tax
risks.
Although the provisions of the Code relevant to your investment
are generally described in “Material U.S. Federal
Income Tax Considerations,” we strongly urge you to consult
your own tax advisor concerning the effects of federal, state
and local income tax law on an investment in our common stock
and on your individual tax situation.
Our failure to
qualify or maintain our qualification as a REIT would subject us
to U.S. federal income tax, which could adversely affect the
value of the shares of our common stock and would substantially
reduce the cash available for distribution to our
stockholders.
We believe that we will be organized in conformity with the
requirements for qualification as a REIT under the Code, and we
intend to operate in a manner that will enable us to meet the
requirements for qualification and taxation as a REIT commencing
with our short taxable year ending December 31, 2011.
However, we cannot assure you that we will qualify and remain
qualified as a REIT. In connection with this offering, we will
receive an opinion from Hunton & Williams LLP that,
commencing with our short taxable year ending December 31,
2011, we will be organized in conformity with the requirements
for qualification and taxation as a REIT under the
U.S. federal income tax laws and our intended method of
operations will enable us to satisfy the requirements for
qualification and taxation as a REIT under the U.S. federal
income tax laws for our short taxable year ending
December 31, 2011 and subsequent taxable years. Investors
should be aware that Hunton & Williams LLP’s
opinion is based upon customary assumptions, will be conditioned
upon certain representations made by us as to factual matters,
including representations regarding the nature of our assets and
the conduct of our business, is not binding upon the Internal
Revenue Service, or the IRS, or any court and speaks as of the
date issued. In addition, Hunton & Williams LLP’s
opinion will be based on existing U.S. federal income tax
law governing qualification as a REIT, which is subject to
change either prospectively or retroactively. Moreover, our
qualification and taxation as a REIT will depend upon our
ability to meet on a continuing basis, through actual annual
operating results, certain qualification tests set forth in the
U.S. federal tax laws. Hunton & Williams LLP will
not review our compliance with those tests on a continuing
basis. Accordingly, given the complex nature of the rules
governing REITs, the ongoing importance of factual
determinations, including the potential tax treatment of
investments we make, and the possibility of future changes in
our circumstances, no assurance can be given that our actual
results of operations for any particular taxable year will
satisfy such requirements.
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If we fail to qualify as a REIT in any calendar year, we would
be required to pay U.S. federal income tax (and any
applicable state and local tax), including any applicable
alternative minimum tax, on our taxable income at regular
corporate rates, and dividends paid to our stockholders would
not be deductible by us in computing our taxable income
(although such dividends received by certain non-corporate
U.S. taxpayers generally would be subject to a preferential
rate of taxation through December 31, 2012). Further, if we
fail to qualify as a REIT, we might need to borrow money or sell
assets in order to pay any resulting tax. 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 under U.S. federal tax laws to distribute
substantially all of our REIT taxable income to our
stockholders. Unless our failure to qualify as a REIT was
subject to relief under U.S. federal tax laws, we could not
re-elect to qualify as a REIT until the fifth calendar year
following the year in which we failed to qualify.
Complying with
REIT requirements may cause us to forego or liquidate otherwise
attractive investments.
To qualify as a REIT, we must continually satisfy various tests
regarding the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our
stockholders and the ownership of our stock. In order to meet
these tests, we may be required to forego investments we might
otherwise make. Thus, compliance with the REIT requirements may
hinder our investment performance.
In particular, we must ensure that at the end of each calendar
quarter, at least 75% of the value of our total assets consists
of cash, cash items, government securities and qualified REIT
real estate assets, including Agency RMBS. The remainder of our
investment in securities (other than government securities and
qualified 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 total assets (other than government securities,
TRS securities, and qualified real estate assets) can consist of
the securities of any one issuer, and no more than 25% of the
value of our total assets can be represented by securities of
one or more TRSs. Generally, if we fail to comply with these
requirements at the end of any calendar quarter, we must correct
the failure within 30 days after the end of the calendar
quarter or qualify for certain statutory relief provisions to
avoid losing our REIT qualification and becoming subject to
U.S. federal income tax (and any applicable state and local
taxes) on all of our income. As a result, we may be required to
liquidate from our portfolio otherwise attractive investments or
contribute such investments to a TRS. These actions could have
the effect of reducing our income and amounts 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.
To qualify as a REIT, we must distribute to our stockholders
each calendar year at least 90% of our REIT taxable income
(including certain items of non-cash income), determined without
regard to the deduction for dividends paid and excluding net
capital gain. To the extent that we satisfy the 90% distribution
requirement, but distribute less than 100% of our taxable
income, we will be subject to 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:
| • | 85% of our REIT ordinary income for that year; | |
| • | 95% of our REIT capital gain net income for that year; and | |
| • | any undistributed taxable income from prior years. |
We intend to distribute our REIT taxable income to our
stockholders in a manner intended to satisfy the 90%
distribution requirement and to avoid both corporate income tax
and the 4%
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nondeductible excise tax. However, there is no requirement that
TRSs distribute their after-tax net income to their parent REIT
or their stockholders.
Our taxable income may substantially exceed our net income as
determined based on GAAP, because, for example, realized capital
losses will be deducted in determining our GAAP net income, but
may not be deductible in computing our taxable income. In
addition, we may invest in assets that generate taxable income
in excess of economic income or in advance of the corresponding
cash flow from the assets. As a result of the foregoing, we may
generate less cash flow than taxable income in a particular
year. To the extent that we generate such non-cash taxable
income in a taxable year, we may incur corporate income tax and
the 4% nondeductible excise tax on that income if we do not
distribute such income to stockholders in that year. In that
event, we may be required to use cash reserves, incur debt, sell
assets, make taxable distributions of our stock or debt
securities or liquidate non-cash assets at rates or at times
that we regard as unfavorable to satisfy the distribution
requirement and to avoid corporate income tax and the 4%
nondeductible excise tax in that year.
Even if we
qualify as a REIT, we may face other tax liabilities that reduce
our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to
certain 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, property and transfer taxes. In addition,
any TRSs we form will be subject to regular corporate federal,
state and local taxes. Any of these taxes would decrease cash
available for distributions to stockholders.
The failure of
Agency RMBS subject to a repurchase agreement to qualify as real
estate assets would adversely affect our ability to qualify as a
REIT.
We have entered and intend to continue to enter into repurchase
agreements under which we will nominally sell certain of our
Agency RMBS to a counterparty and simultaneously enter into an
agreement to repurchase the sold assets. We believe that for
U.S. federal income tax purposes these transactions will be
treated as secured debt and we will be treated as the owner of
the Agency RMBS that are the subject of any such agreement
notwithstanding that such agreement may transfer record
ownership of such assets to the counterparty during the term of
the agreement. It is possible, however, that the IRS could
successfully assert that we do not own the Agency RMBS during
the term of the repurchase agreement, in which case we could
fail to qualify as a REIT.
Our ability to
invest in and dispose of contracts for delayed delivery
transactions, or delayed delivery contracts, including “to
be announced” securities, could be limited by the
requirements necessary to qualify as a REIT, and we could fail
to qualify as a REIT as a result of these
investments.
We may purchase Agency RMBS through delayed delivery contracts,
including “to-be-announced” forward contracts, or
TBAs. We may recognize income or gains on the disposition of
delayed delivery contracts. For example, rather than take
delivery of the Agency RMBS subject to a TBA, we may dispose of
the TBA through a “roll” transaction in which we agree
to purchase similar securities in the future at a predetermined
price or otherwise, which may result in the recognition of
income or gains. The law is unclear regarding whether delayed
delivery contracts will be qualifying assets for the 75% asset
test and whether income and gains from dispositions of delayed
delivery contracts will be qualifying income for the 75% gross
income test.
Until we receive a favorable private letter ruling from the IRS
or we are advised by counsel that delayed delivery contracts
should be treated as qualifying assets for purposes of the 75%
asset test, we will limit our investment in delayed delivery
contracts and any non-qualifying assets to no more than 25% of
our total gross assets at the end of any calendar quarter and
will limit the delayed delivery contracts issued by any one
issuer to no more than 5% of our total gross assets at the end
of any calendar quarter. Further, until we receive a favorable
private letter ruling from the IRS or we are advised by counsel
that income and gains from the disposition of delayed delivery
contracts should be treated as qualifying income for purposes of
the 75% gross income test, we will limit our income and
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gains from dispositions of delayed delivery contracts and any
non-qualifying income to no more than 25% of our gross income
for each calendar year. Accordingly, our ability to purchase
Agency RMBS through delayed delivery contracts and to dispose of
delayed delivery contracts through roll transactions or
otherwise, could be limited.
Moreover, even if we are advised by counsel that delayed
delivery contracts should be treated as qualifying assets or
that income and gains from dispositions of delayed delivery
contracts should be treated as qualifying income, it is possible
that the IRS could successfully take the position that such
assets are not qualifying assets and such income is not
qualifying income. In that event, we could be subject to a
penalty tax or we could fail to qualify as a REIT if
(i) the value of our delayed delivery contracts together
with our non-qualifying assets for the 75% asset test, exceeded
25% of our total gross assets at the end of any calendar
quarter, (ii) the value of our delayed delivery contracts,
including TBAs, issued by any one issuer exceeds 5% of our total
assets at the end of any calendar quarter, or (iii) our
income and gains from the disposition of delayed delivery
contracts together with our non-qualifying income for the 75%
gross income test, exceeded 25% of our gross income for any
taxable year.
Complying with
REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Code substantially limit our ability
to hedge. Our aggregate gross income from non-qualifying hedges,
fees, and certain other non-qualifying sources cannot exceed 5%
of our annual gross income. As a result, we might have to limit
our use of advantageous hedging techniques or implement those
hedges through a TRS. Any hedging income earned by a TRS would
be subject to federal, state and local income tax at regular
corporate rates. This could increase the cost of our hedging
activities or expose us to greater risks associated with changes
in interest rates than we would otherwise want to bear.
Our ownership
of and relationship with any TRSs that we form will be limited
and a failure to comply with the limits would jeopardize our
REIT status and may result in the application of a 100% excise
tax.
A REIT may own up to 100% of the stock of one or more TRSs. A
TRS may earn income that would not be qualifying income if
earned directly by the parent REIT. Both the subsidiary and the
REIT must jointly elect to treat the subsidiary as a TRS. A
corporation (other than a REIT) 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 25% of the value of a REIT’s total assets may
consist of stock or securities of one or more TRSs. A domestic
TRS will pay federal, state and local income tax at regular
corporate rates on any income that it earns. 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 arm’s length
basis. Any domestic TRS that we may form will pay federal, state
and local income tax on its taxable income, and its after-tax
net income will be available for distribution to us but is not
required to be distributed to us unless necessary to maintain
our REIT qualification.
Dividends
payable by REITs do not qualify for the reduced tax rates
available for some dividends.
The maximum tax rate applicable to income from “qualified
dividends” payable to domestic stockholders taxed at
individual rates has been reduced by legislation to 15% through
the end of 2012. Dividends payable by REITs, however, generally
are not eligible for the reduced rates. Although this
legislation does not adversely affect the taxation of REITs or
dividends payable by REITs, the more favorable rates applicable
to regular corporate qualified dividends could cause investors
who are taxed at individual rates to perceive investments in
REITs to be relatively less attractive than investments in the
stocks of non-REIT corporations that pay dividends treated as
qualified dividend income, which could adversely affect the
value of the stock of REITs, including our common stock.
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We may pay
taxable dividends in cash and our common stock, in which case
stockholders may sell shares of our common stock to pay tax on
such dividends, placing downward pressure on the market price of
our common stock.
We may distribute taxable dividends that are payable in cash and
common stock at the election of each stockholder. Under IRS
Revenue Procedure
2010-12, up
to 90% of any such taxable dividend paid with respect to our
2011 taxable year could be payable in shares of our common
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 or accumulated earnings and
profits, as determined for U.S. federal income tax
purposes. As a result, stockholders may be required to pay
income tax with respect to such dividends in excess of the cash
dividends received. If a U.S. stockholder sells the common
stock that 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 common stock at the time of the sale. Furthermore,
with respect to certain
non-U.S. stockholders,
the applicable withholding agent may be required to withhold
U.S. federal income tax with respect to such dividends,
including in respect of all or a portion of such dividend that
is payable in common stock. If we utilize Revenue Procedure
2010-12 and
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. Further, although Revenue Procedure
2010-12
applies only to taxable dividends payable in cash and stock with
respect to our 2011 taxable year, it is unclear whether and to
what extent we will be able to pay taxable dividends payable in
cash and our stock in later years. Moreover, various tax aspects
of taxable cash/stock dividends are uncertain and have not yet
been addressed by the IRS. No assurance can be given that the
IRS will not impose additional requirements in the future with
respect to taxable cash/stock dividends, including on a
retroactive basis, or assert that the requirements for such
taxable cash/stock dividends have not been met. We currently do
not intend to pay taxable dividends payable in cash and our
stock.
Our ownership
limitations may restrict change of control or business
combination opportunities in which our stockholders might
receive a premium for their stock.
In order for us to qualify as a REIT for each taxable year after
2011, no more than 50% in value of our outstanding stock may be
owned, directly or indirectly, by five or fewer individuals
during the last half of any calendar year.
“Individuals” for this purpose include natural
persons, private foundations, some employee benefit plans and
trusts, and some charitable trusts. In order to assist us in
qualifying as a REIT, among other purposes, ownership of our
stock by any person is generally limited to 9.8% in value or
number of shares, whichever is more restrictive, of any class or
series of our stock, except that Bimini may own up to 44% of our
common stock so long as Bimini continues to qualify as a REIT.
These ownership limitations could have the effect of
discouraging a takeover or other transaction in which holders of
our common stock might receive a premium for their common stock
over the then-prevailing market price or which holders might
believe to be otherwise in their best interests.
We may be
subject to adverse legislative or regulatory tax changes that
could reduce the market price of our common stock.
At any time, the U.S. federal income tax laws or
regulations governing REITs or the administrative
interpretations of those laws or regulations may be amended. We
cannot predict when or if any new U.S. federal income tax
law, regulation or administrative interpretation, or any
amendment to any existing U.S. federal income tax law,
regulation or administrative interpretation, will be adopted,
promulgated or become effective and any such law, regulation or
interpretation may take effect retroactively. We and our
stockholders could be adversely affected by any such change in,
or any new, U.S. federal income tax law, regulation or
administrative interpretation.
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Certain
financing activities may subject us to U.S. federal income tax
and could have negative tax consequences for our
stockholders.
We currently do not intend to enter into any transactions that
could result in our, or a portion of our assets, being treated
as a taxable mortgage pool for U.S. federal income tax
purposes. If we enter into such a transaction in the future, we
will be taxable at the highest corporate income tax rate on a
portion of the income arising from a taxable mortgage pool,
referred to as “excess inclusion income,” that is
allocable to the percentage of our stock held in record name by
disqualified organizations (generally tax-exempt entities that
are exempt from the tax on unrelated business taxable income,
such as state pension plans, charitable remainder trusts and
government entities). In that case, under our charter, we will
reduce distributions to such stockholders by the amount of tax
paid by us that is attributable to such stockholder’s
ownership.
If we were to realize excess inclusion income, IRS guidance
indicates that the excess inclusion income would be allocated
among our stockholders in proportion to our dividends paid.
Excess inclusion income cannot be offset by losses of our
stockholders. If the stockholder is a tax-exempt entity and not
a disqualified organization, then this income would be fully
taxable as unrelated business taxable income under
Section 512 of the Code. If the stockholder is a foreign
person, it would be subject to U.S. federal income tax at
the maximum tax rate and withholding will be required on this
income without reduction or exemption pursuant to any otherwise
applicable income tax treaty.
Our
recognition of “phantom” income may reduce a
stockholder’s after-tax return on an investment in our
common stock.
We may recognize taxable income in excess of our economic
income, known as phantom income, in the first years that we hold
certain investments, and experience an offsetting excess of
economic income over our taxable income in later years. As a
result, stockholders at times may be required to pay
U.S. federal income tax on distributions that economically
represent a return of capital rather than a dividend. These
distributions would be offset in later years by distributions
representing economic income that would be treated as returns of
capital for U.S. federal income tax purposes. Taking into
account the time value of money, this acceleration of
U.S. federal income tax liabilities may reduce a
stockholder’s after-tax return on his or her investment to
an amount less than the after-tax return on an investment with
an identical before-tax rate of return that did not generate
phantom income.
Liquidation of
our assets may jeopardize our REIT qualification.
To qualify and maintain our qualification 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.
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 assets that we acquire, 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, the value of such
securities, and also to what extent those securities constitute
qualified real estate assets for purposes of the REIT asset
tests and produce income which qualifies under the 75% gross
income test. The inaccuracy of any such opinions, advice or
statements may adversely affect our REIT qualification and
result in significant corporate-level tax.
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USE OF
PROCEEDS
We estimate that the net proceeds from this offering and the
concurrent private placement will be approximately
$41.2 million (or approximately $47.2 million if the
underwriters fully exercise their option to purchase additional
shares), after deducting the portion of the underwriting
discount and commissions payable by us of approximately
$1.3 million (or approximately $1.4 million if the
underwriters fully exercise their option to purchase additional
shares) and estimated offering expenses of approximately
$416,000 payable by us. A $1.00 increase (decrease) in the
assumed public offering price of $8.00 per share would
increase (decrease) the net proceeds that we will receive from
this offering and the concurrent private placement by
approximately $5.0 million, assuming the number of shares
offered by us, as set forth on the front cover of this
prospectus, remains the same and after deducting the portion of
the underwriting discount and commissions payable by us and
estimated offering expenses payable by us.
Our obligation to pay for the expenses of this offering will be
capped at 1.0% of the total gross proceeds from this offering.
Our Manager will (i) pay the underwriters
$ per share with respect to
each share of common stock sold in this offering on a deferred
basis after the completion of this offering and (ii) pay
the offering expenses that exceed an amount equal to 1.0% of the
total gross proceeds from this offering.
We intend to invest the net proceeds of this offering and the
concurrent private placement in (i) pass-through Agency
RMBS backed by hybrid ARMs, ARMs and fixed-rate mortgage loans
and (ii) structured Agency RMBS. Specifically, we intend to
invest the net proceeds of this offering as follows:
| • | approximately 0% to 50% in pass-through Agency RMBS backed by fixed-rate mortgage loans; | |
| • | approximately 0% to 50% in pass-through Agency RMBS backed by ARMs; | |
| • | approximately 0% to 50% in pass-through Agency RMBS backed by hybrid ARMs; and | |
| • | approximately 25% to 75% in structured Agency RMBS. |
We expect to fully invest the net proceeds of this offering and
the concurrent private placement in Agency RMBS within
approximately three months of closing the offering and, for our
pass-through Agency RMBS portfolio and a certain portion of our
structured Agency RMBS portfolio, to implement our leveraging
strategy within approximately three additional months. We then
expect to borrow against the pass-through Agency RMBS and a
portion of our structured Agency RMBS that we purchase with the
net proceeds of this offering through repurchase agreements and
use the proceeds of the borrowings to acquire additional
pass-through Agency RMBS and structured Agency RMBS in
accordance with a similar targeted allocation. We reserve the
right to change our targeted allocation depending on prevailing
market conditions, including, among others, the pricing and
supply of Agency RMBS and structured Agency RMBS, the
performance of our portfolio and the availability and terms of
financing.
Until these assets can be identified and obtained, we may
temporarily invest the balance of the proceeds of this offering
in interest-bearing short-term investment grade securities or
money market accounts consistent with our intention to qualify
and maintain our qualification as a REIT, or we may hold cash.
These investments are expected to provide a lower net return
than we hope to achieve from our intended investments.
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DISTRIBUTION
POLICY
We intend to make regular quarterly cash distributions to our
stockholders, as more fully described below. To qualify as a
REIT, we must distribute annually to our stockholders an amount
at least equal to 90% of our REIT taxable income, determined
without regard to the deduction for dividends paid and excluding
any net capital gain. We will be subject to income tax on our
taxable income that is not distributed and to an excise tax to
the extent that certain percentages of our taxable income are
not distributed by specified dates. See “Material
U.S. Federal Income Tax Considerations.” Income as
computed for purposes of the foregoing tax rules will not
necessarily correspond to our income as determined for financial
reporting purposes.
Any distributions we make will be authorized by and at the
discretion of our Board of Directors based upon a variety of
factors deemed relevant by our directors, which may include:
| • | actual results of operations; | |
| • | our financial condition; | |
| • | our level of retained cash flows; | |
| • | our capital requirements; | |
| • | the timing of the investment of the net proceeds of this offering and the concurrent private placement; | |
| • | any debt service requirements; | |
| • | our taxable income; | |
| • | the annual distribution requirements under the REIT provisions of the Code; | |
| • | applicable provisions of Maryland law; and | |
| • | other factors that our Board of Directors may deem relevant. |
We have not established a minimum distribution payment level,
and we cannot assure you of our ability to make distributions to
our stockholders in the future.
Our charter will authorize us to issue preferred stock that
could have a preference over our common stock with respect to
distributions. We currently have no intention to issue any
preferred stock, but if we do, the distribution preference on
the preferred stock could limit our ability to make
distributions to the holders of our common stock.
Our ability to make distributions to our stockholders will
depend upon the performance of our investment portfolio, and, in
turn, upon our Manager’s management of our business. To the
extent that our cash available for distribution is less than the
amount required to be distributed under the REIT provisions of
the Code, we may consider various funding sources to cover any
shortfall, including selling certain of our assets, borrowing
funds or using a portion of the net proceeds we receive in this
offering and the concurrent private placement or future
offerings (and thus all or a portion of such distributions may
constitute a return of capital for U.S. federal income tax
purposes). We also may elect to pay all or a portion of any
distribution in the form of a taxable distribution of our stock
or debt securities. We do not currently intend to pay future
distributions from the proceeds of this offering. In addition,
our Board of Directors may change our distribution policy in the
future. See “Risk Factors.”
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CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2011:
| • | On an actual basis; |
| • | On an as adjusted basis to give effect to (i) the sale of 5,200,000 shares of our common stock in this offering, at an assumed public offering price of $8.00 per share, and after deducting the portion of the underwriters’ discounts and commissions payable by us and estimated offering expenses payable by us, (ii) the issuance of 1,063,830 shares of our common stock sold to Bimini for $15.0 million in cash (after giving effect to the stock dividend of 6.0922 shares for each share of common stock that we will effect prior to the completion of this offering, or the Stock Dividend), (iii) the sale of warrants to purchase 2,655,000 shares of our common stock in the concurrent private placement for an aggregate purchase price of $1,248,000 and (iv) the Stock Dividend. |
You should read this table together with “Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations” and our financial statements and related notes
included elsewhere in this prospectus.
| March 31, 2011 | ||||||||
| Actual | As Adjusted(1)(2) | |||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Common stock, $0.01 par value; 1,000,000 shares
authorized; 75,000 shares subscribed, actual; 500,000,000
shares authorized, as adjusted; 6,263,830 shares issued and
outstanding, as adjusted
|
$ | 750 | $ | 62,638 | ||||
|
Preferred stock, $0.01 par value; no shares authorized; no
shares outstanding, actual; 100,000,000 shares authorized and no
shares issued and outstanding, as adjusted
|
— | — | ||||||
|
Additional paid-in capital
|
7,499,250 | 56,121,362 | ||||||
|
(Accumulated deficit) Retained earnings
|
(14,082 | ) | (14,082 | ) | ||||
|
TOTAL STOCKHOLDERS’
EQUITY(3)
|
$ | 7,485,918 | $ | 56,169,918 | ||||
| (1) | The number of shares of common stock to be outstanding immediately after the closing of this offering and the concurrent private placement includes (i) 1,063,830 shares of our common stock that will be held by Bimini upon completion of this offering, and (ii) 5,200,000 shares of common stock to be sold in this offering. Does not include a maximum 4,000,000 shares of common stock reserved for issuance under our 2011 Equity Incentive Plan, with grants under such plan subject to a cap of an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully-diluted basis) at the time of each award. |
| (2) | Does not include the underwriters’ option to purchase up to an additional 780,000 shares of common stock. Also does not include 2,655,000 shares of common stock issuable upon exercise of the warrants issued to Bimini in the concurrent private placement, however, as adjusted additional paid-in capital does include the $1,248,000 aggregate purchase price of such warrants. Each warrant will have an exercise price of 110% of the price per share of the common stock sold in this offering, will be immediately exercisable and will expire seven years from the completion of the offering. |
| (3) | A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share would increase (decrease) total stockholders’ equity by approximately $5.0 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their option to purchase 780,000 additional shares of our common stock, and after deducting the portion of the underwriters discount payable by us and estimated offering expenses payable by us. |
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DILUTION
Our net tangible book value as of March 31, 2011 was
approximately $7.5 million, or $99.81 per share of our
common stock subscribed. Net tangible book value per share
represents the amount of our total tangible assets minus our
total liabilities, divided by the aggregate shares of our common
stock outstanding (or subscribed for). After giving effect to
(i) the sale of 5,200,000 shares of our common stock
in this offering at an assumed initial public offering price of
$8.00 per share, and after deducting the portion of the
underwriting discounts and commissions payable by us and
estimated offering expenses payable by us and (ii) the sale
of warrants to purchase 2,655,000 shares of our common
stock in the concurrent private placement for an aggregate
purchase price of $1,248,000, our as adjusted net tangible book
value on March 31, 2011 would have been approximately
$56.2 million, or $8.97 per share. This amount represents
an immediate increase in net tangible book value of $0.97 per
share to new investors who purchase our common stock in this
offering at an assumed initial public offering price of $8.00.
The following table shows this immediate per share dilution:
|
Public offering price per share
|
$ | 8.00 | ||
|
Net tangible book value per share subscribed for on
March 31, 2011, before giving effect to this offering and
the concurrent private placement
|
$ | 99.81 | ||
|
As adjusted net tangible book value per share of common stock on
March 31, 2011, after giving effect to the additional
investment of $7.5 million in cash and the Stock Dividend
(1,063,830 shares outstanding, as adjusted)
|
$ | 14.09 | ||
|
Decrease in net tangible book value per share attributable to
this offering and the concurrent private placement
|
$ | 5.12 | ||
|
As adjusted net tangible book value per share on March 31,
2011, after giving effect to this offering and the concurrent
private placement
|
$ | 8.97 | ||
|
Accretion in as adjusted net tangible book value per share to
new investors
|
$ | 0.97 |
A $1.00 increase (decrease) in the assumed initial public
offering price of $8.00 per share would increase (decrease) our
adjusted net tangible book value by approximately
$5.0 million, would increase (decrease) our adjusted net
tangible book value per share by $0.80 and would (decrease)
increase the accretion per share to new investors by $(0.20),
assuming the number of shares of common stock offered by us, as
set forth on the cover page of this prospectus, remains the same
and the underwriters do not exercise their over-allotment option
to purchase an additional 780,000 shares of our common
stock, and after deducting the portion of the underwriting
discounts and commissions payable by us and estimated offering
expenses payable by us.
The following table summarizes, on the as adjusted basis
described above as of March 31, 2011, the differences
between the average price per share paid by our existing
stockholder and by new investors purchasing shares of common
stock in this offering at an assumed initial public offering
price of $8.00 per share, before deducting the portion of
the underwriting discounts and commissions payable by us and
estimated offering expenses payable by us in this offering:
|
Shares |
||||||||||||||||||||
| Purchased(1) | Total Consideration |
Average Price |
||||||||||||||||||
| Number | % | Amount | % | Per Share(2) | ||||||||||||||||
|
Shares purchased by existing stockholder
|
1,063,830 | 16.98 | % | $ | 15,000,000 | 26.50 | % | $ | 14.10 | |||||||||||
|
New investors
|
5,200,000 | 83.02 | 41,600,000 | 73.50 | 8.00 | |||||||||||||||
|
Total
|
6,263,830 | 100.00 | % | $ | 56,600,000 | 100.00 | % | |||||||||||||
| (1) | Assumes no exercise of the underwriters’ option to purchase an additional 780,000 shares of our common stock. |
| (2) | The average price per share for shares purchased by the existing stockholder gives effect to the issuance of 913,830 shares of our common stock to Bimini pursuant to the Stock Dividend that will occur immediately prior to the completion of this offering. The actual average price per share for shares purchased by Bimini was $100.00. |
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| (3) | A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share, would increase (decrease) total consideration paid by new investors and total consideration paid by all investors by $5.2 million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their over-allotment option to purchase an additional 780,000 shares of our common stock, and before deducting the portion of the underwriting discounts and commissions payable by us and estimated offering expenses payable by us. |
If the underwriters fully exercise their option to purchase an
additional 780,000 shares of our common stock, the number
of shares of common stock held by the existing stockholder will
be reduced to 15.10% of the aggregate number of shares of common
stock outstanding after this offering, and the number of shares
of common stock held by new investors will be increased to
5,980,000, or 84.90% of the aggregate number of shares of common
stock outstanding after this offering.
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SELECTED
FINANCIAL DATA
The following table presents selected financial data as of
March 31, 2011, for the three months ended March 31,
2011 and for the period beginning on November 24, 2010
(date operations commenced) to December 31, 2010. The
statement of operations data for the period beginning on
November 24, 2010 (date operations commenced) to
December 31, 2010 has been derived from our audited
financial statements. The statement of operations and balance
sheet data as of March 31, 2011 and for the three months
ended March 31, 2011 has been derived from our interim
unaudited financial statements. These interim unaudited
financial statements have been prepared on substantially the
same basis as our audited financial statements and reflect all
adjustments which are, in the opinion of management, necessary
to provide a fair statement of our financial position as of
March 31, 2011 and the results of operations for the three
months ended March 31, 2011. All such adjustments are of a
normal recurring nature. These results are not necessarily
indicative of our results for the full fiscal year.
Because the information presented below is only a summary and
does not provide all of the information contained in our
historical financial statements, including the related notes,
you should read it in conjunction with the more detailed
information contained in our financial statements and related
notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included
elsewhere in this prospectus.
|
Period from |
||||||||
|
November 24, 2010 |
||||||||
|
Three Months |
(Date Operations |
|||||||
|
Ended |
Commenced) to |
|||||||
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
| (unaudited) | ||||||||
|
Statement of Operations Data:
|
||||||||
|
Revenues:
|
||||||||
|
Interest income
|
$ | 307,764 | $ | 69,340 | ||||
|
Interest expense
|
(18,942 | ) | (5,186 | ) | ||||
|
Net interest income
|
288,822 | 64,154 | ||||||
|
Losses on trading
securities(1)
|
(168,532 | ) | (55,307 | ) | ||||
|
Gains on futures contracts
|
10,875 | — | ||||||
|
Net portfolio income
|
131,165 | 8,847 | ||||||
|
Total expenses
|
115,093 | 39,001 | ||||||
|
Net income (loss)
|
$ | 16,072 | $ | (30,154 | ) | |||
|
Basic and diluted income (loss) per share of common
stock(2)
|
$ | 0.21 | $ | (0.68 | ) | |||
|
As of |
||||
| March 31, 2011 | ||||
| (unaudited) | ||||
|
Balance Sheet Data:
|
||||
|
Total mortgage-backed securities
|
$ | 28,903,656 | ||
|
Total assets
|
30,101,395 | |||
|
Repurchase agreements
|
22,530,842 | |||
|
Total liabilities
|
22,615,477 | |||
|
Total stockholder’s equity
|
7,485,918 | |||
|
Book value per share of our common
stock(2)
|
$ | 99.81 | ||
| (1) | Because all of our Agency RMBS have been classified as “held for trading” securities, all changes in the fair values of our Agency RMBS are reflected in our statement of operations, as opposed to a component of other comprehensive income in our |
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| statement of stockholders’ equity if they were instead classified as “available for sale” securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Mortgage-Backed Securities.” | ||
| (2) | On March 31, 2011 and December 31, 2010, no shares of common stock were outstanding; however, on March 31, 2011 and December 31, 2010, 75,000 shares and 44,050 shares of our common stock had been subscribed for by Bimini, respectively. On April 29, 2011, we issued 75,000 shares of our common stock to Bimini, which consisted of the 44,050 shares subscribed for as of December 31, 2010, 17,950 shares subscribed for on March 28, 2011 and 13,000 shares subscribed for on March 31, 2011. |
Core
Earnings
We classify our Agency RMBS as “held for trading.” We
do not intend to elect GAAP hedge accounting for any derivative
financial instruments that we may utilize. Securities held for
trading and hedging instruments, for which hedge accounting has
not been elected, are recorded at estimated fair value, with
changes in the fair value recorded as unrealized gains or losses
through the statement of operations. Many other publicly-traded
REITs that invest in Agency RMBS classify their Agency RMBS as
“available for sale.” Unrealized gains and losses in
the fair value of securities classified as available for sale
are recorded as a component of other comprehensive income in the
statement of stockholders’ equity. As a result, investors
may not be able to readily compare our results of operations to
those of many of our competitors. We believe that the
presentation of our Core Earnings is useful to investors because
it provides a means of comparing our results of operations to
those of our competitors. Core Earnings represents a non-GAAP
financial measure and is defined as net income (loss) excluding
unrealized gains (losses) on trading securities and hedging
instruments and net interest income (expense) on hedging
instruments. Management utilizes Core Earnings because it allows
management to: (i) isolate the net interest income plus
other expenses of the Company over time, free of all
mark-to-market
adjustments and net payments associated with our hedging
instruments and (ii) assess the effectiveness of our
funding and hedging strategies, our capital allocation decisions
and our asset allocation performance. Our funding and hedging
strategies, capital allocation and asset selection are integral
to our risk management strategy, and therefore critical to our
Manager’s management of our portfolio.
Our presentation of Core Earnings may not be comparable to
similarly-titled measures of other companies, who may use
different calculations. As a result, Core Earnings should not be
considered as a substitute for our GAAP net income (loss) as a
measure of our financial performance or any measure of our
liquidity under GAAP.
|
For the Period |
||||||||
|
Three Months |
from November 24, 2010 |
|||||||
|
Ended |
(Date Operations |
|||||||
|
March 31, |
Commenced) through |
|||||||
| 2011 | December 31, 2010 | |||||||
|
Non-GAAP Reconciliation (unaudited):
|
||||||||
|
Net income (loss)
|
$ | 16,072 | $ | (30,154 | ) | |||
|
Unrealized (gains) losses on trading securities
|
168,532 | 55,307 | ||||||
|
Unrealized (gains) losses on hedging instruments
|
(10,875 | ) | — | |||||
|
Net interest (income) expense on hedging instruments
|
— | — | ||||||
|
Core Earnings
|
$ | 173,729 | $ | 25,153 | ||||
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
the sections of this prospectus entitled “Risk
Factors,” “Special Note Regarding Forward-Looking
Statements,” “Business” and our financial
statements and the related notes thereto included elsewhere in
this prospectus. This discussion contains forward-looking
statements reflecting current expectations that involve risks
and uncertainties. Actual results and the timing of events may
differ materially from those contained in these forward-looking
statements due to a number of factors, including those discussed
in the section entitled “Risk Factors” and elsewhere
in this prospectus.
Overview
Orchid Island Capital, Inc. is a specialty finance company that
invests in Agency RMBS. Our investment strategy focuses on, and
our portfolio consists of, two categories of Agency RMBS:
(i) traditional pass-through Agency RMBS and
(ii) structured Agency RMBS, such as CMOs, IOs, IIOs
and POs, among other types of structured Agency RMBS.
Our business objective is to provide attractive risk-adjusted
total returns over the long term through a combination of
capital appreciation and the payment of regular quarterly
distributions. We intend to achieve this objective by investing
in and strategically allocating capital between the two
categories of Agency RMBS described above. We seek to generate
income from (i) the net interest margin on our leveraged
pass-through Agency RMBS portfolio and the leveraged portion of
our structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our
structured Agency RMBS portfolio. We intend to fund our
pass-through Agency RMBS and certain of our structured Agency
RMBS, such as fixed and floating rate tranches of CMOs and POs,
through short-term borrowings structured as repurchase
agreements. However, we do not intend to employ leverage on the
securities in our structured Agency RMBS portfolio that have no
principal balance, such as IOs and IIOs. We do not intend to use
leverage in these instances because the securities contain
structural leverage. Pass-through Agency RMBS and structured
Agency RMBS typically exhibit materially different sensitivities
to movements in interest rates. Declines in the value of one
portfolio may be offset by appreciation in the other. The
percentage of capital that we allocate to our two Agency RMBS
asset categories will vary and will be actively managed in an
effort to maintain the level of income generated by the combined
portfolios, the stability of that income stream and the
stability of the value of the combined portfolios. We believe
that this strategy will enhance our liquidity, earnings, book
value stability and asset selection opportunities in various
interest rate environments.
We were formed by Bimini in August 2010. We commenced operations
on November 24, 2010, and through March 31, 2011,
Bimini had contributed approximately $7.5 million in cash
to us. Since then, Bimini contributed an additional $7.5 million
in cash to us pursuant to a subscription agreement to purchase
additional shares of our common stock. Bimini is currently our
sole stockholder. Bimini has managed our portfolio since
inception by utilizing the same investment strategy that we
expect our Manager and its experienced RMBS investment team to
continue to employ after completion of this offering. As of
March 31, 2011, our Agency RMBS portfolio had a fair value
of approximately $28.9 million and was comprised of
approximately 83.5% pass-through Agency RMBS and 16.5%
structured Agency RMBS. Our net asset value as of March 31,
2011 was approximately $7.5 million.
We intend to qualify and will elect to be taxed as a REIT
commencing with our short taxable year ending December 31,
2011. We generally will not be subject to U.S. federal
income tax to the extent that we annually distribute all of our
REIT taxable income to our stockholders and qualify as a REIT.
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Factors that
Affect our Results of Operations and Financial
Condition
A variety of industry and economic factors may impact our
results of operations and financial condition. These factors
include:
| • | interest rate trends; | |
| • | prepayment rates on mortgages underlying our Agency RMBS, and credit trends insofar as they affect prepayment rates; | |
| • | the difference between Agency RMBS yields and our funding and hedging costs; | |
| • | competition for investments in Agency RMBS; | |
| • | recent actions taken by the U.S. Federal Reserve and the U.S. Treasury; and | |
| • | other market developments. |
In addition, a variety of factors relating to our business may
also impact our results of operations and financial condition.
These factors include:
| • | our degree of leverage; | |
| • | our access to funding and borrowing capacity; | |
| • | our borrowing costs; | |
| • | our hedging activities; | |
| • | the market value of our investments; and | |
| • | the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act. |
We anticipate that, for any period during which changes in the
interest rates earned on our assets do not coincide with
interest rate changes on the corresponding liabilities, such
assets will reprice more slowly than the corresponding
liabilities. Consequently, changes in interest rates,
particularly short term interest rates, may significantly
influence our net income.
Our net income may be affected by a difference between actual
prepayment rates and our projections. Prepayments on loans and
securities may be influenced by changes in market interest rates
and homeowners’ ability and desire to refinance their
mortgages.
Outlook
Regulatory
Developments
In response to the credit market disruption and the
deteriorating financial conditions of Fannie Mae and Freddie
Mac, Congress and the U.S. Treasury undertook a series of
actions that culminated with putting Fannie Mae and Freddie Mac
in conservatorship in September 2008. The FHFA now operates
Fannie Mae and Freddie Mac as conservator, in an effort to
stabilize the entities. The FHFA also noted that during the
conservatorship period, it would work to enact new regulations
for minimum capital standards, prudent safety and soundness
standards and portfolio limits of Fannie Mae and Freddie Mac.
Although the U.S. Government has committed significant
resources to Fannie Mae and Freddie Mac, Agency RMBS guaranteed
by either Fannie Mae or Freddie Mac are not backed by the full
faith and credit of the United States. Moreover, the Secretary
of the U.S. Treasury noted that the guarantee structure of
Fannie Mae and Freddie Mac required examination and that changes
in the structures of the entities were necessary to reduce risk
to the financial system. Such changes may involve an explicit
U.S. Government backing of Fannie Mae and Freddie Mac
Agency RMBS or the express elimination of any implied
U.S. Government guarantee and, therefore, the creation of
credit risk with respect to Fannie
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Table of Contents
Mae and Freddie Mac Agency RMBS. Additionally, on
February 11, 2011, the U.S. Treasury issued a White
Paper titled “Reforming America’s Housing Finance
Market” that lays out, among other things, proposals to
limit or potentially wind down the role that Fannie Mae and
Freddie Mac play in the mortgage market. Accordingly, the effect
of the actions taken and to be taken by the U.S. Treasury
and FHFA remains uncertain. The November 2, 2010 national
elections in the United States created further uncertainty
because of material changes to the composition of both houses of
Congress. Given the public reaction to the substantial funds
made available to Fannie Mae and Freddie Mac, future funding for
both is likely to face increased scrutiny. New and recently
enacted laws, regulations and programs related to Fannie Mae and
Freddie Mac may adversely affect the pricing, supply, liquidity
and value of Agency RMBS and otherwise materially harm our
business and operations. See “Risk Factors —
Risks Related to Our Business — The federal
conservatorship of Fannie Mae and Freddie Mac and related
efforts, along with changes in laws and regulations affecting
the relationship between Fannie Mae and Freddie Mac and the
U.S. Government, may materially adversely affect our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders.”
On July 21, 2010, President Obama signed into law the
Dodd-Frank Act. The Dodd-Frank Act provides for new regulations
on financial institutions and creates new supervisory and
advisory bodies, including the new Consumer Financial Protection
Bureau. The Dodd-Frank Act tasks many agencies with issuing a
variety of new regulations, including rules related to mortgage
origination and servicing, securitization and derivatives.
Because a significant number of regulations under the Dodd-Frank
Act have either not yet been proposed or not yet been adopted in
final form, it is not possible for us to predict how the
Dodd-Frank Act will impact our business. See “Risk
Factors — Risks Related to Our Business —
The recent actions of the U.S. Government for the purpose
of stabilizing the financial markets may adversely affect our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders.”
Agency
RMBS
Our Agency RMBS backed by hybrid ARMs pay a fixed interest rate
for a set period and then convert to a floating rate payment
structure. Our Agency RMBS backed by fixed-rate mortgage loans
pay a fixed rate for a term of either 15 or 30 years. The
market prices of Agency RMBS backed by fixed-rate mortgage loans
correlate more closely with movements in long-term interest
rates than Agency RMBS backed by ARMs or hybrid ARMs.
As 2010 drew to a close, the U.S. economy had not fully
recovered from the effects of the financial crisis. Unemployment
in the United States was 9.4% and gross domestic product growth
was still low. Moreover, inflation in the United States was at
or near the low end of the U.S. Federal Reserve’s
target range of 1% to 2%. On November 3, 2010, the
U.S. Federal Reserve instituted a second round of asset
purchases of up to $600 billion of U.S. Treasury
securities intended to further reduce long-term interest rates.
In addition, the U.S. Federal Reserve announced all
principal amortization of their $1.25 trillion Agency RMBS
portfolio purchased during 2009 and 2010 would be used to
purchase additional U.S. Treasury securities as well.
Partially as a result of the U.S. Federal Reserve’s
actions to stimulate the economy, long-term interest rates have
remained high relative to short-term interest rates, which has
resulted in the issuance of higher-yielding Agency RMBS.
Additionally, on March 21, 2011, the U.S. Treasury
announced that it will begin selling its portfolio of
approximately $142 billion of Agency RMBS at a rate of up
to $10 billion per month beginning in March 2011. These
sales will add additional supply to the Agency RMBS market,
which could lower prices on Agency RMBS and, therefore, increase
yields.
Assuming there is no change in inflation and inflation
expectations and the U.S. labor market recovery remains
tepid, we believe long-term interest rates will remain high
relative to short-term interest rates. However, recent signs of
strength in the U.S. economy and recent increases in energy
prices, to the extent such increases are not transitory, may
cause an increase in long-term interest rates which, in turn,
will decrease the value of certain Agency RMBS, possibly at an
accelerated rate.
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Borrowing
Costs
We leverage our pass-through Agency RMBS portfolio and a portion
of our structured Agency RMBS with principal balances through
the use of short-term repurchase agreement transactions. The
interest rates on our debt most closely correlate with the
30-day LIBOR.
European inter-bank lending rates, specifically LIBOR, are
affected by the fiscal and budgetary problems of several
European countries. The European Union, International Monetary
Fund and member countries provide emergency funding mechanisms
to support those countries facing a crisis of investor
confidence and inability to raise new debt at acceptable levels
(such as Greece, Ireland, Portugal and Spain) and to head off
the expansion of the same to other nations. To the extent this
crisis persists or worsens, LIBOR may increase substantially and
thus increase our funding costs and depress our profitability
and potential dividends.
If the recent strength in the U.S. economy or inflation
pressures cause the U.S. Federal Reserve to raise the
Federal Funds Target Rate in the near future, LIBOR would almost
certainly increase, which would increase our borrowing costs.
Prepayment
Rates and Loan Modification Programs
Prepayment
Rates
Our portfolio is affected by movements in mortgage prepayment
rates in a number of ways. See “Prospectus
Summary — Risk Management — Prepayment Risk
Management,” for a discussion of how movements in
prepayment rates affect our portfolio.
Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise; however, changes in
prepayment rates are difficult to accurately predict. Other
factors also affect prepayment rates, including homeowners’
ability and desire to refinance their mortgages, conditions in
the housing and financial markets, conditions in the mortgage
origination industry, general economic conditions and the
relative interest rates on adjustable-rate and fixed-rate
mortgage loans.
According to Bloomberg, interest rates on
30-year
fixed-rate mortgages have increased from 4.17% to 4.80% from
November 11, 2010 to April 21, 2011, and interest
rates on
15-year
fixed-rate mortgages have increased from 3.57% to 4.02% during
the same period. Conditions in the U.S. residential housing
market have yet to materially improve. Sales of existing and new
homes remain materially below pre-crisis levels. Foreclosure
activity is, and is expected to remain, elevated because of
depressed home prices, high unemployment, record delinquency and
foreclosure rates, and delays in the initiation of foreclosure
proceedings over the last year stemming from legal issues raised
with many mortgage loan servicers. The supply of new and
existing homes for sale, plus the “shadow” inventory
of homes expected to be on the market as a result of future
foreclosures, is likely to keep home prices depressed for an
extended period. The trend in rising mortgage rates coupled with
depressed housing prices have led to a decrease in prepayment
rates among borrowers. Although prepayment rates have been
decreasing, certain recently-enacted government programs have
resulted in prepayments on Agency RMBS. For example, in early
March 2010, both Fannie Mae and Freddie Mac announced they would
purchase from the pools of mortgage loans underlying their RMBS
all mortgage loans that are more than 120 days delinquent.
Due to the recent increase in mortgage interest rates and
currently depressed housing prices, we believe overall
prepayment rates will continue to remain low for the near future.
Loan Modification
Programs
During the second half of 2008, the U.S. Government,
through the FHA and the FDIC, implemented programs to help
homeowners avoid foreclosures. Such programs include extensions
to payment terms or reductions in mortgage principal balances or
interest rates. For example, the Hope
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for Homeowners program has enabled certain distressed borrowers
to refinance their mortgages into FHA-insured loans.
In February 2009, the U.S. Treasury announced the HASP, a
multi-faceted plan to prevent residential mortgage foreclosures
which:
| • | allows certain homeowners, whose homes are encumbered by Fannie Mae or Freddie Mac conforming mortgages, to refinance those mortgages into lower interest rate mortgages with either Fannie Mae or Freddie Mac; | |
| • | created the Homeowner Stability Initiative, which provides incentives to banks and mortgage servicers to reduce monthly mortgage principal and interest payments for certain qualified homeowners; and | |
| • | allows judicial modifications of Fannie Mae and Freddie Mac conforming residential mortgages loans during bankruptcy proceedings. |
The various mortgage loan modification programs have not had a
material impact on the level of foreclosures in the
U.S. housing market. It is unclear if the
U.S. Government will continue pursuing these programs due
to their limited success, controversial nature and in light of
the current political climate related to deficit spending.
However, the current conditions of the U.S. housing market
combined with the current high unemployment rate may persuade
the FHA and the FDIC to extend homeownership assistance programs
beyond their termination dates.
Effect on
Us
Regulatory developments, movements in interest rates and
prepayment rates as well as loan modification programs affect us
in many ways, including the following:
Regulatory
Developments
A change in or elimination of the guarantee structure of Agency
RMBS may increase our costs (if, for example, guarantee fees
increase) or require us to change our investment strategy
altogether. For example, the elimination of the guarantee
structure of Agency RMBS may cause us to change our investment
strategy to focus on non-Agency RMBS, which in turn would
require us to significantly increase our monitoring of the
credit risks of our investments in addition to interest rate and
prepayment risks.
Movements in
Interest Rates
With respect to our pass-through Agency RMBS portfolio, an
increase in long-term interest rates may cause prices on certain
Agency RMBS to decrease, which would decrease the fair value of
our pass-through Agency RMBS portfolio but also decrease the
price of pass-through Agency RMBS we may purchase in the future.
Because we base our investment decisions on risk management
principles rather than anticipated movements in interest rates,
in a volatile interest rate environment we intend to allocate
more capital to structured Agency RMBS with shorter durations,
such as short-term fixed and floating rate CMOs. We believe
these securities have a lower sensitivity to changes in
long-term interest rates than other asset classes. We may also
mitigate our exposure to changes in long-term interest rates by
investing in IOs and IIOs, which typically have different
sensitivities to changes in long-term interest rates than
pass-through Agency RMBS, particularly pass-through Agency RMBS
backed by fixed-rate mortgages.
An increase in LIBOR (which could result from an increase in the
U.S. Federal Funds Target Rate) would increase our
borrowing costs, which could lower our net interest margin.
Because we finance our pass-through Agency RMBS portfolio and a
portion of our structured Agency RMBS portfolio with
LIBOR-based, short-term borrowings, an increase in LIBOR would
quickly be reflected in our borrowing costs unless we have
properly hedged the leveraged portion of our Agency RMBS
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Table of Contents
portfolio. Additionally, an increase in LIBOR would reduce the
coupon payments and possibly the market value of IIOs.
Movements in
Prepayment Rates and Loan Modification Programs
We believe that our pass-through Agency RMBS portfolio will
benefit from the current and expected lower prepayment rates. An
increase in prepayment rates would cause us to receive the
principal balances of our pass-through Agency RMBS faster than
expected. If such an increase in prepayment rates were to be
caused by lower levels of prevailing interest rates, we would
most likely have to reinvest the principal received in
lower-yielding investments. We believe our IOs and IIOs will
also benefit from lower prepayment rates. Because the value of
IOs and IIOs are contingent on the existence of a principal
balance on the underlying mortgages, a decrease in prepayment
rates will extend the effective term of these securities.
Despite the current level of prepayment rates, our portfolio may
experience increased prepayment rates due to the Fannie Mae and
Freddie Mac repurchase programs described above.
We do not believe our investment portfolio will be materially
affected by loan modification programs because Agency RMBS
backed by loans that would qualify for such programs (i.e.
seriously delinquent loans) will be purchased by Fannie Mae and
Freddie Mac at their par value prior to the implementation of
such programs. However, if Fannie Mae and Freddie Mac were to
modify or end their repurchase programs or if the
U.S. Government modified its loan modification programs to
modify non-delinquent mortgage loans, our investment portfolio
could be materially negatively impacted.
Critical
Accounting Policies
Our financial statements are prepared in accordance with GAAP.
GAAP requires our management to make some complex and subjective
decisions and assessments. Our most critical accounting policies
involve decisions and assessments which could significantly
affect reported assets, liabilities, revenues and expenses.
Management has identified its most critical accounting policies:
Mortgage-Backed
Securities
Our investments in Agency RMBS are classified as held for
trading. We acquire our Agency RMBS for the purpose of
generating long-term returns, and not for the short-term
investment of idle capital. Under FASB ASC Topic 320,
Investments — Debt and Equity Securities, we
have the option to classify our Agency RMBS as either trading
securities or available-for-sale securities. Changes in the fair
value of securities held for trading are reflected as part of
our net income or loss in our statement of operations, as
opposed to a component of other comprehensive income in our
statement of stockholder’s equity if they were instead
reclassified as
available-for-sale
securities. We elected to classify our Agency RMBS as trading
securities in order to reflect changes in the fair value of our
Agency RMBS in our statement of operations, which we believe
more appropriately reflects the results of our operations for a
particular reporting period. We have a three-level valuation
hierarchy for determining the fair value of our Agency RMBS.
These levels include:
| • | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), | |
| • | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and | |
| • | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company- |
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| specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
Our Agency RMBS are valued using Level 2 valuations, and
such valuations currently are determined by Bimini based on the
average of third-party broker quotes
and/or by
independent pricing sources when available. Because the price
estimates may vary, Bimini must make certain judgments and
assumptions about the appropriate price to use to calculate the
fair values. Alternatively, Bimini could opt to have the value
of all of our positions in Agency RMBS determined by either an
independent third-party or do so internally.
In managing our portfolio, Bimini employs the following
four-step process at each valuation date to determine the fair
value of our Agency RMBS:
| • | First, Bimini obtains fair values from a subscription-based independent pricing source through AVM, LLP, our repurchase agreement funding services provider. These prices are used by both Bimini as well as our repurchase agreement counterparty on a daily basis to establish margin requirements for our borrowings. As of June 30, 2011, Bimini subscribed to a second subscription-based pricing service through Bank of America, which receives market values directly from Bank of America’s trading desk. | |
| • | Second, Bimini requests non-binding quotes from one to four broker-dealers for each of its Agency RMBS in order to validate the values obtained by the pricing service. Bimini requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested. | |
| • | Third, Bimini reviews the values obtained by the pricing source and the broker-dealers for consistency across similar assets. | |
| • | Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with Bimini’s market observations, Bimini makes a judgment to determine which price appears the most consistent with observed prices from similar assets and selects that price. To the extent Bimini believes that none of the prices are consistent with observed prices for similar assets, which is typically the case for only an immaterial portion of our portfolio each quarter, Bimini may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency RMBS backed by fixed-rate mortgages, Bimini generally uses the quoted or observed market price. For assets such as Agency RMBS backed by ARMs or structured Agency RMBS, Bimini may determine the price based on the yield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price has been obtained. |
After the completion of this offering, we expect our Manager to
continue to employ the process described above to value our
Agency RMBS.
Management believes its pricing methodology to be consistent
with the definition of fair value described in FASB
ASC 820, Fair Value Measurements and Disclosures.
Repurchase
Agreements
We intend to finance the acquisition of a portion of our Agency
RMBS through repurchase transactions under master repurchase
agreements. Repurchase transactions will be treated as
collateralized financing transactions and will be carried at
their contractual amounts, including accrued interest. We have
entered into master repurchase agreements with two financial
institutions (and have taken the initial steps to begin securing
additional repurchase agreement capacity with other
67
Table of Contents
counterparties, which we intend to have in place shortly before
or concurrently with the completion of this offering).
In instances where we acquire Agency RMBS through repurchase
agreements with the same counterparty from whom the Agency RMBS
were purchased, we will account for the purchase commitment and
repurchase agreement on a net basis and record a forward
commitment to purchase Agency RMBS as a derivative instrument if
the transaction does not comply with the criteria in FASB
ASC 860, Transfers and Servicing, for gross
presentation. If the transaction complies with the criteria for
gross presentation, we will record the assets and the related
financing on a gross basis in our statements of financial
condition, and the corresponding interest income and interest
expense in our statement of operations and comprehensive income
(loss). Such forward commitments are recorded at fair value with
subsequent changes in fair value recognized in income.
Additionally, we will record the cash portion of our investment
in Agency RMBS as a mortgage related receivable from the
counterparty on our balance sheet.
Derivatives
and Hedging Activities
We may account for derivative financial instruments in
accordance with FASB ASC 815, Disclosure about
Derivative Instruments, which requires an entity to
recognize all derivatives as either assets or liabilities on the
balance sheet and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either
other comprehensive income in stockholders’ equity until
the hedged item is recognized in earnings or net income
depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the
hedging activity. We use derivatives for hedging purposes rather
than speculation. We will use quotations from counterparties to
determine their fair values.
In the normal course of business, subject to qualifying and
maintaining our qualification as a REIT, we may use a variety of
derivative financial instruments to manage, or hedge, interest
rate risk on our borrowings. These derivative financial
instruments must be effective in reducing our interest rate risk
exposure in order to qualify for hedge accounting. When the
terms of an underlying transaction are modified, or when the
underlying hedged item ceases to exist, all changes in the fair
value of the instrument are
marked-to-market
with changes in value included in net income for each period
until the derivative instrument matures or is settled. Any
derivative instrument used for risk management that does not
meet the effective hedge criteria is
marked-to-market
with the changes in value included in net income.
We do not intend to elect GAAP hedge accounting for any
derivative financial instruments that we may utilize.
Income
Recognition
For securities classified as held for trading, interest income
is based on the stated interest rate and the outstanding
principal balance. We have elected the fair value option,
therefore, premium or discount associated with the purchase of
Agency RMBS are not amortized. Since we commenced operations,
all of our Agency RMBS have been classified as held for trading.
All of our Agency RMBS will be either pass-through securities or
structured Agency RMBS, including CMOs, IOs, IIOs or POs.
Income on pass-through securities, POs and CMOs that contain
principal balances is based on the stated interest rate of the
security. Premium or discount present at the date of purchase is
not amortized. For IOs, IIOs and CMOs that do not contain
principal balances, income is accrued based on the carrying
value and the effective yield. As cash is received it is first
applied to accrued interest and then to reduce the carrying
value of the security. At each reporting date, the effective
yield is adjusted prospectively from the reporting period based
on the new estimate of prepayments, current interest rates and
current asset prices. The new effective yield is calculated
based on the carrying value at the end of the previous reporting
period, the new prepayment estimates and the contractual terms
of the security. Changes in fair value of all of our Agency RMBS
during the
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Table of Contents
period are recorded in earnings and reported as losses on
trading securities in the accompanying statement of operations.
Our
Portfolio
As of March 31, 2011, our Agency RMBS portfolio had a fair
value of approximately $28.9 million, weighted average
coupon on assets of 4.22% and a net weighted average borrowing
cost of 0.33%. The following tables summarize our portfolio as
of March 31, 2011:
|
Weighted |
Weighted |
|||||||||||||||||||||||||||||||||||
|
Percentage |
Average |
Average |
Weighted |
Weighted |
||||||||||||||||||||||||||||||||
|
of |
Weighted |
Maturity |
Coupon |
Average |
Average |
Weighted |
||||||||||||||||||||||||||||||
|
Entire |
Average |
in |
Longest |
Reset in |
Lifetime |
Periodic |
Average |
|||||||||||||||||||||||||||||
|
Asset Category
|
Fair Value | Portfolio | Coupon | Months | Maturity | Months | Cap | Cap | CPR(1) | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
|
Pass-through Agency RMBS backed by:
|
||||||||||||||||||||||||||||||||||||
|
Adjustable-Rate Mortgages
|
$ | 7,721 | 26.7 | % | 2.53 | % | 288 | April 2035 | 5.03 | 9.55 | % | 2.00 | % | 0.11 | % | |||||||||||||||||||||
|
Fixed-Rate Mortgages
|
16,418 | 56.8 | % | 4.54 | % | 171 | November 2025 | N/A | N/A | N/A | 0.75 | % | ||||||||||||||||||||||||
|
Hybrid Adjustable-Rate Mortgages
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total/Weighted Average Whole-pool Mortgage Pass-through Agency
RMBS
|
$ | 24,139 | 83.5 | % | 3.90 | % | 208 | April 2035 | 5.03 | 9.55 | % | 2.00 | % | 0.54 | % | |||||||||||||||||||||
|
Structured Agency RMBS:
|
||||||||||||||||||||||||||||||||||||
|
CMOs
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
IOs
|
966 | 3.3 | % | 4.50 | % | 163 | October 2024 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
IIOs
|
3,799 | 13.2 | % | 6.22 | % | 297 | April 2037 | N/A | N/A | N/A | 19.73 | % | ||||||||||||||||||||||||
|
POs
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total/Weighted Average Structured Agency RMBS
|
4,765 | 16.5 | % | 5.87 | % | 270 | April 2037 | N/A | N/A | N/A | 19.73 | % | ||||||||||||||||||||||||
|
Total/Weighted Average
|
$ | 28,904 | 100 | % | 4.22 | % | 218 | April 2037 | 5.03 | 9.55 | % | 2.00 | % | 5.67 | % | |||||||||||||||||||||
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Table of Contents
|
Percentage of |
||||||||||||
|
Agency
|
Fair Value | Entire Portfolio | ||||||||||
| (In thousands) | ||||||||||||
|
Fannie Mae
|
$ | 22,310 | 77.2 | % | ||||||||
|
Freddie Mac
|
4,337 | 15.0 | % | |||||||||
|
Ginnie Mae
|
2,257 | 7.8 | % | |||||||||
|
Total Portfolio
|
$ | 28,904 | 100.0 | % | ||||||||
|
Entire Portfolio
|
||||||||||||
|
Weighted Average Pass-through Purchase Price
|
$ | 105.44 | ||||||||||
|
Weighted Average Structured Agency RMBS Purchase Price
|
$ | 13.55 | ||||||||||
|
Weighted Average Pass-through Current Price
|
$ | 105.22 | ||||||||||
|
Weighted Average Structured Agency RMBS Current Price
|
$ | 12.66 | ||||||||||
|
Effective
Duration(2)
|
3.26 | |||||||||||
| (1) | CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the constant prepayment rate in the chart above represents the three month prepayment rate of our securities in the respective asset category. | |
| (2) | Effective duration of 3.26 indicates that an interest rate increase of 1.0% would be expected to cause a 3.26% decline in the value of our Agency RMBS as of March 31, 2011. These figures include the structured RMBS securities in the portfolio. |
Liabilities
We have entered into repurchase agreements to finance
acquisitions of our Agency RMBS. As of March 31, 2011, we
had entered into master repurchase agreements with two
counterparties and had funding in place with one of those
parties. The material terms of this repurchase agreement are
described below:
|
Net |
||||||||||||||||
|
Weighted |
Weighted Average |
|||||||||||||||
|
Average |
Maturity of |
|||||||||||||||
|
Borrowing |
Repurchase |
|||||||||||||||
|
Counterparty
|
Balance | Cost | Agreements in Days | Amount at Risk(1) | ||||||||||||
|
MF Global, Inc.
|
$ | 22,530,842 | 0.33 | % | 77 | $ | 1,673,253 | |||||||||
| (1) | Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense. |
During the three months ended March 31, 2011, the average
balance of our repurchase agreement financing was $22,680,448.
As of May 10, 2011, the weighted average haircut on the
repurchase agreement was approximately 5.0%. We have since
entered into three more master repurchase agreements (for a
total of five) and are currently negotiating, and intend to
enter into, additional master repurchase agreements with
additional counterparties after the completion of this offering.
Our master repurchase agreement has no stated expiration but can
be terminated at any time at our option or at the option of the
counterparty. However, once a definitive repurchase agreement
under a master repurchase agreement has been entered into, it
generally may not be terminated by either party absent an event
of default. A negotiated termination can occur but may involve a
fee to be paid by the party seeking to terminate the repurchase
agreement transaction.
Liquidity and
Capital Resources
Liquidity refers to our ability to meet our cash needs. Our
short-term (one-year or less) and long-term liquidity
requirements include asset acquisition, compliance with margin
requirements,
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Table of Contents
repayment of borrowings to the extent we are unable to or
unwilling to roll forward our repurchase agreements and payment
of our general operating expenses.
Our principal sources of capital generally consist of borrowings
under repurchase agreements, proceeds from equity offerings and
payments of principal and interest we receive on our Agency RMBS
portfolio. We believe that these sources of funds will be
sufficient to meet our short-term and long-term liquidity needs.
Based on our current portfolio, amount of free cash on hand,
debt-to-equity
ratio and current and anticipated availability of credit, we
believe that our capital resources will be sufficient to enable
us to meet anticipated short-term and long-term liquidity
requirements. However, the unexpected inability to finance our
pass-through Agency RMBS portfolio would create a serious
short-term strain on our liquidity and would require us to
liquidate much of that portfolio, which in turn would require us
to restructure our portfolio to maintain our exclusion from
registration under the Investment Company Act. Steep declines in
the values of our Agency RMBS assets financed using repurchase
agreements would result in margin calls that would significantly
reduce our free cash position. Furthermore, a substantial
increase in prepayment rates on our assets financed by
repurchase agreements could cause a temporary liquidity
shortfall, because on such assets we are generally required to
post margin in proportion to the amount of the announced
principal pay-downs before the actual receipt of the cash from
such principal pay-downs. If our cash resources are at any time
insufficient to satisfy our liquidity requirements, we may have
to sell assets or issue debt or additional equity securities.
Contractual
Obligations
We are currently party to a management agreement with Bimini.
Upon completion of this offering, we will terminate our
management agreement with Bimini and enter into a new management
agreement as described below. Under our existing management
agreement with Bimini, we paid Bimini aggregate management fees
of $26,400 for the period beginning on November 24, 2010
(date operations commenced) to March 31, 2011, and we
reimbursed Bimini an aggregate of $28,800 in expenses for the
period beginning on November 24, 2010 (date operations
commenced) to March 31, 2011.
We intend to enter into a management agreement with our Manager.
Our Manager will be entitled to receive a management fee, be
reimbursed for its expenses incurred on our behalf, and, in
certain circumstances, receive a termination fee, each as
described in the management agreement. Such fees and expenses do
not have fixed and determinable payments. The management fee
will be payable monthly in arrears in an amount equal to 1/12th
of (a) 1.50% of the first $250,000,000 of our equity (as defined
below), (b) 1.25% of our equity that is greater than
$250,000,000 and less than or equal to $500,000,000, and (c)
1.00% of our equity that is greater than $500,000,000.
“Equity” equals our month-end stockholders’
equity, adjusted to exclude the effect of any unrealized gains
or losses included in either retained earnings or other
comprehensive income (loss), as computed in accordance with GAAP.
We will be required to pay or reimburse our Manager for all
expenses incurred by it related to our operations, but excluding
all employment related expenses of our and our Manager’s
officers and any Bimini employees who provide services to us
pursuant to the management agreement (other than our Chief
Financial Officer). We will reimburse our Manager for our
allocable share of the compensation of our Chief Financial
Officer based our percentage of the aggregate amount of our
Manager’s assets under management and Bimini’s assets.
We will also reimburse our pro rata portion of our
Manager’s and Bimini’s overhead expenses based on our
percentage of the aggregate amount of our Manager’s assets
under management and Bimini’s assets. We will also be
required to pay a termination fee for our non-renewal of the
management agreement without cause. This fee will be equal to
three times the average annual management fee earned by our
Manager during the prior
24-month
period immediately preceding the most recently completed
calendar quarter prior to the effective date of termination.
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Table of Contents
We enter into repurchase agreements to finance some of our
purchases of our pass-through Agency RMBS. As of March 31,
2011, we had outstanding $22,530,842 of liabilities pursuant to
a repurchase agreement that had a borrowing rate of
approximately 0.33% and maturity of 77 days. As of
March 31, 2011, interest payable on our repurchase
agreements was $9,103.
Off-Balance Sheet
Arrangements
As of March 31, 2011, we had no off-balance sheet
arrangements.
Inflation
Virtually all of our assets and liabilities are financial in
nature. As a result, interest rates and other factors influence
our performance far more so than does inflation. Changes in
interest rates do not necessarily correlate with inflation rates
or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our distributions are
determined by our Board of Directors based primarily on our net
income as calculated for tax purposes. In each case, our
activities and balance sheet are measured with reference to
historical cost and or fair market value without considering
inflation.
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Table of Contents
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe the primary risk inherent in our investments is the
effect of movements in interest rates, especially with respect
to our use of leverage and the uncertainty of principal payment
cash flows, which we refer to as prepayment risk. We, therefore,
follow a risk management program designed to offset the
potential adverse effects resulting from these risks.
Interest Rate
Risk
We believe that the risk of adverse interest rate movements
represents the most significant risk to our portfolio. This risk
arises because (i) the interest rate indices used to
calculate the interest rates on the mortgages underlying our
assets may be different from the interest rate indices used to
calculate the interest rates on the related borrowings, and
(ii) interest rate movements affecting our borrowings may
not be reasonably correlated with interest rate movements
affecting our assets.
Interest Rate
Mismatch Risk
We intend to fund a substantial portion of our acquisitions of
Agency RMBS backed by ARMs and hybrid ARMs with borrowings that
have interest rates based on indices and repricing terms similar
to, but of somewhat shorter maturities than, the interest rate
indices and repricing terms of the Agency RMBS we are financing.
The interest rate indices and repricing terms of our Agency RMBS
and our funding sources will be mismatched. Our cost of funds
will likely rise or fall more quickly than the yield on assets.
During periods of changing interest rates, such interest rate
mismatches could negatively impact our business, financial
condition and results of operations and our ability to pay
distributions to our stockholders.
Extension
Risk
We invest in Agency RMBS backed by fixed-rate and hybrid ARMs.
Hybrid ARMs have interest rates that are fixed for the first few
years of the loan — typically three, five, seven or
10 years — and thereafter their interest rates
reset periodically on the same basis as ARMs. As of
March 31, 2011, we did not own any Agency RMBS backed by
hybrid ARMs. We compute the projected weighted average life of
our Agency RMBS backed by fixed-rate mortgages and hybrid ARMs
based on the market’s prepayment rate assumptions. In
general, when an Agency RMBS backed by fixed-rate mortgages or
hybrid ARMs is acquired with borrowings, subject to qualifying
and maintaining our qualification as a REIT, we may, but are not
required to, enter into interest rate swap and cap contracts or
forward funding agreements that effectively cap or fix our
borrowing costs for a period close to the anticipated average
life of the fixed-rate portion of the related Agency RMBS. This
strategy is designed to protect us from rising interest rates
because the borrowing costs are fixed for the duration of the
fixed-rate portion of the related Agency RMBS. However, if
prepayment rates decrease as interest rates rise, the life of
the fixed-rate portion of the related Agency RMBS could extend
beyond the term of the swap agreement or other hedging
instrument. Our borrowing costs would no longer be fixed after
the end of the hedging instrument, but the income earned on the
related Agency RMBS would remain fixed. This situation may also
cause the market value of our Agency RMBS to decline with little
or no offsetting gain from the related hedging transactions. In
extreme situations, we may be forced to sell assets and incur
losses to maintain adequate liquidity.
Interest Rate
Cap Risk
We invest in Agency RMBS backed by ARMs and hybrid ARMs, which
are typically subject to periodic and lifetime interest rate
caps and floors. Interest rate caps and floors may limit changes
to the Agency RMBS yield. However, our borrowing costs pursuant
to our repurchase agreements will not be subject to similar
restrictions. As interest rates rise, the interest rate costs on
our borrowings could increase without limitation by caps, but
the interest-rate yields on the related assets would effectively
be limited by caps. The effect of ARM interest rate caps is
magnified to the extent we acquire Agency
73
Table of Contents
RMBS backed by ARMs and hybrid ARMs whose current coupon is
below the fully-indexed coupon. Further, the underlying
mortgages may be subject to periodic payment caps that result in
some portion of the interest being deferred and added to the
principal outstanding, affecting available liquidity needed to
pay our financing costs. These factors could lower our net
interest income or cause a net loss during periods of rising
interest rates.
Effect on Fair
Value
The market value of our assets is sensitive to changes in
interest rates and may increase or decrease at different rates
than the market value of our liabilities, including our hedging
instruments. We primarily assess our interest rate risk by
estimating the duration of our assets and the duration of our
liabilities. Duration essentially measures the market price
volatility of financial instruments as interest rates change. We
generally calculate duration using various financial models and
empirical data, and different models and methodologies can
produce different duration numbers for the same securities. If
our duration estimates are inaccurate, we could underestimate
our interest rate risk.
Prepayment
Risk
Risk of mortgage prepayments is another significant risk to our
portfolio. When prepayment rates increase, we may not be able to
reinvest the money received from prepayments at yields
comparable to those of the securities prepaid. Also, some ARMs
and hybrid ARMs which back our Agency RMBS may bear initial
“teaser” interest rates that are lower than their
fully-indexed interest rates. If these mortgages are prepaid
during this “teaser” period, we may lose the
opportunity to receive interest payments at the higher,
fully-indexed rate over the expected life of the security.
Additionally, some of our structured Agency RMBS, such as IOs
and IIOs, may be negatively affected by an increase in
prepayment rates because their value is wholly contingent on the
underlying mortgage loans having an outstanding principal
balance.
A decrease in prepayment rates may also have an adverse effect
on our portfolio. Also, if we invest in POs, the purchase price
of such securities will be based, in part, on an assumed level
of prepayments on the underlying mortgage loan. Because the
returns on POs decrease the longer it takes the principal
payments on the underlying loans to be paid, a decrease in
prepayment rates could decrease our returns on these securities.
Prepayment risk also affects our hedging activities. When an
Agency RMBS backed by a fixed-rate mortgage or hybrid ARM is
acquired with borrowings, subject to qualifying and maintaining
our qualification as a REIT, we may cap or fix our borrowing
costs for a period close to the anticipated average life of the
fixed-rate portion of the related Agency RMBS. If prepayment
rates are different than our projections, the term of the
related hedging instrument may not match the fixed-rate portion
of the security, which could cause us to incur losses.
When prevailing interest rates fall below (rise above) the
coupon rate of a mortgage, it becomes more (less) likely to
prepay. Our business may be adversely affected if prepayment
rates are significantly different than our projections.
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Table of Contents
Analyzing
Interest Rate and Prepayment Risks
The following sensitivity analysis shows the estimated impact on
the fair value of our interest rate-sensitive investments as of
March 31, 2011, assuming rates instantaneously fall
100 basis points, rise 100 basis points and rise
200 basis points, or BPS:
|
Interest Rates Fall |
Interest Rates |
Interest Rates |
||||||||||||||
| 100 BPS | Rise 100 BPS | Rise 200 BPS | ||||||||||||||
| (In thousands) | ||||||||||||||||
|
Agency RMBS backed by ARMs
|
||||||||||||||||
|
Fair Value
|
$ | 7,721 | ||||||||||||||
|
Change in Fair Value
|
$ | 184 | $ | (184 | ) | $ | (368 | ) | ||||||||
|
Change as a % of Fair Value
|
2.38 | % | (2.38 | )% | (4.76 | )% | ||||||||||
|
Agency RMBS backed by fixed-rate mortgages
|
||||||||||||||||
|
Fair Value
|
$ | 16,418 | ||||||||||||||
|
Change in Fair Value
|
$ | 608 | $ | (608 | ) | $ | (1,217 | ) | ||||||||
|
Change as a % of Fair Value
|
3.70 | % | (3.70 | )% | (7.41 | )% | ||||||||||
|
Agency RMBS backed by hybrid ARMS
|
||||||||||||||||
|
Fair Value
|
$ | — | ||||||||||||||
|
Change in Fair Value
|
$ | — | $ | — | $ | — | ||||||||||
|
Change as a % of Fair Value
|
— | % | — | % | — | % | ||||||||||
|
Structured RMBS
|
||||||||||||||||
|
Fair Value
|
$ | 4,765 | ||||||||||||||
|
Change in Fair Value
|
$ | 151 | $ | (151 | ) | $ | (303 | ) | ||||||||
|
Change as a % of Fair Value
|
3.18 | % | (3.18 | )% | (6.36 | )% | ||||||||||
|
Portfolio Total
|
||||||||||||||||
|
Fair Value
|
$ | 28,904 | ||||||||||||||
|
Change in Fair Value
|
$ | 943 | $ | (943 | ) | $ | (1,887 | ) | ||||||||
|
Change as a % of Fair Value
|
3.26 | % | (3.26 | )% | (6.53 | )% | ||||||||||
|
Cash
|
||||||||||||||||
|
Fair Value
|
$ | 684 | ||||||||||||||
75
Table of Contents
The table below reflects the same analysis presented above but
with figures in the columns that indicate the estimated impact
of a 100 basis point fall or rise and a 200 basis point
rise adjusted to reflect the impact of convexity, which is the
measure of the sensitivity of our Agency RMBS’s effective
duration to movements in interest rates.
|
Interest Rates |
Interest Rates |
Interest Rates |
||||||||||||||
| Fall 100 BPS | Rise 100 BPS | Rise 200 BPS | ||||||||||||||
| (In thousands) | ||||||||||||||||
|
Agency RMBS backed by ARMs
|
||||||||||||||||
|
Fair Value
|
$ | 7,721 | ||||||||||||||
|
Change in Fair Value
|
$ | 109 | $ | (216 | ) | $ | (489 | ) | ||||||||
|
Change as a % of Fair Value
|
1.42 | % | (2.79 | )% | (6.33 | )% | ||||||||||
|
Agency RMBS backed by fixed-rate mortgages
|
||||||||||||||||
|
Fair Value
|
$ | 16,418 | ||||||||||||||
|
Change in Fair Value
|
$ | 459 | $ | (686 | ) | $ | (1,427 | ) | ||||||||
|
Change as a % of Fair Value
|
2.80 | % | (4.18 | )% | (8.69 | )% | ||||||||||
|
Agency RMBS backed by hybrid ARMs
|
||||||||||||||||
|
Fair Value
|
$ | — | ||||||||||||||
|
Change in Fair Value
|
$ | — | $ | — | $ | — | ||||||||||
|
Change as a % of Fair Value
|
— | % | — | % | — | % | ||||||||||
|
Structured RMBS
|
||||||||||||||||
|
Fair Value
|
$ | 4,765 | ||||||||||||||
|
Change in Fair Value
|
$ | (132 | ) | $ | (303 | ) | $ | (829 | ) | |||||||
|
Change as a % of Fair Value
|
(2.77 | )% | (6.37 | )% | (17.40 | )% | ||||||||||
|
Portfolio Total
|
||||||||||||||||
|
Fair Value
|
$ | 28,904 | ||||||||||||||
|
Change in Fair Value
|
$ | 436 | $ | (1,205 | ) | $ | (2,745 | ) | ||||||||
|
Change as a % of Fair Value
|
1.51 | % | (4.17 | )% | (9.50 | )% | ||||||||||
|
Cash
|
||||||||||||||||
|
Fair Value
|
$ | 684 | ||||||||||||||
As interest rates change, the change in the fair value of our
assets would likely differ from that shown above and such
difference might be material and adverse to us. The volatility
in the fair value of our assets could increase significantly
when interest rates change beyond 100 basis points. In
addition to changes in interest rates, other factors impact the
fair value of our interest rate-sensitive investments and
hedging instruments, if any, such as the shape of the yield
curve, the level of 30-day LIBOR, market expectations about
future interest rate changes and disruptions in the financial
markets.
Our liabilities, consisting primarily of repurchase agreements,
are also affected by changes in interest rates. As rates rise,
the value of the underlying asset, or the collateral, declines.
In certain circumstances, we could be required to post
additional collateral in order to maintain the repurchase
agreement. We maintain cash and unpledged securities to cover
these possible situations. Typically, our cash position is
approximately equal to the haircut on our pledged assets, and
the balance of our unpledged assets exceeds our cash balance. As
an example, if interest rates increased 200 basis points,
as shown on the prior table, our collateral as of March 31,
2011 would decline in value by approximately $2.7 million,
which would require that we post $2.7 million of additional
collateral to meet a margin call. Our cash and unpledged assets
are currently sufficient to cover such a margin call. There can
be no assurance, however, that we will always have sufficient
cash or unpledged assets to cover such shortfalls in all
situations.
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Table of Contents
MARKET
OPPORTUNITY
We believe that the Agency RMBS market presents compelling
opportunities for earning attractive risk-adjusted returns,
particularly in the structured Agency RMBS market. For
example, IIOs have provided strong returns since the peak
of the housing market collapse in the fall of 2008 due to
persistently low short-term interest rates and lower prepayment
rates.
Attractive
Financing Spreads
Financing spreads (the difference between the yields on our
Agency RMBS and our related financing costs) are at high levels
due mainly to historically low financing rates on repurchase
agreement debt.
As of March 31, 2011, three month LIBOR was approximately
0.24% and the Federal Funds Target Rate was 0.25%. We finance
almost all of our Agency RMBS with short-term repurchase
agreement debt, the interests rates of which are tied to LIBOR.
We expect LIBOR and the Federal Funds Target Rate to remain at
historically low levels as long as the U.S. unemployment
rate remains high and inflation in the United States is at or
near the low end of the U.S. Federal Reserve’s target
range of 1% to 2%.
Lower Prepayment
Rates
The recent housing market collapse has caused a dramatic
decrease in home prices. Also, loan losses on residential
mortgages have caused lenders to tighten their lending
standards, making it difficult for home owners to refinance
their mortgages. The combination of lower home prices and
tighter lending standards has lowered prepayment rates on
mortgage loans underlying Agency RMBS.
We believe the current low prepayment rate environment will
reduce portfolio volatility and increase our ability to hedge
our portfolio more effectively. Additionally, lower prepayment
rates may increase the value of our structured Agency RMBS, such
as IOs and IIOs, because the value of such securities are
contingent on the duration of the principal balance of the
underlying mortgage loans.
Availability of
Financing
Data from the Federal Reserve shows that primary dealers are
currently providing approximately $380 billion of term
financing for Agency RMBS as opposed to less than
$250 billion at the beginning of 2010.
We believe the combination of (i) attractive financing
spreads, (ii) lower prepayment rates and
(iii) available financing will result in attractive
risk-adjusted returns.
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Table of Contents
BUSINESS
Our
Company
Orchid Island Capital, Inc. is a specialty finance company that
invests in Agency RMBS. Our investment strategy focuses on, and
our portfolio consists of, two categories of Agency RMBS:
(i) traditional pass-through Agency RMBS and
(ii) structured Agency RMBS, such as CMOs, IOs, IIOs
and POs, among other types of structured Agency RMBS.
Our business objective is to provide attractive risk-adjusted
total returns to our investors over the long term through a
combination of capital appreciation and the payment of regular
quarterly distributions. We intend to achieve this objective by
investing in and strategically allocating capital between the
two categories of Agency RMBS described above. We seek to
generate income from (i) the net interest margin, which is
the spread or difference between the interest income we earn on
our assets and the interest cost of our related borrowing and
hedging activities, on our leveraged pass-through Agency RMBS
portfolio and the leveraged portion of our structured Agency
RMBS portfolio, and (ii) the interest income we generate
from the unleveraged portion of our structured Agency RMBS
portfolio. We intend to fund our pass-through Agency RMBS and
certain of our structured Agency RMBS, such as fixed and
floating rate tranches of CMOs and POs, through short-term
borrowings structured as repurchase agreements. However, we do
not intend to employ leverage on the securities in our
structured Agency RMBS portfolio that have no principal balance,
such as IOs and IIOs. We do not intend to use leverage in these
instances because the securities contain structural leverage.
Pass-through Agency RMBS and structured Agency RMBS typically
exhibit materially different sensitivities to movements in
interest rates. Declines in the value of one portfolio may be
offset by appreciation in the other. The percentage of capital
that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the
level of income generated by the combined portfolios, the
stability of that income stream and the stability of the value
of the combined portfolios. We believe that this strategy will
enhance our liquidity, earnings, book value stability and asset
selection opportunities in various interest rate environments.
We were formed by Bimini in August 2010. We commenced operations
on November 24, 2010, and through March 31, 2011,
Bimini had contributed approximately $7.5 million in cash
to us. Since then, Bimini contributed an additional
$7.5 million in cash to us pursuant to a subscription
agreement to purchase additional shares of our common stock.
Bimini is currently our sole stockholder. Bimini has managed our
portfolio since inception by utilizing the same investment
strategy that we expect our Manager and its experienced RMBS
investment team to continue to employ after completion of this
offering. As of March 31, 2011, our Agency RMBS portfolio
had a fair value of approximately $28.9 million and was
comprised of approximately 83.5% pass-through Agency RMBS and
16.5% structured Agency RMBS. Our net asset value as of
March 31, 2011 was approximately $7.5 million.
We intend to qualify and will elect to be taxed as a REIT under
the Code commencing with our short taxable year ending
December 31, 2011. We generally will not be subject to
U.S. federal income tax to the extent that we annually
distribute all of our REIT taxable income to our stockholders
and qualify as a REIT.
Our
Manager
We are currently managed by Bimini. Upon completion of this
offering, we will be externally managed and advised by Bimini
Advisors, Inc., or our Manager, pursuant to the terms of a
management agreement. Our Manager is a newly-formed Maryland
corporation and wholly-owned subsidiary of Bimini. Our Manager
will be responsible for administering our business activities
and
day-to-day
operations, subject to the supervision and oversight of our
Board of Directors. Members of Bimini’s and our
Manager’s senior management team will also serve as our
executive officers. We will not have any employees.
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Table of Contents
Bimini Capital
Management, Inc.
Bimini is a mortgage REIT that has operated since 2003 and had
approximately $117 million of pass-through Agency RMBS and
structured Agency RMBS as of March 31, 2011. Bimini has
employed this strategy with its own portfolio since the third
quarter of 2008 and with our portfolio since our inception. The
following table shows Bimini’s returns on invested capital
since employing our investment strategy in the third quarter of
2008. The returns on Bimini’s invested capital provided
below are net of the interest paid pursuant to Bimini’s
repurchase agreements but does not give effect to the cost of
Bimini’s other long-term financing costs as described below.
|
Cumulative Return |
||||||||
|
Quarterly Return on |
on Invested |
|||||||
| Invested Capital(1) | Capital(1)(2) | |||||||
|
Three Months Ended
|
||||||||
|
September 30, 2008
|
2.5 | % | 2.5 | % | ||||
|
December 31, 2008
|
8.9 | % | 11.7 | % | ||||
|
March 31, 2009
|
13.2 | % | 26.4 | % | ||||
|
June 30, 2009
|
14.0 | % | 44.0 | % | ||||
|
September 30, 2009
|
10.7 | % | 59.4 | % | ||||
|
December 31, 2009
|
7.0 | % | 70.6 | % | ||||
|
March 31, 2010
|
(0.3 | )% | 70.1 | % | ||||
|
June 30, 2010
|
9.4 | % | 86.0 | % | ||||
|
September 30, 2010
|
3.0 | % | 91.6 | % | ||||
|
December 31, 2010
|
8.0 | % | 106.9 | % | ||||
|
March 31, 2011
|
6.2 | % | 119.7 | % | ||||
|
Annualized Return on Invested
Capital(3)
|
33.1 | % | ||||||
| (1) | Returns on invested capital are calculated by dividing (i) the sum of (A) net interest income, before interest on junior subordinated notes (which equals the difference between interest income and interest expense), and (B) gains/losses on trading securities by (ii) invested capital. Invested capital consists of the sum of: (i) mortgage-backed securities — pledged to counterparties (less repurchase agreements and unsettled security transactions), (ii) mortgage-backed securities — unpledged (which consists of unpledged pass-through Agency RMBS and structured Agency RMBS less any unsettled Agency RMBS), (iii) cash and cash equivalents and (iv) restricted cash. The components of invested capital and returns on invested capital are based entirely on information contained in the SEC filings of Bimini Capital Management, Inc., which are publicly available through the SEC’s website at www.sec.gov. The information contained in the SEC filings of Bimini Capital Management, Inc. do not constitute a part of this prospectus or any amendment or supplement thereto. | |
| (2) | Cumulative return on invested capital represents the return on invested capital assuming the reinvestment of all prior period returns beginning on July 1, 2008. For example, the cumulative return on invested capital as of December 31, 2008 was calculated as follows: ((1+0.0252)*(1+0.0891))-1. | |
| (3) | Calculated by annualizing the total cumulative return on invested capital for the periods presented above. |
The table below shows the components of Bimini’s invested
capital. All information in the table below is based entirely on
information contained in the SEC filings of Bimini which are
publicly
79
Table of Contents
available through the SEC’s website at www.sec.gov. The
information contained in the SEC filings of Bimini do not
constitute a part of this prospectus or any amendment or
supplement thereto.
|
Repurchase |
||||||||||||||||||||||||
|
Mortgage-Backed |
Agreements |
|||||||||||||||||||||||
|
Securities - |
and Unsettled |
Mortgage-Backed |
||||||||||||||||||||||
|
Pledged to |
Security |
Securities - |
Cash and Cash |
Total Invested |
||||||||||||||||||||
|
As of:
|
Counterparties | Transactions(1) | Unpledged | Equivalents | Restricted Cash | Capital | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
September 30, 2008
|
$ | 208,921 | $ | (200,708 | ) | $ | 17,647 | $ | 12,377 | $ | 250 | $ | 38,487 | |||||||||||
|
December 31, 2008
|
158,444 | (148,695 | ) | 13,664 | 7,669 | — | 31,082 | |||||||||||||||||
|
March 31, 2009
|
80,618 | (74,736 | ) | 10,786 | 22,113 | — | 38,781 | |||||||||||||||||
|
June 30, 2009
|
75,159 | (69,887 | ) | 19,335 | 4,821 | — | 29,427 | |||||||||||||||||
|
September 30, 2009
|
66,286 | (82,733 | ) | 39,992 | 14,785 | — | 38,330 | |||||||||||||||||
|
December 31, 2009
|
104,876 | (100,271 | ) | 14,793 | 6,400 | 2,530 | 28,327 | |||||||||||||||||
|
March 31, 2010
|
79,763 | (81,077 | ) | 22,397 | 5,159 | 950 | 27,191 | |||||||||||||||||
|
June 30, 2010
|
75,271 | (73,086 | ) | 22,282 | 4,433 | 168 | 29,068 | |||||||||||||||||
|
September 30, 2010
|
111,886 | (107,274 | ) | 18,891 | 3,071 | 1,539 | 28,114 | |||||||||||||||||
|
December 31, 2010
|
117,254 | (113,592 | ) | 17,879 | 2,831 | 3,546 | 27,918 | |||||||||||||||||
|
March 31, 2011
|
99,509 | (94,927 | ) | 17,525 | 5,199 | 1,186 | 28,491 | |||||||||||||||||
| (1) | On occasion, Bimini enters into reverse repurchase agreements to facilitate the sale of selected positions in its pass-through Agency RMBS portfolio without unwinding an existing repurchase agreement. In accordance with the terms of a master repurchase agreement, repurchase agreements and reverse repurchase agreements are reported net of each other in Bimini’s consolidated balance sheet. As of March 31, 2011, Bimini had outstanding a reverse repurchase agreement with one counterparty of approximately $12.4 million which matured on May 10, 2011. |
We believe that this method of calculating returns described
above provides a useful means to measure the performance of
Bimini’s portfolio because (i) it is based on actual
capital invested in Bimini’s portfolio (including cash and
cash equivalents and restricted cash that could be used to
satisfy margin calls) instead of overall stockholders’
equity, which takes into account Bimini’s accumulated
deficit and other factors unrelated to the portfolio, and
(ii) it shows Bimini’s quarterly and cumulative
returns on its Agency RMBS portfolio taking into account the
repurchase agreement financing costs typical to manage this type
of portfolio, but without taking into account its entity-level
capital by excluding from the returns the effects of interest
due on Bimini’s junior subordinated debt, which is related
to Bimini’s trust preferred securities. Because of the
terms of its trust preferred securities (which include the
long-term nature of the underlying junior subordinated debt and
the fact that such debt is not held directly by outside
investors, but indirectly through preferred equity securities of
an intervening trust that holds such debt), Bimini characterizes
its trust preferred securities (and the related junior
subordinated debt) as a form of capital, rather than as a form
of financing for Bimini’s portfolio, when calculating
returns on invested capital.
Our results may differ from Bimini’s results and will
depend on a variety of factors, some of which are beyond our
control
and/or are
difficult to predict, including changes in interest rates,
changes in prepayment speeds and other changes in market
conditions and economic trends. In addition, Bimini’s
portfolio results above do not include other expenses necessary
to operate a public company and that we will incur following the
completion of this offering, including the management fee we
will pay to our Manager. Therefore, you should not assume that
Bimini’s portfolio’s performance will be indicative of
the performance of our portfolio or the Company.
In 2005, Bimini acquired Opteum Financial Services, LLC, or OFS,
an originator of residential mortgages. At the time OFS was
acquired, Bimini managed an Agency RMBS portfolio with a fair
value of approximately $3.5 billion. OFS operated in
46 states and originated residential mortgages through
three production channels. OFS did not have the capacity to
retain the mortgages it originated, and relied on the ability to
sell loans as they were originated as either whole loans or
through off-balance sheet securitizations. When the residential
housing market in the United States started to collapse in late
2006 and early 2007, the ability to successfully execute this
strategy was quickly impaired as whole
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Table of Contents
loan prices plummeted and the securitization markets closed.
Bimini’s management closed a majority of the mortgage
origination operations in early 2007, with the balance sold by
June 30, 2007. Additional losses were incurred after
June 30, 2007 as the remaining assets were sold or became
impaired, and by December 31, 2009, OFS had an accumulated
deficit of approximately $278 million. The losses generated
by OFS required Bimini to slowly liquidate its Agency RMBS
portfolio as capital was reduced and the operations of OFS
drained Bimini’s cash resources. On November 5, 2007,
Bimini was delisted by the NYSE. By December 31, 2008,
Bimini’s Agency RMBS portfolio was reduced to approximately
$172 million and, as a result of the reduced capital
remaining and the financial crisis, Bimini had limited access to
repurchase agreement funding. Bimini and its subsidiaries are
subject to a number of ongoing legal proceedings. Those
proceedings or any future proceedings may divert the time and
attention of our Manager and certain key personnel of our
Manager from us and our investment strategy. The diversion of
time of our Manager and certain key personnel of our Manager may
have a material adverse effect on our reputation, business
operations, financial condition and results of operations and
our ability to pay distributions to our stockholders. See
“Risk Factors— Legal proceedings involving Bimini
and certain of its subsidiaries have adversely affected Bimini,
may materially adversely affect Bimini’s ability to
effectively manage our business and could materially adversely
affect our reputation, business operations, financial condition
and results of operations and our ability to pay distributions
to our stockholders.”
Although our and Bimini’s Chief Executive Officer,
Mr. Cauley, and Chief Investment Officer and Chief
Financial Officer, Mr. Haas, both worked at Bimini during
the time it owned OFS (Mr. Cauley was the Chief Investment
Officer and Chief Financial Officer and Mr. Haas was the
Head of Research and Trading), their primary focus and
responsibilities were the management of Bimini’s securities
portfolio, not the management of OFS. In addition,
Mr. Cauley is the only director still serving on
Bimini’s board of directors that served when OFS was
acquired. Bimini’s current investment strategy was
implemented in the third quarter of 2008, the first full quarter
of operations after Mr. Cauley become the Chief Executive
Officer of Bimini and Mr. Haas became the Chief Investment
Officer and Chief Financial Officer of Bimini.
Messrs. Cauley and Haas were appointed to these respective
roles on April 14, 2008.
Our Investment
and Capital Allocation Strategy
Our Investment
Strategy
Our business objective is to provide attractive risk-adjusted
total returns to our investors over the long term through a
combination of capital appreciation and the payment of regular
quarterly distributions. We intend to achieve this objective by
investing in and strategically allocating capital between
pass-through Agency RMBS and structured Agency RMBS. We seek to
generate income from (i) the net interest margin on our
leveraged pass-through Agency RMBS portfolio and the leveraged
portion of our structured Agency RMBS portfolio, and
(ii) the interest income we generate from the unleveraged
portion of our structured Agency RMBS portfolio. We also seek to
minimize the volatility of both the net asset value of, and
income from, our portfolio through a process which emphasizes
capital allocation, asset selection, liquidity and active
interest rate risk management.
We intend to fund our pass-through Agency RMBS and certain of
our structured Agency RMBS, such as fixed and floating rate
tranches of CMOs and POs, through repurchase agreements.
However, we do not intend to employ leverage on our structured
Agency RMBS that have no principal balance, such as IOs and
IIOs. We do not intend to use leverage in these instances
because the securities contain structural leverage.
Our investment strategy consists of the following components:
| • | investing in pass-through Agency RMBS and certain structured Agency RMBS, such as fixed and floating rate tranches of CMOs and POs, on a leveraged basis to increase returns on the capital allocated to this portfolio; |
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Table of Contents
| • | investing in certain structured Agency RMBS, such as IOs and IIOs, on an unleveraged basis in order to (i) increase returns due to the structural leverage contained in such securities, (ii) enhance liquidity due to the fact that these securities will be unencumbered and (iii) diversify portfolio interest rate risk due to the different interest rate sensitivity these securities have compared to pass-through Agency RMBS; | |
| • | investing in Agency RMBS in order to minimize credit risk; | |
| • | investing in assets that will cause us to maintain our exclusion from regulation as an investment company under the Investment Company Act; and | |
| • | investing in assets that will allow us to qualify and maintain our qualification as a REIT. |
Our Manager will make investment decisions based on various
factors, including, but not limited to, relative value, expected
cash yield, supply and demand, costs of hedging, costs of
financing, liquidity requirements, expected future interest rate
volatility and the overall shape of the U.S. Treasury and
interest rate swap yield curves. We do not attribute any
particular quantitative significance to any of these factors,
and the weight we give to these factors depends on market
conditions and economic trends. We believe that this strategy,
combined with our Manager’s experienced RMBS investment
team, will enable us to provide attractive long-term returns to
our stockholders.
Capital
Allocation Strategy
The percentage of capital invested in our two asset categories
will vary and will be managed in an effort to maintain the level
of income generated by the combined portfolios, the stability of
that income stream and the stability of the value of the
combined portfolios. Typically, pass-through Agency RMBS and
structured Agency RMBS exhibit materially different
sensitivities to movements in interest rates. Declines in the
value of one portfolio may be offset by appreciation in the
other, although we cannot assure you that this will be the case.
Additionally, our Manager will seek to maintain adequate
liquidity as it allocates capital.
We will allocate our capital to assist our interest rate risk
management efforts. The unleveraged portfolio does not require
unencumbered cash or cash equivalents to be maintained in
anticipation of possible margin calls. To the extent more
capital is deployed in the unleveraged portfolio, our liquidity
needs will generally be less.
During periods of rising interest rates, refinancing
opportunities available to borrowers typically decrease because
borrowers are not able to refinance their current mortgage loans
with new mortgage loans at lower interest rates. In such
instances, securities that are highly sensitive to refinancing
activity, such as IOs and IIOs, typically increase in value. Our
capital allocation strategy allows us to redeploy our capital
into such securities when and if we believe interest rates will
be higher in the future, thereby allowing us to hold securities
the value of which we believe is likely to increase as interest
rates rise. Also, by being able to re-allocate capital into
structured Agency RMBS, such as IOs, during periods of rising
interest rates, we may be able to offset the likely decline in
the value of our pass-through Agency RMBS, which are negatively
impacted by rising interest rates.
We intend to qualify as a REIT and operate in a manner that will
not subject us to regulation under the Investment Company Act.
In order to rely on the exemption provided by
Section 3(c)(5)(C) under the Investment Company Act, we
must maintain at least 55% of our assets in qualifying real
estate assets. For purposes of this test, structured
mortgage-backed securities are non-qualifying real estate
assets. Accordingly, while we have no explicit limitation on the
amount of our capital that we will deploy to the unleveraged
structured Agency RMBS portfolio, we will deploy our capital in
such a way so as to maintain our exemption from registration
under the Investment Company Act.
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Table of Contents
Competitive
Strengths
We believe that our competitive strengths include:
| • | Ability to Successfully Allocate Capital between Pass-Through and Structured Agency RMBS. We seek to maximize our risk-adjusted returns by investing exclusively in Agency RMBS, which has limited credit risk due to the guarantee of principal and interest payments on such securities by Fannie Mae, Freddie Mac or Ginnie Mae. Our Manager will allocate capital between pass-through Agency RMBS and structured Agency RMBS. The percentage of our capital we allocate to our two asset categories will vary and will be actively managed in an effort to maintain the level of income generated by the combined portfolios, the stability of that income stream and the stability of the value of the combined portfolios. We believe this strategy will enhance our liquidity, earnings, book value stability and asset selection opportunities in various interest rate environments and provide us with a competitive advantage over other REITs that invest in only pass-through Agency RMBS. This is because, among other reasons, our investment and capital allocation strategies allow us to move capital out of pass-through Agency RMBS and into structured Agency RMBS in a rising interest rate environment, which will protect our portfolio from excess margin calls on our pass-through Agency RMBS portfolio and reduced net interest margins, and allow us to invest in securities, such as IOs, that have historically performed well in a rising interest rate environment. | |
| • | Experienced RMBS Investment Team. Mr. Cauley, our Chief Executive Officer and co-founder of Bimini, and Mr. Haas, our Chief Investment Officer, have 19 and ten years of experience, respectively, in analyzing, trading and investing in Agency RMBS. Additionally, Messrs. Cauley and Haas each have over seven years of experience managing Bimini, which is a publicly-traded REIT that has invested in Agency RMBS since its inception in 2003. Messrs. Cauley and Haas managed Bimini through the recent housing market collapse and the related adverse effects on the banking and financial system, repositioning Bimini’s portfolio in response to adverse market conditions. We believe this experience has enabled them to recognize portfolio risk in advance, hedge such risk accordingly and manage liquidity and borrowing risks during adverse market conditions. We believe that Messrs. Cauley’s and Haas’s experience will provide us with a competitive advantage over other management teams that may not have experience managing a publicly-traded mortgage REIT or managing a business similar to ours during various interest rate and credit cycles, including the recent housing market collapse. | |
| • | Clean Balance Sheet With an Implemented Investment Strategy. As a recently-formed entity, we intend to build on our existing investment portfolio. As of March 31, 2011, our Agency RMBS portfolio had a fair value of approximately $28.9 million and was comprised of approximately 83.5% pass-through Agency RMBS and 16.5% structured Agency RMBS. Our net asset value as of March 31, 2011 was approximately $7.5 million. Bimini has managed our portfolio since inception by utilizing the same investment strategy that we expect our Manager and its experienced RMBS investment team to continue to employ after the completion of this offering. |
| • | Alignment of Interests. Upon completion of this offering, Bimini will own 1,063,830 shares of our common stock. Concurrently with this offering, we will sell to Bimini warrants to purchase an aggregate of 2,655,000 shares of our common stock in a separate private placement for an aggregate purchase price of $1,248,000. Upon completion of this offering, Bimini will own common stock representing approximately 16.98% of the outstanding shares of our common stock (or 15.10% if the underwriters exercise their option to purchase additional shares in full). Bimini has agreed that, for a period of 365 days after the date of this prospectus, it will not, without the prior written consent of Barclays Capital Inc., dispose of or hedge any of (i) its shares of our common stock, including any shares of our common stock issuable upon the exercise of the warrants it intends to purchase in the concurrent |
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| private placement, (ii) the warrants that it intends to purchase in the concurrent private placement or (iii) any common stock that it may acquire after the completion of this offering, subject to certain exceptions and extensions. |
Our
Portfolio
As of March 31, 2011, our portfolio consisted of Agency
RMBS with an aggregate fair value of approximately
$28.9 million, a weighted average coupon of 4.22% and a net
weighted average borrowing cost of 0.33%. The following table
summarizes our portfolio as of March 31, 2011:
|
Weighted |
||||||||||||||||||||||||||||||||||||
|
Percentage |
Weighted |
Average |
Weighted |
Weighted |
||||||||||||||||||||||||||||||||
|
of |
Weighted |
Average |
Coupon |
Average |
Average |
Weighted |
||||||||||||||||||||||||||||||
|
Entire |
Average |
Maturity in |
Longest |
Reset in |
Lifetime |
Periodic |
Average |
|||||||||||||||||||||||||||||
|
Asset Category
|
Fair Value | Portfolio | Coupon | Months | Maturity | Months | Cap | Cap | CPR(1) | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
|
Pass-through Agency RMBS backed by:
|
||||||||||||||||||||||||||||||||||||
|
Adjustable-Rate Mortgages
|
$ | 7,721 | 26.7 | % | 2.53 | % | 288 | April 2035 | 5.03 | 9.55 | % | 2.00 | % | 0.11 | % | |||||||||||||||||||||
|
Fixed-Rate Mortgages
|
16,418 | 56.8 | % | 4.54 | % | 171 | November 2025 | N/A | N/A | N/A | 0.75 | % | ||||||||||||||||||||||||
|
Hybrid Adjustable-Rate Mortgages
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total/Weighted Average Whole-pool Mortgage Pass-through Agency
RMBS
|
$ | 24,139 | 83.5 | % | 3.90 | % | 208 | April 2035 | 5.03 | 9.55 | % | 2.00 | % | 0.54 | % | |||||||||||||||||||||
|
Structured Agency RMBS:
|
||||||||||||||||||||||||||||||||||||
|
CMOs
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
IOs
|
966 | 3.3 | % | 4.50 | % | 163 | October 2024 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
IIOs
|
3,799 | 13.2 | % | 6.22 | % | 297 | April 2037 | N/A | N/A | N/A | 19.73 | % | ||||||||||||||||||||||||
|
POs
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total/Weighted Average Structured Agency RMBS
|
4,765 | 16.5 | % | 5.87 | % | 270 | April 2037 | N/A | N/A | N/A | 19.73 | % | ||||||||||||||||||||||||
|
Total/Weighted Average
|
$ | 28,904 | 100 | % | 4.22 | % | 218 | April 2037 | 5.03 | 9.55 | % | 2.00 | % | 5.67 | % | |||||||||||||||||||||
| (1) | CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically the constant prepayment rate in the chart above represents the three month prepayment rate of the securities in the respective asset category. |
Description of
Agency RMBS
Pass-through
Agency RMBS
We invest in pass-through securities, which are securities
secured by residential real property in which payments of both
interest and principal on the securities are generally made
monthly. In effect, these securities pass through the monthly
payments made by the individual borrowers on the mortgage loans
that underlie the securities, net of fees paid to the issuer or
guarantor of the securities. Pass-through certificates can be
divided into various categories based on the characteristics of
the underlying mortgages, such as the term or whether the
interest rate is fixed or variable.
The payment of principal and interest on mortgage pass-through
securities issued by Ginnie Mae, but not the market value, is
guaranteed by the full faith and credit of the federal
government. Payment of principal and interest on mortgage
pass-through certificates issued by Fannie Mae and Freddie Mac,
but not the market value, is guaranteed by the respective agency
issuing the security.
A key feature of most mortgage loans is the ability of the
borrower to repay principal earlier than scheduled. This is
called a prepayment. Prepayments arise primarily due to sale of
the underlying property, refinancing or foreclosure. Prepayments
result in a return of principal to pass-through
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certificate holders. This may result in a lower or higher rate
of return upon reinvestment of principal. This is generally
referred to as prepayment uncertainty. If a security purchased
at a premium prepays at a
higher-than-expected
rate, then the value of the premium would be eroded at a
faster-than-expected
rate. Similarly, if a discount mortgage prepays at a
lower-than-expected
rate, the amortization towards par would be accumulated at a
slower-than-expected
rate. The possibility of these undesirable effects is sometimes
referred to as “prepayment risk.”
In general, declining interest rates tend to increase
prepayments, and rising interest rates tend to slow prepayments.
Like other fixed-income securities, when interest rates rise,
the value of Agency RMBS generally declines. The rate of
prepayments on underlying mortgages will affect the price and
volatility of Agency RMBS and may shorten or extend the
effective maturity of the security beyond what was anticipated
at the time of purchase. If interest rates rise, our holdings of
Agency RMBS may experience reduced returns if the borrowers of
the underlying mortgages pay off their mortgages later than
anticipated. This is generally referred to as extension risk.
The mortgage loans underlying pass-through certificates can
generally be classified into the following three categories:
| • | Fixed-Rate Mortgages. Fixed-rate mortgages are those where the borrower pays an interest rate that is constant throughout the term of the loan. Traditionally, most fixed-rate mortgages have an original term of 30 years. However, shorter terms (also referred to as final maturity dates) have become common in recent years. Because the interest rate on the loan never changes, even when market interest rates change, over time there can be a divergence between the interest rate on the loan and current market interest rates. This in turn can make fixed-rate mortgages price sensitive to market fluctuations in interest rates. In general, the longer the remaining term on the mortgage loan, the greater the price sensitivity. | |
| • | ARMs. ARMs are mortgages for which the borrower pays an interest rate that varies over the term of the loan. The interest rate usually resets based on market interest rates, although the adjustment of such an interest rate may be subject to certain limitations. Traditionally, interest rate resets occur at regular set intervals (for example, once per year). We will refer to such ARMs as “traditional” ARMs. Because the interest rates on ARMs fluctuate based on market conditions, ARMs tend to have interest rates that do not deviate from current market rates by a large amount. This in turn can mean that ARMs have less price sensitivity to interest rates. | |
| • | Hybrid Adjustable-Rate Mortgages. Hybrid ARMs have a fixed-rate for the first few years of the loan, often three, five, or seven years, and thereafter reset periodically like a traditional ARM. Effectively, such mortgages are hybrids, combining the features of a pure fixed-rate mortgage and a traditional ARM. Hybrid ARMs have price sensitivity to interest rates similar to that of a fixed-rate mortgage during the period when the interest rate is fixed and similar to that of an ARM when the interest rate is in its periodic reset stage. However, because many hybrid ARMs are structured with a relatively short initial time span during which the interest rate is fixed, even during that segment of its existence, the price sensitivity may be high. |
Structured
Agency RMBS
We also invest in structured Agency RMBS, which include CMOs,
IOs, IIOs and POs. The payment of principal and interest,
as appropriate, on structured Agency RMBS issued by Ginnie Mae,
but not the market value, is guaranteed by the full faith and
credit of the federal government. Payment of principal and
interest, as appropriate, on structured Agency RMBS issued by
Fannie Mae and Freddie Mac, but not the market value, is
guaranteed by the respective agency issuing the security. The
types of structured Agency RMBS in which we invest are described
below.
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| • | CMOs. CMOs are a type of RMBS the principal and interest of which are paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities issued directly by or under the auspices of Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. Generally, fixed-rate mortgages are used to collateralize CMOs. However, the CMO tranches need not all have fixed-rate coupons. Some CMO tranches have floating rate coupons that adjust based on market interest rates, subject to some limitations. Such tranches, often called “CMO floaters,” can have relatively low price sensitivity to interest rates. | |
| • | IOs. IOs represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. Holders of IOs have no claim to any principal payments. The value of IOs depends primarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments going forward, hence IOs are highly sensitive to prepayment rates. IOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments. | |
| • | IIOs. IIOs represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. Holders of IIOs have no claim to any principal payments. The value of IIOs depends primarily on three factors, which are prepayments, LIBOR rates and term interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments, hence IIOs are highly sensitive prepayment rates. The coupon on IIOs is derived from both the coupon interest rate on the underlying pool of mortgages and 30-day LIBOR. IIOs are typically created in conjunction with a floating rate CMO that has a principal balance and which is entitled to receive all of the principal payments on the underlying pool of mortgages. The coupon on the floating rate CMO is also based on 30-day LIBOR. Typically, the coupon on the floating rate CMO and the IIO, when combined, equal the coupon on the pool of underlying mortgages. The coupon on the pool of underlying mortgages typically represents a cap or ceiling on the combined coupons of the floating rate CMO and the IIO. Accordingly, when the value of 30-day LIBOR increases, the coupon of the floating rate CMO will increase and the coupon on the IIO will decrease. When the value of 30-day LIBOR falls, the opposite is true. Accordingly, the value of IIOs are sensitive to the level of 30-day LIBOR and expectations by market participants of future movements in the level of 30-day LIBOR. IIOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments. | |
| • | POs. POs represent the stream of principal payments on a pool of mortgages. Holders of POs have no claim to any interest payments, although the ultimate amount of principal to be received over time is known — it equals the principal balance of the underlying pool of mortgages. What is not known is the timing of the receipt of the principal payments. The value of POs depends primarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgages accelerate the stream of principal repayments, hence POs are highly sensitive to the rate at which the mortgages in the pool are prepaid. POs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future principal payments on a pool of mortgages. Further, an increase in interest rates also has a tendency to reduce prepayments, which decelerates, or |
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| pushes further out in time, the ultimate receipt of the principal payments. The opposite is true when interest rates decline. |
Our Financing
Strategy
We intend to fund our pass-through Agency RMBS and certain of
our structured Agency RMBS, such as fixed and floating rate
tranches of CMOs and POs, through short-term repurchase
agreements. However, we do not intend to employ leverage on our
structured Agency RMBS that have no principal balance, such as
IOs and IIOs. We do not intend to use leverage in these
instances because the securities contain structural leverage.
Our borrowings currently consist of short-term borrowings
pursuant to repurchase agreements. We may use other sources of
leverage, such as secured or unsecured debt or issuances of
preferred stock. We do not have a policy limiting the amount of
leverage we may incur. However, we generally expect that the
ratio of our total liabilities compared to our equity, which we
refer to as our leverage ratio, will be less than 12 to 1. Our
amount of leverage may vary depending on market conditions and
other factors that we deem relevant. As of March 31, 2011,
our portfolio leverage ratio was approximately 3.0 to 1. As of
March 31, 2011, we had entered into master repurchase
agreements with two counterparties and had funding in place with
one such counterparty, as described below. We have since entered
into master repurchase agreements with three additional
counterparties (for a total of five) and are currently
negotiating, and intend to enter into, additional master
repurchase agreements with additional counterparties after
completion of this offering to attain additional lending
capacity and to diversify counterparty credit risk. However, we
cannot assure you that we will enter into such additional master
repurchase agreements on favorable terms, or at all.
|
Net |
||||||||||||||||||||
|
Weighted |
Weighted Average |
|||||||||||||||||||
|
Percent of |
Average |
Maturity of |
||||||||||||||||||
|
Total |
Borrowing |
Repurchase |
||||||||||||||||||
|
Counterparty
|
Balance | Borrowings | Cost | Agreements in Days | Amount at Risk(1) | |||||||||||||||
|
MF Global Inc.
|
$ | 22,530,842 | 100 | % | 0.33 | % | 77 | $ | 1,673,153 | |||||||||||
| (1) | Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense. |
During the three months ended March 31, 2011, the average
balance of our repurchase agreement financing was $22,680,448.
Risk
Management
We invest in Agency RMBS to mitigate credit risk. Additionally,
our Agency RMBS are backed by a diversified base of mortgage
loans to mitigate geographic, loan originator and other types of
concentration risks.
Interest Rate
Risk Management
We believe that the risk of adverse interest rate movements
represents the most significant risk to our portfolio. This risk
arises because (i) the interest rate indices used to
calculate the interest rates on the mortgages underlying our
assets may be different from the interest rate indices used to
calculate the interest rates on the related borrowings, and
(ii) interest rate movements affecting our borrowings may
not be reasonably correlated with interest rate movements
affecting our assets. We attempt to mitigate our interest rate
risk by using the following techniques:
Agency RMBS Backed by ARMs. We seek to
minimize the differences between interest rate indices and
interest rate adjustment periods of our Agency RMBS backed by
ARMs and related borrowings. At the time of funding, we
typically align (i) the underlying interest rate index used
to calculate interest rates for our Agency RMBS backed by ARMs
and the related borrowings and (ii) the interest rate
adjustment periods for our Agency RMBS backed by ARMs and the
interest rate adjustment periods for our related borrowings. As
our borrowings mature or are renewed, we may
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adjust the index used to calculate interest expense, the
duration of the reset periods and the maturities of our
borrowings.
Agency RMBS Backed by Fixed-Rate
Mortgages. As interest rates rise, our
borrowing costs increase; however, the income on our Agency RMBS
backed by fixed-rate mortgages remains unchanged. Subject to
qualifying and maintaining our qualification as a REIT, we may
seek to limit increases to our borrowing costs through the use
of interest rate swap or cap agreements, options, put or call
agreements, futures contracts, forward rate agreements or
similar financial instruments to effectively convert our
floating-rate borrowings into fixed-rate borrowings.
Agency RMBS Backed by Hybrid
ARMs. During the fixed-rate period of our
Agency RMBS backed by hybrid ARMs, the security is similar to
Agency RMBS backed by fixed-rate mortgages. During this period,
subject to qualifying and maintaining our qualification as a
REIT, we may employ the same hedging strategy that we employ for
our Agency RMBS backed by fixed-rate mortgages. Once our Agency
RMBS backed by hybrid ARMs convert to floating rate securities,
we may employ the same hedging strategy as we employ for our
Agency RMBS backed by ARMs.
Additionally, our structured Agency RMBS generally exhibit
sensitivities to movements in interest rates different than our
pass-through Agency RMBS. To the extent they do so, our
structured Agency RMBS may protect us against declines in the
market value of our combined portfolio that result from adverse
interest rate movements, although we cannot assure you that this
will be the case.
Prepayment
Risk Management
The risk of mortgage prepayments is another significant risk to
our portfolio. When prevailing interest rates fall below the
coupon rate of a mortgage, mortgage prepayments are likely to
increase. Conversely, when prevailing interest rates increase
above the coupon rate of a mortgage, mortgage prepayments are
likely to decrease.
When prepayment rates increase, we may not be able to reinvest
the money received from prepayments at yields comparable to
those of the securities prepaid. Also, some ARMs and hybrid ARMs
which back our Agency RMBS may bear initial “teaser”
interest rates that are lower than their fully-indexed interest
rates. If these mortgages are prepaid during this
“teaser” period, we may lose the opportunity to
receive interest payments at the higher, fully-indexed rate over
the expected life of the security. Additionally, some of our
structured Agency RMBS, such as IOs and IIOs, may be negatively
affected by an increase in prepayment rates because their value
is wholly contingent on the underlying mortgage loans having an
outstanding principal balance.
A decrease in prepayment rates may also have an adverse effect
on our portfolio. For example, if we invest in POs, the purchase
price of such securities will be based, in part, on an assumed
level of prepayments on the underlying mortgage loan. Because
the returns on POs decrease the longer it takes the principal
payments on the underlying loans to be paid, a decrease in
prepayment rates could decrease our returns on these securities.
Prepayment risk also affects our hedging activities. When an
Agency RMBS backed by a fixed-rate mortgage or hybrid ARM is
acquired with borrowings, we may cap or fix our borrowing costs
for a period close to the anticipated average life of the
fixed-rate portion of the related Agency RMBS. If prepayment
rates are different than our projections, the term of the
related hedging instrument may not match the fixed-rate portion
of the security, which could cause us to incur losses.
Because our business may be adversely affected if prepayment
rates are different than our projections, we seek to invest in
Agency RMBS backed by mortgages with well-documented and
predictable prepayment histories. To protect against increases
in prepayment rates, we invest in Agency RMBS backed by
mortgages that we believe are less likely to be prepaid. For
example, we invest in Agency RMBS backed by mortgages
(i) with loan balances low enough such that a borrower
would likely have little incentive to refinance,
(ii) extended to borrowers with credit histories weak
enough to not be eligible to refinance their mortgage loans,
(iii) that are newly originated fixed-rate or
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hybrid ARMs or (iv) that have interest rates low enough
such that a borrower would likely have little incentive to
refinance. To protect against decreases in prepayment rates, we
may also invest in Agency RMBS backed by mortgages with
characteristics opposite to those described above, which would
typically be more likely to be refinanced. We may also invest in
certain types of structured Agency RMBS as a means of mitigating
our portfolio-wide prepayment risks. For example, certain
tranches of CMOs are less sensitive to increases in prepayment
rates, and we may invest in those tranches as a means of hedging
against increases in prepayment rates.
Liquidity
Management Strategy
Because of our use of leverage, we manage liquidity to meet our
lenders’ margin calls using the following measures:
| • | Maintaining cash balances or unencumbered assets well in excess of anticipated margin calls; and | |
| • | Making margin calls on our lenders when we have an excess of collateral pledged against our borrowings. |
We also attempt to minimize the number of margin calls we
receive by:
| • | Deploying capital from our leveraged Agency RMBS portfolio to our unleveraged Agency RMBS portfolio; | |
| • | Investing in Agency RMBS backed by mortgages that we believe are less likely to be prepaid to decrease the risk of excessive margin calls when monthly prepayments are announced. Prepayments are declared, and the market value of the related security declines, before the receipt of the related cash flows. Prepayment declarations give rise to a temporary collateral deficiency and generally results in margin calls by lenders; | |
| • | Obtaining funding arrangements which defer or waive prepayment-related margin requirements in exchange for payments to the lender tied to the dollar amount of the collateral deficiency and a pre-determined interest rate; and | |
| • | Reducing our overall amount of leverage. |
Investment
Committee and Investment Guidelines
Our Manager will establish an investment committee, which will
initially consist of Messrs. Cauley and Haas, each of whom
are directors or officers of our Manager. From time to time the
investment committee may propose revisions to our investment
guidelines, which will be subject to the approval of our Board
of Directors. We expect that the investment committee will meet
monthly to discuss diversification of our investment portfolio,
hedging and financing strategies and compliance with the
investment guidelines. Our Board of Directors intends to receive
an investment report and review our investment portfolio and
related compliance with the investment guidelines on at least a
quarterly basis. Our Board of Directors will not review or
approve individual investments unless the investment is outside
our operating policies or investment guidelines.
Our Board of Directors has approved the following investment
guidelines:
| • | no investment shall be made in any non-Agency RMBS; | |
| • | at the end of each quarterly period, our leverage ratio may not exceed 12 to 1. In the event that our leverage inadvertently exceeds the leverage ratio of 12 to 1 at the end of a quarterly period, we may not utilize additional leverage without prior approval from our Board of Directors until our leverage ratio is below 12 to 1; | |
| • | no leverage on structured Agency RMBS that have no principal balance, such as IOs and IIOs, because such securities already contain structural leverage. | |
| • | no investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes; and |
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| • | no investment shall be made that would cause us to register as an investment company under the Investment Company Act. |
The investment committee may change these investment guidelines
at any time with the approval of our Board of Directors but
without any approval from our stockholders.
Repurchase
Agreement Trading, Clearing and Administrative
Services
We have engaged AVM, L.P. (a securities broker-dealer) to
provide us with repurchase agreement trading, clearing and
administrative services. AVM, L.P. acts as our clearing agent
and adviser in arranging for third parties to enter into
repurchase agreements with us, executes and maintains records of
our repurchase transactions and assists in managing the margin
arrangements between us and our counterparties for each of our
repurchase agreements.
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, the retention of cash flow
(subject to the REIT provisions in the Code concerning
distribution requirements and the taxability of undistributed
REIT taxable income), other funds from debt financing, including
repurchase agreements, 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 have authority to offer our common stock or other 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.
We may, but do not intend to, make loans to third parties or
underwrite securities of other issuers or invest in the
securities of other issuers for the purpose of exercising
control.
Subject to qualifying and maintaining our qualifications as a
REIT, we may, but do not intend to, invest in securities of
other REITs, other entities engaged in real estate activities or
securities of other issuers, including for the purpose of
exercising control over such entities.
Subject to applicable law, our Board of Directors may change any
of these policies, as well as our investment guidelines, without
prior notice to you or a vote of our stockholders.
Custodian
Bank
J.P. Morgan Chase & Co. serves as our custodian bank.
J.P. Morgan Chase & Co. is entitled to fees for
its services.
Tax
Structure
We will elect and intend to qualify to be taxed as a REIT
commencing with our short taxable year ending December 31,
2011. Our qualification as a REIT, and the maintenance of such
qualification, will depend upon our ability to meet, on a
continuing basis, various complex requirements under the Code
relating to, among other things, the sources of our gross
income, the composition and values of our assets, our
distribution levels and the concentration of ownership of our
capital stock. We believe that we will be organized in
conformity with the requirements for qualification and taxation
as a REIT under the Code, and we intend to operate in a manner
that will enable us to meet the requirements for qualification
and taxation as a REIT commencing with our short taxable year
ending December 31, 2011. In connection with this offering,
we will receive an opinion from Hunton & Williams LLP
to the effect that we will be organized in conformity with the
requirements for qualification and taxation as a REIT under the
Code, and that our intended method of operation will enable us
to meet the requirements for qualification and taxation as a
REIT.
As a REIT, we generally will not be subject to U.S. federal
income tax on the REIT taxable income that we currently
distribute to our stockholders, but taxable income generated by
any TRS that
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we may form or acquire will be subject to federal, state and
local income tax. Under the Code, REITs are subject to numerous
organizational and operational requirements, including a
requirement that they distribute annually at least 90% of their
REIT taxable income, determined without regard to the deduction
for dividends paid and excluding any net capital gains. If we
fail to qualify as a REIT in any calendar year and do not
qualify for certain statutory relief provisions, our income
would be subject to U.S. federal income tax, and we would
likely be precluded from qualifying for treatment as a REIT
until the fifth calendar year following the year in which we
failed to qualify. Even if we qualify as a REIT, we may still be
subject to certain federal, state and local taxes on our income
and assets and to U.S. federal income and excise taxes on
our undistributed income.
Investment
Company Act Exemption
We operate our business so that we are exempt from registration
under the Investment Company Act. We rely on the exemption
provided by Section 3(c)(5)(C) of the Investment Company
Act. In order to rely on the exemption provided by
Section 3(c)(5)(C), we must maintain at least 55% of our
assets in qualifying real estate assets. For the purposes of
this test, structured Agency RMBS are non-qualifying real estate
assets. We monitor our portfolio periodically and prior to each
investment to confirm that we continue to qualify for the
exemption. To qualify for the exemption, we make investments so
that at least 55% of the assets we own on an unconsolidated
basis consist of qualifying mortgages and other liens on and
interests in real estate, which we refer to as qualifying real
estate assets, and so that at least 80% of the assets we own on
an unconsolidated basis consist of real estate-related assets,
including our qualifying real estate assets.
We treat whole-pool pass-through Agency RMBS as qualifying real
estate assets based on no-action letters issued by the Staff of
the SEC. To the extent that the SEC publishes new or different
guidance with respect to these matters, we may fail to qualify
for this exemption. Our Manager intends to manage our
pass-through Agency RMBS portfolio such that we will have
sufficient whole-pool pass-through Agency RMBS to ensure we
maintain our exemption from registration under the Investment
Company Act. At present, we generally do not expect that our
investments in structured Agency RMBS will constitute qualifying
real estate assets but will constitute real estate-related
assets for purposes of the Investment Company Act.
Competition
When we invest in Agency RMBS and other investment assets, we
compete with a variety of institutional investors, including
other REITs, insurance companies, mutual funds, pension funds,
investment banking firms, banks and other financial institutions
that invest in the same types of assets. Many of these investors
have greater financial resources and access to lower costs of
capital than we do. The existence of these competitive entities,
as well as the possibility of additional entities forming in the
future, may increase the competition for the acquisition of
mortgage related securities, resulting in higher prices and
lower yields on assets.
Employees
We have no employees.
Properties
We do not own any properties. Our offices are located at 3305
Flamingo Drive, Vero Beach, Florida 32963 and the telephone
number of our offices is (772) 231-1400. Bimini owns these
offices. This property is adequate for our business as currently
conducted.
Legal
Proceedings
There are no legal proceedings pending or threatened involving
Orchid Island Capital, Inc. as of March 31, 2011.
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OUR MANAGER AND
THE MANAGEMENT AGREEMENT
Our
Manager
We are currently managed by Bimini. Upon completion of this
offering, we will be externally managed and advised by Bimini
Advisors, Inc., or our Manager, pursuant to the terms of a
management agreement. Our Manager is a newly-formed Maryland
corporation and wholly-owned subsidiary of Bimini. Our Manager
will be responsible for administering our business activities
and
day-to-day
operations, subject to the supervision and oversight of our
Board of Directors. Members of Bimini’s and our
Manager’s senior management team will also serve as our
executive officers. We will not have any employees.
Officers of Our
Manager
Biographical information for each of the executive officers of
our Manager is set forth below.
Robert E. Cauley, CFA has been our Chairman, President
and Chief Executive Officer since August 2010 and is the
Chairman and Chief Executive Officer of our Manager.
Mr. Cauley co-founded Bimini Capital in 2003 and has served
as its Chief Executive Officer and Chairman of the Board of
Directors since 2008. He served as Vice-Chairman, Chief
Financial Officer and Chief Investment Officer prior to 2008.
Prior to co-founding Bimini Capital in 2003, Mr. Cauley was
a vice-president and portfolio manager at Federated Investors in
Pittsburgh from 1996 to 2003. Prior to 1996, Mr. Cauley was
a member of the ABS/MBS structuring desk at Lehman Brothers from
1994 to 1996 and a credit analyst at Barclays Bank, PLC from
1992 to 1994. Mr. Cauley is a CPA (inactive status) and
served in the United States Marine Corps for four years. We
believe that Mr. Cauley should serve as a member of our Board of
Directors due to his experience managing a publicly-traded REIT
and his career as a RMBS portfolio manager.
G. Hunter Haas, IV has been our Chief Financial
Officer and Chief Investment Officer since August 2010 and has
served on our Board of Directors since August 2010.
Mr. Haas is the President, Chief Investment Officer and
Chief Financial Officer of our Manager. Mr. Haas has been
the President, Chief Investment Officer and Chief Financial
Officer of Bimini since 2008. Prior to assuming those roles with
Bimini, he was a Senior Vice President and Head of Research and
Trading. Mr. Haas joined Bimini in April 2004 as Vice
President and Head of Mortgage Research. He has over
10 years experience in this industry and has managed
trading operations for the portfolio since his arrival in May
2004. Mr. Haas has approximately seven years experience as
a member of senior management of a public REIT. Prior to joining
Bimini, Mr. Haas worked in the mortgage industry as a
member of a team responsible for hedging a servicing portfolio
at both National City Mortgage and Homeside Lending, Inc. We
believe that Mr. Haas should serve as a member of our Board of
Directors due to his experience as the Chief Financial Officer
of a publicly-traded REIT and his experience in the mortgage
industry.
Our Management
Agreement
We are currently a party to a management agreement with Bimini.
Upon completion of this offering, we will terminate our
management agreement with Bimini and enter into a new management
agreement with our Manager pursuant to which our Manager will be
responsible for administering our business activities and
day-to-day
operations, subject to the supervision and oversight of our
Board of Directors. The material terms of the management
agreement are described below.
Management
Services
The management agreement requires our Manager to oversee our
business affairs in conformity with our operating policies and
investment guidelines. Our Manager at all times will be subject
to the supervision and direction of our Board of Directors, the
terms and conditions of the management agreement and such
further limitations or parameters as may be imposed from time to
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time by our Board of Directors. Our Manager is responsible for
(i) the selection, purchase and sale of assets in our
investment portfolio, (ii) our financing and hedging
activities and (iii) providing us with investment advisory
services. Our Manager is responsible for our
day-to-day
operations and will perform such services and activities
relating to our assets and operations as may be appropriate,
including, without limitation:
| • | forming and maintaining our investment committee, which will have the following responsibilities: (A) proposing the investment guidelines to the Board of Directors, (B) reviewing the Company’s investment portfolio for compliance with the investment guidelines on a monthly basis, (C) reviewing the investment guidelines adopted by our Board of Directors on a periodic basis, (D) reviewing the diversification of the Company’s investment portfolio and the Company’s hedging and financing strategies on a monthly basis, and (E) generally be responsible for conducting or overseeing the provision of the management services; | |
| • | serving as our consultant with respect to the periodic review of our investments, borrowings and operations and other policies and recommendations with respect thereto, including, without limitation, the investment guidelines, in each case subject to the approval of our Board of Directors; | |
| • | serving as our consultant with respect to the selection, purchase, monitoring and disposition of our investments; | |
| • | serving as our consultant with respect to decisions regarding any financings, hedging activities or borrowings undertaken by us, including (1) assisting us in developing criteria for debt and equity financing that is specifically tailored to our investment objectives and (2) advising us with respect to obtaining appropriate financing for our investments; | |
| • | purchasing and financing investments on our behalf; | |
| • | providing us with portfolio management; | |
| • | engaging and supervising, on our behalf and at our expense, independent contractors that provide real estate, investment banking, securities brokerage, insurance, legal, accounting, transfer agent, registrar and such other services as may be required relating to our operations or investments (or potential investments); | |
| • | providing executive and administrative personnel, office space and office services required in rendering services to us; | |
| • | performing and supervising the performance of 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 information technology services to perform such administrative functions; | |
| • | communicating on behalf of the Company with the holders of any equity or debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading exchanges or markets and to maintain effective relations with such holders, including website maintenance, logo design, analyst presentations, investor conferences and annual meeting arrangements; | |
| • | counseling us in connection with policy decisions to be made by our Board of Directors; | |
| • | evaluating and recommending to us hedging strategies and engaging in hedging activities on our behalf, consistent with our qualification and maintenance of our qualification as a REIT and with the investment guidelines; |
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| • | counseling us regarding our qualification and maintenance of qualification as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and U.S. Treasury regulations promulgated thereunder; | |
| • | counseling us regarding the maintenance of our exemption from status as an investment company under the Investment Company Act and monitoring compliance with the requirements for maintaining such exemption; | |
| • | furnishing reports and statistical and economic research to us regarding the activities and services performed for us by our Manager; | |
| • | monitoring the operating performance of our investments and providing periodic reports with respect thereto to our Board of Directors, including comparative information with respect to such operating performance and budgeted or projected operating results; | |
| • | investing and re-investing any of our cash and securities (including in short-term investments, payment of fees, costs and expenses, or payments of dividends or distributions to stockholders and partners of the Company) and advising us as to our capital structure and capital-raising activities; | |
| • | causing us to retain qualified accountants and legal counsel, as applicable, to (i) assist in developing appropriate accounting procedures, compliance procedures and testing systems with respect to financial reporting obligations and compliance with the provisions of the Code applicable to REITs and, if applicable, TRSs and (ii) conduct quarterly compliance reviews with respect thereto; | |
| • | causing us to qualify to do business in all jurisdictions in which such qualification is required and to obtain and maintain all appropriate licenses; |
| • | assisting us in complying with all applicable regulatory requirements 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 Securities Exchange Act of 1934, as amended, or the Exchange Act, or the Securities Act of 1933, as amended, or the Securities Act, or by the NYSE Amex or other stock exchange requirements as applicable; |
| • | taking all necessary actions to enable us to make required tax filings and reports, including soliciting stockholders for required information to the extent necessary under the Code and U.S. Treasury regulations applicable to REITs; | |
| • | handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which the Company may be involved or to which the Company may be subject arising out of the Company’s day-to-day operations; | |
| • | arranging marketing materials, advertising, industry group activities (such as conference participations and industry organization memberships) and other promotional efforts designed to promote our business; | |
| • | using commercially reasonable efforts to cause expenses incurred by or on our behalf to be commercially reasonable or commercially customary and within any budgeted parameters or expense guidelines set by our Board of Directors from time to time; | |
| • | performing such other services as may be required from time to time for the 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 | |
| • | using commercially reasonable efforts to cause us to comply with all applicable laws. |
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Pursuant to the terms of the management agreement, our Manager
will provide us with a management team, including our Chief
Executive Officer, Chief Financial Officer and Chief Investment
Officer or similar positions, along with appropriate support
personnel to provide the management services to be provided by
our Manager to us as described in the management agreement. None
of the officers or employees of our Manager will be exclusively
dedicated to us.
Our Manager has not assumed any responsibility other than to
render the services called for under the management agreement in
good faith and is not responsible for any action of our Board of
Directors in following or declining to follow its advice or
recommendations, including as set forth in the investment
guidelines. Our Manager and its affiliates, and the directors,
officers, employees, members and stockholders of our Manager and
its affiliates, will not be liable to us, our Board of Directors
or our stockholders for any acts or omissions performed in
accordance with and pursuant to the management agreement, except
by reason of acts constituting bad faith, willful misconduct,
gross negligence or reckless disregard of their respective
duties under the management agreement. We have agreed to
indemnify our Manager and its affiliates, and the directors,
officers, employees, members and stockholders of our Manager and
its affiliates, with respect to all expenses, losses, damages,
liabilities, demands, charges and claims in respect of or
arising from any acts or omissions of our Manager, its
affiliates, and the directors, officers, employees, members and
stockholders of our Manager and its affiliates, performed in
good faith under the management agreement and not constituting
bad faith, willful misconduct, gross negligence or reckless
disregard of their respective duties. Our Manager has agreed to
indemnify us and our directors, officers and stockholders with
respect to all expenses, losses, damages, liabilities, demands,
charges and claims in respect of or arising from any acts or
omissions of our Manager constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties
under the management agreement. Our Manager will maintain
reasonable and customary “errors and omissions” and
other customary insurance coverage upon the completion of this
offering.
Our Manager is required to refrain from any action that, in its
sole judgment made in good faith, (i) is not in compliance
with the investment guidelines, (ii) would adversely affect
our qualification as a REIT under the Code or our status as an
entity exempted from investment company status under the
Investment Company Act, or (iii) would violate any law,
rule or regulation of any governmental body or agency having
jurisdiction over us or of any exchange on which our securities
are listed or that would otherwise not be permitted by our
charter or bylaws. If our Manager is ordered to take any action
by our Board of Directors, our Manager will notify our Board of
Directors if it is our Manager’s judgment that such action
would adversely affect such status or violate any such law, rule
or regulation or our charter or bylaws. Our Manager, its
directors, officers or members will not be liable to us, our
Board of Directors or our stockholders for any act or omission
by our Manager, its directors, officers or stockholders except
as provided in the management agreement.
Term and
Termination
The management agreement has an initial term expiring
on ,
2014. The management agreement will be automatically renewed for
one-year terms thereafter unless terminated by either us or our
Manager. The management agreement does not limit the number of
renewal terms. Either we or our Manager may elect not to renew
the management agreement upon the expiration of the initial term
of the management agreement or upon the expiration of any
automatic renewal terms, both upon 180 days’ prior
written notice to our Manager or us. Any decision by us to not
renew the management agreement must be approved by the majority
of our independent directors. If we choose not to renew the
management agreement, we will pay our Manager a termination fee,
upon expiration, equal to three times the average annual
management fee earned by our Manager during the prior
24-month
period immediately preceding the most recently completed
calendar quarter prior to the effective date of termination. We
may only elect not to renew the management agreement without
cause with the consent of the majority of our independent
directors. If we elect not to renew the management agreement
without cause, we may not, without the consent of our Manager,
employ any employee of the Manager or any of its affiliates, or
any person who has been employed by our
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Manager or any of its affiliates at any time within the two year
period immediately preceding the date on which the person
commences employment with us during the term of the management
agreement and for two years after its expiration or termination.
In addition, following any termination of the management
agreement, we must pay our Manager all compensation accruing to
the date of termination. Neither we nor our Manager may assign
the management agreement in whole or in part to a third party
without the written consent of the other party, except that our
Manager may delegate the performance of any its responsibilities
to an affiliate so long as our Manager remains liable for such
affiliate’s performance.
Furthermore, if we decide not to renew the management agreement
without cause as a result of the determination by the majority
of our independent directors that the management fee is unfair,
our Manager may agree to perform its management services at fees
the majority of our Board of Directors determine to be fair, and
the management agreement will not terminate. Our Manager may
give us notice that it wishes to renegotiate the fees, in which
case we and our Manager must negotiate in good faith, and if we
cannot agree on a revised fee structure at the end of the
60-day
negotiation period following our receipt of our Manager’s
intent to renegotiate, the agreement will terminate, and we must
pay the termination fees described above.
We may also terminate the management agreement with
30 days’ prior written notice for cause, without
paying the termination fee, if any of the following events
occur, which will be determined by a majority of our independent
directors:
| • | our Manager’s fraud, misappropriation of funds or embezzlement against us or gross negligence (including such action or inaction by our Manager which materially impairs our ability to conduct our business); | |
| • | our Manager fails to provide adequate or appropriate personnel that are reasonably necessary for our Manager to identify investment opportunities for us and to manage and develop our investment portfolio if such default continues uncured for a period of 60 days after written notice thereof, which notice must contain a request that the same be remedied; | |
| • | a material breach of any provision of the management agreement (including the failure of our Manager to use reasonable efforts to comply with the investment guidelines) if such default continues uncured for a period of 30 days after written notice thereof, which notice must contain a request that the same be remedied; | |
| • | our Manager or Bimini commences any proceeding relating to its bankruptcy, insolvency, reorganization or relief of debtors or there is commenced against our Manager or Bimini any such proceeding; | |
| • | our Manager is convicted (including a plea of nolo contendre) of a felony; | |
| • | a change of control (as defined in the management agreement) of our Manager or Bimini; | |
| • | the departure of both Mr. Cauley and Mr. Haas from the senior management of our Manager during the initial term of the management agreement; or | |
| • | the dissolution of our Manager. |
Management Fee
and Reimbursement of Expenses
We do not intend to employ personnel. As a result, we will rely
on our Manager to administer our business activities and
day-to-day
operations. The management fee is payable monthly in arrears in
cash. The management fee is intended to reimburse our Manager
for providing personnel to provide certain services to us as
described above in “— Management Services.”
Our Manager may also be entitled to certain monthly expense
reimbursements described below.
Management Fee. The management fee will be
payable monthly in arrears in an amount equal to 1/12th of (a)
1.50% of the first $250,000,000 of our equity (as defined
below), (b) 1.25% of
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our equity that is greater than $250,000,000 and less than or
equal to $500,000,000, and (c) 1.00% of our equity that is
greater than $500,000,000.
“Equity” equals our month-end stockholders’
equity, adjusted to exclude the effect of any unrealized gains
or losses included in either retained earnings or other
comprehensive income (loss), as computed in accordance with GAAP.
Our Manager will calculate each monthly installment of the
management fee within 15 days after the end of each
calendar month, and we will pay the monthly management fee with
respect to each calendar month within five business days
following the delivery to us of our Manager’s statement
setting forth the computation of the monthly management fee for
such month.
Under our existing management agreement with Bimini, which will
be terminated upon the completion of this offering and replaced
by a new management agreement with our Manager, we paid Bimini
aggregate management fees of $5,500 for the period beginning on
November 24, 2010 (date operations commenced) to
December 31, 2010, and we paid Bimini aggregate management
fees of $20,900 for the three months ended March 31, 2011.
Reimbursement of Expenses. We will pay, or
reimburse our Manager, for all of our operating expenses. We
will not have any employees and will not pay our officers any
cash or non-cash equity compensation. Pursuant to the terms of
the management agreement, (i) we are not responsible for
the salaries, benefits or other employment related expenses of
our and our Manager’s officers and any Bimini employees
that provide services to us under the management agreement
(other than the compensation of our Chief Financial Officer) and
(ii) our Manager will pay the offering expenses that exceed
an amount equal to 1.0% of the total gross proceeds from this
offering. The costs and expenses required to be paid by us
include, but are not limited to:
| • | costs incurred in connection with this offering of our common stock up to an amount equal to 1.0% of the total gross proceeds from this offering; | |
| • | transaction costs incident to the acquisition, disposition and financing of our investments; | |
| • | expenses incurred in contracting with third parties; | |
| • | our allocable share of the compensation of our Chief Financial Officer based on our percentage of the aggregate amount of our Manager’s assets under management and Bimini’s assets; | |
| • | external legal, auditing, accounting, consulting, investor relations and administrative fees and expenses, including in connection with this offering of our common stock; | |
| • | the compensation and expenses of our directors (excluding those directors who are employees of Bimini) and the cost of liability insurance to indemnify our directors and officers; | |
| • | all other insurance costs including (A) liability or other insurance to indemnify (1) our Manager, (2) underwriters of any securities of the Company, (B) “errors and omissions” insurance coverage and (C) any other insurance deemed necessary or advisable by our Board of Directors for the benefit of the Company and our directors and officers; | |
| • | the costs associated with our establishment and maintenance of any repurchase agreement facilities and other indebtedness (including commitment fees, accounting fees, legal fees, closing costs and similar expenses); | |
| • | expenses associated with other securities offerings by us; | |
| • | expenses relating to the payment of dividends; | |
| • | costs incurred by personnel of our Manager for travel on our behalf; |
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| • | expenses connected with communications to holders of our securities and in complying with the continuous reporting and other requirements of the SEC and other governmental bodies; | |
| • | transfer agent and exchange listing fees; | |
| • | the costs of printing and mailing proxies and reports to our stockholders; | |
| • | our pro rata portion (based on our percentage of the aggregate amount of our Manager’s assets under management and Bimini’s assets) of costs associated with any computer software, hardware or information technology services that are used by us; | |
| • | our pro rata portion (based on our percentage of the aggregate amount of our Manager’s assets under management and Bimini’s assets) of the costs and expenses incurred with respect to market information systems and publications, research publications and materials used by us; | |
| • | settlement, clearing, and custodial fees and expenses relating to us; | |
| • | the costs of maintaining compliance with all federal, state and local rules and regulations or any other regulatory agency (as such costs relate to us), all taxes and license fees and all insurance costs incurred on behalf of us; | |
| • | the costs of administering any of our incentive plans; and | |
| • | our pro rata portion (based on our percentage of the aggregate amount of our Manager’s assets under management and Bimini’s assets) of rent (including disaster recovery facility costs and expenses), telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of our Manager and its affiliates required for our operations. |
Under our existing management agreement with Bimini, which will
be terminated upon the completion of this offering and replaced
by a new management agreement with our Manager, we reimbursed
Bimini an aggregate of $7,200 in expenses for the period
beginning on November 24, 2010 (date operations commenced)
to December 31, 2010, and we reimbursed Bimini an aggregate
of $21,600 in expenses for the three months ended March 31,
2011.
Assuming aggregate net proceeds from this offering and the
concurrent private placement of warrants for approximately
$41.2 million and no additional increases or decreases in
our stockholders’ equity, we will pay our Manager
management fees equal to approximately $843,000 during the first
12 months after the completion of this offering and the
concurrent private placement.
Payments by the
Manager to the Underwriters
Pursuant to the underwriting agreement among the underwriters,
our Manager, Bimini and us, our Manager will pay the
underwriters $ per share with
respect to each share of common stock sold in this offering on a
deferred basis after the completion of this offering. Our
Manager will pay the underwriters all of the management fees it
receives from us each month until it has paid the underwriters
an aggregate amount of $ .
Overhead Sharing
Agreement
Our Manager will enter into an overhead sharing agreement with
Bimini effective upon the closing of this offering. Pursuant to
this agreement, our Manager will be provided with access to,
among other things, Bimini’s portfolio management, asset
valuation, risk management and asset management services as well
as administration services addressing accounting, financial
reporting, legal, compliance, investor relations and information
technologies necessary for the performance of our Manager’s
duties in exchange for a reimbursement of the Manager’s
allocable cost for these services. The reimbursement paid by our
Manager pursuant to this agreement will not constitute an
expense under the management agreement.
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Conflicts of
Interest; Equitable Allocation of Opportunities
Bimini invests solely in Agency RMBS and, because it is
internally-managed, does not pay a management fee. Additionally,
Bimini currently receives management fees from us and, as the
sole stockholder of our Manager, will indirectly receive the
management fees earned by our Manager through payments under the
overhead sharing agreement and our Manager’s payment of
dividends to Bimini. Our Manager may in the future manage other
funds, accounts and investment vehicles that have strategies
that are similar to our strategy, although our Manager currently
does not manage any other funds, accounts or investment
vehicles. Our Manager and Bimini make available to us
opportunities to acquire assets that they determine, in their
reasonable and good faith judgment, based on our objectives,
policies and strategies, and other relevant factors, are
appropriate for us in accordance with their written investment
allocation procedures and policies, subject to the exception
that we might not be offered each such opportunity, but will on
an overall basis equitably participate with Bimini and our
Manager’s other accounts in all such opportunities when
considered together. Bimini and our Manager have agreed not to
sponsor another REIT that has substantially the same investment
strategy as Bimini or us prior to the earlier of (i) the
termination or expiration of the management agreement or (ii)
our Manager no longer being a subsidiary or affiliate of Bimini.
Because many of our targeted assets are typically available only
in specified quantities and because many of our targeted assets
are also targeted assets for Bimini and may be targeted assets
for other accounts our Manager may manage in the future, neither
Bimini nor our Manager may be able to buy as much of any given
asset as required to satisfy the needs of Bimini, us and any
other account our Manager may manage in the future. In these
cases, our Manager’s and Bimini’s investment
allocation procedures and policies will typically allocate such
assets to multiple accounts in proportion to their needs and
available capital. The policies will permit departure from such
proportional allocation when (i) allocating purchases of
whole-pool Agency RMBS, because those securities cannot be
divided into multiple parts to be allocated among various
accounts, and (ii) such allocation would result in an
inefficiently small amount of the security being purchased for
an account. In these cases, the policy allows for a protocol of
allocating assets so that, on an overall basis, each account is
treated equitably. Specifically, our investment allocation
procedures and policies stipulate that we will base our
allocation of investment opportunities on the following factors:
| • | the primary investment strategy and the stage of portfolio development of each account; | |
| • | the effect of the potential investment on the diversification of each account’s portfolio by coupon, purchase price, size, prepayment characteristics and leverage; | |
| • | the cash requirements of each account; | |
| • | the anticipated cash flow of each account’s portfolio; and | |
| • | the amount of funds available to each account and the length of time such funds have been available for investment. |
On a quarterly basis, our independent directors will review with
our Manager its allocation decisions, if any, and discuss with
our Manager the portfolio needs of each account for the next
quarter and whether such needs will give rise to an asset
allocation conflict and, if so, the potential resolution of such
conflict.
Other policies of Bimini and our Manager that will apply to the
management of the Company include controls for:
| • | Cross transactions — defined as transactions between us or one of our subsidiaries, if any, on the one hand, and an account (other than us or one of our subsidiaries, if any) managed by our Manager, on the other hand. It is our Manager’s policy to engage in a cross transaction only when the transaction is in the best interests of, and is consistent with the objectives and policies of, both accounts involved in the transaction. Our Manager may enter into cross transactions where it acts both on our behalf and on behalf of the other party to |
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| the transaction. Upon written notice to our Manager, we may at any time revoke our consent to our Manager’s executing cross transactions. Additionally, unless approved in advance by a majority of our independent directors or pursuant to and in accordance with a policy that has been approved by a majority of our independent directors, all cross transactions must be effected at the then-prevailing market prices. Pursuant to our Manager’s current policies and procedures, assets for which there are no readily observable market prices may be purchased or sold in cross transactions (i) at prices based upon third party bids received through auction, (ii) at the average of the highest bid and lowest offer quoted by third party dealers or (iii) according to another pricing methodology approved by our Manager’s chief compliance officer. |
| • | Principal transactions — defined as transactions between Bimini or our Manager (or any related party of Bimini or our Manager, which includes employees of Bimini and our Manager and their families), on the one hand, and us or one of our subsidiaries, if any, on the other hand. Certain cross transactions may also be considered principal transactions whenever our Manager or Bimini (or any related party of our Manager or Bimini, which includes employees of our Manager or Bimini and their families) have a substantial ownership interest in one of the transacting parties. Our Manager is only authorized to execute principal transactions with the prior approval of a majority of our independent directors and in accordance with applicable law. Such prior approval includes approval of the pricing methodology to be used, including with respect to assets for which there are no readily observable market prices. | |
| • | Split price executions — pursuant to the management agreement, our Manager is authorized to combine purchase or sale orders on our behalf together with orders for Bimini or accounts managed by our Manager or their affiliates and allocate the securities or other assets so purchased or sold, on an average price basis or other fair and consistent basis, among such accounts. |
To date, we have not entered into any cross transactions;
however, we have entered into one principal transaction and have
conducted split price executions. See “Certain
Relationships and Related Transactions — Purchases of
Agency RMBS from Bimini,” for a description of this
principal transaction. We currently do not anticipate that we
will enter into any
cross-transactions
or principal transactions after the completion of this offering.
We are entirely dependent on our Manager for our
day-to-day
management and do not have any independent officers. Our
executive officers are also executive officers of Bimini and our
Manager, and none of them will devote his time to us
exclusively. We compete with Bimini and will compete with any
other account managed by our Manager or other RMBS investment
vehicles that may be sponsored by Bimini in the future for
access to these individuals.
John B. Van Heuvelen, one of our independent director
nominees, owns shares of common stock of Bimini.
Mr. Cauley, our Chief Executive Officer and Chairman of our
Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of
common stock of Bimini. Mr. Haas, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our
Board of Directors, also serves as the Chief Financial Officer,
Chief Investment Officer and Treasurer of Bimini and owns shares
of common stock of Bimini. Accordingly,
Messrs. Van Heuvelen, Cauley and Haas may have a
conflict of interest with respect to actions by our Board of
Directors that relate to Bimini or our Manager.
Because our executive officers are also officers of our Manager,
the terms of our management agreement, including fees payable,
were not negotiated on an arm’s-length basis, and its terms
may not be as favorable to us as if it was negotiated with an
unaffiliated party.
The management fee we will pay to our Manager will be paid
regardless of our performance and it may not provide sufficient
incentive to our Manager to seek to achieve attractive
risk-adjusted returns for our investment portfolio.
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OUR
MANAGEMENT
Our Directors and
Executive Officers
Our business, property and affairs are managed under the
direction of our Board of Directors. Our Board of Directors is
currently comprised of two directors. We intend to appoint four
additional independent directors to our Board of Directors prior
to the completion of this offering. Upon the expiration of their
terms at the annual meeting of stockholders in 2012, our
directors will be elected to serve a term of one year and until
their successors are duly elected and qualify. Our Board of
Directors is elected by stockholders to oversee our management
in the best interests of the Company. We expect that our Board
of Directors will determine that our three additional directors
will satisfy the listing standards for independence of the NYSE
Amex. Our bylaws will provide that a majority of our entire
Board of Directors may at any time increase or decrease the
number of directors. However, the number of directors may never
be less than one nor, unless our bylaws are amended, more than
15.
We expect that Mr. Cauley will serve as the Chairman of the
Board of Directors and that Mr. Van Heuvelen will serve as
our lead independent director. The following table sets forth
certain information regarding our executive officers and
directors:
|
Name
|
Age
|
Position
|
||||
|
Robert E. Cauley, CFA
|
52 | Chief Executive Officer, President and Chairman of the Board | ||||
|
G. Hunter Haas, IV
|
35 | Secretary, Chief Financial Officer, Chief Investment Officer and Director | ||||
|
W Coleman Bitting
|
45 | Independent Director Nominee | ||||
|
John B. Van Heuvelen
|
65 | Independent Director Nominee | ||||
|
Frank P. Filipps
|
64 | Independent Director Nominee | ||||
|
Ava L. Parker
|
48 | Independent Director Nominee | ||||
Biographical
Information
For biographical information on Messrs. Cauley and Haas,
see “Our Manager and the Management Agreement.”
Biographical information for our independent director nominees
is set forth below.
W Coleman Bitting. Mr. Bitting has
agreed to become a director upon completion of this offering and
is expected to be an independent director. Since 2007,
Mr. Bitting has maintained a private consulting practice
focused on REITs. Mr. Bitting was a Founding Partner and
Head of Corporate Finance at Flagstone Securities, a leading
investment bank that specialized in mortgage REITs and finance
companies, from 2000 to 2007. Flagstone managed more than 40
equity offerings raising more than $5 billion of equity
capital. Flagstone helped clients build investment and liability
management practices. Prior to Flagstone, Mr. Bitting held
senior equity research positions at Stifel, Nicholas &
Co. Inc. and Kidder, Peabody & Co., Inc. Due to his
significant capital markets experience and experience analyzing
and advising REITs, we believe Mr. Bitting should serve as
a member of our Board of Directors.
John B. Van Heuvelen. Mr. Van Heuvelen
has agreed to become a director upon completion of this offering
and is expected to be an independent director. Mr. Van
Heuvelen was appointed to the board of Hallador Energy Company
(Nasdaq: HNRG) in September 2009 and serves as the chair of the
audit committee. Mr. Van Heuvelen has been a member of the
board of directors of MasTec, Inc. (NYSE:MTZ) since June 2002
and is currently the lead outside director and serves on their
audit committee. He was chairman of their audit committee and
the financial expert from 2004 to 2009. He also served on the
board of directors of LifeVantage, Inc. (OTC: LFVN) from August
2005 through August 2007. From 1999 to the present, Mr. Van
Heuvelen has been a private equity investor based in Denver,
Colorado. His investment activities have included private
telecom and technology firms, where
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he still remains active. Mr. Van Heuvelen spent
14 years with Morgan Stanley and Dean Witter Reynolds in
various executive positions in the mutual fund, unit investment
trust and municipal bond divisions before serving as president
of Morgan Stanley Dean Witter Trust Company from 1993 until
1999. Due to his significant experience as the audit committee
chairman of two publicly-traded companies as well as his
experience in fixed income investments, we believe Mr. Van
Heuvelen should serve as a member of our Board of Directors.
Frank P. Filipps. Mr. Filipps has agreed
to become a director upon completion of this offering and is
expected to be an independent director. From 2005 to 2008,
Mr. Filipps served as the Chairman and Chief Executive
Officer of Clayton Holdings, Inc., a mortgage services company,
leading it through its initial public offering and listing on
the Nasdaq and subsequent sale. Prior to that, Mr. Filipps
was employed by the Radian Group, Inc., spending two years as
Senior Vice President and Chief Financial Officer, one year as
Executive Vice President and Chief Operating Officer and ten
years as Chairman and Chief Executive Officer. In his time with
the Radian Group, Inc., Mr. Filipps led the company through
its initial public offering and listing on the NYSE. Prior to
his tenure with the Radian Group, Inc., Mr. Filipps spent
17 years with American International Group, Inc. (NYSE:
AIG), where he held multiple Vice President-level positions and
was the President, Chief Executive Officer and founder of AIG
Capital Corporation, the first non-insurance financial company
within AIG, which focused on interest rate swaps, foreign
exchange and equity arbitrage and leveraged buyout bridge
financing. Mr. Filipps has served as a director of Impac
Mortgage Holdings, Inc. (NYSE Amex: IMH) since 1995, as a
director and the chair of the nominating and corporate
governance committee of Primus Guaranty, Ltd. (NYSE: PRS) since
2002 and as a director and chairman of the governance committee
of Fortegra Financial Corp. (NYSE: FRF) since 2010. Due to his
financial and business expertise, diversified management
background, extensive experience with real estate-related and
mortgage services companies and experience as a director of
other public companies, we believe Mr. Filipps should serve
as a member of our Board of Directors.
Ava L. Parker. Ms. Parker has agreed to
become a director upon completion of this offering and is
expected to be an independent director. Since 2001,
Ms. Parker has been a partner in the law firm of
Lawrence & Parker, PA, where she serves as bond
counsel and underwriter’s counsel in connection with
municipal finance transactions as well as assists for-profit and
not-for-profit clients with corporate organization, development
and interpretation of contracts and litigation issues.
Ms. Parker is also the President of Linking Solutions,
Inc., which provides training, technical support and program
management services in the public and private sectors. She has
served as the President of Linking Solutions since 2002. In
2006, Ms. Parker was appointed to the Jacksonville
Transportation Authority Board of Directors, where she is
currently a Board Member and has served as Chairman.
Ms. Parker presently serves as Chairman of the State of
Florida Board of Governors of the State University System. Due
to her experience as a member of a number of private, state and
municipal boards, with complex financial and corporate
transactions and in corporate counseling, we believe
Ms. Parker should serve as a member of our Board of
Directors.
Other
Officers
Jerry Sintes, 45, has served as a Vice President and our
Treasurer since August 2010. Mr. Sintes has also served as
a Vice President and Controller of Bimini since October 2007.
From January 2005 to October 2007, Mr. Sintes was Vice
President and Assistant Controller of Riverside National Bank of
Florida. Prior to that, he served as Chief Financial Officer of
GS Financial Corp. and its subsidiary, Guaranty Savings and
Homestead Association from May 2003 to December 2005 and in
various positions at Bain, Freibaum, Sagona & Co.,
LLP, from September 1992 to May 2003 and Whitney National Bank
from May 1988 to September 1992. A graduate of Louisiana State
University, Mr. Sintes holds a Bachelor of Science degree
in Accounting and is a Certified Public Accountant. He is also a
member of the American Institute of Certified Public Accountants.
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Board
Committees
Upon completion of this offering, our Board of Directors will
establish three standing committees: the Audit Committee, the
Compensation Committee and the Nominating and Corporate
Governance Committee. The following table reflects the
composition of each of the committees upon completion of this
offering:
|
Audit Committee
|
Compensation Committee
|
Nominating and Corporate
Governance Committee
|
||
|
John B. Van Heuvelen
|
W Coleman Bitting | Ava L. Parker | ||
|
Frank P. Filipps
|
Frank P. Filipps | Frank P. Filipps | ||
|
Ava L. Parker
|
John B. Van Heuvelen | W Coleman Bitting |
Audit
Committee
Mr. Van Heuvelen will chair our audit committee and the
Board of Directors has determined that Mr. Van Heuvelen
qualifies as the “audit committee financial expert,”
as that term is defined by the SEC. The Board of Directors has
also determined that each of Frank P. Filipps and Ava L. Parker
are independent as independence is defined in
Rule 10A-3
of the Securities Exchange Act of 1934, as amended, and under
the NYSE Amex listing standards. The committee assists our Board
of Directors in overseeing:
| • | our accounting and financial reporting processes; | |
| • | the integrity and audits of our financial statements; | |
| • | our compliance with legal and regulatory requirements; | |
| • | the qualifications and independence of our independent registered public accounting firm; and | |
| • | the performance of our independent registered public accounting firm and any internal auditors. |
The committee is also responsible for engaging our independent
registered public accounting firm, reviewing with the
independent registered public accounting firm the plans and
results of the audit engagement, approving professional services
provided by the independent registered public accounting firm,
reviewing the independence of the independent registered public
accounting firm, considering the range of audit and non-audit
fees and reviewing the adequacy of our internal accounting
controls.
Compensation
Committee
Mr. Bitting will chair the compensation committee, the
principal functions of which are to:
| • | evaluate the performance of our Manager; | |
| • | review the compensation and fees payable to our Manager under our management agreement; and | |
| • | administer the issuance of any stock to the employees of our Manager who provide services to us. |
Nominating and
Corporate Governance Committee
Ms. Parker will chair the nominating and corporate
governance committee, which is responsible for seeking,
considering and recommending to our full Board of Directors
qualified candidates for election as directors and recommending
a slate of nominees for election as directors at the annual
meeting of stockholders. It also periodically prepares and
submits to our Board of Directors for adoption the
committee’s selection criteria for director nominees. It
reviews and makes
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recommendations on matters involving the general operation of
our Board of Directors and our corporate governance, and
annually recommends to our Board of Directors nominees for each
committee of our Board of Directors. In addition, the committee
annually facilitates the assessment of our Board of
Directors’ performance as a whole and of the individual
directors and reports thereon to our Board of Directors.
Code of
Business Conduct and Ethics
Our Board of Directors will establish a code of business conduct
and ethics that applies to our officers and directors and the
employees of our Manager. Among other matters, our code of
business conduct and ethics will be designed to deter wrongdoing
and to promote:
| • | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| • | full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications; | |
| • | compliance with applicable governmental laws, rules and regulations; | |
| • | prompt internal reporting of violations of the code to appropriate persons identified in the code; and | |
| • | accountability for adherence to the code. |
Any waiver of the code of business conduct and ethics for our
executive officers or directors may be made only by our audit
committee and will be promptly disclosed as required by law or
stock exchange regulations.
Compensation
Committee Interlocks and Insider Participation
No member of the compensation committee was at any time during
2010 an officer or employee of the Company or any of the
Company’s direct or indirect subsidiaries nor is any such
person a former officer of the Company or any of the
Company’s direct or indirect subsidiaries. In addition, no
executive officer of the Company currently serves as a director
or member of the compensation committee of any entity that has
one or more executive officers serving as a director of the
Company.
Compensation of
Directors
Our independent directors will each receive annual compensation
of $70,000. Additionally, each independent director will receive
reimbursement for travel and hotel expenses associated with
attending such board and committee meetings. The chairperson of
each of the compensation committee and the corporate governance
and nominating committee will be entitled to an additional
annual fee of $7,500. The chairperson of the audit committee
will be entitled to an additional annual fee of $12,500. These
retainer fees will be paid quarterly, and directors will be
entitled to elect to receive shares of the Company’s common
stock in lieu of all or any portion of their retainer fees that
would otherwise be payable in cash. In addition, except for
directors that own, through direct ownership or voting control,
50,000 shares or more of the Company’s common stock, a
minimum of one-half of the compensation paid to the
Company’s independent directors will be paid in the form of
shares of the Company’s common stock.
We did not have any independent directors in 2010.
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Compensation of
Executive Officers
Compensation
Discussion and Analysis
We have not paid, and we do not intend to pay, any cash or
non-cash equity compensation to any of our officers, and we do
not currently intend to adopt any policies with respect thereto.
We will reimburse our Manager for our allocable share of the
compensation, including, without limitation, annual base salary,
bonus, any related withholding taxes and employee benefits, of
our Chief Financial Officer based on our percentage of the
aggregate amount of our Manager’s assets under management
and Bimini’s assets. Our management agreement provides that
our Manager will provide us with a management team, including
our Chief Executive Officer, Chief Financial Officer and Chief
Investment Officer or similar positions. Each of our officers
are employees of Bimini. The Compensation Committee of
Bimini’s Board of Directors will determine the levels of
base salary and cash incentive compensation that may be earned
by our officers, including our Chief Financial Officer, based on
factors as Bimini may determine are appropriate. Bimini will
also determine whether and to what extent our officers will be
provided with pension, long-term or deferred compensation and
other employee benefits plans and programs. We expect that
Bimini will use proceeds from the management agreement and
overhead sharing agreement in part to pay compensation to its
officers and employees. For a description of these agreements,
see “Our Manager and the Management Agreement.”
We have adopted the equity incentive plan described below
pursuant to which we are permitted to grant equity-based awards
to our directors and executive officers, our Manager and its
affiliates. Under this plan, our compensation committee will
have discretion to determine the recipients and the terms and
conditions of any such awards. In determining the amount of
equity-based awards we will pay to certain of our Manager’s
employees, we expect that our compensation committee will
consider a number of factors, which may include our performance,
our Manager’s performance and the total amount of
management fees and expense reimbursements paid to our Manager.
We expect that our compensation committee will work with our
Manager in determining which of our Manager’s employees
will be eligible to receive equity-based awards and the amount
of such equity-based awards. If our compensation committee does
not agree with our Manager with respect to the proposed
recipients of, or amounts of, equity-based awards, our
compensation committee may decide to alter or eliminate the
proposed equity-based awards.
2011 Equity
Incentive Plan
Our Board of Directors has adopted, and our sole stockholder,
Bimini, has approved, an equity incentive plan, or the 2011
Equity Incentive Plan, to recruit and retain employees,
directors and service providers, including certain officers and
employees of our Manager and its affiliates. The 2011 Equity
Incentive Plan provides for the grant of options to purchase
shares of common stock, stock awards, stock appreciation rights,
performance units, dividend equivalents, other equity-based
awards and incentive awards.
Administration
of the 2011 Equity Incentive Plan
The 2011 Equity Incentive Plan will be administered by the
compensation committee of our Board of Directors, except that
the 2011 Equity Incentive Plan will be administered by our full
Board of Directors with respect to awards made to directors who
are not employees. This summary uses the term
“administrator” to refer to the compensation committee
or our Board of Directors, as applicable. The administrator will
approve all terms of awards under the 2011 Equity Incentive
Plan. The administrator also will approve who will receive
grants under the 2011 Equity Incentive Plan and the number of
shares of common stock subject to each grant.
Eligibility
Our directors and individuals who perform services for us and
our subsidiaries and affiliates by virtue of their employment
with our Manager or an affiliate of our Manager, including but
not limited
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to Bimini, may receive grants under the 2011 Equity Incentive
Plan in the sole discretion of the administrator. If we or our
subsidiaries and affiliates have any employees in the future,
they will be eligible to receive grants under the 2011 Equity
Incentive Plan.
Share
Authorization
The 2011 Equity Incentive Plan provides for grants up to an
aggregate of 10% of the issued and outstanding shares of our
common stock (on a fully diluted basis) at the time of the
award, subject to a maximum aggregate number of shares of common
stock that may be issued under the 2011 Equity Incentive Plan of
4,000,000 shares of common stock. In connection with stock
splits, stock dividends, extraordinary cash dividend,
reorganizations and certain other events, our Board of Directors
will make equitable adjustments that it deems appropriate in the
aggregate number of shares of common stock that may be issued
under the 2011 Equity Incentive Plan and the terms of
outstanding awards and the individual grant limit (described
below). If any options or stock appreciation rights terminate,
expire or are forfeited, exchanged or surrendered without having
been exercised or paid or if any stock awards, performance units
or other equity-based awards are forfeited, the shares of common
stock subject to such awards will again be available for
purposes of the 2011 Equity Incentive Plan. Shares of common
stock tendered or withheld to satisfy the exercise price or for
tax withholding are not available for future grants under the
2011 Equity Incentive Plan. No awards under the 2011 Equity
Incentive Plan were outstanding prior to completion of this
offering.
Individual
Award Limit
The 2011 Equity Incentive Plan limits the awards that any
individual may be granted in a calendar year. The limit provides
that no individual may be granted awards covering more than
250,000 shares of common stock in any calendar year. The
limit applies to incentive awards that are stated with reference
to shares of common stock or that may be settled in common
stock, and the limit covers all options, stock awards, stock
appreciation rights, performance units, other equity-based
awards and certain incentive awards that are granted in a
calendar year. A separate limit, described below, applies to
incentive awards that are not stated with reference to shares of
common stock and that will be settled in cash.
Options
The 2011 Equity Incentive Plan permits the grant of nonqualified
stock options and incentive stock options qualifying under
Section 422 of the Code. The number of shares subject to an
option will be determined by the administrator. The exercise
price of each option will be determined by the administrator,
provided that the price cannot be less than 100% of the fair
market value of the shares of common stock on the date on which
the option is granted (or 110% of the shares’ fair market
value on the grant date in the case of an incentive stock option
granted to an individual who is a “ten percent
stockholder” under Sections 422 and 424 of the Code).
The exercise price for any option is generally payable
(i) in cash, (ii) by certified check, (iii) by
the surrender of shares of common stock (or attestation of
ownership of shares of common stock) with an aggregate fair
market value on the date on which the option is exercised, equal
to the exercise price, or (iv) by payment through a broker
in accordance with procedures established by the Federal Reserve
Board. The term of an option cannot exceed ten years from the
date of grant (or five years in the case of an incentive stock
option granted to a “ten percent stockholder”).
Stock
Awards
The 2011 Equity Incentive Plan also provides for the grant of
stock awards and the administrator will determine the number of
shares subject to each stock award. A stock award is an award of
shares of common stock that may be subject to restrictions on
transferability and other restrictions as the administrator
determines in its sole discretion on the date of grant. The
restrictions, if any, may lapse over a specified period of time
or through the satisfaction of conditions, in installments or
otherwise, as the administrator may determine. Unless otherwise
specified in the applicable award agreement, a participant who
receives a stock award will have all of the rights of a
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stockholder as to those shares, including, without limitation,
the right to vote the shares and the right to receive dividends
or distributions on the shares. During the period, if any, when
stock awards are non-transferable or forfeitable, (i) a
participant is prohibited from selling, transferring, pledging,
exchanging, hypothecating or otherwise disposing of his or her
stock award shares, (ii) the Company will retain custody of
the certificates and (iii) a participant must deliver a
stock power to the Company for each stock award.
Stock
Appreciation Rights
The 2011 Equity Incentive Plan authorizes the grant of stock
appreciation rights to individuals who provide direct services
to us or our affiliates and the administrator will determine the
number of shares subject to each award of stock appreciation
rights. A stock appreciation right provides the recipient with
the right to receive, upon exercise of the stock appreciation
right, cash, shares of common stock or a combination of the two.
The amount that the recipient will receive upon exercise of the
stock appreciation right generally will equal the excess of the
fair market value of the shares of common stock on the date of
exercise over the shares’ fair market value on the date of
grant. Stock appreciation rights will become exercisable in
accordance with terms determined by the compensation committee
and unless otherwise determined by the administrator, stock
appreciation rights may not be transferred. Stock appreciation
rights may be granted in tandem with an option grant or as
independent grants. The term of a stock appreciation right
cannot exceed ten years from the date of grant or five years in
the case of a stock appreciation right granted in tandem with an
incentive stock option awarded to a “ten percent
stockholder.”
Performance
Units
The 2011 Equity Incentive Plan also authorizes the grant of
performance units and the administrator will determine the
number of performance units that will be granted. Performance
units represent the participant’s right to receive an
amount, based on the value of a specified number of shares of
common stock, if the terms and conditions prescribed by the
compensation committee are satisfied. The administrator will
determine on the date of grant the requirements that must be
satisfied before performance units are earned, including but not
limited to any applicable performance period, and performance
goals. Performance goals will be prescribed by the administrator
and may include criteria or objectives stated with reference to
our financial performance, the participant’s performance or
such other criteria determined by the administrator. If
performance units are earned, they will be settled in cash,
shares of common stock or a combination thereof.
Incentive
Awards
The 2011 Equity Incentive Plan also authorizes our compensation
committee to make incentive awards. An incentive award entitles
the participant to receive a cash payment if certain performance
goals requirements are met. Our compensation committee will
establish the requirements that must be met before an incentive
award is earned, and the requirements may be stated with
reference to one or more performance measures or criteria
prescribed by the compensation committee. An incentive award
that is earned will be settled in a single payment, which may be
in cash, common stock or a combination of cash and common stock.
The administrator will determine the amount that may be earned
under an incentive award, except that the 2011 Equity Incentive
Plan provides that no participant may receive more than $500,000
in any calendar year under incentive awards that are not granted
with reference to a number of shares of common stock and that
will be settled in cash.
Other
Equity-Based Awards
The administrator may grant other types of stock-based awards as
other equity-based awards under the 2011 Equity Incentive Plan
and the administrator will determine the number of other
equity-based awards that will be granted. Other equity-based
awards are payable in cash, shares of common
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stock or other equity, or a combination thereof, as determined
by the administrator. The terms and conditions of other
equity-based awards are determined by the administrator.
Dividend
Equivalents
The administrator may grant dividend equivalents in connection
with the grant of performance units and other equity-based
awards. Dividend equivalents may be paid currently or accrued as
contingent cash obligations (in which case they may be deemed to
have been invested in shares of common stock) and may be payable
in cash, shares of common stock or other property dividends
declared on shares of common stock. The administrator will
determine the terms of any dividend equivalents.
Change in
Control
If we experience a change in control, the administrator may, at
its discretion, provide that all outstanding options and stock
appreciation rights become fully exercisable, all stock awards
become transferable and non forfeitable, and performance units
incentive awards or other equity-based awards become earned and
non forfeitable in their entirety. The administrator may also
provide that all Awards will be assumed by the surviving entity,
or will be replaced by a comparable substitute award of the same
type as the original award and that has substantially equal
value granted by the surviving entity. The administrator may
also provide that participants must surrender their outstanding
options and stock appreciation rights, stock awards, performance
units, incentive awards and other equity-based awards in
exchange for a payment, in cash or shares of our common stock or
other securities or consideration received by stockholders in
the change in control transaction, equal to (i) the entire
amount that can be earned under an incentive award,
(ii) the value received by stockholders in the change in
control transaction for each share subject to a stock award,
performance unit or other equity-based award, or (iii) in
the case of options and stock appreciation rights, the amount by
which that transaction value exceeds the exercise price.
In summary, a change in control under the 2011 Equity Incentive
Plan occurs if:
| • | a person, entity or affiliated group (with certain exceptions) acquires, in a transaction or series of transactions, more than 50% of the total combined voting power of our outstanding securities; | |
| • | we merge into another entity, unless the holders of our voting securities immediately prior to the merger have more than 50% of the combined voting power of the securities in the merged entity or its parent; | |
| • | we sell or dispose of all or substantially all of our assets, other than a sale or disposition to any entity more than 50% of the combined voting power and common stock of which is owned by our stockholders; or | |
| • | during any period of two consecutive years individuals who, at the beginning of such period, constitute our Board of Directors together with any new directors (other than individuals who become directors in connection with certain transactions or election contests) cease for any reason to constitute a majority of our Board of Directors. |
The Code has special rules that apply to “parachute
payments,” i.e., compensation or benefits the payment of
which is contingent upon a change in control. If certain
individuals receive parachute payments in excess of a safe
harbor amount prescribed by the Code, the payor is denied a
U.S. federal income tax deduction for a portion of the
payments and the recipient must pay a 20% excise tax, in
addition to income tax, on a portion of the payments.
If we experience a change in control, benefits provided under
the 2011 Equity Incentive Plan could be treated as parachute
payments. In that event, the 2011 Equity Incentive Plan provides
that the plan benefits, and all other parachute payments
provided under other plans and agreements, will be
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reduced to the safe harbor amount, i.e., the maximum amount that
may be paid without excise tax liability or loss of deduction,
if the reduction allows the recipient to receive greater
after-tax benefits. The benefits under the 2011 Equity Incentive
Plan and other plans and agreements will not be reduced,
however, if the recipient will receive greater after-tax
benefits (taking into account the 20% excise tax payable by the
recipient) by receiving the total benefits. The 2011 Equity
Incentive Plan also provides that these provisions do not apply
to a participant who has an agreement with us providing that the
individual is entitled to indemnification from us for the 20%
excise tax.
Amendment;
Termination
Our Board of Directors may amend or terminate the 2011 Equity
Incentive Plan at any time, provided that no amendment may
adversely impair the rights of participants under outstanding
awards. Our stockholders must approve any amendment if such
approval is required under applicable law or stock exchange
requirements. Our stockholders also must approve any amendment
that materially increases the benefits accruing to participants
under the 2011 Equity Incentive Plan, materially modifies the
eligibility requirements of the 2011 Equity Incentive Plan,
materially increases the aggregate number of shares of common
stock that may be issued under the 2011 Equity Incentive Plan,
reduces the option price of an outstanding option or reduces the
base or initial price of an outstanding stock appreciation right
(in each case other than on account of stock dividends, stock
splits or other changes in capitalization as described above).
Unless terminated sooner by our Board of Directors or extended
with stockholder approval, the 2011 Equity Incentive Plan will
terminate on the day before the tenth anniversary of the date
our Board of Directors adopted the 2011 Equity Incentive Plan.
Indemnification
of Directors and Executive Officers and Limitations on
Liability
For information concerning limitations of liability and
indemnification applicable to our directors and executive
officers and employees, if any, see “Certain Provisions of
Maryland Law and of Our Charter and Bylaws,” and
“Certain Relationships and Related Transactions —
Indemnification Agreements.”
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Purchases of
Warrants and Common Stock by Bimini
Bimini is currently our sole stockholder. Prior to the
completion of this offering, we intend to enter into a warrant
purchase agreement with Bimini pursuant to which it will agree
to purchase warrants exercisable for an aggregate of
2,655,000 shares of common stock at an exercise price of
110% of the price per share of the common stock sold in
this offering. The aggregate purchase price for the warrants to
be purchased by Bimini in the concurrent private placement will
be $1,248,000. Upon the completion of this offering, Bimini will
own 1,063,830 shares (after giving effect to the Stock
Dividend) of our common stock for an aggregate purchase price of
$15.0 million. As a result of these transactions, Bimini
will own approximately 41.7% of our outstanding common stock
upon completion of this offering and the concurrent private
placement, on a fully-diluted basis after giving effect to the
issuance of our common stock upon exercise of the warrants (or
approximately 38.3% if the underwriters exercise their option to
purchase additional shares in full).
Purchases of
Agency RMBS from Bimini
On March 31, 2011, we purchased from Bimini Agency RMBS
with a fair value of $1,056,421 for a purchase price of
$1,071,040 (including $14,620 of accrued interest). We
determined the fair value of the Agency RMBS purchased from
Bimini pursuant to the valuation methodology described in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies — Mortgage-Backed
Securities.” We purchased these assets from Bimini based on
our Manager’s management team’s knowledge of such
assets. We currently do not anticipate that we will enter into
any cross transactions or principal transactions after the
completion of this offering.
Management
Agreement
We are currently managed by Bimini. Upon completion of this
offering, we will be externally managed and advised by our
Manager pursuant to a management agreement, pursuant to which
our Manager will manage our
day-to-day
operations. Under our existing management agreement with Bimini,
which will be terminated upon the completion of this offering
and replaced by a new management agreement with our Manager, we
paid Bimini aggregate management fees of $5,500 for the period
beginning on November 24, 2010 (date operations commenced)
to December 31, 2010, and we paid Bimini aggregate
management fees of $20,900 for the three months ended
March 31, 2011. Under our new management agreement, we will
pay our Manager a monthly management fee and will reimburse our
Manager for certain expenses. Our Manager will earn a management
fee regardless of the performance of our investments. See
“Our Manager and the Management Agreement — Our
Management Agreement” for more information regarding the
services our Manager will provide to us and the fees we will pay
to our Manager.
Payment of
Underwriting Discount and Commissions and Certain Offering
Expenses
Pursuant to the underwriting agreement among the underwriters,
our Manager, Bimini and us, our Manager will pay the
underwriters $ per share with
respect to each share of common stock sold in this offering on a
deferred basis after the completion of this offering. Our
Manager will pay the underwriters all of the management fees it
receives from us each month until it has paid the underwriters
an aggregate amount of $ .
In addition, our Manager has agreed to pay the offering expenses
that exceed an amount equal to 1.0% of the total gross proceeds
from this offering.
Consulting
Agreement
In September 2010, we entered into a consulting agreement with W
Coleman Bitting, who has agreed to become one of our independent
directors. The terms of the consulting agreement provide
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that Mr. Bitting will advise us with respect to financing
alternatives, business strategies and related matters as
requested during the term of the agreement. Although there is no
defined term of the agreement, it can be terminated by either
party and at any time upon 10 days’ written notice. In
exchange for his services, the consulting agreement provides
that we will pay Mr. Bitting an hourly fee of $150 and
reimburse him for all
out-of-pocket
expenses reasonably incurred in the performance of his services.
To date, we have paid Mr. Bitting a total of approximately
$52,000. We intend to terminate this consulting agreement upon
completion of this offering.
Registration
Rights Agreement
We will enter into a registration rights agreement with regard
to the common stock owned by Bimini upon completion of this
offering and the common stock issuable to Bimini upon exercise
of the warrants it intends to purchase in the concurrent private
placement. Pursuant to the registration rights agreement, on the
first anniversary of the completion of this offering, we will
grant to (i) Bimini and its transferees demand registration
rights to have its shares of common stock registered for resale,
provided that no holder may request more than two demand
registrations, and (ii) solely Bimini, in certain
circumstances, the right to “piggy-back” these shares
in registration statements we might file in connection with any
future public offering, so long as Bimini holds these shares.
Notwithstanding the foregoing, these registration rights will be
subject to underwriter cutback provisions, and we will be
permitted to suspend the use, from time to time, of the
prospectus that is part of the registration statement (and
therefore suspend sales under the registration statement) for
certain periods, referred to as “blackout periods.”
Indemnification
Agreements
We intend to enter into indemnification agreements with each of
our directors and executive officers. The indemnification
agreements will require, among other things, that we indemnify
our directors and certain officers to the fullest extent
permitted by law and advance to our directors and certain
officers all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted.
Related Person
Transaction Policies
We expect our Board of Directors to adopt a policy providing
that any investment transaction between Bimini, our Manager or
any of their affiliates and us or any of our subsidiaries
requires the prior approval of a majority of our independent
directors.
We also expect our Board of Directors to adopt a policy
regarding the approval of any “related person
transaction”, which is any transaction or series of
transactions in which we or any of our subsidiaries is or are to
be a participant, the amount involved exceeds $120,000 and a
“related person” (as defined under SEC rules) has a
direct or indirect material interest. Under the policy, a
related person would need to promptly disclose to the audit
committee any related person transaction and all material facts
about the transaction. The audit committee would then assess and
promptly communicate that information to our Board of Directors.
Based on its consideration of all of the relevant facts and
circumstances, this committee will decide whether or not to
approve such transaction and will generally approve only those
transactions that do not create a conflict of interest. If we
become aware of an existing related person transaction that has
not been pre-approved under this policy, the transaction will be
referred to this committee, which will evaluate all options
available, including ratification, revision or termination of
such transaction. Our policy requires any director who may be
interested in a related person transaction to recuse himself or
herself from any consideration of such related person
transaction.
In fulfilling its responsibility, the audit committee will
review the relevant facts of each related person transaction or
series of related transactions and either approve, ratify or
disapprove such transaction or transactions. The audit committee
will take into account such factors as it deems
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necessary or appropriate in deciding whether to approve, ratify
or disapprove any related person transaction, including any one
or more of the following:
| • | The terms of the transaction; | |
| • | The benefits to the Company of the transaction; | |
| • | The availability of other sources for comparable products or services; | |
| • | The terms available to unrelated third parties or to employees generally; and | |
| • | The impact on a director’s independence in the event that such director is a party to the transaction or such director, an immediately family member of such director or an entity in which such director is an executive officer or has a direct or indirect material interest is a party to the transaction. |
No director may participate in any consideration or approval of
a related person transaction with respect to which such director
or any of such director’s immediate family members is the
related person or has a direct or indirect material interest.
Related person transactions will only be approved if they are
determined to be in, or not inconsistent with, the best
interests of the Company.
On an annual basis, the Company will solicit information from
each of the Company’s directors and executive officers to
identify related person transactions. If a related person
transaction that has not been previously approved or previously
ratified is identified, the audit committee will promptly
consider all of the relevant facts. If the transaction is
ongoing, the audit committee may ratify or request the
rescission, amendment or termination of the related person
transaction. If the transaction has been completed, the audit
committee may seek to rescind the transaction where appropriate
and may recommend that our Board of Directors or the Company
take appropriate disciplinary action where warranted. In
addition, the audit committee will generally review any ongoing
related person transactions on an annual basis to determine
whether to continue, modify or terminate such related person
transactions.
In addition, our code of business conduct and ethics, which is
reviewed and approved by our Board of Directors and provided to
all our directors, officers and the persons who provide services
to us pursuant to the management agreement will require that all
such persons avoid any situations or relationships that involve
actual or potential conflicts of interest, or perceived
conflicts of interest, between an individual’s personal
interests and the interests of the Company. Pursuant to our code
of business conduct and ethics, each of these persons must
disclose any conflicts of interest, or actions or relationships
that might give rise to a conflict, to their supervisor or our
secretary. If a conflict is determined to exist, the person must
disengage from the conflict situation or terminate his provision
of services to us. Our Chief Executive Officer, Chief Financial
Officer, principal accounting officer and certain other persons
who may be designated by our Board of Directors, whom we
collectively refer to as our financial executives, must consult
with our audit committee with respect to any proposed actions or
arrangements that are not clearly consistent with our code of
business conduct and ethics. In the event that a financial
executive wishes to engage in a proposed action or arrangement
that is not consistent with our code of business conduct and
ethics, the executive must obtain a waiver of the relevant
provisions of our code of business conduct and ethics in advance
from our audit committee.
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DESCRIPTION OF
SECURITIES
The following is a summary of the rights and preferences of our
securities and related provisions of our charter and bylaws as
they will be in effect upon the closing of this offering. While
we believe that the following description covers the material
terms of our securities, the description may not contain all of
the information that is important to you. We encourage you to
read carefully this entire prospectus, our charter and bylaws
and the other documents we refer to for a more complete
understanding of our securities. Copies of our charter and
bylaws will be filed as exhibits to the registration statement
of which this prospectus is a part. See “Where You Can Find
More Information.”
General
Immediately following the closing of this offering, our
authorized capital stock will consist of 600,000,000 shares
of which (i) 500,000,000 shares will be designated as
common stock and (ii) 100,000,000 shares will be designated
as preferred stock, each with a par value of $0.01 per share.
Prior to the completion of this offering, we intend to effect a
stock dividend pursuant to which we will issue 6.0922 shares for
each then outstanding share of common stock. Pursuant to such
stock dividend, the 150,000 shares of our common stock that
will be owned by Bimini prior to completion of this offering
will become 1,063,830 shares of our common stock. Upon
completion of this offering, 6,263,830 shares of common stock
will be issued and outstanding and no shares of preferred stock
will be issued and outstanding.
Common
Stock
Immediately before the completion of this offering, we will
amend and restate our charter and our bylaws. Subject to the
preferential rights, if any, of holders of any other class or
series of stock and to the provisions of our charter regarding
restrictions on ownership and transfer of our stock, holders of
shares of our common stock are entitled to receive distributions
if, when and as authorized by our Board of Directors and
declared by us out of assets legally available for distribution.
Subject to the provisions of our charter regarding restrictions
on ownership and transfer of our stock and except as may
otherwise be specified in the terms of any class or series of
capital stock, each outstanding share of our common stock
entitles the holder thereof to one vote on all matters submitted
to a vote of stockholders, including the election of directors.
Except as may be provided with respect to any other class or
series of stock, the holders of such shares will possess the
exclusive voting power. There is no cumulative voting in the
election of our directors, and directors will be elected by a
plurality of the votes cast in the election of directors.
Holders of shares of our common stock have no preference,
conversion, exchange, sinking fund, redemption or appraisal
rights and have no preemptive rights to subscribe for any
securities of the Company. Subject to the provisions of our
charter regarding restrictions on ownership and transfer of our
stock, all holders of our shares of common stock will have equal
liquidation and other rights.
Our charter authorizes our Board of Directors, without
stockholder approval, to reclassify any unissued shares of our
common stock into other classes or series of stock and to
establish the number of shares in each class or series and to
set the preferences, conversion or other rights, voting powers
(including voting rights exclusive to such class or series),
restrictions (including, without limitation, restrictions on
transferability), limitations as to dividends or other
distributions, qualifications and terms and conditions of
redemption for each such class or series.
Preferred
Stock
Our charter authorizes our Board of Directors, without
stockholder approval, to classify any unissued shares of
preferred stock and to reclassify any previously classified but
unissued shares of any class or series of preferred stock. Prior
to issuance of shares of each class or series, our Board of
Directors is required by the MGCL and our charter to set the
preferences, conversion or other rights, voting powers
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(including voting rights exclusive to such class or series),
restrictions (including, without limitation, restrictions on
transferability), limitations as to dividends or other
distributions, qualifications and terms and conditions of
redemption for each such class or series. Thus, our Board of
Directors could authorize the issuance of shares of preferred
stock that have priority over our common stock with respect to
dividends or rights upon liquidation or with terms and
conditions which could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company
that might involve a premium price for holders of our common
stock or otherwise be in their best interests. As of the date of
this prospectus, no shares of preferred stock are outstanding,
and we have no present plans to issue any preferred stock.
Warrants
The warrants we intend to sell to Bimini in the concurrent
private placement will be issued pursuant to a warrant agreement
that we will enter into with Continental Stock
Transfer & Trust Company, as warrant agent,
immediately prior to the completion of the concurrent private
placement. Each warrant entitles the holder to purchase one
share of common stock for an exercise price equal to 110% of the
price per share of the common stock sold in this offering. The
following is a brief summary of certain provisions of the
warrant agreement and does not purport to be complete and is
qualified in its entirety by reference to the warrant agreement.
Exercise of Warrants. Each warrant
entitles the holder to purchase one share of our common stock
for an exercise price equal to
$ per share, subject to
adjustment as set forth below under
“— Anti-Dilution Adjustments.” The warrants
will become exercisable immediately upon their issuance and will
expire at the close of business
on ,
2018. The warrants will be exercisable only for cash. The
warrants have not been and will not be registered under the
Securities Act.
Upon receipt of payment of the exercise price and the warrant
certificate, we will, as soon as practicable, forward the shares
of common stock issuable upon exercise of the warrants. Payment
must be made in cash or by certified or official bank check or
by wire transfer of funds to an account designated by us for
such purpose. We shall at all times during the term of the
warrants keep in reserve sufficient authorized but unissued
shares of common stock for issuances in the event of the
exercise of the warrants.
Valuation of Warrants. We will value
the warrants to be issued to Bimini in the concurrent private
placement using a trinomial pricing model. In determining the
value of the warrants using a trinomial pricing model, we will
use the following assumptions: (i) a warrant term of seven
years, (ii) an exercise price of $8.80 per share,
(iii) an implied volatility rate of our common stock of
22.5%, (iv) an offering price of our common stock of $8.00
per share, (v) a risk-free interest rate of 2.63% and
(vi) a distribution rate on our common stock of 12.5%. The
assumptions listed above are based on our Manager’s
good-faith estimates, and there can be no assurance that these
expectations will be achieved or that the value of the warrants
as determined by a trinomial pricing model will reflect the
actual fair market value of such warrants.
Anti-Dilution Adjustments. The warrants
are subject to customary anti-dilution provisions, including
adjustments to the exercise price and the shares of common stock
deliverable upon exercise of the warrants upon the following
events: (i) stock dividends, subdivisions, combinations and
reclassifications, (ii) self-tenders and (iii) other
distributions and other similar dilutive events (other than
ordinary cash dividends). However, no adjustment of the exercise
price or the number of shares of common stock issuable upon
exercise of the warrants will be made unless the adjustment,
either by itself or with other adjustments not previously made,
increases or decreases by at least 1% the exercise price or the
number of shares of common stock issuable upon exercise of the
warrants immediately prior to making the adjustment.
Power to Increase
or Decrease Authorized Stock and Issue Additional Shares of Our
Common Stock and Preferred Stock
Upon completion of this offering, our charter will provide that
we may issue up to 500,000,000 shares of common stock and
100,000,000 shares of preferred stock. Our charter will
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authorize our Board of Directors, with the approval of a
majority of our entire Board of Directors, to amend our charter
to increase or decrease the aggregate number of authorized
shares of stock or the number of authorized shares of stock of
any class or series without stockholder approval. We believe
that the power of our Board of Directors to increase or decrease
the number of authorized shares of stock and to classify or
reclassify unissued shares of our common stock or preferred
stock and thereafter to cause us 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 which might arise. The
additional classes or series, as well as the additional 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 transaction or a change in control of
the Company that might involve a premium price for our common
stockholders or otherwise be in their best interests.
Restrictions on
Ownership and Transfer
In order to qualify as a REIT under the Code for each taxable
year beginning after December 31, 2011, our shares of stock
must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year. Also, for
our taxable years beginning after December 31, 2011, no
more than 50% of the value of our outstanding shares of capital
stock may be owned, directly or constructively, by five or fewer
individuals (as defined in the Code to include certain entities)
during the second half of any calendar year.
Because our Board of Directors believes it is at present
essential for us to qualify as a REIT, our charter provides
that, subject to certain exceptions, no person or entity may
beneficially or constructively own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8%
in value or in number of shares, whichever is more restrictive,
of the outstanding shares of any class or series of our capital
stock, or the ownership limit, except that Bimini may own up to
44% of our common stock so long as Bimini continues to qualify
as a REIT.
Our charter also prohibits any person from (i) beneficially
or constructively owning or transferring shares of our capital
stock if such ownership or transfer would result in our being
“closely held” under Section 856(h) of the Code
(without regard to whether the ownership interest is held during
the last half of a taxable year) or otherwise cause us to fail
to qualify as a REIT and (ii) transferring shares of our
capital stock if such transfer would result in our capital stock
being beneficially owned by fewer than 100 persons. Any
person who acquires or attempts or intends to acquire beneficial
or constructive ownership of shares of our stock that will or
may violate any of the foregoing restrictions on transfer and
ownership, or who is the intended transferee of shares of our
stock which are transferred to the trust (as described below),
will be required to give written notice immediately to us or in
the case of a proposed or attempted transaction, to give at
least 15 days’ prior written notice, and provide us
with such other information as we may request in order to
determine the effect, if any, of such transfer on our status as
a REIT. The foregoing restrictions on transfer 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, or that compliance with the
restrictions on transfer and ownership is no longer required for
us to qualify as a REIT.
Our Board of Directors, in its sole discretion, may exempt
(prospectively or retroactively) a person from certain of the
limits described above and may establish or increase an excepted
holder limit for such person. The person seeking an exemption
must provide to our Board of Directors any such representations,
covenants and undertakings as our Board of Directors may deem
appropriate in order to conclude that granting the exemption
and/or
establishing or increasing an excepted holder limit, as the case
may be, will not cause us to fail to qualify as a REIT. Our
Board of Directors may also require a ruling from the IRS or an
opinion of counsel in order to determine that granting the
exemption will not cause us to lose our qualification as a REIT.
In connection with granting a waiver of
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the ownership limit or creating an excepted holder limit or at
any other time, our Board of Directors may from time to time
increase or decrease the ownership limit, subject to certain
restrictions.
Our charter provides that to the extent we incur any tax under
the Code as the result of any “excess inclusion
income” of ours being allocated to a “disqualified
organization” that holds our stock in record name, our
Board of Directors will cause us to reduce distributions to such
stockholder in an amount equal to such tax paid by us that is
attributable to such stockholder’s ownership in accordance
with applicable U.S. Treasury regulations. We do not
currently intend to make investments or engage in activities
that generate “excess inclusion income,” but our
charter does not prevent “disqualified organizations”
from owning our common stock. See “Material
U.S. Federal Income Tax Considerations — Taxation
of Our Company” and “— Requirements for
Qualification — Taxable Mortgage Pools” for a
discussion of “disqualified organizations” and
“excess inclusion income.”
Any attempted transfer of our capital stock that, if effective,
would result in a violation of the foregoing restrictions, will
cause the number of shares causing the violation (rounded up to
the nearest whole share) to be automatically transferred to a
charitable trust for the benefit of a charitable beneficiary and
the proposed transferee will not acquire any rights in such
shares, except that any transfer that, if effective, would
result in the violation of the restriction relating to shares of
our capital stock being beneficially owned by fewer than
100 persons will be void ab initio. The automatic transfer
will be effective as of the close of business on the business
day (as defined in our charter) prior to the date of the
transfer. If, for any reason, the transfer to the trust would
not be effective to prevent the violation of the foregoing
restrictions, our charter provides that the purported transfer
in violation of the restrictions will be void ab initio. Shares
of our capital stock held in the trust will be issued and
outstanding shares of stock. The proposed transferee will not
benefit economically from ownership of any shares of stock held
in the trust, will have no rights to dividends or other
distributions and no rights to vote or other rights attributable
to the shares of stock held in the trust.
The trustee of the trust will have all voting rights and rights
to dividends or other distributions with respect to shares held
in the 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 must 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. Any
dividend or other distribution paid to the trustee will be held
in trust for the charitable beneficiary. Subject to Maryland
law, the trustee will have the authority (i) to rescind as
void any vote cast by the proposed transferee prior to our
discovery that the shares have been transferred to the trust and
(ii) to recast the vote in accordance with the desires of
the trustee acting for the benefit of the charitable
beneficiary. However, if we have already taken irreversible
corporate action, then the trustee will not have the authority
to rescind and recast the vote.
Within 20 days of receiving notice from us that shares of
our stock have been transferred to the trust, the trustee must
sell the shares to a person designated by the trustee, whose
ownership of the shares will not violate the above ownership and
transfer limitations. Upon such sale, the interest of the
charitable beneficiary in the shares sold will terminate and the
trustee will distribute the net proceeds of the sale to the
proposed transferee and to the charitable beneficiary as
follows. The proposed transferee will receive the lesser of
(i) the price paid by the proposed transferee for the
shares or, if the proposed transferee did not give value for the
shares in connection with the event causing the shares to be
held in the trust (e.g., a gift, devise or other similar
transaction), the market price (as defined in our charter) of
the shares on the day of the event causing the shares to be held
in the trust and (ii) the price received by the trustee
from the sale or other disposition of the shares (net of any
commissions and other expenses). Any net sale proceeds in excess
of the amount payable to the proposed transferee will be paid
immediately to the charitable beneficiary. The trustee may
reduce the amount payable to the proposed transferee by the
amount of dividends and other distributions paid to the
purported transferee and owed by the proposed transferee to the
trustee. If, prior to our discovery that shares of our stock
have been transferred to the trust, the shares are sold by the
proposed transferee, then (i) the shares will be deemed to
have been sold on behalf of the trust and
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(ii) to the extent that the proposed transferee received an
amount for the shares that exceeds the amount the proposed
transferee was entitled to receive, the excess must be paid to
the trustee upon demand.
In addition, shares of our stock held in the trust will be
deemed to have been offered for sale to us, or our designee, at
a price per share equal to the lesser of (i) the price per
share in the transaction that resulted in the transfer to the
trust (or, in the case of a devise or gift, the market price at
the time of the devise or gift) and (ii) the market price
on the date we accept, or our designee accepts, the offer, which
we may reduce by the amount of dividends and other distributions
paid to the proposed transferee and owed by the proposed
transferee to the trustee. We will have the right to accept the
offer until the trustee has sold the shares. Upon a sale to us,
the interest of the charitable beneficiary in the shares sold
will terminate and the trustee will distribute the net proceeds
of the sale to the proposed transferee and any dividends or
other distributions held by the trustee will be paid to the
charitable beneficiary. If shares of our stock are certificated,
all such certificates will bear a legend referring to the
restrictions described above (or a declaration that we will
furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge).
Every owner of 5% or more (or such lower percentage as required
by the Code or the regulations promulgated thereunder) of all
classes or series of our stock, including shares of common
stock, within 30 days after the end of each taxable year,
must give written notice to us stating the name and address of
such owner, the number of shares of each class and series of
shares of our stock which the owner beneficially owns and a
description of the manner in which the shares are held. Each
owner must also provide to us such additional information as we
may request in order to determine the effect, if any, of the
beneficial ownership on our status as a REIT and to ensure
compliance with the ownership limit. In addition, each owner of
our stock must, upon demand, provide to us 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 and to ensure compliance with the ownership limit.
These ownership limitations could delay, defer or prevent a
transaction or a change in control that might involve a premium
price for our securities or might otherwise be in the best
interests of our stockholders.
Transfer Agent
and Registrar
We expect that the transfer agent and registrar for our common
stock will be Continental Stock Transfer &
Trust Company. Their mailing address is 17 Battery Place,
New York, New York, 10004. Their telephone number is
(212) 845-3200.
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STOCK AVAILABLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that sales
of shares or the availability of shares for sale will have on
the market price of our common stock prevailing from time to
time. Sales of substantial amounts of our common stock in the
public market, or the perception that such sales could occur,
could adversely affect the prevailing market price of our common
stock.
Upon completion of this offering, Bimini will own
1,063,830 shares of our common stock. Upon exercise of the
warrants Bimini intends to purchase in the concurrent private
placement, Bimini will own an additional 2,655,000 shares
of common stock. Upon completion of this offering, we will have
outstanding an aggregate of 8,918,830 shares of our common
stock on a fully-diluted basis after giving effect to the
issuance of our common stock upon exercise of the warrants.
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 of our common stock 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 reported through the NYSE
Amex 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.
Lock-Up
Agreements
We and each of our Manager, our directors and executive officers
will agree that, for a period of 180 days after the date of
this prospectus, without the prior written consent of Barclays
Capital Inc., we and they will not sell, dispose of or hedge any
shares of our common stock, subject to certain exceptions and
extensions in certain circumstances. Additionally, Bimini will
agree that, for a period of 365 days after the date of this
prospectus, it will not, without the prior written consent of
Barclays Capital Inc., dispose of or hedge any of (i) its
shares of our common stock, including any shares of our common
stock issuable upon exercise of the warrant it intends to
purchase in the concurrent private placement, (ii) the warrants
that it intends to purchase in the concurrent private placement
or (iii) any shares of our common stock that it may acquire
after completion of this offering, subject to certain exceptions
and extensions.
Registration
Rights
See “Certain Relationships and Related
Transactions — Registration Rights Agreement,”
for a description of our Registration Rights Agreement with
Bimini.
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CERTAIN
PROVISIONS OF MARYLAND LAW AND
OF OUR CHARTER AND BYLAWS
OF OUR CHARTER AND BYLAWS
The following is a summary of the material provisions of
Maryland law applicable to us and of our charter and bylaws as
they will be in effect upon completion of this offering. Copies
of our charter and bylaws will be filed as exhibits to the
registration statement of which this prospectus is a part. See
“Where You Can Find More Information.”
Our Board of
Directors
Our charter and bylaws provide that the number of directors of
the Company will not be less than the minimum number required
under the MGCL, which is one, and, unless our bylaws are
amended, not more than fifteen and may be increased or decreased
pursuant to our bylaws by a vote of the majority of our entire
Board of Directors. Subject to the rights of holders of one or
more classes or series of preferred stock, any vacancy may be
filled only by a majority of the remaining directors, even if
the remaining directors do not constitute a quorum, and any
director elected to fill a vacancy will serve for the remainder
of the full term of the directorship in which such vacancy
occurred and until a successor is elected and qualifies.
Pursuant to our bylaws, each member of our Board of Directors is
elected by our stockholders to serve until the next annual
meeting of stockholders and until his or her successor is duly
elected and qualifies. Holders of shares of our common stock
will have no right to cumulative voting in the election of
directors, and directors will be elected by a plurality of the
votes cast in the election of directors.
Removal of
Directors
Our charter provides that, subject to the rights of holders of
one or more classes or series of preferred stock to elect or
remove one or more directors, a director may be removed only for
cause and only by the affirmative vote of holders of shares
entitled to cast at least two-thirds of the votes entitled to be
cast generally in the election of directors. “Cause”
is defined in our charter, with respect to any particular
director, as the conviction of a felony or a final judgment of a
court of competent jurisdiction holding that such director
caused demonstrable, material harm to us through bad faith or
active and deliberate dishonesty. This provision, when coupled
with the exclusive power of our Board of Directors to fill
vacant directorships, may preclude stockholders from removing
incumbent directors except for cause and by a substantial
affirmative vote and filling the vacancies created by such
removal with their own nominees.
Business
Combinations
Under the MGCL, certain “business combinations”
(including a merger, consolidation, statutory share exchange or,
in circumstances specified in the statute, an asset transfer or
issuance or reclassification of equity securities) between a
Maryland corporation and an interested stockholder (i.e., any
person (other than the corporation or any subsidiary) who
beneficially owns 10% or more of the voting power of the
corporation’s outstanding voting stock after the date on
which the corporation had 100 or more beneficial owners of its
stock, or an affiliate or associate of the corporation who, at
any time within the two-year period immediately prior to the
date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding stock of the corporation
after the date on which the corporation had 100 or more
beneficial owners of its stock) or an affiliate of 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 between
the Maryland corporation and an interested stockholder generally
must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least
(1) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation 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, unless, among other
conditions, the corporation’s 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
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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.
The board of directors may provide that its approval is subject
to compliance, at or after the time of approval, with any terms
and conditions determined by it.
As permitted by the MGCL, our Board of Directors has adopted a
resolution exempting any business combination between us and any
other person, provided that the business combination is first
approved by our Board of Directors (including a majority of
directors who are not affiliates or associates of such persons).
However, our Board of Directors may repeal or modify this
resolution at any time in the future, in which case the
applicable provisions of this statute will become applicable to
business combinations between us and interested stockholders.
Control Share
Acquisitions
The MGCL provides that holders of “control shares” of
a Maryland corporation acquired in a “control share
acquisition” have no voting rights with respect to the
control shares except to the extent approved by the affirmative
vote of two-thirds of the votes entitled to be cast on the
matter with respect to such shares, excluding votes cast by
(1) the 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:
(1) one-tenth or more but less than one-third,
(2) one-third or more but less than a majority or
(3) a majority or more of all voting power. Control shares
do not include shares 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 issued and outstanding 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), may compel the 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, among
other things: (1) shares acquired in a merger,
consolidation or statutory share exchange if the corporation is
a party to the transaction or (2) acquisitions approved or
exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share
acquisition statute any acquisition by any person of shares of
our stock; however, our Board of Directors may repeal such bylaw
provision, in whole or in part at any time. There can be no
assurance that such provision will not be amended or eliminated
at any time in the future.
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Maryland
Unsolicited Takeovers Act
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 of the MGCL which provide, respectively, that:
| • | the corporation’s board of directors will be divided into three classes; | |
| • | the affirmative vote of two-thirds of all the votes entitled to be cast by stockholders generally in the election of directors is required to remove a director; | |
| • | the number of directors may be fixed only by vote of the directors; | |
| • | a vacancy on the board of directors be filled only by the remaining directors and that directors elected to fill a vacancy will serve for the remainder of the full term of the class of directors in which the vacancy occurred; and | |
| • | the request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting is required for stockholders to require the calling of a special meeting of stockholders. |
Without our having elected to be subject to Subtitle 8, our
charter and bylaws already (1) require the affirmative vote
of holders of shares entitled to cast at least two-thirds of all
the votes entitled to be cast generally in the election of
directors to remove a director from our Board of Directors,
(2) vest in our Board of Directors the exclusive power to
fix the number of directors, by vote of a majority of our entire
Board of Directors, and (3) require, unless called by the
Chairman of our Board of Directors, our Chief Executive Officer,
our President or our Board of Directors, the request of
stockholders entitled to cast not less than a majority of all
the votes entitled to be cast at the meeting to call a special
meeting of stockholders. Our charter provides that, subject to
our eligibility to make an election under Subtitle 8, vacancies
on our Board of Directors may be filled only by the affirmative
vote of a majority of the remaining directors then in office,
even if the remaining directors do not constitute a quorum, and
directors elected to fill a vacancy will serve for the full term
of the directorship in which the vacancy occurred and until his
or her successor is duly elected and qualifies. Our Board of
Directors is not currently classified. In the future, our Board
of Directors may elect, without stockholder approval, to
classify our Board of Directors or elect to be subject to any of
the other provisions of Subtitle 8.
Charter
Amendments and Extraordinary Transactions
Under the MGCL, a Maryland corporation generally cannot
dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a statutory share exchange or
engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders
entitled to cast at least two-thirds of the votes entitled to be
cast on the matter unless a lesser percentage (but not less than
a majority of all of the votes entitled to be cast on the
matter) is set forth in the corporation’s charter. Our
charter generally provides that charter amendments requiring
stockholder approval must be declared advisable by our Board of
Directors and approved by the affirmative vote of stockholders
entitled to cast a majority of all of the votes entitled to be
cast on the matter. However, our charter’s provisions
regarding the removal of directors and restrictions on ownership
and transfer of our stock, and amendments to the vote required
to amend these provisions, may be amended only if such amendment
is declared advisable by our Board of Directors and approved by
the affirmative vote of stockholders entitled to cast not less
than two-thirds of all the votes entitled to be cast on the
matter. In addition, we generally may not merge with or into
another company, sell all or substantially all of our assets,
engage in a share exchange or engage in similar transactions
outside the ordinary course of business unless such transaction
is declared advisable by our Board of Directors and approved by
the affirmative vote of stockholders entitled to cast a majority
of all of the votes entitled to be cast on the matter. However,
because operating assets may be held by
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a corporation’s subsidiaries, as in our situation, this may
mean that one of our subsidiaries could transfer all of its
assets without any vote of our stockholders.
Bylaw
Amendments
Our Board of Directors has the exclusive power to adopt, alter
or repeal any provision of our bylaws and to make new bylaws.
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 other business to be
considered by our stockholders at an annual meeting of
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 was a stockholder of
record both at the time of giving of notice and at the time of
the meeting, who is entitled to vote at the meeting on the
election of the individual so nominated or on such other
business and who has complied with the advance notice procedures
set forth in our bylaws, including a requirement to provide
certain information about the stockholder and its affiliates and
the nominee or business proposal, as applicable.
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 at a special meeting of
stockholders at which directors are to be elected only
(1) by or at the direction of our Board of Directors or
(2) provided that the special meeting has been properly
called for the purpose of electing directors, by a stockholder
who was a stockholder of record both at the time of giving of
notice and at the time of the meeting, who is entitled to vote
at the meeting on the election of each individual so nominated
and who has complied with the advance notice provisions set
forth in our bylaws, including a requirement to provide certain
information about the stockholder and its affiliates and the
nominee.
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 common
stock or otherwise be in the best interests of our stockholders,
including business combination provisions, supermajority vote
and cause requirements for removal of directors, provisions that
vacancies on our Board of Directors may be filled only by the
remaining directors, for the full term of the directorship in
which the vacancy occurred, the power of our Board of Directors
to increase or decrease the aggregate number of authorized
shares of stock or the number of shares of any class or series
of stock, to cause us to issue additional shares of stock of any
class or series and to fix the terms of one or more classes or
series of stock without stockholder approval, the restrictions
on ownership and transfer of our stock and advance notice
requirements for director nominations and stockholder proposals.
Likewise, if the provision in the bylaws opting out of the
control share acquisition provisions of the MGCL or the
resolution of our Board of Directors opting out of the business
combination provisions of the MGCL were repealed or rescinded,
or if a business combination was not first approved by our Board
of Directors, these provisions of the MGCL could have similar
anti-takeover effects.
Limitation of
Directors’ and Officers’ Liability and
Indemnification
The MGCL 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 that is
established by a final judgment and is material to the cause of
action. Our charter contains a provision that eliminates such
liability to the maximum extent permitted by Maryland law.
The MGCL requires a corporation (unless its 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
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defense of any proceeding to which he or she is made, or
threatened to be made, a party by reason of his or her 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:
| • | 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; | |
| • | the director or officer actually received an improper personal benefit in money, property or services; or | |
| • | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
However, under the MGCL, a Maryland corporation may not
indemnify a director or officer for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of
liability on the basis that personal benefit was improperly
received by such director or officer, unless in either case a
court orders indemnification, and then only for expenses. In
addition, the MGCL permits a Maryland corporation to advance
reasonable expenses to a director or officer upon its receipt of:
| • | 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 | |
| • | a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct. |
Our charter authorizes us 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 such a proceeding to:
| • | any present or former director or officer of the Company who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity; and | |
| • | any individual who, while a director or officer of the Company and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, REIT, limited liability company, 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. |
Our charter and bylaws also permit us, with the approval of our
Board of Directors, to indemnify and advance expenses to any
individual who served our predecessor in any of the capacities
described above and to any employee or agent of the Company or
our predecessor.
Upon completion of this offering, we will enter into
indemnification agreements with each of our directors and
executive officers that will provide for indemnification and
advance of expenses to the maximum extent permitted by Maryland
law. See “Certain Relationships and Related
Transactions — Indemnification Agreements.”
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 attempt to qualify, or to continue to qualify, as a
REIT.
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PRINCIPAL
STOCKHOLDERS
The following table sets forth information as to the beneficial
ownership of our common stock as of July 21, 2011 and after
giving effect to the sale of the common stock offered hereby and
shares of common stock issuable upon exercise of the warrants
sold in the concurrent private placement, by (1) each
person or group who is known to us to own beneficially more than
5% of the outstanding shares of our common stock; (2) each
director and named executive officer; and (3) all directors
and executive officers as a group. The number of shares
beneficially owned included in the table below reflects the
stock dividend that we intend to effect prior to the completion
of this offering.
| Amount of Beneficial Ownership(1) | ||||||||||||||||
|
Immediately Prior to |
||||||||||||||||
| this Offering(2) | Immediately After this Offering(3) | |||||||||||||||
|
Number of |
||||||||||||||||
|
Shares of |
Percent of |
|||||||||||||||
|
Name and Address of |
Number of |
Common |
Common |
|||||||||||||
|
Beneficial
Owner(4)
|
Shares | Percent | Stock | Stock | ||||||||||||
|
Bimini Capital Management, Inc.
|
1,063,830 | (5) | 100 | % | 3,718,830 | (6) | 41.7 | % | ||||||||
|
Robert E. Cauley
|
— | — | — | — | ||||||||||||
|
G. Hunter Haas, IV
|
— | — | — | — | ||||||||||||
|
W Coleman Bitting
|
— | — | — | — | ||||||||||||
|
John B. Van Heuvelen
|
— | — | — | — | ||||||||||||
|
Frank P. Filipps
|
— | — | — | — | ||||||||||||
|
Ava L. Parker
|
— | — | — | — | ||||||||||||
|
All directors and executive officers as a group
(six persons)
|
— | — | — | — | ||||||||||||
| (1) | In accordance with SEC rules, beneficial ownership includes: | |
|
• all shares the investor
actually owns beneficially or of record;
|
||
|
• all shares over which
the investor has or shares voting or dispositive control (such
as in the capacity as a general partner of an investment fund);
and
|
||
|
• all shares the investor
has the right to acquire within 60 days (such as upon
exercise of options that are currently vested or which are
scheduled to vest within 60 days).
|
||
| (2) | Gives effect to the Stock Dividend. | |
| (3) | Assumes no exercise of the underwriters’ option to purchase additional shares. | |
| (4) | The address of Bimini Capital Management, Inc. and each of the executive officers and directors listed above is c/o Bimini Capital Management Inc., 3305 Flamingo Dr., Vero Beach, FL 32963. | |
| (5) | Consists of shares of our common stock Bimini will own upon completion of this offering. |
| (6) | Includes 2,655,000 shares of common stock issuable upon exercise of the warrants Bimini intends to purchase in the concurrent private placement. The warrants will become exercisable upon the completion of this offering and will expire at the close of business on , 2018. Shares of common stock issuable upon exercise of the warrants are deemed outstanding for computing the percentage of ownership of the person holding the warrants, but are not deemed outstanding for computing the percentage of any other person. |
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MATERIAL U.S.
FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S. federal income
tax considerations that you, as a stockholder, may consider
relevant in connection with the purchase, ownership and
disposition of our common stock. Hunton & Williams LLP
has acted as our counsel, has reviewed this summary, and is of
the opinion that the discussion contained herein is accurate in
all material respects. Because this section is a summary, it
does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or
tax circumstances, or to certain types of stockholders that are
subject to special treatment under the U.S. federal income
tax laws, such as:
| • | insurance companies; | |
| • | tax-exempt organizations (except to the limited extent discussed in “— Taxation of Tax-Exempt Stockholders” below); | |
| • | financial institutions or broker-dealers; | |
| • | non-U.S. individuals, and non-U.S. corporations (except to the limited extent discussed in “— Taxation of Non-U.S. Stockholders” below); | |
| • | U.S. expatriates; | |
| • | persons who mark-to-market our common stock; | |
| • | subchapter S corporations; | |
| • | U.S. stockholders (as defined below) whose functional currency is not the U.S. dollar; | |
| • | regulated investment companies and REITs; | |
| • | trusts and estates (except to the extent discussed herein); | |
| • | persons who receive our common stock through the exercise of employee stock options or otherwise as compensation; | |
| • | persons holding our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment; | |
| • | persons subject to the alternative minimum tax provisions of the Code; | |
| • | persons holding our common stock through a partnership or similar pass-through entity; and | |
| • | persons holding a 10% or more (by vote or value) beneficial interest in our stock. |
This summary assumes that stockholders hold our common stock as
capital assets for U.S. federal income tax purposes, which
generally means property held for investment.
The statements in this section are not intended to be, and
should not be construed as, tax advice. The statements in this
section are based on the Code, current, temporary and proposed
U.S. Treasury regulations, the legislative history of the
Code, current administrative interpretations and practices of
the IRS, and court decisions. The reference to IRS
interpretations and practices includes the IRS practices and
policies endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that
receives the ruling. In each case, these sources are relied upon
as they exist on the date of this discussion. Future
legislation, U.S. Treasury regulations, administrative
interpretations and court decisions could change current law or
adversely affect existing interpretations of current law on
which the information in this section is based. Any such change
could apply retroactively. We have not received any rulings from
the IRS concerning our qualification as a REIT. Accordingly,
even if there is no change in the applicable law, no assurance
can be provided that the statements made in the following
discussion, which do not bind the IRS or the courts, will not be
challenged by the IRS or will be sustained by a court if so
challenged.
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WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND
SALE OF OUR COMMON STOCK AND OF OUR ELECTION TO BE TAXED AS A
REIT. SPECIFICALLY, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR
REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND
REGARDING POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of Our
Company
We were organized on August 17, 2010 as a Maryland
corporation. From the time of our formation until the closing of
this offering, we will be a “qualified REIT
subsidiary” of Bimini. As described below, a corporation
that is a “qualified REIT subsidiary” is not treated
as a corporation separate from its parent REIT for
U.S. federal income tax purposes. We intend to elect to be
taxed as a REIT commencing with our short taxable year ending on
December 31, 2011. We believe that, commencing with such
short taxable year, we will be organized in conformity with the
requirements for qualification as a REIT under the Code, and we
intend to operate in a manner that will enable us to meet, on a
continuing basis, the requirements for qualification as a REIT,
but no assurances can be given that we will be successful in
operating in a manner so as to qualify or remain qualified as a
REIT. This section discusses the laws governing the
U.S. federal income tax treatment of a REIT and its
stockholders. These laws are highly technical and complex.
In connection with this offering, Hunton & Williams
LLP is rendering an opinion that, commencing with our short
taxable year ending on December 31, 2011, we will be
organized in conformity with the requirements for qualification
and taxation as a REIT under the U.S. federal income tax
laws, and our intended method of operations will enable us to
satisfy the requirements for qualification and taxation as a
REIT under the U.S. federal income tax laws for our short
taxable year ending December 31, 2011 and thereafter.
Investors should be aware that Hunton & Williams
LLP’s opinion is based upon customary assumptions, will be
conditioned upon certain representations made by us as to
factual matters, including representations regarding the nature
of our assets and the conduct of our business, is not binding
upon the IRS, or any court, and speaks as of the date issued. In
addition, Hunton & Williams LLP’s opinion will be
based on existing U.S. federal income tax law governing
qualification as a REIT, which is subject to change either
prospectively or retroactively. Moreover, our qualification and
taxation as a REIT will depend upon our ability to meet on a
continuing basis, through actual annual operating results,
certain qualification tests set forth in the U.S. federal
tax laws. Those qualification tests involve, among others, the
percentage of income that we earn from specified sources, the
percentage of our assets that falls within specified categories,
the diversity of our stock ownership, and the percentage of our
earnings that we distribute. Hunton & Williams LLP
will not review our compliance with those tests on a continuing
basis. Accordingly, no assurance can be given that our actual
results of operations for any particular taxable year will
satisfy such requirements. Hunton & Williams
LLP’s opinion does not foreclose the possibility that we
may have to use one or more REIT savings provisions discussed
below, which could require us to pay an excise or penalty tax
(which could be material) in order for us to maintain our REIT
qualification. For a discussion of the tax consequences of our
failure to qualify as a REIT, see “— Failure to
Qualify.”
As long as we qualify as a REIT, we generally will not be
subject to U.S. federal income tax on the REIT taxable
income that we distribute to our stockholders. However, taxable
income generated by any TRSs that we may own will be subject to
regular corporate income tax. The benefit of REIT tax treatment
is that it avoids the double taxation, or taxation at both the
corporate and stockholder levels, that generally results from
owning stock in a corporation. However, we will be subject to
U.S. federal tax in the following circumstances:
| • | We will pay U.S. federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders during, or within a specified time period after, the calendar year in which the income is earned. |
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| • | We may be subject to the “alternative minimum tax” on any items of tax preference that we do not distribute or allocate to stockholders. | |
| • | We will pay income tax at the highest corporate rate on: |
| • | net income from the sale or other disposition of property acquired through foreclosure, or foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, and | |
| • | other non-qualifying income from foreclosure property. |
| • | We will pay a 100% tax on our net income earned from prohibited transactions involving sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business. | |
| • | If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under “— Gross Income Tests,” and nonetheless continue to qualify as a REIT because we meet other requirements, we will pay a 100% tax on the greater of the amount by which we fail the 75% gross income test or the 95% gross income test multiplied in either case by a fraction intended to reflect our profitability. | |
| • | In the event of a failure of the asset tests (other than a de minimis failure of the 5% asset test or the 10% vote test or the 10% value test (as described below under “— Asset Tests”)), as long as the failure was due to reasonable cause and not to willful neglect, we file a description of the assets that caused such failure with the IRS, and we dispose of the assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identify such failure, we will pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which we failed to satisfy any of the asset tests. | |
| • | If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests or the asset tests, as long as such failure was due to reasonable cause and not to willful neglect, we will be required to pay a penalty of $50,000 for each such failure. | |
| • | If we fail to distribute during a calendar year at least the sum of: |
| • | 85% of our REIT ordinary income for the year, | |
| • | 95% of our REIT capital gain net income for the year, and | |
| • | any undistributed taxable income required to be distributed from earlier periods, |
we will pay a 4% nondeductible excise tax on the excess of the
required distribution over the sum of (1) the amount we
actually distributed and (2) any retained amounts on which
income tax has been paid at the corporate level.
| • | We may elect to retain and pay income tax on our net long-term capital gain. In that case, a U.S. stockholder would be taxed on its proportionate share of our undistributed long-term capital gain (to the extent that we make a timely designation of such gain to the stockholder) and would receive a credit or refund for its proportionate share of the tax we paid. | |
| • | We will be subject to a 100% excise tax on transactions with a TRS that are not conducted on an arm’s-length basis. | |
| • | If we acquire any asset from a C corporation, or a corporation that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by reference either to the C corporation’s basis in the asset or to another asset, we will pay tax at the highest regular corporate rate applicable if we recognize gain on |
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| the sale or disposition of the asset during the 10-year period after we acquire the asset. The amount of gain on which we will pay tax is the lesser of: |
| • | the amount of gain that we recognize at the time of the sale or disposition, and | |
| • | the amount of gain that we would have recognized if we had sold the asset at the time we acquired it. |
| • | 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 a REIT’s stockholders, as described below in “— Recordkeeping Requirements.” | |
| • | The earnings of our lower-tier entities that are subchapter C corporations, including any TRS, will be subject to U.S. federal corporate income tax. | |
| • | In addition, notwithstanding our qualification as a REIT, we may also have to pay certain state and local income taxes, because not all states and localities treat REITs in the same manner that they are treated for U.S. federal income tax purposes. Moreover, as further described below, TRSs will be subject to federal, state and local corporate income tax on their taxable income. | |
| • | Although we do not expect to own an equity interest in a taxable mortgage pool, if we were to own such an interest we would be subject to tax on a portion of any excess inclusion income equal to the percentage of our stock that is held in record name by “disqualified organizations.” A “disqualified organization” includes (i) the United States; (ii) any state or political subdivision of the United states; (iii) any foreign government; (iv) any international organization; (v) any agency or instrumentality of any of the foregoing; (vi) any other tax-exempt organization (other than a farmer’s cooperative described in Section 521 of the Code) that is exempt from income taxation and is not subject to taxation under the unrelated business taxable income provisions of the Code; and (vii) any rural electrical or telephone cooperative. We do not currently intend to engage in financing activities that may result in treatment of us or a portion of our assets as a taxable mortgage pool. For a discussion of “excess inclusion income,” see “— Requirements for Qualification — Taxable Mortgage Pools.” |
Requirements for
Qualification
A REIT is a corporation, trust, or association that meets each
of the following requirements:
(1) It is managed by one or more trustees or directors.
(2) Its beneficial ownership is evidenced by transferable
shares, or by transferable certificates of beneficial interest.
(3) It would be taxable as a domestic corporation, but for
the REIT provisions of the U.S. federal income tax laws.
(4) It is neither a financial institution nor an insurance
company subject to special provisions of the U.S. federal
income tax laws.
(5) At least 100 persons are beneficial owners of its
shares or ownership certificates.
(6) Not more than 50% in value of its outstanding shares or
ownership certificates is owned, directly or indirectly, by five
or fewer individuals, which the Code defines to include certain
entities, during the last half of any taxable year.
(7) It elects to be a REIT, or has made such election for a
previous taxable year, and satisfies all relevant filing and
other administrative requirements established by the IRS that
must be met to elect and maintain REIT status.
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(8) It meets certain other qualification tests, described
below, regarding the nature of its income and assets and the
distribution of its income.
(9) It uses a calendar year for U.S. federal income
tax purposes and complies with the recordkeeping requirements of
the U.S. federal income tax laws.
(10) It has no earnings and profits from any non-REIT
taxable year at the close of any taxable year.
We must meet requirements 1 through 4, 7, 8 and 9 during our
entire taxable year, meet requirement 10 at the close of each
taxable year and meet requirement 5 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. Requirements 5 and 6 will apply to us beginning
with our 2012 taxable year. If we comply with all the
requirements for ascertaining the ownership of our outstanding
stock in a taxable year and have no reason to know that we
violated requirement 6, we will be deemed to have satisfied
requirement 6 for that taxable year. For purposes of determining
share ownership under requirement 6, an “individual”
generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable
purposes. An “individual,” however, generally does not
include a trust that is a qualified employee pension or profit
sharing trust under the U.S. federal income tax laws, and
beneficiaries of such a trust will be treated as holding our
stock in proportion to their actuarial interests in the trust
for purposes of requirement 6.
Our charter provides restrictions regarding the transfer and
ownership of our common stock. See “Description of
Securities — Restrictions on Ownership and
Transfer.” We believe that we will issue sufficient common
stock with sufficient diversity of ownership to allow us to
satisfy requirements 5 and 6 above. The restrictions in our
charter are intended (among other things) to assist us in
continuing to satisfy requirements 5 and 6 described above.
These restrictions, however, may not ensure that we will, in all
cases, be able to satisfy such stock ownership requirements. If
we fail to satisfy these stock ownership requirements, our
qualification as a REIT may terminate.
Qualified REIT Subsidiaries. A corporation
that is a “qualified REIT subsidiary” is not treated
as a corporation separate from its parent REIT. A
“qualified REIT subsidiary” is disregarded for
U.S. federal income tax purposes, and all assets,
liabilities, and items of income, deduction, and credit of a
“qualified REIT subsidiary” are treated as assets,
liabilities, and items of income, deduction, and credit of the
REIT. A “qualified REIT subsidiary” is a corporation,
other than a TRS, all of the capital stock of which is owned by
the REIT and that has not elected to be a TRS. Thus, in applying
the requirements described herein, any “qualified REIT
subsidiary” that we own will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such
subsidiary will be treated as our assets, liabilities, and items
of income, deduction, and credit for all purposes of the Code,
including the REIT qualification tests.
Other Disregarded Entities and
Partnerships. An unincorporated domestic entity,
such as a partnership or limited liability company that has a
single owner, generally is not treated as an entity separate
from its parent for U.S. federal income tax purposes. An
unincorporated domestic entity with two or more owners generally
is treated as a partnership for U.S. federal income tax
purposes. In the case of a REIT that is a partner in a
partnership that has other partners, the REIT is treated as
owning its proportionate share of the assets of the partnership
and as earning its allocable share of the gross income of the
partnership for purposes of the applicable REIT qualification
tests. For purposes of the 10% value test (see
“— Asset Tests”), our proportionate share
will be based on our proportionate interest in the equity
interests and certain debt securities issued by the partnership.
For all of the other asset and income tests, our proportionate
share is based on our proportionate interest in the capital
interests in the partnership. Thus, our proportionate share of
the assets, liabilities, and items of income of any partnership,
joint venture, or limited liability company that is treated as a
partnership for U.S. federal income tax purposes in which
we acquire an interest, directly or indirectly, will be treated
as our assets and gross income for purposes of applying the
various REIT qualification requirements.
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Taxable REIT Subsidiaries. A REIT is permitted
to own up to 100% of the stock of one or more TRSs. A TRS is a
fully taxable corporation that may earn income that would not be
qualifying income if earned directly by the parent REIT. The
subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation with respect to which a TRS
directly or indirectly owns more than 35% of the voting power or
value of the outstanding securities will automatically be
treated as a TRS. However, an entity will not qualify as a TRS
if it directly or indirectly operates or manages a lodging or
health care facility or, generally, provides to another person,
under a franchise, license or otherwise, rights to any brand
name under which any lodging facility or health care facility is
operated. We generally may not own more than 10%, as measured by
voting power or value, of the securities of a corporation that
is not a qualified REIT subsidiary or a REIT unless we and such
corporation elect to treat such corporation as a TRS. Overall,
no more than 25% of the value of a REIT’s total assets may
consist of stock or securities of one or more TRSs.
Domestic TRSs are subject to U.S. federal income tax, as
well as state and local income tax where applicable, on their
taxable income. To the extent that a domestic TRS is required to
pay taxes, it will have less cash available for distribution to
us. If dividends are paid to us by our domestic TRSs, then the
dividends we pay to our stockholders who are taxed at individual
rates, up to the amount of dividends we receive from our
domestic TRSs, will generally be eligible to be taxed at the
reduced 15% rate applicable to qualified dividend income through
2012. See “— Taxation of Taxable
U.S. Stockholders.”
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. Further,
the rules impose a 100% excise tax on transactions between a TRS
and its parent REIT or the REIT’s tenants that are not
conducted on an arm’s-length basis. We intend that all of
our transactions with any TRS that we form will be conducted on
an arm’s-length basis, but there can be no assurance that
we will be successful in this regard.
Taxable Mortgage Pools. An entity, or a
portion of an entity, may be classified as a taxable mortgage
pool, or TMP, under the Code if:
| • | substantially all of its assets consist of debt obligations or interests in debt obligations; | |
| • | more than 50% of those debt obligations are real estate mortgage loans or interests in real estate mortgage loans as of specified testing dates; | |
| • | the entity has issued debt obligations that have two or more maturities; and | |
| • | 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. |
Under U.S. 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 not considered to
comprise “substantially all” of its assets, and
therefore the entity would not be treated as a TMP.
A TMP is generally treated as a corporation for
U.S. federal income tax purposes. It cannot be included in
any consolidated U.S. federal corporate income tax return.
However, if a REIT is a taxable mortgage pool, or if a REIT owns
a qualified REIT subsidiary that is a taxable mortgage pool,
then a portion of the REIT’s income will be treated as
“excess inclusion income” and a portion of the
dividends the REIT pays to its stockholders will be considered
to be excess inclusion income. A stockholder’s share of
excess inclusion income (a) would not be allowed to be
offset by any losses otherwise available to the stockholder,
(b) would be subject to tax as unrelated business taxable
income, or UBTI, in the hands of most types of stockholders that
are otherwise generally exempt from U.S. federal income
tax, and (c) would result in the application of
U.S. federal income tax withholding at the maximum rate
(30%), without reduction under any otherwise applicable income
tax treaty, to the extent allocable to most types of foreign
stockholders. IRS guidance indicates that a REIT’s excess
inclusion income will be allocated among its stockholders in
proportion to its dividends paid. However,
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the manner in which excess inclusion income would be allocated
to dividends attributable to a tax year that are not paid until
a subsequent tax year or to dividends attributable to a portion
of a tax year when no excess inclusion income-generating assets
were held or how such income is to be reported to stockholders
is not clear under current law. Although the law is unclear, the
IRS has taken the position that a REIT is taxable at the highest
corporate tax rate on the portion of any excess inclusion income
that it derives from an equity interest in a TMP equal to the
percentage of its stock that is held in record name by
“disqualified organizations” (as defined above under
“— Taxation of Our Company”). In that case,
under our charter, we will reduce distributions to such
stockholders by the amount of tax paid by us that is
attributable to such stockholder’s ownership.
U.S. Treasury regulations provide that such a reduction in
distributions does not give rise to a preferential dividend that
could adversely affect our compliance with the distribution
requirement. (see “— Distribution
Requirement.”)
If we own less than 100% of the ownership interests in a
subsidiary that is a TMP, 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
federal corporate income tax. In addition, this characterization
would alter our REIT income and asset test calculations and
could adversely affect our compliance with those requirements.
Although we will leverage our investments in Agency RMBS, we
believe that our financing transactions will not cause us or any
portion of our assets to be treated as a TMP, and we do not
expect that any portion of our dividend distributions will be
treated as excess inclusion income.
Gross Income
Tests
We must satisfy two gross income tests annually to qualify as a
REIT. First, at least 75% of our gross income for each taxable
year must consist of defined types of income that we derive,
directly or indirectly, from investments relating to real
property or mortgage loans on real property or qualified
temporary investment income. Qualifying income for purposes of
the 75% gross income test generally includes:
| • | rents from real property; | |
| • | interest on debt secured by a mortgage on real property, or on interests in real property; | |
| • | dividends or other distributions on, and gain from the sale of, shares in other REITs; | |
| • | gain from the sale of real estate assets; | |
| • | income derived from a real estate mortgage investment conduit, or REMIC, in proportion to the real estate assets held by the REMIC, unless at least 95% of the REMIC’s assets are real estate assets, in which case all of the income derived from the REMIC; and | |
| • | income derived from the temporary investment of new capital that is attributable to the issuance of our stock or a public offering of our debt with a maturity date of at least five years and that we receive during the one-year period beginning on the date on which we received such new capital. |
Second, in general, at least 95% of our gross income for each
taxable year must consist of income that is qualifying income
for purposes of the 75% gross income test, other types of
interest and dividends, gain from the sale or disposition of
stock or securities, or any combination of these. Gross income
from our sale of property that we hold primarily for sale to
customers in the ordinary course of business is excluded from
both the numerator and the denominator in both gross income
tests. In addition, income and gain from “hedging
transactions,” as defined in “— Hedging
Transactions,” that we enter into to hedge indebtedness
incurred or to be incurred to acquire or carry real estate
assets and that are clearly and timely identified as such will
be excluded from both the numerator and the denominator for
purposes of the 75% and 95% gross income tests. In addition,
certain foreign currency gains will be excluded from gross
income for purposes of one or both of the gross income tests.
See “— Foreign Currency Gain”. We will
monitor the amount of our non-qualifying
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income and will seek to manage our investment portfolio to
comply at all times with the gross income tests. The following
paragraphs discuss the specific application of the gross income
tests to us.
Interest. The term “interest,” as
defined for purposes of both gross income tests, generally
excludes any amount that is based in whole or in part on the
income or profits of any person. However, interest generally
includes the following:
| • | an amount that is based on a fixed percentage or percentages of receipts or sales; and | |
| • | an amount that is based on the income or profits of a debtor, as long as the debtor derives substantially all of its income from the real property securing the debt from leasing substantially all of its interest in the property, and only to the extent that the amounts received by the debtor would be qualifying “rents from real property” if received directly by a REIT. |
If a loan contains a provision that entitles a REIT to a
percentage of the borrower’s gain upon the sale of the real
property securing the loan or a percentage of the appreciation
in the property’s value as of a specific date, income
attributable to that loan provision will be treated as gain from
the sale of the property securing the loan, which generally is
qualifying income for purposes of both gross income tests.
Interest on debt secured by a mortgage on real property or on
interests in real property, including, for this purpose, market
discount, original issue discount, discount points, prepayment
penalties, loan assumption fees, and late payment charges that
are not compensation for services, generally is qualifying
income for purposes of the 75% gross income test. However, if a
loan is secured by real property and other property and the
highest principal amount of a loan outstanding during a taxable
year exceeds the fair market value of the real property securing
the loan as of the date the REIT agreed to originate or acquire
the loan, a portion of the interest income from such loan will
not be qualifying income for purposes of the 75% gross income
test, but will be qualifying income for purposes of the 95%
gross income test. The portion of the interest income that will
not be qualifying income for purposes of the 75% gross income
test will be equal to the portion of the principal amount of the
loan that is not secured by real property — that is,
the amount by which the loan exceeds the value of the real
estate that is security for the loan.
We intend to invest in Agency RMBS that are pass-through
certificates and CMOs (including IOs, IIOs, and POs). Other
than income from derivative instruments, as described below, we
expect that all of the income on our Agency RMBS will be
qualifying income for purposes of the 95% gross income test. We
expect that the Agency RMBS that are pass-through certificates
will be treated as interests in a grantor trust and that Agency
RMBS that are CMOs will be treated as regular interests in a
REMIC for U.S. federal income tax purposes. In the case of
Agency RMBS treated as interests in a grantor trust, we would be
treated as owning an undivided beneficial ownership interest in
the mortgage loans held by the grantor trust. The interest on
such mortgage loans would be qualifying income for purposes of
the 75% gross income test to the extent that the obligation is
secured by real property, as discussed above. Although the IRS
has ruled generally that the interest income from non-CMO Agency
RMBS is qualifying income for purposes of the 75% gross income
test, it is not clear how this guidance would apply to secondary
market purchases of non-CMO Agency RMBS at a time when the
loan-to-value
ratio of one or more of the mortgage loans backing the Agency
RMBS is greater than 100%. In the case of Agency RMBS treated as
interests in a REMIC, such as CMOs, income derived from REMIC
interests will generally be treated as qualifying income for
purposes of the 75% gross income test. If less than 95% of the
assets of the REMIC are real estate assets, however, then only a
proportionate part of our income from our interest in the REMIC
will qualify for purposes of the 75% gross income test. Although
the law is not clear, the IRS may take the position that this
test is measured on a quarterly basis. In addition, some REMIC
securitizations include imbedded interest rate swap or cap
contracts or other derivative instruments that potentially could
produce nonqualifying income for the holders of the related
REMIC securities. We expect that a sufficient portion of income
from our Agency RMBS will be qualifying income so that we will
satisfy both the 95% and 75% gross
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income tests. However, there can be no assurance that we will
satisfy both the 95% and 75% gross income tests. We may purchase
Agency RMBS through delayed delivery contracts, including TBAs.
We may recognize income or gains on the disposition of delayed
delivery contracts. For example, rather than take delivery of
the Agency RMBS subject to a TBA, we may dispose of the TBA
through a “roll” transaction in which we agree to
purchase similar securities in the future at a predetermined
price or otherwise, which may result in the recognition of
income or gains. We will account for roll transactions as
purchases and sales. The law is unclear with respect to the
qualification of gains from dispositions of delayed delivery
contracts as gains from the sale of real property (including
interests in real property and interests in mortgages on real
property) or other qualifying income for purposes of the 75%
gross income test. Until we receive a favorable private letter
ruling from the IRS or we receive an opinion of counsel to the
effect that income and gain from the disposition of delayed
delivery contracts should be treated as qualifying income for
purposes of the 75% gross income test, we will limit our gains
from dispositions of delayed delivery contracts and any
non-qualifying income to no more than 25% of our gross income
for each calendar year. Accordingly, our ability to dispose of
delayed delivery contracts through roll transactions or
otherwise could be limited. Moreover, even if we are advised by
counsel that income and gains from dispositions of delayed
delivery contracts should be treated as qualifying income, it is
possible that the IRS could successfully take the position that
such income is not qualifying income. In the event that such
income were determined not to be qualifying for the 75% gross
income test, we could be subject to a penalty tax or we could
fail to qualify as a REIT if such income and any non-qualifying
income exceeds 25% of our gross income. See
“— Failure to Qualify.”
Dividends. Our share of any dividends received
from any corporation (including any TRS, but excluding any REIT)
in which we own an equity interest will qualify for purposes of
the 95% gross income test but not for purposes of the 75% gross
income test. Our share of any dividends received from any other
REIT in which we own an equity interest will be qualifying
income for purposes of both gross income tests.
Fee Income. Fee income will be qualifying
income for purposes of both the 75% and 95% gross income tests
if it is 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, such as
fees received for servicing or originating loans, are not
qualifying for purposes of either gross income test. We
currently do not anticipate earning non-qualifying fee income.
Foreign Currency Gain. Certain foreign
currency gains will be excluded from gross income for purposes
of one or both of the gross income tests. “Real estate
foreign exchange gain” is excluded from gross income for
purposes of the 75% gross income test. Real estate foreign
exchange gain generally includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 75% gross income test, foreign
currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations secured by
mortgages on real property or on interest in real property and
certain foreign currency gain attributable to certain
“qualified business units” of a REIT. “Passive
foreign exchange gain” is excluded from gross income for
purposes of the 95% gross income test. Passive foreign exchange
gain generally includes real estate foreign exchange gain as
described above, and also includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 95% gross income test and foreign
currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations. Because
passive foreign exchange gain includes real estate foreign
exchange gain, real estate foreign exchange gain is excluded
from gross income for purposes of both the 75% and 95% gross
income tests. These exclusions for real estate foreign exchange
gain and passive foreign exchange gain do not apply to foreign
currency gain derived from dealing, or engaging in substantial
and regular trading, in securities. Such gain is treated as
nonqualifying income for purposes of both the 75% and 95% gross
income tests.
Rents from Real Property. We currently do not
hold, and do not intend to acquire, any real property, but we
may acquire real property or an interest therein in the future.
To the extent that we acquire real property or an interest
therein, rents we receive will qualify as “rents from real
property” in
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satisfying the gross income requirements for a REIT described
above only if the following conditions are met:
| • | First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from rents from real property solely by reason of being based on fixed percentages of receipts or sales. | |
| • | Second, rents we receive from a “related party tenant” will not qualify as rents from real property in satisfying the gross income tests unless the tenant is a TRS, and either (i) at least 90% of the property is leased to unrelated tenants and the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space or (ii) the TRS leases a qualified lodging facility or qualified health care property and engages an “eligible independent contractor” to operate such facility or property on its behalf. A tenant is a related party tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of the tenant. | |
| • | Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property. | |
| • | Fourth, we generally must not operate or manage our real property or furnish or render noncustomary services to our tenants, other than through an “independent contractor” who is adequately compensated and from whom we do not derive revenue. However, we may provide services directly to tenants if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not considered to be provided for the tenants’ convenience. In addition, we may provide a minimal amount of “noncustomary” services to the tenants of a property, other than through an independent contractor, as long as our income from the services (valued at not less than 150% of our direct cost of performing such services) does not exceed 1% of our income from the related property. Furthermore, we may own up to 100% of the stock of a TRS, which may provide customary and noncustomary services to tenants without tainting our rental income from the related properties. |
Hedging Transactions. From time to time, we
will enter into hedging transactions with respect to one or more
of our assets or liabilities. Income and gain from “hedging
transactions” will be excluded from gross income for
purposes of the 95% gross income test and the 75% gross income
test. A “hedging transaction” includes any transaction
entered into in the normal course of our trade or business
primarily to manage the risk of interest rate changes, 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. A
“hedging transaction” also includes any transaction
entered into primarily to manage risk of currency fluctuations
with respect to any item of income or gain that is qualifying
income for purposes of the 75% or 95% gross income test (or any
property which generates such income or gain). We will be
required to clearly identify any such hedging transaction before
the close of the day on which it was acquired, originated, or
entered into and to satisfy other identification requirements.
To the extent that we hedge for other purposes or to the extent
that a portion of the assets financed with the applicable
borrowing are not treated as “real estate assets” (as
described below under “— Asset Tests”) or in
certain other situations, the income from those transactions
will likely be treated as non-qualifying income for purposes of
the gross income tests. We intend to structure any hedging
transactions in a manner that is consistent with satisfying the
requirements for qualification as a REIT, but we cannot assure
you that we will be able to do so. We may, however, find that in
certain instances we must hedge risks incurred by us through
transactions entered into by a TRS. Hedging our risk through a
TRS would be inefficient on an after-tax basis because of the
tax liability imposed on the TRS.
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Prohibited Transactions. A REIT will incur a
100% tax on the net income (including foreign currency gain)
derived from any sale or other disposition of property, other
than foreclosure property, that the REIT holds primarily for
sale to customers in the ordinary course of a trade or business.
Any such income will be excluded from the application of the 75%
and 95% gross income tests. Whether a REIT holds an asset
“primarily for sale to customers in the ordinary course of
a trade or business” depends, however, on the facts and
circumstances in effect from time to time, including those
related to a particular asset. We believe that none of our
assets will be held primarily for sale to customers and that a
sale of any of our assets will not be in the ordinary course of
our business. There can be no assurance, however, that the IRS
will not successfully assert a contrary position, in which case
we would be subject to the prohibited transaction tax on the
gain from the sale of those assets. To the extent we intend to
dispose of an asset that may be treated as held “primarily
for sale to customers in the ordinary course of a trade or
business,” we may contribute the asset to a TRS prior to
the disposition.
Foreclosure Property. We will be subject to
tax at the maximum corporate rate on any income (including
foreign currency gain) from foreclosure property, other than
income that otherwise would be qualifying income for purposes of
the 75% gross income test, less expenses directly connected with
the production of that income. However, gross income from
foreclosure property will qualify under the 75% and 95% gross
income tests as long as the property qualifies as foreclosure
property (see the discussion below regarding the grace period
during which property qualifies as foreclosure property).
Foreclosure property is any real property, including interests
in real property, and any personal property incident to such
real property:
| • | that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or default was imminent on a lease of such property or on indebtedness that such property secured; | |
| • | for which the related loan or lease was acquired by the REIT at a time when the default was not imminent or anticipated; and | |
| • | for which the REIT makes a proper election to treat the property as foreclosure property. |
A REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a
mortgagee-in-possession
and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Property generally ceases to be
foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the
property, or longer if an extension is granted by the Secretary
of the Treasury. This grace period terminates and foreclosure
property ceases to be foreclosure property on the first day:
| • | on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test disregarding income from foreclosure property, or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test disregarding income from foreclosure property; | |
| • | on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or | |
| • | which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income. |
Failure to Satisfy Gross Income Tests. If we
fail to satisfy one or both of the gross income tests for any
taxable year, we nevertheless may qualify as a REIT for that
year if we qualify for relief
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under certain provisions of the U.S. federal income tax
laws. Those relief provisions generally will be available if:
| • | our failure to meet such tests is due to reasonable cause and not due to willful neglect; and | |
| • | following such failure for any taxable year, a schedule of the sources of our income is filed with the IRS. |
We cannot predict, however, whether in all circumstances we
would qualify for the relief provisions. In addition, as
discussed above in “— Taxation of Our
Company,” even if the relief provisions apply, we would
incur a 100% tax on the gross income attributable to the greater
of the amount by which we fail the 75% gross income test or the
95% gross income test, multiplied, in either case, by a fraction
intended to reflect our profitability.
Asset
Tests
To qualify as a REIT, we also must satisfy the following asset
tests at the end of each quarter of each taxable year. First, at
least 75% of the value of our total assets must consist of:
| • | cash or cash items, including certain receivables; | |
| • | government securities; | |
| • | interests in real property, including leaseholds and options to acquire real property and leaseholds; | |
| • | interests in mortgage loans secured by real property; | |
| • | stock (or transferable certificates of beneficial interest) in other REITs; | |
| • | investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or public offerings of debt with at least a five-year term; and | |
| • | regular or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consists of assets that are qualifying real estate-related assets under the U.S. federal income tax laws, determined as if we held such assets, we will be treated as holding directly our proportionate share of the assets of such REMIC. |
Second, of our investments not included in the 75% asset class,
the value of our interest in any one issuer’s securities
(other than any TRS we may own) may not exceed 5% of the value
of our total assets, or the 5% asset test.
Third, of our investments not included in the 75% asset class,
we may not own (i) more than 10% of the total voting power
of any one issuer’s outstanding securities, which we refer
to as the 10% vote test, or (ii) more than 10% of the total
value of any one issuer’s outstanding securities, which we
refer to as the 10% value test.
Fourth, no more than 25% of the value of our total assets may
consist of the securities of one or more TRSs.
Fifth, no more than 25% of the value of our total assets may
consist of the securities of TRSs and other non-TRS taxable
subsidiaries and other assets that are not qualifying assets for
purposes of the 75% asset test, or the 25% securities test.
For purposes of the 5% asset test, the 10% vote test, the 10%
value test and the 25% securities test, the term
“securities” does not include stock in another REIT,
equity or debt securities of
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a qualified REIT subsidiary, mortgage loans or mortgage-backed
securities that constitute real estate assets. For purposes of
the 10% value test, the term “securities” does not
include:
| • | “Straight debt” securities, which is defined as a written unconditional promise to pay on demand or on a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into stock, and (ii) the interest rate and interest payment dates are not contingent on profits, the borrower’s discretion, or similar factors. “Straight debt” securities do not include any securities issued by a partnership or a corporation in which we or any controlled TRS (i.e., a TRS in which we own directly or indirectly more than 50% of the voting power or value of the stock) hold non-“straight debt” securities that have an aggregate value of more than 1% of the issuer’s outstanding securities. However, “straight debt” securities include debt subject to the following contingencies: |
| • | a contingency relating to the time of payment of interest or principal, as long as either (i) there is no change to the effective yield of the debt obligation, other than a change to the annual yield that does not exceed the greater of 0.25% or 5% of the annual yield, or (ii) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt obligations held by us exceeds $1 million and no more than 12 months of unaccrued interest on the debt obligations can be required to be prepaid; and | |
| • | a contingency relating to the time or amount of payment upon a default or prepayment of a debt obligation, as long as the contingency is consistent with customary commercial practice. |
| • | Any loan to an individual or an estate. | |
| • | Any “section 467 rental agreement,” other than an agreement with a related party tenant. | |
| • | Any obligation to pay “rents from real property.” | |
| • | Certain securities issued by governmental entities. | |
| • | Any security issued by a REIT. | |
| • | Any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes to the extent of our interest as a partner in the partnership. | |
| • | Any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes not described in the preceding bullet points if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test described above in “— Gross Income Tests.” |
For purposes of the 10% value test, our proportionate share of
the assets of a partnership is our proportionate interest in any
securities issued by the partnership, without regard to the
securities described in the last two bullet points above.
We expect that our investments in Agency RMBS will be qualifying
assets for purposes of the 75% asset test because they are real
estate assets or government securities. With respect to Agency
RMBS that are pass-through certificates, we expect that the
Agency RMBS will be treated as interests in a grantor trust and
that Agency RMBS that are CMOs (including IOs, IIOs, and
POs) will be treated as regular interests in a REMIC for
U.S. federal income tax purposes. In the case of Agency
RMBS treated as interests in a grantor trust, we would be
treated as owning an undivided beneficial ownership interest in
the mortgage loans held by the grantor trust. Such mortgage
loans will generally qualify as real estate assets to the extent
that they are secured by real property. The IRS recently issued
Revenue Procedure
2011-16,
which provided a safe harbor under which the IRS has stated that
it will not challenge a REIT’s treatment of a loan as
being, in part, a qualifying real estate asset in an amount
equal to the lesser of (1) the fair market value of the
real property securing the loan determined as of the date the
REIT committed to acquire the loan or (2) the fair market
value of the loan on the date of the relevant quarterly REIT
asset testing date. Additionally, although the IRS has ruled
generally that
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Agency RMBS that are pass-through certificates are real estate
assets for purposes of the 75% asset test, it is not clear how
this guidance would apply to secondary market purchases of
Agency RMBS that are pass-through certificates at a time when a
portion of one or more mortgage loans backing the Agency RMBS is
not treated as real estate assets as a result of the loans not
being treated as fully secured by real property. In the case of
Agency RMBS that are CMOs, which will be treated as regular
interests in a REMIC, such interests will generally qualify as
real estate assets. If less than 95% of the assets of the REMIC
are real estate assets, however, then only a proportionate part
of our interest in the REMIC interests will qualify as real
estate assets. Although the law is not clear, the IRS may take
the position that this test is measured on a quarterly basis. To
the extent any Agency RMBS are not treated as real estate
assets, we expect such Agency RMBS will be treated as government
securities because they are issued or guaranteed as to principal
or interest by the United States or by a person controlled or
supervised by and acting as an instrumentality of the government
of the United States pursuant to authority granted by the
Congress of the United States.
We have entered and intend to enter into repurchase agreements
under which we would nominally sell certain of our Agency RMBS
to a counterparty and simultaneously enter into an agreement to
repurchase the sold assets in exchange for a purchase price that
reflects a financing charge. Based on positions the IRS has
taken in analogous situations, we believe that these
transactions will be treated as secured debt and that we will be
treated for REIT asset and gross income test purposes as the
owner of the Agency RMBS 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 Agency RMBS during the term
of the sale and repurchase agreement, in which case we could
fail to qualify as a REIT.
We may purchase Agency RMBS through delayed delivery contracts,
including TBAs. The law is unclear with respect to the
qualification of delayed delivery contracts as real estate
assets or government securities for purposes of the 75% asset
test. Until we receive a favorable private letter ruling from
the IRS or we receive an opinion from counsel to the effect that
delayed delivery contracts should be treated as qualifying
assets for purposes of the 75% asset test, we will limit our
aggregate investment in delayed delivery contracts, including
TBAs, and any nonqualifying assets to no more than 25% of our
total assets at the end of any calendar quarter and will limit
our investment in the delayed delivery contracts of any one
issuer to less than 5% of our total assets at the end of any
calendar quarter. Accordingly, our ability to purchase Agency
RMBS through delayed delivery transactions could be limited.
Moreover, even if we are advised by counsel that delayed
delivery transactions should be treated as qualifying assets, it
is possible that the IRS could successfully take the position
that such assets are not qualifying assets. In the event that
such assets were determined not to be qualifying for the 75%
asset test, we could be subject to a penalty tax or we could
fail to qualify as a REIT. See “— Failure to
Qualify.”
We will monitor the status of our assets for purposes of the
various asset tests and will seek to manage our portfolio to
comply at all times with such tests. There can be no assurance,
however, that we will be successful in this effort. In this
regard, we will need to value our investment in our assets to
ensure compliance with the asset tests. Although we will seek to
be prudent in making these estimates, there can be no assurances
that the IRS might not disagree with these determinations and
assert that a different value is applicable in which case we
might not satisfy the 75% asset test and the other asset tests
and, thus could fail to qualify as a REIT. If we fail to satisfy
the asset tests at the end of a calendar quarter, we will not
lose our REIT status if:
| • | we satisfied the asset tests at the end of the preceding calendar quarter; and | |
| • | the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. |
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If we did not satisfy the condition described in the second
item, above, we still could avoid disqualification by
eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
In the event that we violate the 5% asset test, the 10% vote
test or the 10% value test described above at the end of any
calendar quarter, we will not lose our REIT qualification if
(i) the failure is de minimis (up to the lesser of 1% of
the total value of our assets or $10 million) and
(ii) we dispose of assets or otherwise comply with the
asset tests within six months after the last day of the quarter
in which we identified such failure. In the event of a failure
of any of the asset tests (other than a de minimis failure
described in the preceding sentence), as long as the failure was
due to reasonable cause and not due to willful neglect, we will
not lose our REIT qualification if we (i) dispose of assets
or otherwise comply with the asset tests within six months after
the last day of the quarter in which we identified such failure,
(ii) file a schedule with the IRS describing the assets
that caused such failure in accordance with regulations
promulgated by the Secretary of the Treasury and (iii) pay
a tax equal to the greater of $50,000 or the highest rate of
U.S. federal corporate income tax (currently, 35%) on the
net income from the nonqualifying assets during the period in
which we failed to satisfy the asset tests.
We believe that the investments that we will hold will satisfy
the foregoing asset test requirements. However, we will not
obtain independent appraisals to support our conclusions as to
the value of our assets and securities, or the real estate
collateral for the mortgage loans that support our Agency RMBS.
Moreover, the values of some assets may not be susceptible to a
precise determination. As a result, there can be no assurance
that the IRS will not contend that our ownership of securities
and other assets violates one or more of the asset tests
applicable to REITs.
Distribution
Requirements
Each taxable year we must distribute dividends, other than
capital gain dividends and deemed distributions of retained
capital gain, to our stockholders in an aggregate amount at
least equal to:
| • | the sum of |
| • | 90% of our “REIT taxable income,” computed without regard to the dividends paid deduction and our net capital gain, and | |
| • | 90% of our after-tax net income, if any, from foreclosure property, minus |
| • | the sum of certain items of non-cash income. |
We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if either (a) we
declare the distribution before we timely file our
U.S. federal income tax return for the year and pay the
distribution on or before the first regular dividend payment
date after such declaration, or (b) we declare the
distribution in October, November or December of the taxable
year, payable to stockholders of record on a specified day in
any such month, and we actually pay the dividend before the end
of January of the following year. The distributions under
clause (a) are taxable to the stockholders in the year in
which paid, and the distributions in clause (b) are treated
as paid on December 31 of the prior taxable year. In both
instances, these distributions relate to our prior taxable year
for purposes of the 90% distribution requirement.
We will pay U.S. federal income tax on taxable income,
including net capital gain, that we do not distribute to
stockholders. Furthermore, if we fail to distribute during a
calendar year, or by the end of the following January after the
calendar year in the case of distributions with declaration and
record dates falling in the last three months of the calendar
year, at least the sum of:
| • | 85% of our REIT ordinary income for such year, | |
| • | 95% of our REIT capital gain income for such year, and | |
| • | any undistributed taxable income from prior periods, |
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we will incur a 4% nondeductible excise tax on the excess of
such required distribution over the amounts we actually
distribute. We may elect to retain and pay income tax on the net
long-term capital gain we receive in a taxable year. If we so
elect, we will be treated as having distributed any such
retained amount for purposes of the 4% nondeductible excise tax
described above. We intend to make timely distributions
sufficient to satisfy the annual distribution requirements and
to avoid corporate income tax and the 4% nondeductible excise
tax.
It is possible that, from time to time, we may experience timing
differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of that income
and deduction of such expenses in arriving at our REIT taxable
income. Possible examples of those timing differences include
the following:
| • | Because we may deduct capital losses only to the extent of our capital gains, we may have taxable income that exceeds our economic income. | |
| • | We will recognize taxable income in advance of the related cash flow if any of our Agency RMBS are deemed to have original issue discount. We generally must accrue original issue discount based on a constant yield method that takes into account projected prepayments but that defers taking into account losses until they are actually incurred. | |
| • | We may acquire debt instruments in the secondary market for less than their face amount. The amount of such discount may be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, we dispose of the debt investment or any payment of principal of the debt instrument is made, unless we elect to include accrued market discount in income as it accrues. Principal payments on certain debt instruments are made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions. |
Although several types of non-cash income are excluded in
determining the annual distribution requirement, we will incur
corporate income tax and the 4% nondeductible excise tax with
respect to those non-cash income items if we do not distribute
those items on a current basis. As a result of the foregoing, we
may have less cash than is necessary to distribute all of our
taxable income and thereby avoid corporate income tax and the
excise tax imposed on certain undistributed income. In such a
situation, we may need to borrow funds or, if possible, pay
taxable dividends of our stock or debt securities.
Pursuant to IRS Revenue Procedure
2010-12, the
IRS has indicated that it will treat distributions from
publicly-traded REITs that are paid partly in cash and partly in
stock as dividends that would satisfy the REIT annual
distribution requirements and qualify for the dividends paid
deduction for U.S. federal income tax purposes. In order to
qualify for such treatment, IRS Revenue Procedure
2010-12
requires that at least 10% of the total distribution be payable
in cash and that each stockholder have a right to elect to
receive its entire distribution in cash. If too many
stockholders elect to receive cash, each stockholder electing to
receive cash must receive a proportionate share of the cash to
be distributed (although no stockholder electing to receive cash
may receive less than 10% of such stockholder’s
distribution in cash). IRS Revenue Procedure
2010-12
applies to distributions declared on or before December 31,
2012 with respect to taxable years ending on or before
December 31, 2011. Although Revenue Procedure
2010-12
applies only to taxable dividends payable in cash and stock with
respect to our 2011 taxable year, the IRS has issued private
letter rulings to other REITs granting similar treatment to
elective cash/stock dividends made prior to the issuance of
Revenue Procedure
2010-12.
Those rulings may only be relied upon by the taxpayers to whom
they were issued, but we could request a similar ruling from the
IRS. Accordingly, it is unclear whether and to what extent we
will be able to pay taxable dividends payable in cash and stock
in later years. We currently do not intend to pay taxable
dividends payable in cash and stock.
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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 qualify as a REIT, we may not have, at the end of any taxable
year, any undistributed earnings and profits accumulated in any
non-REIT taxable year. We may satisfy the 90% distribution test
with taxable distributions of our stock or debt securities.
Under certain circumstances, we may be able to correct a failure
to meet the distribution requirement for a year by paying
“deficiency dividends” to our stockholders in a later
year. We may include such deficiency dividends in our deduction
for dividends paid for the earlier year. Although we may be able
to avoid income tax on amounts distributed as deficiency
dividends, we will be required to pay interest to the IRS based
upon the amount of any deduction we take for deficiency
dividends.
Recordkeeping
Requirements
We must maintain certain records in order to qualify as a REIT.
In addition, to avoid a monetary penalty, we must request on an
annual basis information from our stockholders designed to
disclose the actual ownership of our outstanding stock. We
intend to comply with these requirements.
Failure to
Qualify
If we fail to satisfy one or more requirements for REIT
qualification, other than the gross income tests and the asset
tests, we could avoid disqualification if our failure is due to
reasonable cause and not to willful neglect and we pay a penalty
of $50,000 for each such failure. In addition, there are relief
provisions for a failure of the gross income tests and asset
tests, as described in “— Gross Income
Tests” and “— Asset Tests.”
If we fail to qualify as a REIT in any taxable year, and no
relief provision applies, we would be subject to
U.S. federal income tax and any applicable alternative
minimum tax on our taxable income at regular corporate rates. In
calculating our taxable income in a year in which we fail to
qualify as a REIT, we would not be able to deduct amounts paid
out to stockholders. In fact, we would not be required to
distribute any amounts to stockholders in that year. In such
event, to the extent of our current or accumulated earnings and
profits, all distributions to stockholders would be taxable as
ordinary income. Subject to certain limitations of the
U.S. federal income tax laws, corporate stockholders might
be eligible for the dividends received deduction and
stockholders taxed at individual rates might be eligible for the
reduced U.S. federal income tax rate of 15% through 2012 on
such dividends. Unless we qualified for relief under specific
statutory provisions, we also would be disqualified from
taxation as a REIT for the four taxable years following the year
during which we ceased to qualify as a REIT. We cannot predict
whether in all circumstances we would qualify for such statutory
relief.
Taxation of
Taxable U.S. Stockholders
The term “U.S. stockholder” means a beneficial
owner of our common stock that, for U.S. federal income tax
purposes, is:
| • | a citizen or resident of the United States; | |
| • | a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any of its states or the District of Columbia; | |
| • | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
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| • | any trust if (i) 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 (ii) it has a valid election in place to be treated as a U.S. person. |
If a partnership, entity or arrangement treated as a partnership
for U.S. federal income tax purposes holds our common
stock, the U.S. federal income tax treatment of a partner
in the partnership will generally depend on the status of the
partner, the activities of the partnership and certain
determinations made at the partner
and/or
partnership level. If you are a partner in a partnership holding
shares of our common stock, you are urged to consult your tax
advisor regarding the consequences of the ownership and
disposition of our common stock by the partnership.
As long as we qualify as a REIT, a taxable U.S. stockholder
must generally take into account as ordinary income
distributions made out of our current or accumulated earnings
and profits that we do not designate as capital gain dividends
or retained long-term capital gain. A corporate
U.S. stockholder will not qualify for the dividends
received deduction generally available to corporations. In
addition, dividends paid by a REIT to a U.S. stockholder
taxed at individual rates generally will not qualify for the 15%
tax rate for “qualified dividend income.” The maximum
tax rate for qualified dividend income received by
U.S. stockholders taxed at individual rates is 15% through
2012. The maximum tax rate on qualified dividend income is lower
than the maximum tax rate on ordinary income, which is currently
35%. Qualified dividend income generally includes dividends paid
to U.S. stockholders taxed at individual rates by domestic
C corporations and certain qualified foreign corporations.
Because we are not generally subject to U.S. federal income
tax on the portion of our REIT taxable income distributed to our
stockholders, our dividends generally will not be eligible for
the 15% rate on qualified dividend income. As a result, our
ordinary REIT dividends will be taxed at the higher tax rate
applicable to ordinary income. However, the 15% tax rate for
qualified dividend income will apply to our ordinary REIT
dividends, if any, that are (i) attributable to dividends
received by us from non-REIT corporations, such as a TRS, and
(ii) to the extent attributable to income upon which we
have paid corporate income tax (e.g., to the extent that we
distribute less than 100% of our taxable income). In general, to
qualify for the reduced tax rate on qualified dividend income, a
stockholder must hold our common stock for more than
60 days during the
121-day
period beginning on the date that is 60 days before the
date on which our stock becomes ex-dividend. In addition, for
taxable years beginning after December 31, 2012, dividends
paid to certain individuals, trusts or estates will be subject
to a 3.8% Medicare tax. We may pay taxable dividends of our
stock or debt securities. In the case of such a taxable
distribution of our stock or debt securities,
U.S. stockholders would be required to include the dividend
as income and would be required to satisfy the tax liability
associated with the dividend with cash from other sources,
including sales of our stock or debt securities.
As discussed above under “Description of
Securities — Warrants,” warrants will be sold to
Bimini in a concurrent private placement. The terms of the
warrants contain anti-dilution provisions. If the IRS were to
determine that adjustments made pursuant to the anti-dilution
provisions were not made pursuant to a bona fide, reasonable
adjustment formula or there is otherwise a lack of an
appropriate anti-dilution adjustment resulting in an increase in
the proportionate interest of the holders of our common stock in
our earnings and profits or assets, such increase may result in
a constructive distribution that could be taxable as a dividend
to the holders of shares of common stock.
A U.S. stockholder generally will take into account as
long-term capital gain any distributions that we properly
designate as capital gain dividends without regard to the period
for which the U.S. stockholder has held our common stock.
We generally will designate our capital gain dividends as either
15% or 25% rate distributions. See “— Capital
Gains and Losses.” A corporate U.S. stockholder,
however, may be required to treat up to 20% of certain capital
gain dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term
capital gain that we recognize in a taxable year. In that case,
to the extent we designate such amount on a timely notice to
such stockholder, a U.S. stockholder would be taxed on its
proportionate share of our undistributed long-term capital gain.
The U.S. stockholder would receive a credit or refund for
its proportionate share of
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the tax we paid. The U.S. stockholder would increase the
basis in its common stock by the amount of its proportionate
share of our undistributed long-term capital gain, minus its
share of the tax we paid.
A U.S. stockholder will not incur tax on a distribution in
excess of our current or accumulated earnings and profits if the
distribution does not exceed the adjusted basis of the
U.S. stockholder’s common stock. Instead, the
distribution will reduce the adjusted basis of the
U.S. stockholder’s common stock. A
U.S. stockholder will recognize a distribution in excess of
both our current and accumulated earnings and profits and the
U.S. stockholder’s adjusted basis in his or her common
stock as long-term capital gain, or short-term capital gain if
the common stock has been held for one year or less. In
addition, if we declare a distribution in October, November or
December of any year that is payable to a U.S. stockholder
of record on a specified date in any such month, such
distribution shall be treated as both paid by us and received by
the U.S. stockholder on December 31 of such year, provided
that we actually pay the distribution during January of the
following calendar year.
Stockholders may not include in their individual income tax
returns any of our net operating losses or capital losses.
Instead, these losses are generally carried over by us for
potential offset against our future income. Taxable
distributions from us and gain from the disposition of our
common stock will not be treated as passive activity income and,
therefore, stockholders generally will not be able to apply any
“passive activity losses,” such as losses from certain
types of limited partnerships in which the stockholder is a
limited partner, against such income. In addition, taxable
distributions from us and gain from the disposition of our
common stock generally will be treated as investment income for
purposes of the investment interest limitations. We will notify
stockholders after the close of our taxable year as to the
portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and capital gain.
We may recognize taxable income in excess of our economic
income, known as phantom income, in the first years that we hold
certain investments, and experience an offsetting excess of
economic income over our taxable income in later years. As a
result, stockholders at times may be required to pay
U.S. federal income tax on distributions that economically
represent a return of capital rather than a dividend. These
distributions would be offset in later years by distributions
representing economic income that would be treated as returns of
capital for U.S. federal income tax purposes. Taking into
account the time value of money, this acceleration of
U.S. federal income tax liabilities may reduce a
stockholder’s after-tax return on his or her investment to
an amount less than the after-tax return on an investment with
an identical before-tax rate of return that did not generate
phantom income. For example, if an investor with a 30% tax rate
purchases a taxable bond with an annual interest rate of 10% on
its face value, the investor’s before-tax return on the
investment would be 10% and the investor’s after-tax return
would be 7%. However, if the same investor purchased our common
stock at a time when the before-tax rate of return was 10%, the
investor’s after-tax rate of return on such common stock
might be somewhat less than 7% as a result of our phantom
income. In general, as the ratio of our phantom income to our
total income increases, the after-tax rate of return received by
a taxable stockholder will decrease.
If excess inclusion income from a taxable mortgage pool is
allocated to any stockholder, that income will be taxable in the
hands of the stockholder and will not be offset by any net
operating losses of the stockholder that would otherwise be
available. See “— Requirements for
Qualification — Taxable Mortgage Pools.” As
required by IRS guidance, we intend to notify our stockholders
if a portion of a dividend paid by us is attributable to excess
inclusion income.
Taxation of U.S.
Stockholders on the Disposition of Common Stock
A U.S. stockholder who is not a dealer in securities must
generally treat any gain or loss realized upon a taxable
disposition of our common stock as long-term capital gain or
loss if the U.S. stockholder has held the common stock for
more than one year and otherwise as short-term capital gain or
loss. In general, a U.S. stockholder will realize gain or
loss in an amount equal to the difference between the sum of the
fair market value of any property and the amount of cash
received
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in such disposition and the U.S. stockholder’s
adjusted tax basis. A stockholder’s adjusted tax basis
generally will equal the U.S. stockholder’s
acquisition cost, increased by the excess of net capital gains
deemed distributed to the U.S. stockholder (discussed
above) less tax deemed paid on such gains and reduced by any
returns of capital. However, a U.S. stockholder must treat
any loss upon a sale or exchange of common stock held by such
stockholder for six-months or less as a long-term capital loss
to the extent of capital gain dividends and any other actual or
deemed distributions from us that such U.S. stockholder
treats as long-term capital gain. All or a portion of any loss
that a U.S. stockholder realizes upon a taxable disposition
of our common stock may be disallowed if the
U.S. stockholder purchases our common stock or
substantially identical common stock within 30 days before
or after the disposition.
Capital Gains and
Losses
A taxpayer generally must hold a capital asset for more than one
year for gain or loss derived from its sale or exchange to be
treated as long-term capital gain or loss. The highest marginal
individual income tax rate currently is 35% (which rate, absent
additional congressional action, will apply until
December 31, 2012). The maximum tax rate on long-term
capital gain applicable to taxpayers taxed at individual rates
is 15% for sales and exchanges of assets held for more than one
year occurring through December 31, 2012. Absent additional
congressional action, this rate will increase to 20% for sales
and exchanges occurring after December 31, 2012. The
maximum tax rate on long-term capital gain applicable to
non-corporate taxpayers is 15% through December 31, 2012.
The maximum tax rate on long-term capital gain from
“section 1250 property,” or depreciable real
property, is 25%, which applies to the lesser of the total
amount of the gain or the accumulated depreciation on the
Section 1250 property. In addition, for taxable years
beginning after December 31, 2012, capital gains recognized
by certain individuals, trusts or estates will be subject to a
3.8% Medicare tax.
With respect to distributions that we designate as capital gain
dividends and any retained capital gain that we are deemed to
distribute, we generally may designate whether such a
distribution is taxable to our stockholders taxed at individual
rates at a 15% or 25% rate. Thus, the tax rate differential
between capital gain and ordinary income for those taxpayers may
be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate
taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer may deduct
capital losses only to the extent of capital gains, with unused
losses being carried back three years and forward five years.
Taxation of
Tax-Exempt Stockholders
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 UBTI. While many
investments in real estate generate UBTI, the IRS has issued a
ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the
exempt employee pension trust does not otherwise use the shares
of the REIT in an unrelated trade or business of the pension
trust. Based on that ruling, amounts that we distribute to
tax-exempt stockholders generally should not constitute UBTI.
However, if a tax-exempt stockholder were to finance its
investment in our common stock with debt, a portion of the
income that it receives from us would constitute UBTI pursuant
to the “debt-financed property” rules. Moreover,
social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under special
provisions of the U.S. federal income tax laws are subject
to different UBTI rules, which generally will require them to
characterize distributions that they receive from us as UBTI.
Furthermore, a tax-exempt stockholder’s share of any excess
inclusion income that we recognize would be subject to tax as
UBTI.
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Finally, in certain circumstances, a qualified employee pension
or profit sharing trust that owns more than 10% of our stock is
required to treat a percentage of the dividends that it receives
from us as UBTI. Such percentage is equal to the gross income
that we derive from an unrelated trade or business, determined
as if we were a pension trust, divided by our total gross income
for the year in which we pay the dividends. That rule applies to
a pension trust holding more than 10% of our stock only if:
| • | the percentage of our dividends that the tax-exempt trust would be required to treat as UBTI is at least 5%; | |
| • | we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our stock be owned by five or fewer individuals that allows the beneficiaries of the pension trust to be treated as holding our stock in proportion to their actuarial interests in the pension trust; and | |
| • | either: (i) one pension trust owns more than 25% of the value of our stock or (ii) a group of pension trusts individually holding more than 10% of the value of our stock collectively owns more than 50% of the value of our stock. |
Taxation of
Non-U.S.
Stockholders
The following discussion addresses the rules governing
U.S. federal income taxation of the purchase, ownership and
sale of our common stock by
non-U.S. stockholders.
When we use the term
“non-U.S. stockholder,”
we mean beneficial owners of our common stock who are not
U.S. stockholders as described above in
“— Taxation of Taxable
U.S. Stockholders,” or partnerships (or entities or
arrangements treated as partnerships for U.S. federal
income tax purposes). The rules governing U.S. federal
income taxation of
non-U.S. stockholders
are complex. This section is only a summary of such rules. We
urge
non-U.S. stockholders
to consult their own tax advisers to determine the impact of
federal, state, and local income tax laws on ownership of our
common stock, including any reporting requirements.
A
non-U.S. stockholder
that receives a distribution that is not attributable to gain
from our sale or exchange of a “United States real property
interest,” or USRPI, as defined below, and that we do not
designate as a capital gain dividend or retained capital gain
will recognize ordinary income to the extent that we pay the
distribution out of our current or accumulated earnings and
profits. A withholding tax equal to 30% of the gross amount of
the distribution ordinarily will apply unless an applicable tax
treaty reduces or eliminates the tax. However, if a distribution
is treated as effectively connected with the
non-U.S. stockholder’s
conduct of a U.S. trade or business, the
non-U.S. stockholder
generally will be subject to U.S. federal income tax on the
distribution at graduated rates, in the same manner as
U.S. stockholders are taxed on distributions and also may
be subject to the 30% branch profits tax in the case of a
corporate
non-U.S. stockholder.
It is expected that the applicable withholding agent will
withhold U.S. income tax at the rate of 30% on the gross
amount of any distribution paid to a
non-U.S. stockholder
unless either:
| • | a lower treaty rate applies and the non-U.S. stockholder files with the applicable withholding agent an IRS Form W-8BEN evidencing eligibility for that reduced rate, or | |
| • | the non-U.S. stockholder files with the applicable withholding agent an IRS Form W-8ECI claiming that the distribution is effectively connected income. |
However, reduced treaty rates are not available to the extent
income allocated to the
non-U.S. stockholder
is excess inclusion income.
A
non-U.S. stockholder
will not incur U.S. tax on a distribution in excess of our
current or accumulated earnings and profits if the excess
portion of the distribution does not exceed the adjusted basis
of its common stock. Instead, the excess portion of the
distribution will reduce the adjusted basis of that common
stock. A
non-U.S. stockholder
will be subject to tax on a distribution that exceeds
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both our current and accumulated earnings and profits and the
adjusted basis of its common stock, if the
non-U.S. stockholder
otherwise would be subject to tax on gain from the sale or
disposition of its common stock, as described below. Because we
generally cannot determine at the time we make a distribution
whether or not the distribution will exceed both our current and
accumulated earnings and profits, it is expected that the
applicable withholding agent normally will withhold tax on the
entire amount of any distribution at the same rate as it would
withhold on a dividend. However, by filing a U.S. tax
return, a
non-U.S. stockholder
may obtain a refund of amounts that the applicable withholding
agent withheld if we later determine that a distribution in fact
exceeded our current and accumulated earnings and profits.
For taxable years beginning after December 31, 2012, a
U.S. withholding tax at a 30% rate will be imposed on
dividends and proceeds of sale in respect of our common stock
received by certain
non-U.S. stockholders
if certain disclosure requirements related to U.S. accounts
or ownership are not satisfied. If payment of withholding taxes
is required,
non-U.S. stockholders
that are otherwise eligible for an exemption from, or reduction
of, U.S. withholding taxes with respect to such dividends
and proceeds will be required to seek a refund from the IRS to
obtain the benefit of such exemption or reduction. We will not
pay any additional amounts in respect to any amounts withheld.
For any year in which we qualify as a REIT, a
non-U.S. stockholder
could incur tax on distributions that are attributable to gain
from our sale or exchange of USRPI, under the Foreign Investment
in Real Property Act of 1980, or FIRPTA. A USRPI includes
certain interests in real property and shares in corporations at
least 50% of whose assets consist of interests in real property.
The term “USRPI” does not generally include mortgage
loans or RMBS, such as Agency RMBS. As a result, we do not
anticipate that we will generate material amounts of gain that
would be subject to FIRPTA. Under the FIRPTA rules, a
non-U.S. stockholder
is taxed on distributions attributable to gain from sales of
USRPIs as if the gain were effectively connected with a
U.S. business of the
non-U.S. stockholder.
A
non-U.S. stockholder
thus would be taxed on such a distribution at the normal capital
gain rates applicable to U.S. stockholders, subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual. A
non-U.S. corporate
stockholder not entitled to treaty relief or exemption also
might be subject to the 30% branch profits tax on such a
distribution. The applicable withholding agent would be required
to withhold 35% of any such distribution that we could designate
as a capital gain dividend. A
non-U.S. stockholder
might receive a credit against its tax liability for the amount
withheld.
However, if our common stock is regularly traded on an
established securities market in the United States, capital gain
distributions on our common stock that are attributable to our
sale of real property will be treated as ordinary dividends
rather than as gain from the sale of a USRPI, as long as the
non-U.S. stockholder
does not own more than 5% of our common stock during the
one-year period preceding the date of the distribution. As a
result,
non-U.S. stockholders
generally will be subject to withholding tax on such capital
gain distributions in the same manner as they are subject to
withholding tax on ordinary dividends. We anticipate that our
common stock will be regularly traded on an established
securities market in the United States immediately following
this offering.
A
non-U.S. stockholder
generally will not incur tax under FIRPTA with respect to gain
realized upon a disposition of our common stock as long as we
are not a United States real property holding corporation during
a specified testing period. If at least 50% of a REIT’s
assets are USRPIs, then the REIT will be a United States real
property holding corporation. We do not anticipate that we will
be a United States real property holding corporation based on
our investment strategy. In the unlikely event that at least 50%
of the assets we hold were determined to be USRPIs, gains from
the sale of our common stock by a
non-U.S. stockholder
could be subject to a FIRPTA tax. However, even if that event
were to occur, a
non-U.S. stockholder
generally would not incur tax under FIRPTA on gain from the sale
of our common stock if we were a “domestically controlled
qualified investment entity.” A domestically controlled
qualified investment entity includes a REIT in which, at all
times during a specified testing period, less than 50% in value
of its shares are held directly or indirectly by
non-U.S. persons. We cannot assure you that this test will
be met. If our common stock is regularly traded
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on an established securities market, an additional exception to
the tax under FIRPTA will be available with respect to our
common stock, even if we do not qualify as a domestically
controlled qualified investment entity at the time the
non-U.S. stockholder
sells our common stock. Under that exception, the gain from such
a sale by such a
non-U.S. stockholder
will not be subject to tax under FIRPTA if:
| • | our common stock is treated as being regularly traded under applicable U.S. Treasury regulations on an established securities market; and | |
| • | the non-U.S. stockholder owned, actually or constructively, 5% or less of our common stock at all times during a specified testing period. |
As noted above, we anticipate that our common stock will be
regularly traded on an established securities market immediately
following this offering.
If we are a domestically controlled qualified investment entity
and a
non-U.S. stockholder
disposes of our common stock during the
30-day
period preceding a dividend payment, and such
non-U.S. stockholder
(or a person related to such
non-U.S. stockholder)
acquires or enters into a contract or option to acquire our
common stock within 61 days of the first day of the
30-day
period described above, and any portion of such dividend payment
would, but for the disposition, be treated as a USRPI capital
gain to such
non-U.S. stockholder,
then such
non-U.S. stockholder
shall be treated as having USRPI capital gain in an amount that,
but for the disposition, would have been treated as USRPI
capital gain.
If the gain on the sale of our common stock were taxed under
FIRPTA, a
non-U.S. stockholder
would be taxed on that gain in the same manner as
U.S. stockholders, subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. Furthermore, a
non-U.S. stockholder
generally will incur tax on gain not subject to FIRPTA if:
| • | the gain is effectively connected with the non-U.S. stockholder’s U.S. trade or business, 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 | |
| • | the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the non-U.S. stockholder will incur a tax of 30% on his or her net capital gains. |
Information
Reporting Requirements and Backup Withholding, Shares Held
Offshore
We will report to our stockholders and to the IRS the amount of
distributions we pay during each calendar year, and the amount
of tax we withhold, if any. Under the backup withholding rules,
a stockholder may be subject to backup withholding at a rate of
28% (for payments made prior to January 1, 2012) with
respect to distributions unless the holder:
| • | is a corporation or qualifies for certain other exempt categories and, when required, demonstrates this fact; or | |
| • | provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. |
A stockholder who does not provide the applicable withholding
agent with its correct taxpayer identification number also may
be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the
stockholder’s income tax liability. In addition, the
applicable withholding agent may be required to withhold a
portion of capital gain distributions to any stockholders who
fail to certify their U.S. status.
Backup withholding will generally not apply to payments of
dividends made by us or our paying agents, in their capacities
as such, to a
non-U.S. stockholder
provided that the
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non-U.S. stockholder
furnishes to the applicable withholding agent the required
certification as to its
non-U.S. status,
such as providing a valid IRS
Form W-8BEN
or W-8ECI,
or certain other requirements are met. Notwithstanding the
foregoing, backup withholding may apply if the applicable
withholding agent has actual knowledge, or reason to know, that
the holder is a U.S. person that is not an exempt
recipient. Payments of the net proceeds from a disposition or a
redemption effected outside the United States by a
non-U.S. stockholder
made by or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding.
However, information reporting (but not backup withholding)
generally will apply to such a payment if the broker has certain
connections with the U.S. unless the broker 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. Payment of the net proceeds from a disposition by a
non-U.S. stockholder
of common stock made by or through the U.S. office of a
broker is generally subject to information reporting and backup
withholding unless the
non-U.S. stockholder
certifies under penalties of perjury that it is not a
U.S. person and satisfies certain other requirements, or
otherwise establishes an exemption from information reporting
and backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be refunded or
credited against the stockholder’s U.S. federal income
tax liability if certain required information is timely
furnished to the IRS. Stockholders are urged consult their own
tax advisors regarding application of backup withholding to them
and the availability of, and procedure for obtaining an
exemption from, backup withholding.
For taxable years beginning after December 31, 2012, a
U.S. withholding tax at a 30% rate will be imposed on
dividends and proceeds of sale in respect of our common stock
received by U.S. stockholders who own their shares through
foreign accounts or foreign intermediaries if certain disclosure
requirements related to U.S. accounts or ownership are not
satisfied. We will not pay any additional amounts in respect of
any amounts withheld.
Sunset of Reduced
Tax Rate Provisions
Several of the tax considerations described herein are subject
to sunset provisions. These sunset provisions generally provide
that for taxable years beginning after December 31, 2012,
certain provisions that are currently in the Code will revert
back to a prior version of those provisions. These provisions
include provisions related to the reduced maximum income tax
rate for long-term capital gains of 15% (rather than 20%) for
taxpayers taxed at individual rates, the application of the 15%
tax rate to qualified dividend income, and certain other tax
rate provisions described herein. Prospective stockholders are
urged to consult their own tax advisors regarding the effect of
sunset provisions on an investment in our common stock.
State, Local and
Foreign Taxes
We and our subsidiaries and stockholders may be subject to
state, local or foreign taxation in various jurisdictions,
including those in which we or they transact business, own
property or reside. The state, local or foreign tax treatment of
us 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 our stockholders against their
U.S. federal income tax 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 common stock.
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ERISA
CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement or other
employee benefit plan (“Plan”) subject to the Employee
Retirement Income Security Act of 1974, as amended
(“ERISA”), should consider the fiduciary standards
under ERISA in the context of the Plan’s particular
circumstances before authorizing an investment of a portion of
such Plan’s assets in the shares of common stock.
Accordingly, such fiduciary should consider (i) whether the
investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA, (ii) whether the
investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of
ERISA, and (iii) whether the investment is prudent under
ERISA. In addition to the imposition of general fiduciary
standards of investment prudence and diversification, ERISA, and
the corresponding provisions of the Code, prohibit a wide range
of transactions involving the assets of the Plan and persons who
have certain specified relationships to the Plan (“parties
in interest” within the meaning of ERISA,
“disqualified persons” within the meaning of the
Code). Thus, a Plan fiduciary considering an investment in the
shares of common stock also should consider whether the
acquisition or the continued holding of the shares of common
stock might constitute or give rise to a direct or indirect
prohibited transaction.
Investment in shares of our common stock by a Plan that has such
a relationship in certain limited circumstances could be deemed
to constitute a prohibited transaction under Title I of
ERISA or Section 4975 of the Internal Revenue Code. Such
transactions may, however, be subject to one or more statutory
or administrative exemptions, such as: Section 408(b)(17)
of ERISA, which exempts certain transactions with non-fiduciary
service providers; Prohibited Transaction Class Exemption
(“PTCE”)
90-1, which
exempts certain transactions involving insurance company pooled
separate accounts;
PTCE 91-38,
which exempts certain transactions involving bank collective
investment funds;
PTCE 84-14,
which exempts certain transactions effected on behalf of a Plan
by a “qualified professional asset manager”;
PTCE 95-60,
which exempts certain transactions involving insurance company
general accounts;
PTCE 96-23,
which exempts certain transactions effected on behalf of a Plan
by an “in-house asset manager”;
PTCE 75-1,
which exempts certain transactions involving a Plan and certain
members of an underwriting syndicate; or another available
exemption. Such exemptions may not, however, apply to all of the
transactions that could be deemed prohibited transactions in
connection with a Plan’s investment in shares of our common
stock. If a purchase was to result in a non-exempt prohibited
transaction, such purchase may have to be rescinded, though
there can be no assurance that a rescission would avoid the
imposition of taxes or penalties.
The Department of Labor (the “DOL”) has issued final
regulations (the “DOL Regulations”) as to what
constitutes assets of an employee benefit plan under ERISA.
Under the DOL Regulations, if a Plan acquires an equity interest
in an entity, which interest is neither a “publicly offered
security” nor a security issued by an investment company
registered under the Investment Company Act, the Plan’s
assets would include, for purposes of the fiduciary
responsibility provision of ERISA, both the equity interest and
an undivided interest in each of the entity’s underlying
assets unless certain specified exceptions apply. The DOL
Regulations define a publicly offered security as a security
that is “widely held,” “freely
transferable,” and either part of a class of securities
registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act
within 120 days after the end of the fiscal year of the
issuer during which the public offering occurred). The shares of
common stock are being sold in an offering registered under the
Securities Act and will be registered under the Exchange Act.
The DOL Regulations provide that whether a security is
“freely transferable” is a factual question to be
determined on the basis of all relevant facts and circumstances.
The DOL Regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or
less, as is the case with the offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding
that such securities are “freely transferable.” The
Company believes that the
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restrictions imposed under its charter on the transfer of its
common stock are limited to the restrictions on transfer
generally permitted under the DOL Regulations and are not likely
to result in the failure of the common stock to be “freely
transferable.” The DOL Regulations only establish a
presumption in favor of the finding of free transferability,
and, therefore, no assurance can be given that the DOL will not
reach a contrary conclusion.
Assuming that the common stock will be “widely held”
and “freely transferable,” the Company believes that
its common stock will be publicly offered securities for
purposes of the DOL Regulations and that the assets of the
Company will not be deemed to be “plan assets” of any
Plan that invests in its common stock.
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UNDERWRITING
Barclays Capital Inc. and JMP Securities LLC are acting as the
representatives of the underwriters and the joint book-running
managers of this offering. Under the terms of an underwriting
agreement, which will be filed as an exhibit to the registration
statement, each of the underwriters named below has severally
agreed to purchase from us the respective number of shares of
common stock shown opposite its name below:
|
Number of |
||||
|
Shares of |
||||
|
Underwriters
|
Common Stock | |||
|
Barclays Capital Inc.
|
||||
|
JMP Securities LLC
|
||||
|
Cantor Fitzgerald & Co.
|
||||
|
Oppenheimer & Co. Inc.
|
||||
|
Lazard Capital Markets LLC
|
||||
|
Sterne, Agee & Leach, Inc.
|
||||
|
Total
|
5,200,000 | |||
The underwriting agreement provides that the underwriters’
obligation to purchase shares of common stock depends on the
satisfaction of the conditions contained in the underwriting
agreement including:
| • | the obligation to purchase all of the shares of common stock offered hereby (other than those shares of common stock covered by their option to purchase additional shares as described below), if any of the shares are purchased; | |
| • | the representations and warranties made by us to the underwriters are true; | |
| • | there is no material change in our business or the financial markets; and | |
| • | we deliver customary closing documents to the underwriters. |
Commissions and
Expenses
The following table summarizes the underwriting discounts and
commissions that will be paid to the underwriters by us and our
Manager. These amounts are shown assuming both no exercise and
full exercise of the underwriters’ option to purchase
additional shares. The underwriting fee is the difference
between the initial price to the public and the amount the
underwriters pay to us for the shares.
|
Full |
||||||||
| No Exercise | Exercise | |||||||
|
Per
share(1)
|
||||||||
|
Total
|
||||||||
| (1) | At the closing of this offering, the underwriters will be entitled to receive $ per share from us for the shares sold in the underwritten offering. Our Manager will pay the underwriters the remaining $ per share with respect to each share of common stock sold in this offering on a deferred basis as described below after the completion of this offering. |
Pursuant to the underwriting agreement, our Manager will pay the
underwriters $ per share with
respect to each share of common stock sold in this offering on a
deferred basis after the completion of this offering. Our
Manager will pay the underwriters all of the management fees it
receives from us each month until it has paid the underwriters
an aggregate amount of $ .
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock
directly to the public at the public offering price on the cover
of this prospectus and to selected dealers, which may include
the underwriters, at such offering price less a
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selling concession not in excess of
$ per share. After the offering,
the representatives may change the offering price and other
selling terms. Sales of shares made outside of the United States
may be made by affiliates of the underwriters.
The expenses of the offering that are payable by us are
estimated to be $416,000 (excluding the portion of the
underwriting discounts and commissions payable by us). Our
Manager will pay any offering expenses that exceed an amount
equal to 1.0% of the total gross proceeds from this offering.
Option to
Purchase Additional Shares
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus to purchase, from
time to time, in whole or in part, up to an aggregate of 780,000
shares of common stock at the public offering price less
underwriting discounts and commissions. To the extent that this
option is exercised, each underwriter will be obligated, subject
to certain conditions, to purchase its pro rata portion of these
additional shares based on the underwriter’s underwriting
commitment in the offering as indicated in the table at the
beginning of this “Underwriting” section.
Lock-Up
Agreements
We and each of our Manager, our directors and executive officers
will agree that, without the prior written consent of Barclays
Capital Inc., we and they will not directly or indirectly,
(1) offer for sale, sell, pledge, or otherwise dispose of
(or enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at
any time in the future of) any shares of common stock
(including, without limitation, shares of common stock that may
be deemed to be beneficially owned by us or them in accordance
with the rules and regulations of the SEC and shares of common
stock that may be issued upon exercise of any options or
warrants) or securities convertible into or exercisable or
exchangeable for common stock, (2) enter into any swap or
other derivatives transaction that transfers to another, in
whole or in part, any of the economic consequences of ownership
of the common stock, (3) make any demand for or exercise
any right or file or cause to be filed a registration statement,
including any amendments thereto, with respect to the
registration of any shares of common stock or securities
convertible, exercisable or exchangeable into common stock or
any of our other securities, or (4) publicly disclose the
intention to do any of the foregoing for a period of
180 days after the date of this prospectus.
The 180-day
restricted period described in the preceding paragraph will be
extended if:
| • | 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 | |
| • | 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, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or occurrence of the material event unless such extension is waived in writing by Barclays Capital Inc. |
Notwithstanding the foregoing, each of our directors and
executive officers may sell or transfer shares of our common
stock during this
180-day
period without the prior written consent of Barclays Capital
Inc.:
| • | as a bona fide gift or gifts; | |
| • | to any trust for the direct or indirect benefit of such party or his or her immediate family; or | |
| • | by will or intestate succession; |
provided, however, it is a condition to any such transfer that
the transferee (or trustee, if applicable) execute a similar
lock-up
agreement stating that such transferee (or trustee, if
applicable) is receiving
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and holding shares of our common stock subject to the
provisions of the agreement pursuant to which these persons
agree not to sell or transfer shares of our common stock for the
remainder of the
180-day
period described above; provided, further, that no filing by any
party under the Securities Act or the Exchange Act is required
or voluntarily made in connection with such transfer (other than
on a Form 5 made after the expiration of the 180-day
restricted period). For this purpose, “immediate
family” means any relationship by blood, marriage or
adoption, not more remote than first cousin.
Additionally, Bimini will agree that, for a period of
365 days after the date of this prospectus, it will not,
without the prior written consent of Barclays Capital Inc.,
dispose of or hedge any of (i) its shares of our common
stock, including any shares of our common stock issuable upon
exercise of the warrants it intends to purchase in the
concurrent private placement, (ii) the warrants that it
intends to purchase in the concurrent private placement or
(iii) any shares of our common stock that it may acquire
after completion of this offering. Barclays Capital Inc., in its
sole discretion, may release the common stock and other
securities subject to the
lock-up
agreements described above in whole or in part at any time with
or without notice. When determining whether or not to release
common stock and other securities from
lock-up
agreements, Barclays Capital Inc. will consider, among other
factors, the holder’s reasons for requesting the release,
the number of shares of common stock and other securities for
which the release is being requested and market conditions at
the time.
Offering Price
Determination
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
negotiated between the representatives and us. In determining
the initial public offering price of our common stock, the
representatives will consider:
| • | the history and prospects for the industry in which we compete; | |
| • | our financial information; | |
| • | the ability of our management and our business potential and earning prospects; | |
| • | the prevailing securities markets at the time of this offering; and | |
| • | the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. |
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act and
to contribute to payments that the underwriters may be required
to make for these liabilities.
Stabilization,
Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of the common stock, in each
case as described below, in accordance with Regulation M
under the Exchange Act:
| • | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. | |
| • | A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option |
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| to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| • | Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. | |
| • | Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of the common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NYSE Amex or otherwise and, if commenced, may
be discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make representation that the representatives will
engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic
Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters
and/or
selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view
offering terms online and, depending upon the particular
underwriter or selling group member, prospective investors may
be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of shares for sale to
online brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same
basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriter’s or selling group member’s web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
NYSE
Amex
We have applied to list our shares of common stock for quotation
on the NYSE Amex under the symbol “ORC.” In order to
meet one of the requirements for listing the common stock on the
NYSE Amex, the underwriters have undertaken to sell lots of 100
or more shares to a minimum of 400 beneficial holders.
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Discretionary
Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
Stamp
Taxes
If you purchase shares of common stock offered in this
prospectus, you may be required to pay stamp taxes and other
charges under the laws and practices of the country of purchase,
in addition to the offering price listed on the cover page of
this prospectus.
Relationships
Bimini has engaged in Agency RMBS trading transactions with
Barclays Capital Inc. and/or its affiliates in the past and may
continue to do so in the future. In addition, Barclays Capital
Inc. is currently party to a master repurchase agreement with
the Company. The Company is currently negotiating a master
repurchase agreement with Cantor Fitzgerald & Co. Certain
of the underwriters
and/or their
affiliates have in the past and may in the future engage in
commercial and investment banking transactions with us and
Bimini in the ordinary course of their business. They expect to
receive customary compensation and expense reimbursement for
these commercial and investment banking transactions.
Selling
Restrictions
European
Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of securities
described in this prospectus may not be made to the public in
that relevant member state other than:
| • | to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; | |
| • | to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; | |
| • | to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives; or | |
| • | in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive, |
provided that no such offer of securities shall require us or
any underwriter to publish a prospectus pursuant to
Article 3 of the Prospectus Directive.
For purposes of this provision, the expression an “offer of
securities to the public” in any relevant member state
means the communication in any form and by any means of
sufficient information on the terms of the offer and the
securities to be offered so as to enable an investor to decide
to purchase or subscribe the securities, as the expression may
be varied in that member state by any measure implementing the
Prospectus Directive in that member state, and the expression
“Prospectus Directive” means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
We have not authorized and do not authorize the making of any
offer of securities through any financial intermediary on their
behalf, other than offers made by the underwriters with a view
to the final placement of the securities as contemplated in this
prospectus. Accordingly, no purchaser of the securities, other
than the underwriters, is authorized to make any further offer
of the securities on behalf of us or the underwriters.
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United
Kingdom
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive (“Qualified Investors”) that are
also (i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the “Order”) or
(ii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as “relevant persons”).
This prospectus and its contents are confidential and should not
be distributed, published or reproduced (in whole or in part) or
disclosed by recipients to any other persons in the United
Kingdom. Any person in the United Kingdom that is not a relevant
person should not act or rely on this document or any of its
contents.
Switzerland
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a
and/or 1156
of the Swiss Code of Obligations. The shares will not be listed
on the SIX Swiss Exchange and, therefore, the documents relating
to the shares, including, but not limited to, this document, do
not claim to comply with the disclosure standards of the listing
rules of the SIX Swiss Exchange. The shares are being offered in
Switzerland by way of a private placement, i.e., to a small
number of selected investors only, without any public offer and
only to investors who do not purchase the shares with the
intention to distribute them to the public. The investors will
be individually approached by the issuer from time to time. This
document, as well as any other material relating to the shares,
is personal and confidential and do not constitute an offer to
any other person. This document may only be used by those
investors to whom it has been handed out in connection with the
offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without express consent of the issuer. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in (or from) Switzerland.
Hong
Kong
The shares may not be offered or sold in Hong Kong, by means of
any document, other than (a) to “professional
investors” as defined in the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made under
that Ordinance or (b) in other circumstances which do not
result in the document being a “prospectus” as defined
in the Companies Ordinance (Cap. 32, Laws of Hong Kong) or which
do not constitute an offer to the public within the meaning of
that Ordinance. No advertisement, invitation or document
relating to the shares may be issued or may be in the possession
of any person for the purpose of the issue, whether in Hong Kong
or elsewhere, which is directed at, or the contents of which are
likely to be read by, the public in Hong Kong (except if
permitted to do so under the laws of Hong Kong) other than with
respect to the shares which are intended to be disposed of only
to persons outside Hong Kong or only to “professional
investors” as defined in the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) or any rules made under
that Ordinance.
Japan
No securities registration statement (“SRS”) has been
filed under Article 4, Paragraph 1 of the Financial
Instruments and Exchange Law of Japan (Law No. 25 of 1948,
as amended) (“FIEL”) in relation to the shares. The
shares are being offered in a private placement to
“qualified institutional investors”
(tekikaku-kikan-toshika) under Article 10 of the Cabinet
Office Ordinance concerning Definitions provided in
Article 2 of the FIEL (the Ministry of Finance Ordinance
No. 14, as amended) (“QIIs”), under
Article 2, Paragraph 3, Item 2 i of the FIEL. Any
QII acquiring the shares in this offer may not transfer or
resell those shares except to other QIIs.
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Table of Contents
Korea
The shares may not be offered, sold and delivered directly or
indirectly, or offered or sold to any person for reoffering or
resale, directly or indirectly, in Korea or to any resident of
Korea except pursuant to the applicable laws and regulations of
Korea, including the Korea Securities and Exchange Act and the
Foreign Exchange Transaction Law and the decrees and regulations
thereunder. The shares have not been registered with the
Financial Services Commission of Korea for public offering in
Korea. Furthermore, the shares may not be resold to Korean
residents unless the purchaser of the shares complies with all
applicable regulatory requirements (including but not limited to
government approval requirements under the Foreign Exchange
Transaction Law and its subordinate decrees and regulations) in
connection with the purchase of the shares.
Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Future
Act, Chapter 289 of Singapore (the “SFA”),
(ii) to a “relevant person” as defined in
Section 275(2) of the SFA, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed and purchased under
Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as
defined in Section 4A of the SFA)) the sole business of
which is to hold investments and the entire share capital of
which is owned by one or more individuals, each of whom is an
accredited investor; or
(b) a trust (where the trustee is not an accredited
investor (as defined in Section 4A of the SFA)) whose sole
whole purpose is to hold investments and each beneficiary is an
accredited investor, shares, debentures and units of shares and
debentures of that corporation or the beneficiaries’ rights
and interest (howsoever described) in that trust shall not be
transferable within six months after that corporation or that
trust has acquired the shares under Section 275 of the SFA
except:
(i) to an institutional investor under Section 274 of
the SFA or to a relevant person (as defined in
Section 275(2) of the SFA) and in accordance with the
conditions, specified in Section 275 of the SFA;
(ii) (in the case of a corporation) where the transfer
arises from an offer referred to in Section 275(1A) of the
SFA, or (in the case of a trust) where the transfer arises from
an offer that is made on terms that such rights or interests are
acquired at a consideration of not less than S$200,000 (or its
equivalent in a foreign currency) for each transaction, whether
such amount is to be paid for in cash or by exchange of
securities or other assets;
(iii) where no consideration is or will be given for the
transfer; or
(iv) where the transfer is by operation of law.
By accepting this prospectus, the recipient hereof represents
and warrants that he is entitled to receive it in accordance
with the restrictions set forth above and agrees to be bound by
limitations contained herein. Any failure to comply with these
limitations may constitute a violation of law.
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LEGAL
MATTERS
Certain legal matters in connection with this offering including
the validity of the shares being offered by this prospectus and
certain tax matters will be passed upon for us by
Hunton & Williams LLP. Certain legal matters in
connection with this offering will be passed upon for the
underwriters by Fried, Frank, Harris, Shriver &
Jacobson LLP, New York, New York. Venable LLP will issue an
opinion to us regarding certain matters of Maryland law,
including the validity of the shares of common stock offered by
this prospectus.
EXPERTS
The financial statements as of December 31, 2010 and for
the period from November 24, 2010 (date operations
commenced) through December 31, 2010 included in this
Prospectus and in the Registration Statement have been so
included in reliance on the report of BDO USA, LLP, an
independent registered public accounting firm, appearing
elsewhere herein and in the Registration Statement, given on the
authority of said firm as experts in auditing and accounting.
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WHERE YOU CAN
FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-11,
including exhibits and schedules filed with the registration
statement of which this prospectus is a part, under the
Securities Act with respect to the shares of our 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 the Company and the shares
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 SEC, 100 F Street, N.E.,
Room 1580, Washington, DC 20549. Information about the
operation of the public reference room may be obtained by
calling the SEC at
1-800-SEC-0300.
Copies of all or a portion of the registration statement can be
obtained from the public reference room of the SEC upon payment
of prescribed fees. Our SEC filings, including our registration
statement, are also available to you for free on the SEC’s
website at www.sec.gov.
As a result of this offering, we will become subject to the
information and reporting requirements of the Exchange Act and
will file periodic reports and 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.
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Index to
Financial Statements
| Page | ||||
|
FINANCIAL STATEMENTS AS OF MARCH 31, 2011 AND DECEMBER 31,
2010, AND FOR THE THREE MONTHS ENDED MARCH 31, 2011
(UNAUDITED)
|
||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
|
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2010 AND FOR THE
PERIOD FROM NOVEMBER 24, 2010 (DATE OPERATIONS COMMENCED)
THROUGH DECEMBER 31, 2010
|
||||
| F-15 | ||||
| F-16 | ||||
| F-17 | ||||
| F-18 | ||||
| F-19 | ||||
| F-20 | ||||
F-1
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
| March 31, 2011 | December 31, 2010 | |||||||
| (Unaudited) | ||||||||
|
ASSETS:
|
||||||||
|
Mortgage-backed securities — held for trading
|
||||||||
|
Pledged to counterparty, at fair value
|
$ | 24,138,771 | $ | 24,420,773 | ||||
|
Unpledged, at fair value
|
4,764,885 | 1,421,891 | ||||||
|
Total mortgage-backed securities
|
28,903,656 | 25,842,664 | ||||||
|
Cash and cash equivalents
|
684,045 | 1,196,035 | ||||||
|
Restricted cash
|
130,950 | — | ||||||
|
Accrued interest receivable
|
172,251 | 93,326 | ||||||
|
Prepaid expenses and other assets
|
105,310 | — | ||||||
|
Due from Bimini Capital Management, Inc.
|
105,183 | — | ||||||
|
Total Assets
|
$ | 30,101,395 | $ | 27,132,025 | ||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||
| LIABILITIES: | ||||||||
|
Repurchase agreements
|
$ | 22,530,842 | $ | 22,732,684 | ||||
|
Accrued interest payable
|
9,103 | 4,407 | ||||||
|
Accounts payable and accrued expenses
|
75,532 | — | ||||||
|
Due to Bimini Capital Management, Inc.
|
— | 20,088 | ||||||
|
Total Liabilities
|
22,615,477 | 22,757,179 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
|
STOCKHOLDER’S EQUITY:
|
||||||||
|
Common Stock, $0.01 par value; 1,000,000 shares
authorized; 75,000 shares subscribed as of March 31,
2011 and 44,050 shares subscribed as of December 31,
2010
|
750 | 441 | ||||||
|
Additional paid-in capital
|
7,499,250 | 4,404,559 | ||||||
|
Accumulated deficit
|
(14,082 | ) | (30,154 | ) | ||||
|
Total Stockholder’s Equity
|
7,485,918 | 4,374,846 | ||||||
|
Total Liabilities and Stockholder’s Equity
|
$ | 30,101,395 | $ | 27,132,025 | ||||
See Notes to Financial Statements
F-2
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
For the Three Months Ended March 31, 2011
| (Unaudited) | ||||
|
Interest income
|
$ | 307,764 | ||
|
Interest expense
|
(18,942 | ) | ||
|
Net interest income
|
288,822 | |||
|
Losses on trading securities
|
(168,532 | ) | ||
|
Gains on futures contracts
|
10,875 | |||
|
Net portfolio income
|
131,165 | |||
|
Expenses:
|
||||
|
Audit, legal and other professional fees
|
49,951 | |||
|
Direct REIT operating and other administrative expenses
|
65,142 | |||
|
Total expenses
|
115,093 | |||
|
Income before income taxes
|
16,072 | |||
|
Income tax provision
|
— | |||
|
Net income
|
$ | 16,072 | ||
|
Basic and diluted net income per subscribed share
|
$ | 0.21 | ||
|
Shares subscribed at March 31, 2011
|
75,000 | |||
See Notes to Financial Statements
F-3
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
STATEMENT OF STOCKHOLDER’S EQUITY
For the Three Months Ended March 31, 2011
STATEMENT OF STOCKHOLDER’S EQUITY
For the Three Months Ended March 31, 2011
|
Additional Paid-in |
Accumulated |
|||||||||||||||
| Common Stock | Capital | Deficit | Total | |||||||||||||
| (Unaudited) | ||||||||||||||||
|
Balances, January 1, 2011
|
$ | 441 | $ | 4,404,559 | $ | (30,154 | ) | $ | 4,374,846 | |||||||
|
Common shares subscribed
|
309 | 3,094,691 | — | 3,095,000 | ||||||||||||
|
Net income
|
— | — | 16,072 | 16,072 | ||||||||||||
|
Balances, March 31, 2011
|
$ | 750 | $ | 7,499,250 | $ | (14,082 | ) | $ | 7,485,918 | |||||||
See Notes to Financial Statements
F-4
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
For the Three Months Ended March 31, 2011
| (Unaudited) | ||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||
|
Net income
|
$ | 16,072 | ||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||
|
Losses on trading securities
|
168,532 | |||
|
Changes in operating assets and liabilities:
|
||||
|
Accrued interest receivable
|
(78,924 | ) | ||
|
Prepaids and other assets
|
(105,310 | ) | ||
|
Accrued interest payable
|
4,696 | |||
|
Accounts payable and accrued expenses
|
75,532 | |||
|
Due from/to Bimini Capital Management, Inc.
|
(3,288 | ) | ||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
77,310 | |||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||
|
From mortgage-backed securities investments:
|
||||
|
Purchases
|
(3,769,370 | ) | ||
|
Principal repayments
|
417,864 | |||
|
Increase in restricted cash
|
(130,950 | ) | ||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(3,482,456 | ) | ||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||
|
Proceeds from repurchase agreements
|
22,530,842 | |||
|
Principal payments on repurchase agreements
|
(22,732,684 | ) | ||
|
Proceeds from common shares subscription
|
3,095,000 | |||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
2,893,156 | |||
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(511,990 | ) | ||
|
CASH AND CASH EQUIVALENTS, beginning of the period
|
1,196,035 | |||
|
CASH AND CASH EQUIVALENTS, end of the period
|
$ | 684,045 | ||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||
|
Cash paid during the period for:
|
||||
|
Interest
|
$ | 14,246 | ||
See Notes to Financial Statements
F-5
Table of Contents
| NOTE 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
Organization and
Business Description
Orchid Island Capital, Inc., a Maryland corporation
(“Orchid” or the “Company”), was
incorporated in Maryland on August 17, 2010 for the purpose
of creating and managing a leveraged investment portfolio
consisting of residential mortgage-backed securities
(“MBS”). From incorporation through March 31,
2011, Orchid was a wholly owned subsidiary of Bimini Capital
Management, Inc. (“Bimini”). Orchid began operations
on November 24, 2010 (the date of commencement of
operations). From incorporation through November 24, 2010,
Orchid’s only activity was the sale of common stock to
Bimini. Bimini has elected to be taxed as a real estate
investment trust (“REIT”) under the Internal Revenue
Code of 1986, as amended (the “Code”), and Orchid is
therefore a “qualified REIT subsidiary” of Bimini
under the Code. A REIT is generally not subject to federal
income tax on its REIT taxable income provided that it
distributes to its stockholders at least 90% of its REIT taxable
income on an annual basis. In addition, a REIT must meet other
provisions of the Code to retain its special tax status.
Basis of
Presentation and Use of Estimates
The accompanying financial statements are prepared on the
accrual basis of accounting in accordance with accounting
principles generally accepted in the United States
(“GAAP”). The preparation of financial statements in
conformity with GAAP 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 financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The significant
estimates affecting the accompanying financial statements are
the fair values of MBS.
Statement of
Comprehensive Income (Loss)
In accordance with the Financial Accounting Standards
Board’s Accounting Standards Codification (“FASB
ASC”) Topic 220, Comprehensive Income, a statement
of comprehensive income has not been included as the Company has
no items of other comprehensive income. Comprehensive income is
the same as net income for the period presented.
Cash and Cash
Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial
institutions and highly liquid investments with original
maturities of three months or less. Restricted cash, if any,
represents cash held on deposit as collateral with the
repurchase agreement counterparty, which may be used to make
principal and interest payments on the related repurchase
agreements. As of March 31, 2011, $130,950 of the
Company’s cash and cash equivalents were restricted at
March 31, 2011.
The Company maintains cash balances at two banks, and at times,
balances may exceed federally insured limits. The Company has
not experienced any losses related to these balances. All
non-interest bearing cash balances were fully insured at
March 31, 2011 due to a temporary federal program in effect
from December 31, 2010 through December 31, 2012.
Under the program, there is no limit to the amount of insurance
for eligible accounts. Beginning 2013, insurance coverage will
revert to $250,000 per depositor at each financial institution,
and our non-interest bearing cash balances may again exceed
federally insured limits. At March 31, 2011, none of the
Company’s deposits were uninsured.
F-6
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
Mortgage-Backed
Securities
The Company invests in MBS consisting primarily of mortgage
pass-through (“PT”) certificates, collateralized
mortgage obligations, and interest only (“IO”)
securities or inverse interest only (“IIO”) securities
representing interest in or obligations backed by pools of
mortgage loans. MBS transactions are recorded on the trade date.
Investments in MBS are classified as held for trading. The
Company acquires MBS for the purpose of generating long-term
returns, and not for the short-term investment of idle capital.
Under FASB ASC 320, Investments — Debt and
Equity Securities, the Company has the option to classify
its MBS as either trading securities or available for sale. The
Company elected to classify its MBS as trading securities in
order to reflect changes in the fair value of the MBS in its
statement of operations, which it believes more appropriately
reflects the results of operations for a particular period. All
MBS securities held by Orchid are reflected in the
Company’s financial statements at their estimated fair
value.
The fair value of the Company’s investments in MBS is
governed by FASB ASC 820, Fair Value Measurements and
Disclosures. The definition of fair value in FASB
ASC 820 focuses on the price that would be received to sell
the asset or paid to transfer the liability in an orderly
transaction between market participants at the measurement date.
The fair value measurement assumes that the transaction to sell
the asset or transfer the liability either occurs in the
principal market for the asset or liability, or in the absence
of a principal market, occurs in the most advantageous market
for the asset or liability. Estimated fair values for MBS are
based on the average of third-party broker quotes received
and/or
independent pricing sources when available.
Income on MBS PT securities is based on the stated interest rate
of the security. Premiums or discounts present at the date of
purchase are not amortized. For IO securities, the income is
accrued based on the carrying value and the effective yield.
Cash received is first applied to accrued interest and then to
reduce the carrying value. At each reporting date, the effective
yield is adjusted prospectively from the reporting period based
on the new estimate of prepayments and the contractual terms of
the security. For IIO securities, effective yield and income
recognition calculations also take into account the index value
applicable to the security. Changes in fair value of MBS during
the period are recorded in earnings and reported as gains or
losses on trading securities in the accompanying statement of
operations.
Derivative
Financial Instruments
The Company has entered into Eurodollar futures contracts to
manage interest rate risk, facilitate asset/liability strategies
and manage other exposures, and it may continue to do so in the
future. The Company has elected to not treat any of its
derivative financial instruments as hedges. FASB ASC Topic 815,
Derivatives and Hedging, requires that all derivative
instruments are carried at fair value.
Financial
Instruments
FASB ASC 825, Financial Instruments, requires
disclosure of the fair value of financial instruments for which
it is practicable to estimate that value, either in the body of
the financial statements or in the accompanying notes. MBS and
Eurodollar futures contracts are accounted for at fair value in
the balance sheet. The methods and assumptions used to estimate
fair value for these instruments are presented in Note 7 of
the financial statements.
The estimated fair value of cash and cash equivalents, accrued
interest receivable, repurchase agreements, accrued interest
payable, accounts payable and accrued expenses and due to Bimini
F-7
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
generally approximates their carrying value as of March 31,
2011 due to the short-term nature of these financial instruments.
Repurchase
Agreements
The Company finances the acquisition of the majority of its PT
MBS through the use of repurchase agreements. Repurchase
agreements are treated as collateralized financing transactions
and are carried at their contractual amounts, including accrued
interest, as specified in the respective agreements. Although
structured as a sale and repurchase obligation, a repurchase
agreement operates as a financing under which securities are
pledged as collateral to secure a short-term loan equal in value
to a specified percentage (generally between 90 and
93 percent) of the market value of the pledged collateral.
While used as collateral, the borrower retains beneficial
ownership of the pledged collateral, including the right to
distributions. At the maturity of a repurchase agreement, the
borrower is required to repay the loan and concurrently receive
the pledged collateral from the lender or, with the consent of
the lender, renew such agreement at the then prevailing
financing rate. Margin calls, whereby a lender requires that the
Company pledge additional securities or cash as collateral to
secure borrowings under its repurchase agreements with such a
lender, are expected to be routinely experienced by the Company
when the value of the MBS pledged as collateral declines or as a
result of principal amortization or due to changes in market
interest rates, spreads or other market conditions.
The Company’s repurchase agreements typically have terms
ranging from 24 days to six months at inception, with some
having longer terms. Should a counterparty decide not to renew a
repurchase agreement at maturity, the Company must either
refinance with another lender or be in a position to satisfy the
obligation. If, during the term of a repurchase agreement, a
lender should file for bankruptcy, the Company might experience
difficulty recovering its pledged assets, which could result in
an unsecured claim against the lender for the difference between
the amount loaned to the Company plus interest due to the
counterparty and the fair value of the collateral pledged to
such lender. At March 31, 2011, the Company had outstanding
balances under repurchase agreements with one lender with a
maximum amount at risk (the difference between the amount loaned
to the Company, including interest payable, and the fair value
of securities pledged by the Company as collateral, including
accrued interest on such securities) of $1.7 million.
Earnings Per
Share
The Company follows the provisions of FASB ASC 260,
Earnings Per Share. Basic earnings per share
(“EPS”) is calculated as income available to common
stockholders divided by the weighted average number of common
shares outstanding or subscribed during the period. Diluted EPS
is calculated using the “if converted” method for
common stock equivalents, if any. However, the common stock
equivalents are not included in computing diluted EPS if the
result is anti-dilutive. For the period ended March 31,
2011, the number of shares outstanding at March 31, 2011 is
used for the EPS computation, as Bimini was the sole subscribed
shareholder during the entire period.
Income
Taxes
Bimini has elected to be taxed as a REIT under the Code. For tax
purposes, for the period ended March 31, 2011, Orchid is
considered to be a “qualified REIT subsidiary” of
Bimini, and therefore, Orchid is included in the federal income
tax return filed by Bimini. Orchid’s income tax attributes,
as discussed below, are calculated as if Bimini and Orchid filed
on a separate return basis.
REIT taxable income is computed in accordance with the Code,
which is different than Orchid’s financial statement net
income computed in accordance with GAAP. These differences can
be substantial and can effect several years. For the initial
period ended March 31, 2011, Orchid’s REIT
F-8
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
taxable income is estimated to be $185,000. This difference from
the GAAP income is solely attributable to the fair value
adjustments on trading securities recorded for GAAP totaling
$169,000; for tax purposes, such losses are not recognized until
the loss is realized upon the sale of the securities.
Bimini and Orchid will generally not be subject to federal
income tax on their REIT taxable income to the extent that
Bimini distributes its REIT taxable income to its stockholders
and satisfies the ongoing REIT requirements, including meeting
certain asset, income and stock ownership tests. A REIT must
generally distribute at least 90% of its REIT taxable income to
its stockholders, of which 85% generally must be distributed
within the taxable year, in order to avoid the imposition of an
excise tax. The remaining balance may be distributed up to the
end of the following taxable year, provided the REIT elects to
treat such amount as a prior year distribution and meets certain
other requirements. At March 31, 2011, management believes
that Bimini and Orchid have complied with the Code requirements
and that Bimini continues to qualify as a REIT.
Orchid recognizes and measures its unrecognized tax benefits in
accordance with FASB ASC 740, Income Taxes. Under that
guidance, Orchid assesses the likelihood, based on their
technical merit, that tax positions will be sustained upon
examination based on the facts, circumstances and information
available at the end of each period. All of Orchid’s tax
positions, including its future REIT status, are categorized as
highly certain. There is no accrual for any tax, interest or
penalties related to Orchid’s assessment. The measurement
of unrecognized tax benefits is adjusted when new information is
available, or when an event occurs that requires a change.
Recent Accounting
Pronouncements
In April 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
2011-03
(“ASU”) regarding repurchase agreements. In a typical
repurchase agreement transaction, an entity transfers financial
assets to a counterparty in exchange for cash with an agreement
for the counterparty to return the same or equivalent financial
assets for a fixed price in the future. Previous to this ASU,
one of the factors in determining whether sale treatment could
be used was whether the transferor maintained effective control
of the transferred assets and, in order to do so, the transferor
must have the ability to repurchase such assets. Based on this
ASU, the FASB concluded that the assessment of effective control
should focus on a transferor’s contractual rights and
obligations with respect to transferred financial assets, rather
than whether the transferor has the practical ability to perform
in accordance with those rights or obligations. Therefore, this
ASU removes the transferor’s ability criterion from
consideration of effective control. This ASU is effective for
the first interim or annual period beginning on or after
December 15, 2011. Since the Company records repurchase
agreements as secured borrowings and not sales, this ASU will
have no effect on the Company’s financial statements.
In March 2010, the FASB issued ASU
No. 2010-11,
Derivatives and Hedging (Topic 815) — Scope
Exception Related to Embedded Credit Derivatives, to clarify
the scope exception under ASC
815-15,
Derivatives and Hedging — Embedded Derivatives,
for embedded credit derivative features to explain how to
determine which features are considered to be embedded
derivatives that should not be analyzed for potential
bifurcation. The ASU also clarifies that the embedded credit
derivative feature related to the transfer of credit risk only
in the form of subordination is not subject to the application
of
ASC 815-15
and articulates certain additional circumstances that do not
qualify for the exception. The ASU also discusses the use of the
fair value option for investments in a beneficial interest in a
securitized financial asset. The ASU was effective at the
beginning of the first fiscal quarter beginning after
June 15, 2010, with early adoption permitted. The
implementation of this new accounting guidance did not have a
material impact on the Company’s financial statements.
F-9
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
In February 2010, the FASB issued ASU
No. 2010-09,
Amendments to Certain Recognition and Disclosure
Requirements, which amends ASC 855, Subsequent
Events, to address certain implementation issues related to
an entity’s requirement to perform and disclose
subsequent-events procedures. ASU
2010-09
requires SEC filers to evaluate subsequent events through the
date the financial statements are issued and exempts SEC filers
from disclosing the date through which subsequent events have
been evaluated. The ASU was effective immediately upon issuance.
The implementation of this new accounting guidance did not have
a material impact on the Company’s financial statements.
In January 2010, the FASB issued ASU
No. 2010-06,
Improving Disclosures about Fair Value Measurements,
which requires additional disclosures related to the transfers
in and out of the fair value hierarchy and the activity of
Level 3 financial instruments. This ASU also provides
clarification for the classification of financial instruments
and the discussion of inputs and valuation techniques. The new
disclosures and clarification are effective for interim and
annual reporting periods after December 15, 2009, except
for the disclosures related to the activity of Level 3
financial instruments. Those disclosures are effective for
periods beginning after December 15, 2010 and for interim
periods within those years. The Company has implemented all of
the required disclosures of ASU
No. 2010-06,
and that implementation did not have a material impact on the
Company’s financial statements.
| NOTE 2. | MORTGAGE-BACKED SECURITIES |
The following table presents the Company’s MBS portfolio as
of March 31, 2011 and December 31, 2010:
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Pass-through certificates, at fair value:
|
||||||||
|
Adjustable-rate mortgages
|
$ | 7,721 | $ | 7,732 | ||||
|
Fixed-rate mortgages
|
16,418 | 16,689 | ||||||
|
Total pass-through certificates
|
24,139 | 24,421 | ||||||
|
Structured MBS certificates, at fair value:
|
||||||||
|
Structured MBS
|
4,765 | 1,422 | ||||||
|
Totals
|
$ | 28,904 | $ | 25,843 | ||||
The Company’s entire MBS portfolio has contractual
maturities greater than 10 years as of March 31, 2011.
Actual maturities of MBS investments are generally shorter than
stated contractual maturities and are affected by the
contractual lives of the underlying mortgages, periodic payments
of principal and prepayments of principal.
NOTE
3. REPURCHASE AGREEMENTS
As of March 31, 2011, Orchid had outstanding repurchase
obligations of approximately $22.5 million with a net
weighted average borrowing rate of 0.33%. These agreements were
collateralized by MBS with a fair value, including accrued
interest, of approximately $24.2 million. As of
December 31, 2010, Orchid had outstanding repurchase
obligations of approximately $22.7 million with a net
weighted average borrowing rate of 0.32%. These agreements were
collateralized by MBS with a
F-10
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
fair value, including accrued interest, of approximately
$24.5 million. As of March 31, 2011 and
December 31, 2010, Orchid’s repurchase agreements had
remaining maturities as summarized below:
|
Overnight |
Between 2 and |
Between 31 and |
Greater Than |
|||||||||||||||||
| (1 Day or Less) | 30 Days | 90 Days | 90 Days | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
March 31, 2011
|
||||||||||||||||||||
|
Agency-backed mortgage — backed securities:
|
||||||||||||||||||||
|
Fair market value of securities sold, including accrued interest
receivable
|
$ | — | $ | — | $ | 8,853 | $ | 15,360 | $ | 24,213 | ||||||||||
|
Repurchase agreement liabilities associated with these securities
|
$ | — | $ | — | $ | 8,026 | $ | 14,505 | $ | 22,531 | ||||||||||
|
Net weighted average borrowing rate
|
— | — | 0.32 | % | 0.33 | % | 0.33 | % | ||||||||||||
|
December 31, 2010
|
||||||||||||||||||||
|
Agency-backed mortgage — backed securities:
|
||||||||||||||||||||
|
Fair market value of securities sold, including accrued interest
receivable
|
$ | — | $ | 8,990 | $ | 15,506 | $ | — | $ | 24,496 | ||||||||||
|
Repurchase agreement liabilities associated with these securities
|
$ | — | $ | 8,020 | $ | 14,713 | $ | — | $ | 22,733 | ||||||||||
|
Net weighted average borrowing rate
|
— | 0.27 | % | 0.35 | % | — | 0.32 | % | ||||||||||||
Summary information regarding the Company’s amounts at risk
with individual counterparties greater than 10% of the
Company’s equity at March 31, 2011 and
December 31, 2010 is as follows:
|
Weighted Average |
||||||||
|
Maturity of |
||||||||
|
Repurchase |
||||||||
|
Amount |
Agreements |
|||||||
|
Repurchase Agreement Counterparties
|
at Risk(1) | in Days | ||||||
| (In thousands) | ||||||||
|
March 31, 2011
|
||||||||
|
MF Global, Inc.
|
$ | 1,673 | 77 | |||||
|
December 31, 2010
|
||||||||
|
MF Global, Inc.
|
$ | 1,760 | 46 | |||||
| (1) | Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense. |
NOTE
4. CAPITAL STOCK
The total number of shares of capital stock which the Company
has the authority to issue is 1,000,000 shares of
$0.01 par value common stock. Subsequent to its
organization and through
F-11
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
March 31, 2011, the Company received aggregate net proceeds
of $7,500,000 from Bimini for the subscription to purchase
75,000 shares of the Company’s common stock. Orchid
had 75,000 shares of common stock subscribed for issuance
as of March, 31, 2011.
NOTE
5. EARNINGS PER SHARE
The table below reconciles the numerator and denominator of the
EPS for the period ended March 31, 2011.
|
Net income
|
$ | 16,072 | ||
|
Outstanding shares subscribed
|
75,000 | |||
|
Income per common share subscribed
|
$ | 0.21 | ||
NOTE
6. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with the Company’s interest rate risk
management strategy, during the first quarter of 2011 the
Company economically hedged a portion of its interest rate risk
by entering into derivative financial instrument contracts. The
Company did not elect hedging treatment under GAAP, and as such
all gains and losses on these instruments are reflected in
earnings for the period presented.
As of March 31, 2011, such instruments are comprised
entirely of Eurodollar futures contracts. Eurodollar futures are
cash settled futures contracts on an interest rate, with gains
and losses credited and charged to the Company’s account on
a daily basis. A minimum balance, or “margin”, is
required to be maintained in the account on a daily basis. The
Company is exposed to the changes in value of the futures by the
amount of margin held by the broker. The total amount of margin
at March 31, 2011 was approximately $131,000 and is
reflected in restricted cash.
The Company’s Eurodollar futures contracts with a notional
amount of $20 million attempt to achieve a fixed interest
rate related to a portion of its repurchase agreement
obligations. As of March 31, 2011, the Company has
effectively locked in a weighted-average fixed LIBOR rate of
0.97% on $20 million of its repurchase agreement
obligations through December 2012.
For the three months ended March 31, 2011, the Company
recorded gains of approximately $11,000 on Eurodollar futures
contracts.
NOTE
7. FAIR VALUE
Authoritative accounting literature establishes a framework for
using fair value to measure assets and liabilities and defines
fair value as the price that would be received to sell an asset
or paid to transfer a liability (an exit price) as opposed to
the price that would be paid to acquire the asset or received to
assume the liability (an entry price). A fair value measure
should reflect the assumptions that market participants would
use in pricing the asset or liability, including the assumptions
about the risk inherent in a particular valuation technique, the
effect of a restriction on the sale or use of an asset and the
risk of nonperformance. Required disclosures include
stratification of balance sheet amounts measured at fair value
based on inputs the Company uses to derive fair value
measurements. These strata include:
| • | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), |
F-12
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
| • | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and | |
| • | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
MBS and Eurodollar futures contracts were recorded at fair value
on a recurring basis during the period ended March 31,
2011. When determining fair value measurements, the Company
considers the principal or most advantageous market in which it
would transact and considers assumptions that market
participants would use when pricing the asset. When possible,
the Company looks to active and observable markets to price
identical assets. When identical assets are not traded in active
markets, the Company looks to market observable data for similar
assets. The following table presents financial assets and
liabilities measured at fair value on a recurring basis as of
March 31, 2011 and December 31, 2010:
| Fair Value Measurements Using | ||||||||||||||||
|
Quoted Prices |
||||||||||||||||
|
in Active |
Significant |
|||||||||||||||
|
Markets for |
Other |
Significant |
||||||||||||||
|
Identical |
Observable |
Unobservable |
||||||||||||||
|
Fair Value |
Assets |
Inputs |
Inputs |
|||||||||||||
| Measurements | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (In thousands) | ||||||||||||||||
|
March 31, 2011
|
||||||||||||||||
|
MBS
|
$ | 28,904 | $ | — | $ | 28,904 | $ | — | ||||||||
|
Eurodollar futures contracts
|
131 | 131 | — | — | ||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
MBS
|
$ | 25,843 | $ | — | $ | 25,843 | $ | — | ||||||||
NOTE
8. RELATED PARTY TRANSACTIONS
Management
Agreement
Orchid has entered into a management agreement with Bimini,
which provides for an initial term through December 31,
2011 with automatic one-year extension options and subject to
certain termination rights. The Company pays Bimini a monthly
management fee equal to 1.50% per annum of the gross
Stockholders’ Equity (as defined in the management
agreement) of Orchid.
Orchid is obligated to reimburse Bimini for its costs incurred
under the management agreement. In addition, Orchid is required
to pay Bimini a monthly fee of $7,200, which represents an
allocation of overhead expenses for items that include, but are
not limited to, occupancy costs, insurance and administrative
expenses. These expenses are allocated based on the ratio of
Orchid’s assets and Bimini consolidated assets. Total
expenses recorded during the period ended March 31, 2011
for management fees and allocated costs incurred was $42,500.
During the three months ended March 31, 2011, the Company
purchased MBS with a fair value of $1,071,040, including $14,620
of accrued interest, from Bimini. The MBS purchases were in the
F-13
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
ordinary course of business and on substantially the same terms,
including prices, as comparable transactions available in the
market.
At March 31, 2011, there was an amount due from Bimini of
$105,183. At December 31, 2010, there was an amount due to
Bimini of $20,088.
NOTE
9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various
claims and legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported
contingencies at March 31, 2011.
NOTE
10. SUBSEQUENT EVENTS
Subsequent events were evaluated through June 23, 2011, the
date which the financial statements were available to be issued,
and Orchid has determined that no events occurred subsequent to
March 31, 2011 that require disclosure other than described
below.
On April 28, 2011, the Company’s Board of Directors
authorized: (i) the offer and sale in an underwritten
public offering by the Company of shares of the Company’s
Class A Common Stock, par value $0.01 per share, and
(ii) a private placement by the Company of the
Company’s Class B Common Stock, par value $0.01 per
share, with Bimini as purchaser, in each case having the terms,
rights, and privileges, and subject to conditions, set forth in
a Registration Statement on
Form S-11.
F-14
Table of Contents
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholder
Orchid Island Capital, Inc.
Vero Beach, Florida
We have audited the accompanying balance sheet of Orchid Island
Capital, Inc. (the “Company”) as of December 31,
2010 and the related statements of operations,
stockholder’s equity and cash flows for the period from
November 24, 2010 (date operations commenced) to
December 31, 2010. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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 financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its 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 Company’s 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 financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Orchid Island Capital, Inc. at December 31, 2010, and
the results of its operations and its cash flows for period from
November 24, 2010 (date operations commenced) to
December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Certified Public Accountants
West Palm Beach, Florida
May 3, 2011
F-15
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
DECEMBER 31,
2010
|
ASSETS:
|
||||
|
Mortgage-backed securities — held for trading
|
||||
|
Pledged to counterparty, at fair value
|
$ | 24,420,773 | ||
|
Unpledged, at fair value
|
1,421,891 | |||
|
Total mortgage-backed securities
|
25,842,664 | |||
|
Cash and cash equivalents
|
1,196,035 | |||
|
Accrued interest receivable
|
93,326 | |||
|
Total Assets
|
$ | 27,132,025 | ||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||
| LIABILITIES: | ||||
|
Repurchase agreements
|
$ | 22,732,684 | ||
|
Accrued interest payable
|
4,407 | |||
|
Due to Bimini Capital Management, Inc.
|
20,088 | |||
|
Total Liabilities
|
$ | 22,757,179 | ||
|
COMMITMENTS AND CONTINGENCIES
|
||||
|
STOCKHOLDER’S EQUITY:
|
||||
|
Common Stock, $0.01 par value; 1,000,000 shares
authorized:
44,050 shares subscribed as of December 31, 2010 |
441 | |||
|
Additional paid-in capital
|
4,404,559 | |||
|
Accumulated deficit
|
(30,154 | ) | ||
|
Total Stockholder’s Equity
|
4,374,846 | |||
|
Total Liabilities and Stockholder’s Equity
|
$ | 27,132,025 | ||
See Notes to Financial Statements
F-16
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
For the
Period from November 24, 2010 (date operations commenced)
through December 31, 2010
|
Interest income
|
$ | 69,340 | ||
|
Interest expense
|
(5,186 | ) | ||
|
Net interest income
|
64,154 | |||
|
Losses on trading securities
|
(55,307 | ) | ||
|
Net portfolio income
|
8,847 | |||
|
Expenses:
|
||||
|
Audit, legal and other professional fees
|
22,542 | |||
|
Direct REIT operating and other administrative expenses
|
16,459 | |||
|
Total expenses
|
39,001 | |||
|
Loss before income taxes
|
(30,154 | ) | ||
|
Income tax provision
|
— | |||
|
Net loss
|
$ | (30,154 | ) | |
|
Basic and diluted net loss per subscribed share
|
$ | (0.68 | ) | |
|
Shares subscribed at December 31, 2010
|
44,050 | |||
See Notes to Financial Statements
F-17
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
For the
Period from November 24, 2010 (date operations commenced)
through December 31, 2010
|
Additional |
Accumulated |
|||||||||||||||
| Common Stock | Paid-in Capital | Deficit | Total | |||||||||||||
|
Balances, date of incorporation
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Common shares subscribed
|
441 | 4,404,559 | — | 4,405,000 | ||||||||||||
|
Net loss
|
— | — | (30,154 | ) | (30,154 | ) | ||||||||||
|
Balances, December 31, 2010
|
$ | 441 | $ | 4,404,559 | $ | (30,154 | ) | $ | 4,374,846 | |||||||
See Notes to Financial Statements
F-18
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
For the
Period from November 24, 2010 (date operations commenced)
through December 31, 2010
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||
|
Net loss
|
$ | (30,154 | ) | |
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
||||
|
Losses on trading securities
|
55,307 | |||
|
Changes in operating assets and liabilities:
|
||||
|
Accrued interest receivable
|
(93,326 | ) | ||
|
Accrued interest payable
|
4,407 | |||
|
Due to Bimini Capital Management, Inc.
|
20,088 | |||
|
NET CASH USED IN OPERATING ACTIVITIES
|
(43,678 | ) | ||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||
|
From mortgage-backed securities investments:
|
||||
|
Purchases
|
(25,949,180 | ) | ||
|
Principal repayments
|
51,209 | |||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(25,897,971 | ) | ||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||
|
Proceeds from repurchase agreements
|
30,021,684 | |||
|
Principal payments on repurchase agreements
|
(7,289,000 | ) | ||
|
Proceeds from common shares subscription
|
4,405,000 | |||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
27,137,684 | |||
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
1,196,035 | |||
|
CASH AND CASH EQUIVALENTS, beginning of the period
|
— | |||
|
CASH AND CASH EQUIVALENTS, end of the period
|
$ | 1,196,035 | ||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||
|
Cash paid during the period for:
|
||||
|
Interest
|
$ | 779 | ||
See Notes to Financial Statements
F-19
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
DECEMBER 31, 2010
| NOTE 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
Organization and
Business Description
Orchid Island Capital, Inc., a Maryland corporation
(“Orchid” or “the Company”), was
incorporated in Maryland on August 17, 2010 for the purpose
of creating and managing a leveraged investment portfolio
consisting of residential mortgage-backed securities
(“MBS”). From incorporation through December 31,
2010, Orchid was a wholly owned subsidiary of Bimini Capital
Management, Inc. (“Bimini”). Orchid began operations
on November 24, 2010 (the date of commencement of
operations). From incorporation through November 24, 2010,
Orchid’s only activity was the sale of common stock to
Bimini. Bimini has elected to be taxed as a real estate
investment trust (“REIT”) under the Internal Revenue
Code of 1986, as amended (the “Code”), and Orchid is
therefore a “qualified REIT subsidiary” of Bimini
under the Code. REITs are generally not subject to federal
income tax on their REIT taxable income provided that they
distribute to their stockholders at least 90% of their REIT
taxable income on an annual basis. In addition, a REIT must meet
other provisions of the Code to retain its special tax status.
Basis of
Presentation and Use of Estimates
The accompanying financial statements are prepared on the
accrual basis of accounting in accordance with accounting
principles generally accepted in the United States
(“GAAP”). The preparation of financial statements in
conformity with GAAP 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 financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The significant
estimates affecting the accompanying financial statements are
the fair values of MBS.
Statement of
Comprehensive Income (Loss)
In accordance with the Financial Accounting Standards
Board’s Accounting Standards Codification (“FASB
ASC”) Topic 220, Comprehensive Income, a statement of
comprehensive income has not been included as the Company has no
items of other comprehensive income. Comprehensive loss is the
same as net loss for the period presented.
Cash and Cash
Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial
institutions and highly liquid investments with original
maturities of three months or less. Restricted cash, if any,
represents cash held on deposit as collateral with the
repurchase agreement counterparty, which may be used to make
principal and interest payments on the related repurchase
agreements. None of the Company’s cash and cash equivalents
were restricted at December 31, 2010.
The Company maintains cash balances at two banks, and, at times,
balances may exceed federally insured limits. The Company has
not experienced any losses related to these balances. All
non-interest bearing cash balances were fully insured at
December 31, 2010 due to a temporary federal program in
effect from December 31, 2010 through December 31,
2012. Under the program, there is no limit to the amount of
insurance for eligible accounts. Beginning in 2013, insurance
coverage will revert to $250,000 per depositor at each financial
institution, and our non-interest bearing cash balances may
again exceed federally insured limits. At December 31,
2010, none of the Company’s deposits were uninsured.
Mortgage-Backed
Securities
The Company invests primarily in mortgage pass-through
(“PT”) certificates, collateralized mortgage
obligations, and interest only (“IO”) securities or
inverse interest only (“IIO”) securities
F-20
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
representing interest in or obligations backed by MBS. MBS
transactions are recorded on the trade date.
In accordance with FASB ASC 320, Investments —
Debt and Equity Securities, the Company classifies its
investments in MBS into one of three categories: trading,
available-for-sale
or
held-to-maturity.
All MBS securities held by Orchid are reflected in the
Company’s financial statements at their estimated fair
value.
The fair value of the Company’s investments in MBS is
governed by FASB ASC 820, Fair Value Measurements and
Disclosures. The definition of fair value in FASB ASC 820
focuses on the price that would be received to sell the asset or
paid to transfer the liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement assumes that the transaction to sell the asset or
transfer the liability either occurs in the principal market for
the asset or liability, or in the absence of a principal market,
occurs in the most advantageous market for the asset or
liability. Estimated fair values for MBS are based on the
average of third-party broker quotes received
and/or
independent pricing sources when available.
Income on PT MBS securities is based on the stated interest rate
of the security. Premiums or discounts present at the date of
purchase are not amortized. For IO securities, the income is
accrued based on the carrying value and the effective yield.
Cash received is first applied to accrued interest and then to
reduce the carrying value. At each reporting date, the effective
yield is adjusted prospectively from the reporting period based
on the new estimate of prepayments and the contractual terms of
the security. For IIO securities, effective yield and income
recognition calculations also take into account the index value
applicable to the security. Changes in fair value of MBS during
the period are recorded in earnings and reported as losses on
trading securities in the accompanying statement of operations.
Financial
Instruments
FASB ASC 825, Financial Instruments, requires disclosure of
the fair value of financial instruments for which it is
practicable to estimate that value, either in the body of the
financial statements or in the accompanying notes. MBS are
accounted for at fair value in the balance sheet. The methods
and assumptions used to estimate fair value for these
instruments are presented in Note 6 of the financial
statements.
The estimated fair value of cash and cash equivalents, accrued
interest receivable, repurchase agreements and accrued interest
payable and due to Bimini Capital Management, Inc. generally
approximates their carrying value as of December 31, 2010
due to the short-term nature of these financial instruments.
Repurchase
Agreements
The Company finances the acquisition of the majority of its PT
MBS through the use of repurchase agreements. Repurchase
agreements are treated as collateralized financing transactions
and are carried at their contractual amounts, including accrued
interest, as specified in the respective agreements. Although
structured as a sale and repurchase obligation, a repurchase
agreement operates as a financing under which securities are
pledged as collateral to secure a short-term loan equal in value
to a specified percentage (generally between 90 and
93 percent) of the market value of the pledged collateral.
While used as collateral, the borrower retains beneficial
ownership of the pledged collateral, including the right to
distributions. At the maturity of a repurchase agreement, the
borrower is required to repay the loan and concurrently receive
the pledged collateral from the lender or, with the consent of
the lender, renew such agreement at the then prevailing
financing rate. Margin calls, whereby a lender requires that the
Company pledge additional securities or cash as collateral to
secure borrowings under its repurchase agreements with such a
lender, are expected to be routinely
F-21
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
experienced by the Company when the value of the MBS pledged as
collateral declines or as a result of principal amortization or
due to changes in market interest rates, spreads or other market
conditions.
The Company’s repurchase agreements typically have terms
ranging from 24 days to six months at inception, with some
having longer terms. Should a counterparty decide not to renew a
repurchase agreement at maturity, the Company must either
refinance with another lender or be in a position to satisfy the
obligation. If, during the term of a repurchase agreement, a
lender should file for bankruptcy, the Company might experience
difficulty recovering its pledged assets, which could result in
an unsecured claim against the lender for the difference between
the amount loaned to the Company plus interest due to the
counterparty and the fair value of the collateral pledged to
such lender, including the accrued interest receivable. At
December 31, 2010, the Company had outstanding balances
under repurchase agreements with one lender with a maximum
amount at risk (the difference between the amount loaned to the
Company, including interest payable, and the fair value of
securities pledged by the Company as collateral, including
accrued interest on such securities) of $1.8 million.
Earnings Per
Share
The Company follows the provisions of FASB ASC 260,
Earnings Per Share. Basic earnings per share (“EPS”)
is calculated as income available to common stockholders divided
by the weighted average number of common shares outstanding or
subscribed during the period. Diluted EPS is calculated using
the “if converted” method for common stock
equivalents, if any. However, the common stock equivalents are
not included in computing diluted EPS if the result is
anti-dilutive. For the initial period ended December 31,
2010, the number of shares outstanding or subscribed at
December 31, 2010 is used for the EPS computation, as
Bimini was the sole subscribed shareholder during the entire
period.
Income
Taxes
Bimini has elected to be taxed as a REIT under the Code. For tax
purposes, for the period ended December 31, 2010, Orchid is
considered to be a “qualified REIT subsidiary” of
Bimini, and therefore, Orchid is included in the federal income
tax return filed by Bimini. Orchid’s income tax attributes,
as discussed below, are calculated as if Bimini and Orchid filed
on a separate return basis.
REIT taxable income (loss) is computed in accordance with the
Code, which is different than Orchid’s financial statement
net income (loss) computed in accordance with GAAP. These
differences can be substantial, and can affect several years.
For the initial period ended December 31, 2010,
Orchid’s REIT taxable income is estimated to be $25,153.
This difference from the GAAP loss is solely attributable to the
fair value adjustments on trading securities recorded for GAAP
totaling $55,307; for tax purposes, such losses are not
recognized until the loss is realized upon the sale of the
securities.
Bimini and Orchid will generally not be subject to federal
income tax on their REIT taxable income to the extent that
Bimini distributes its REIT taxable income to its stockholders
and satisfies the ongoing REIT requirements, including meeting
certain asset, income and stock ownership tests. A REIT must
generally distribute at least 90% of its REIT taxable income to
its stockholders, of which 85% generally must be distributed
within the taxable year, in order to avoid the imposition of an
excise tax. The remaining balance may be distributed up to the
end of the following taxable year, provided the REIT elects to
treat such amount as a prior year distribution and meets certain
other requirements. At December 31, 2010, management
believes that Bimini and Orchid have complied with the Code
requirements and that Bimini continues to qualify as a REIT.
Orchid recognizes and measures its unrecognized tax benefits in
accordance with FASB ASC 740, Income Taxes. Under that
guidance, Orchid assesses the likelihood, based on their
technical merit, that tax positions will be sustained upon
examination based on the facts, circumstances and
F-22
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
information available at the end of each period. All of
Orchid’s tax positions are categorized as highly certain.
There is no accrual for any tax, interest or penalties related
to Orchid’s assessment. The measurement of unrecognized tax
benefits is adjusted when new information is available, or when
an event occurs that requires a change.
Recent Accounting
Pronouncements
In March 2010, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
No. 2010-11,
Derivatives and Hedging (Topic 815) — Scope Exception
Related to Embedded Credit Derivatives, to clarify the scope
exception under
ASC 815-15,
Derivatives and Hedging — Embedded Derivatives, for
embedded credit derivative features to explain how to determine
which features are considered to be embedded derivatives that
should not be analyzed for potential bifurcation. The ASU also
clarifies that the embedded credit derivative feature related to
the transfer of credit risk only in the form of subordination is
not subject to the application of
ASC 815-15
and articulates certain additional circumstances that do not
qualify for the exception. The ASU also discusses the use of the
fair value option for investments in a beneficial interest in a
securitized financial asset. The ASU was effective at the
beginning of the first fiscal quarter beginning after
June 15, 2010, with early adoption permitted. The
implementation of this new accounting guidance did not have a
material impact on the Company’s financial statements.
In February 2010, the FASB issued ASU
No. 2010-09,
Amendments to Certain Recognition and Disclosure Requirements,
which amends ASC 855, Subsequent Events, to address certain
implementation issues related to an entity’s requirement to
perform and disclose subsequent-events procedures. ASU
2010-09
requires SEC filers to evaluate subsequent events through the
date the financial statements are issued and exempts SEC filers
from disclosing the date through which subsequent events have
been evaluated. The ASU was effective immediately upon issuance.
The implementation of this new accounting guidance did not have
a material impact on the Company’s financial statements.
In January 2010, the FASB issued ASU
No. 2010-06,
Improving Disclosures about Fair Value Measurements, which
requires additional disclosures related to the transfers in and
out of the fair value hierarchy and the activity of Level 3
financial instruments. This ASU also provides clarification for
the classification of financial instruments and the discussion
of inputs and valuation techniques. The new disclosures and
clarification are effective for interim and annual reporting
periods after December 15, 2009, except for the disclosures
related to the activity of Level 3 financial instruments.
Those disclosures are effective for periods beginning after
December 15, 2010 and for interim periods within those
years. The Company has implemented all of the required
disclosures of ASU
No. 2010-06;
and that implementation did not have a material impact on the
financial statements.
| NOTE 2. | MORTGAGE-BACKED SECURITIES |
The following table presents the Company’s MBS portfolio as
of December 31, 2010:
| (In thousands) | ||||
|
Pass-Through Certificates, at fair value:
|
||||
|
Adjustable-rate Mortgages
|
$ | 7,732 | ||
|
Fixed-rate Mortgages
|
16,689 | |||
|
Total Pass-Through Certificates
|
24,421 | |||
|
Structured MBS Certificates, at fair value:
|
||||
|
Structured MBS
|
1,422 | |||
|
Totals
|
$ | 25,843 | ||
F-23
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
The Company’s entire MBS portfolio has contractual
maturities greater than 10 years as of December 31,
2010. Actual maturities of MBS investments are generally shorter
than stated contractual maturities and are affected by the
contractual lives of the underlying mortgages, periodic payments
of principal and prepayments of principal.
| NOTE 3. | REPURCHASE AGREEMENTS |
As of December 31, 2010, Orchid had outstanding repurchase
obligations of approximately $22.7 million with a net
weighted average borrowing rate of 0.32%. These agreements were
collateralized by MBS with a fair value, including accrued
interest, of approximately $24.5 million. As of
December 31, 2010, Orchid’s repurchase agreements had
remaining maturities as summarized below:
|
Overnight |
Between 2 and |
Between 31 and |
Greater than |
|||||||||||||||||
| (1 Day or Less) | 30 Days | 90 Days | 90 Days | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Agency MBS:
|
||||||||||||||||||||
|
Fair market value of securities sold, including accrued interest
receivable
|
$ | — | $ | 8,990 | $ | 15,506 | $ | — | $ | 24,496 | ||||||||||
|
Repurchase agreement liabilities associated with these securities
|
$ | — | $ | 8,020 | $ | 14,713 | $ | — | $ | 22,733 | ||||||||||
|
Net weighted average borrowing rate
|
— | 0.27 | % | 0.35 | % | — | 0.32 | % | ||||||||||||
Summary information regarding the Company’s amounts at risk
with individual counterparties greater than 10% of the
Company’s equity at December 31, 2010 is as follows:
|
Weighted Average |
||||||||
|
Maturity of |
||||||||
|
Repurchase |
||||||||
|
Amount |
Agreements |
|||||||
|
Repurchase Agreement Counterparties
|
at Risk(1) | in Days | ||||||
| (In thousands) | ||||||||
|
MF Global, Inc.
|
$ | 1,760 | 46 | |||||
| (1) | Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense. |
| NOTE 4. | CAPITAL STOCK |
The total number of shares of capital stock which the Company
has the authority to issue is 1,000,000 shares of
$0.01 par value common stock. Subsequent to its
organization and through December 31, 2010, the Company
received aggregate net proceeds of $4,405,000 from Bimini for
the subscription to purchase 44,050 shares of the
Company’s common stock. Orchid had 44,050 shares of
common stock subscribed for issuance as of December 31,
2010.
| NOTE 5. | EARNINGS PER SHARE |
The table below reconciles the numerator and denominator of the
EPS for the period ended December 31, 2010.
|
Net loss
|
$ | (30,154 | ) | |
|
Common shares subscribed
|
44,050 | |||
|
Loss per common share subscribed
|
$ | (0.68 | ) | |
F-24
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
| NOTE 6. | FAIR VALUE |
Authoritative accounting literature establishes a framework for
using fair value to measure assets and liabilities and defines
fair value as the price that would be received to sell an asset
or paid to transfer a liability (an exit price) as opposed to
the price that would be paid to acquire the asset or received to
assume the liability (an entry price). A fair value measure
should reflect the assumptions that market participants would
use in pricing the asset or liability, including the assumptions
about the risk inherent in a particular valuation technique, the
effect of a restriction on the sale or use of an asset and the
risk of nonperformance. Required disclosures include
stratification of balance sheet amounts measured at fair value
based on inputs the Company uses to derive fair value
measurements. These strata include:
| • | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), | |
| • | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and | |
| • | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
MBS were recorded at fair value on a recurring basis during the
period ended December 31, 2010. When determining fair value
measurements, the Company considers the principal or most
advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the
asset. When possible, the Company looks to active and observable
markets to price identical assets. When identical assets are not
traded in active markets, the Company looks to market observable
data for similar assets. The following table presents financial
assets and liabilities measured at fair value on a recurring
basis as of December 31, 2010:
| Fair Value Measurements at December 31, 2010, Using | ||||||||||||||||
|
Quoted Prices |
||||||||||||||||
|
in Active |
Significant |
|||||||||||||||
|
Markets for |
Other |
Significant |
||||||||||||||
|
Identical |
Observable |
Unobservable |
||||||||||||||
|
Fair Value |
Assets |
Inputs |
Inputs |
|||||||||||||
| Measurements | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (In thousands) | ||||||||||||||||
|
MBS
|
$ | 25,843 | $ | — | $ | 25,843 | $ | — | ||||||||
| NOTE 7. | RELATED PARTY TRANSACTIONS |
Management
Agreement
Orchid has entered into a management agreement with Bimini,
which provides for an initial term through December 31,
2011 with automatic one-year extension options and subject to
certain termination rights. The Company pays Bimini a monthly
management fee equal to 1.50% per annum of the gross
Stockholders’ Equity (as defined in the management
agreement) of Orchid.
F-25
Table of Contents
ORCHID ISLAND
CAPITAL, INC.
NOTES TO
FINANCIAL STATEMENTS — (Continued)
Orchid is obligated to reimburse Bimini for its costs incurred
under the management agreement. In addition, Orchid is required
to pay Bimini a monthly fee of $7,200, which represents an
allocation of overhead expenses for items that include, but are
not limited to, occupancy costs, insurance and administrative
expenses. These expenses are allocated based on the ratio of
Orchid’s assets and Bimini’s consolidated assets.
Total expenses recorded during the period ended
December 31, 2010 for the management fee and costs incurred
was $20,088. This entire amount was due to Bimini as of
December 31, 2010 and is included in Due to Bimini Capital
Management, Inc. in the accompanying balance sheet.
| NOTE 8. | COMMITMENTS AND CONTINGENCIES |
From time to time, the Company may become involved in various
claims and legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported
contingencies at December 31, 2010.
| NOTE 9. | SUBSEQUENT EVENTS |
Subsequent events were evaluated through May 3, 2011, the
date which the financial statements were available to be issued,
and Orchid has determined that no events occurred subsequent to
December 31, 2010 that require disclosure other than as
described below.
During March 2011, Bimini paid an aggregate of $3,095,000 in
cash to the Company for the subscription to purchase an
aggregate of 30,950 additional shares of common stock of the
Company. On April 29, 2011, 75,000 shares of the
Company’s common stock were issued to Bimini.
On April 28, 2011, the Company’s Board of Directors
authorized: (i) the offer and sale in an underwritten
public offering by the Company of shares of the Company’s
Class A Common Stock, par value $0.01 per share, and
(ii) a private placement by the Company of the
Company’s Class B Common Stock, par value $0.01 per
share, with Bimini as purchaser, in each case having the terms,
rights, and privileges, and subject to conditions, set forth in
a Registration Statement on Form S-11.
F-26
Table of Contents
Until ,
2011 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery is in addition to the dealer’s
obligation to deliver a prospectus when acting as an underwriter
and with respect to its unsold allotments or subscriptions.
5,200,000 Shares
Common Stock
Prospectus
, 2011
, 2011
Barclays Capital
JMP Securities
Cantor Fitzgerald &
Co.
Oppenheimer & Co.
Lazard Capital Markets
Sterne Agee
Table of Contents
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
| Item 31. | Other Expenses of Issuance and Distribution. |
The following table itemizes the expenses incurred by us in
connection with the issuance and registration of the securities
being registered hereunder. All amounts shown are estimates
except the Securities and Exchange Commission registration fee.
|
Securities and Exchange Commission registration fee
|
$ | 13,352 | ||
|
FINRA filing fee
|
$ | 12,000 | ||
|
NYSE Amex fees
|
$ | 55,000 | ||
|
Printing and engraving fees
|
$ | 195,000 | ||
|
Legal fees and expenses
|
$ | 651,949 | ||
|
Accounting fees and expenses
|
$ | 113,790 | ||
|
Transfer Agent and Registrar fees
|
$ | 4,000 | ||
|
Miscellaneous expenses
|
— | |||
|
Total
|
$ | 1,045,091 | ||
| Item 32. | Sales to Special Parties. |
See response to Item 33.
| Item 33. | Recent Sales of Unregistered Securities. |
On August 23, 2010, November 3, 2010,
November 12, 2010, November 30, 2010, December 7,
2010, December 17, 2010, December 31, 2010,
March 28, 2011, March 31, 2011, July 12, 2011 and
July 13, 2011 Bimini Capital Management, Inc. made
aggregate capital contributions of $15,000,000. These capital
contributions were made as consideration to purchase
150,000 shares of our common stock at a price of $100 per
share, which were issued on April 29, 2011 and July 8,
2011 in reliance on the exemption from registration under the
Securities Act or 1933, as amended, or the Securities Act,
afforded by Section 4(2) of the Securities Act.
Concurrently with this offering, we will sell to Bimini Capital
Management, Inc. warrants to purchase an aggregate of
2,655,000 shares of our common stock for an aggregate purchase
price of $1,248,000. Such issuance will be exempt from
registration under the Securities Act pursuant to Section 4(2)
of the Securities Act.
| Item 34. | Indemnification of Directors and Officers. |
The Maryland General Corporation Law (“MGCL”) 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 that is established by
a final judgment and is material to the cause of action. Our
charter contains a provision that eliminates such liability to
the maximum extent permitted by Maryland law.
The MGCL requires a corporation (unless its 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 or she is made, or
threatened to be made, a party by reason of his or her 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
II-1
Table of Contents
be made, or threatened to be made, a party by reason of their
service in those or other capacities unless it is established
that:
| • | 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; | |
| • | the director or officer actually received an improper personal benefit in money, property or services; or | |
| • | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
However, under the MGCL, a Maryland corporation may not
indemnify a director or officer for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of
liability on the basis that personal benefit was improperly
received by such director or officer, unless in either case a
court orders indemnification, and then only for expenses. In
addition, the MGCL permits a Maryland corporation to advance
reasonable expenses to a director or officer upon its receipt of:
| • | 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 | |
| • | a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct. |
Our charter will authorize us and our bylaws will 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 such a proceeding to:
| • | any present or former director or officer of the Company who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity; and | |
| • | any individual who, while a director or officer of the Company and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, 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. |
Our charter and bylaws will also permit us, with the approval of
our Board of Directors, to indemnify and advance expenses to any
individual who served our predecessor in any of the capacities
described above and to any employee or agent of the Company or
our predecessor.
Upon completion of this offering, we intend to enter into
indemnification agreements with each of our directors and
executive officers that will provide for indemnification and
advance of expenses 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.
| Item 35. | Treatment of Proceeds from Stock Being Registered. |
None of the proceeds of this offering will be credited to an
account other than the appropriate capital share account.
II-2
Table of Contents
| Item 36. | Financial Statements and Exhibits. |
(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:
|
Exhibit No.
|
Description
|
|||
| 1 | .1 | Form of Underwriting Agreement by and among Orchid Island Capital, Inc. and the underwriters named therein* | ||
| 3 | .1 | Articles of Amendment and Restatement of Orchid Island Capital, Inc.** | ||
| 3 | .2 | Amended and Restated Bylaws of Orchid Island Capital, Inc.** | ||
| 4 | .1 | Specimen Certificate of common stock of Orchid Island Capital, Inc.** | ||
| 5 | .1 | Opinion of Venable LLP as to the legality of the securities being registered** | ||
| 8 | .1 | Opinion of Hunton & Williams LLP as to certain U.S. federal income tax matters** | ||
| 10 | .1 | Form of Management Agreement** | ||
| 10 | .2 | Form of Warrant Purchase Agreement** | ||
| 10 | .3 | Form of Registration Rights Agreement** | ||
| 10 | .4 | Form of Investment Allocation Agreement** | ||
| 10 | .5 | 2011 Equity Incentive Plan (supercedes Exhibit 10.5 previously filed as an exhibit to Amendment No. 1 to the Registration Statement)*† | ||
| 10 | .6 | Form of Indemnification Agreement** | ||
| 10 | .7 | Form of Master Repurchase Agreement** | ||
| 10 | .8 | Form of Warrant Agreement** | ||
| 23 | .1 | Consent of BDO USA, LLP | ||
| 23 | .2 | Consent of Venable LLP (included in Exhibit 5.1)** | ||
| 23 | .3 | Consent of Hunton & Williams LLP (included in Exhibit 8.1)** | ||
| 24 | .1 | Power of Attorney** | ||
| 99 | .1 | Consent of W Coleman Bitting to being named as a director nominee** | ||
| 99 | .2 | Consent of John B. Van Heuvelen to being named as a director nominee** | ||
| 99 | .3 | Consent of Ava L. Parker to being named as a director nominee** | ||
| 99 | .4 | Consent of Frank P. Filipps to being named as a director nominee** | ||
| * | To be filed by amendment. |
| ** | Previously filed. | |
| † | Compensatory plan or arrangement. |
| Item 37. | Undertakings. |
(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, 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 of
1933, as amended, and is, therefore, unenforceable. In the event
that 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
II-3
Table of Contents
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 of
1933, as amended, and will be governed by the final adjudication
of such issue.
(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 of 1933, as amended, shall be deemed to be 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 of 1933, as amended, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds
to believe that the registrant meets all of the requirements for
filing on
Form S-11
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Vero Beach, in the State of Florida, on this
21st day of July, 2011.
ORCHID ISLAND CAPITAL MANAGEMENT, INC.
| By: |
/s/ ROBERT
E. CAULEY
|
Name: Robert E. Cauley
| Title: | Chairman, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 3 to the Registration Statement
has been signed by the following persons in the capacities
indicated on the 21st day of July, 2011.
|
Name
|
Title
|
Date
|
||||
|
/s/ ROBERT
E. CAULEY Robert E. Cauley |
Chairman, Chief Executive Officer and Director (Principal Executive Officer) | July 21, 2011 | ||||
|
/s/ G.
HUNTER HAAS IV G. Hunter Haas IV |
Chief Financial Officer and Director (Principal Financial Officer) | July 21, 2011 | ||||
|
/s/ JERRY
SINTES Jerry Sintes |
Controller (Principal Accounting Officer) | July 21, 2011 | ||||
II-5
Table of Contents
EXHIBIT INDEX
|
Exhibit No.
|
Description
|
|||
| 1 | .1 | Form of Underwriting Agreement by and among Orchid Island Capital, Inc. and the underwriters named therein* | ||
| 3 | .1 | Articles of Amendment and Restatement of Orchid Island Capital, Inc.** | ||
| 3 | .2 | Amended and Restated Bylaws of Orchid Island Capital, Inc.** | ||
| 4 | .1 | Specimen Certificate of common stock of Orchid Island Capital, Inc.** | ||
| 5 | .1 | Opinion of Venable LLP as to the legality of the securities being registered** | ||
| 8 | .1 | Opinion of Hunton & Williams LLP as to certain U.S. federal income tax matters** | ||
| 10 | .1 | Form of Management Agreement** | ||
| 10 | .2 | Form of Warrant Purchase Agreement** | ||
| 10 | .3 | Form of Registration Rights Agreement** | ||
| 10 | .4 | Form of Investment Allocation Agreement** | ||
| 10 | .5 | 2011 Equity Incentive Plan (supercedes Exhibit 10.5 previously filed as an exhibit to Amendment No. 1 to the Registration Statement)*† | ||
| 10 | .6 | Form of Indemnification Agreement** | ||
| 10 | .7 | Form of Master Repurchase Agreement** | ||
| 10 | .8 | Form of Warrant Agreement** | ||
| 23 | .1 | Consent of BDO USA, LLP | ||
| 23 | .2 | Consent of Venable LLP (included in Exhibit 5.1)** | ||
| 23 | .3 | Consent of Hunton & Williams LLP (included in Exhibit 8.1)** | ||
| 24 | .1 | Power of Attorney** | ||
| 99 | .1 | Consent of W Coleman Bitting to being named as a director nominee** | ||
| 99 | .2 | Consent of John B. Van Heuvelen to being named as a director nominee** | ||
| 99 | .3 | Consent of Ava L. Parker to being named as a director nominee** | ||
| 99 | .4 | Consent of Frank P. Filipps to being named as a director nominee** | ||
| * | To be filed by amendment. |
| ** | Previously filed. | |
| † | Compensatory plan or arrangement. |
II-6
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Orchid Island Capital, Inc.
Vero Beach, Florida
Vero Beach, Florida
We hereby consent to the use in the Prospectus constituting a part of Amendment No. 3 of this
Registration Statement of our report dated May 3, 2011, relating to the financial statements of
Orchid Island Capital, Inc., which is contained in that Prospectus.
We also consent to the reference to us under the caption “Experts” in the Prospectus.
/s/ BDO USA, LLP
Certified Public Accountants
West Palm Beach, Florida
July 21, 2011
West Palm Beach, Florida
July 21, 2011