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TABLE OF CONTENTS
FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on March 20, 2013

Registration Statement No. 333-185570

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Amendment No. 4
to
FORM S-11
FOR REGISTRATION
UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

FIVE OAKS INVESTMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)

641 Lexington Avenue
Suite 1432
New York, New York 10022
(212) 328-9521

(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)

David C. Carroll
Chief Executive Officer and President
641 Lexington Avenue
Suite 1432
New York, New York 10022
(212) 328-9521

(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)

Copies to:

Kenneth G.M. Mason, Esq.
Kaye Scholer LLP
425 Park Avenue
New York, New York 10022
Telephone: (212) 836-8000
Facsimile: (212) 836-8689


Daniel J. Hartnett, Esq.
Kaye Scholer LLP
3 First National Plaza, Suite 4100
70 West Madison Street
Chicago, Illinois 60602
Telephone: (312) 583-2300
Facsimile: (312) 583-2360

 




Bonnie A. Barsamian, Esq.
Valerie Ford Jacob, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
One New York Plaza
New York, New York 10004
Telephone: (212) 859-8000
Facsimile: (212) 859-4000



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 ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

          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 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

   


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The information in this preliminary prospectus is not complete and may be changed. The issuer shall not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, Dated March 20, 2013
PRELIMINARY PROSPECTUS

4,033,333 Shares

LOGO

Common Stock

        Five Oaks Investment Corp. is a recently organized Maryland corporation focused on investing in, financing and managing a leveraged portfolio of agency and non-agency residential mortgage-backed securities, residential mortgage loans and other mortgage-related investments. We are externally managed and advised by Oak Circle Capital Partners LLC, or our Manager. Our Manager is majority owned by its employees (including all of our officers), with a minority stake held by XL Global, Inc., a subsidiary of XL Group plc (NYSE: XL). XL Group plc, through its wholly owned subsidiaries, is a global insurance and reinsurance company, and actively invests in alternative investment funds, private investment funds and investment management companies.

        This is our initial public offering and no public market currently exists for our common stock. We are offering 4,033,333 shares of our common stock, par value $0.01 per share, as described in this prospectus. We anticipate that the initial public offering price will be $15.00 per share of our common stock. Concurrently with this offering, XL Investments Ltd (an indirect and wholly owned subsidiary of XL Group plc) has agreed to purchase in a concurrent private placement an aggregate of $25.0 million of shares of our common stock at the initial public offering price, or 1,666,667 shares based on the anticipated public offering price set forth above. All of the 5,700,000 shares to be sold in this offering and the concurrent private placement to XL Investments Ltd are being sold by Five Oaks Investment Corp. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "OAKS," subject to notice of issuance.

        XL Investments Ltd and employees of our Manager purchased $26.5 million of our common stock in a May 2012 private placement. We also agreed as part of the private placement to issue to XL Investments Ltd warrants to purchase two shares of our common stock for each share of our common stock owned by XL Investments Ltd, and we issued the warrants on September 29, 2012. The warrants have an exercise price equal to 105% of the initial public offering price in this offering and will become exercisable 120 days after the completion of this offering. We used the $26.2 million of net proceeds from the private placement to fund our existing portfolio. We intend to effect a one-for-16 reverse stock split of our issued and outstanding shares of common stock immediately prior to the closing of this offering.

        We will elect to be taxed as a real estate investment trust, or a REIT, for U.S. federal income tax purposes, commencing with our short taxable year ended December 31, 2012. To assist us in qualifying as a real estate investment trust, stockholders are generally restricted from owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock. Our board of directors has granted XL Investments Ltd an exemption from this ownership limitation. Based on a public offering price of $15.00, which is the anticipated initial public offering price set forth above, XL Investments Ltd will beneficially own 43.7% of our common stock following this offering and the concurrent purchase by XL Investments Ltd (or 40.4% if the underwriters exercise their option to purchase additional shares as further described below). Our articles of incorporation contain various other restrictions on the ownership and transfer of our common stock. See "Description of Our Securities—Restrictions on Ownership and Transfer of Our Capital Stock."

        We are an "emerging growth company" under applicable federal securities laws, and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

        Investing in our common stock involves risks. See "Risk Factors" beginning on page 34 of this prospectus for a discussion of the following and other risks:

    Our Manager has had experience operating a REIT only since May 2012, and may not be able to successfully manage our business as a REIT.

    We only commenced operations in May 2012 and may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our stockholders.

    We may change our target assets, investment or financing strategies and other operational policies without stockholder consent, which may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

    Interest rate fluctuations may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

    Changes in prepayment rates may adversely affect our profitability.

    Our strategy involves significant leverage, which may amplify losses.

    We enter into hedging transactions that expose us to contingent liabilities in the future, which may adversely affect our financial results or cash available for distribution to stockholders.

    The management agreement with our Manager was not negotiated on an arm's-length basis and may be costly and difficult to terminate.

    Maintenance of our exclusion from the Investment Company Act will impose limits on our business.

    Our independent registered public accountants identified a material weakness and two significant deficiencies in our internal control over financial reporting.

    If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

       
 
 
  Per Share
  Total
 

Public offering

  $   $
 

Underwriting discount(1)

  $   $
 

Proceeds, before expenses, to us

  $   $

 

(1)
Our Manager will pay the underwriters at closing $         per share for each share sold in this offering, representing the full underwriting discount payable with respect to the shares sold in this offering. The underwriters will not receive any discount on the shares purchased by XL Investments Ltd. in the concurrent private placement. In addition, our Manager will reimburse us for any offering expenses that exceed $1.5 million in the aggregate. See "Underwriting."

        We have granted underwriters the right to purchase up to an additional 605,000 shares of our common stock from us at the initial public offering price, less the underwriting discount, within 30 days after the date of this prospectus. The underwriters expect to deliver the shares of common stock to investors on or about                            , 2013.

Barclays   Credit Suisse   UBS Investment Bank   Keefe, Bruyette & Woods
A Stifel Company



Ladenburg Thalmann & Co. Inc.   Mitsubishi UFJ Securities   Aegis Capital Corp.   National Securities Corporation

The date of this prospectus is         , 2013.


TABLE OF CONTENTS

Glossary

    i  

Prospectus Summary

    1  

Risk Factors

    34  

Forward-Looking Statements

    81  

Use of Proceeds

    83  

Distribution Policy

    84  

Capitalization

    85  

Selected Financial Information

    87  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    88  

Business

    117  

Management

    142  

Our Manager and the Management Agreement

    155  

Principal Stockholders

    165  

Certain Relationships and Related Transactions

    166  

Description of Our Securities

    169  

Certain Provisions of the Maryland General Corporation Law and Our Articles of Incorporation and Bylaws

    176  

Shares Eligible for Future Sale

    182  

U.S. Federal Income Tax Considerations

    186  

Underwriting

    212  

Legal Matters

    220  

Experts

    220  

Where You Can Find More Information

    220  

Index to the Financial Statements of Five Oaks Investment Corp.

    F-1  

        You should rely only on the information contained in this prospectus or in any free writing prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

        Until                        , 2013 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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GLOSSARY

        This glossary highlights some of the terms that we use elsewhere in this prospectus and is not a complete list of all the defined terms used herein.

        "Advisers Act" means the Investment Advisers Act of 1940, as amended.

        "AFS security" means an available-for-sale security.

        "Agency" means each of Fannie Mae, Freddie Mac and Ginnie Mae.

        "Agency RMBS" means RMBS whose principal and interest payments are guaranteed by a GSE or Ginnie Mae. These securities may be either "pass through" securities, where cash flows from the underlying mortgage loan pool are paid to holders of the securities on a pro rata basis, or securities structured from "pass through" securities, as to which cash flows are redirected in various priorities, which we refer to as CMOs.

        "ARMs" means adjustable-rate residential mortgage loans.

        "B Notes" means subordinated mortgage loans or notes secured by mortgage loans that are subordinated to at least one class of senior notes.

        "Bankruptcy Code" means Title 11 of the United States Code, as amended.

        "CMO" means a collateralized mortgage obligation.

        "CPR" means constant prepayment rate.

        "credit enhancement" means techniques to improve the credit ratings of securities, including overcollateralization, creating retained spread, creating subordinated tranches and insurance.

        "Dodd-Frank Act" means the Dodd Frank Wall Street Reform and Consumer Protection Act.

        "Exchange Act" means the Securities Exchange Act of 1934, as amended.

        "Fannie Mae" means the Federal National Mortgage Association.

        "FASB" means the Financial Accounting Standards Board.

        "FHA" means the Federal Housing Administration.

        "FHFA" means the U.S. Federal Housing Finance Agency.

        "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.

        "Freddie Mac" means the Federal Home Loan Mortgage Corporation.

        "FRMs" means fixed-rate mortgages.

        "Fundamental Transaction" means any capital reorganization, reclassification of our capital stock, consolidation or merger of us with another company in which we are not the survivor, or sale, transfer or other disposition of all or substantially all of our assets to another company.

        "GAAP" means the United States generally accepted accounting principles.

        "Ginnie Mae" means the Government National Mortgage Association, a wholly owned corporate instrumentality of the United States of America within the U.S. Department of Housing and Urban Development. Ginnie Mae is a U.S. Government agency.

        "GSE" means a U.S. Government-sponsored entity such as Freddie Mac or Fannie Mae.

        "HARP" means the Home Affordable Refinance Program.

        "HERA" means the Housing and Economic Recovery Act of 2008.

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        "High LTV Pools" means securities collateralized by loans with greater than or equal to 80% loan-to-value.

        "hybrid ARMs" means residential mortgage loans that have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index.

        "Internal Revenue Code" means the U.S. Internal Revenue Code of 1986, as amended.

        "Investment Company Act" means the Investment Company Act of 1940, as amended.

        "Investor Only Pools" means securities collateralized by loans secured by investor-owned properties.

        "IRS" means the U.S. Internal Revenue Service.

        "JOBS Act" means the Jumpstart Our Business Startups Act.

        "Legacy Non-Agency RMBS" means Non-Agency RMBS issued prior to the end of 2008.

        "Linked Transaction" means the initial purchase of RMBS securities and contemporaneous financing with a repurchase agreement with the same counterparty from which the securities were purchased.

        "Loan Balance Pools" means securities collateralized by loans of less than $175,000 in principal.

        "Manager" or "Oak Circle" means Oak Circle Capital Partners LLC, a Delaware limited liability company.

        "Manager Equity Plan" means the Five Oaks Investment Corp. Manager Equity Plan.

        "MBS" means mortgage-backed securities.

        "MGCL" means the Maryland General Corporation Law.

        "mortgage loans" means loans secured by real estate with a right to receive the payment of principal and interest on the loan (including servicing fees).

        "New Issue Non-Agency RMBS" means Non-Agency RMBS issued since the beginning of 2009.

        "Non-Agency RMBS" means RMBS that are not issued or guaranteed by a GSE or Ginnie Mae, including investment grade classes (rated AAA through BBB), non-investment grade classes (rated BB or lower) and unrated classes.

        "NYSE" means the New York Stock Exchange, Inc.

        "prime mortgage loans" means residential mortgage loans that generally conform to Ginnie Mae or GSE underwriting guidelines.

        "REMIC" means a real-estate mortgage investment conduit as defined under Section 860D of the Internal Revenue Code.

        "RMBS" means mortgage-backed securities that are collateralized by residential mortgages.

        "Sarbanes-Oxley Act" means the Sarbanes-Oxley Act of 2002.

        "SEC" means the U.S. Securities and Exchange Commission.

        "Securities Act" means the Securities Act of 1933, as amended.

        "Swaption" means an option in which the buyer has the right to enter into an interest rate swap.

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        "TBAs" means to-be-announced forward contracts. In a TBA, a buyer will agree to purchase, for future delivery, Agency mortgage investments with certain principal and interest terms and certain types of underlying collateral, but the particular Agency mortgage investments to be delivered are not identified until shortly before the TBA settlement date.

        "TMP" means a taxable mortgage pool as defined under Section 7701(i) of the Internal Revenue Code.

        "TRS" means a taxable REIT subsidiary as defined under Section 856(l) of the Internal Revenue Code.

        "UBTI" means unrelated business taxable income as defined under Section 512(a) of the Internal Revenue Code.

        "USRPI" means a U.S. real property interest as defined under Section 897(c) of the Internal Revenue Code.

        "whole pool" means MBS issued with respect to an underlying pool of mortgage loans in which a buyer holds all of the certificates issued by a pool.

        "XL Global" means XL Global, Inc., an indirect wholly owned subsidiary of XL Group plc (NYSE: XL).

        "XL Investments" means XL Investments Ltd, an indirect wholly owned subsidiary of XL Group plc (NYSE: XL).

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PROSPECTUS SUMMARY

        This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read carefully the more detailed information set forth under "Risk Factors" and the other information included in this prospectus. Except where the context suggests otherwise, the terms "company," "we," "us," and "our" refer to Five Oaks Investment Corp., a Maryland corporation, and "our Manager" refers to Oak Circle Capital Partners LLC, our external manager.

        We intend to effect a one- for-16 reverse stock split of our issued and outstanding shares of common stock immediately prior to the closing of this offering. Unless indicated otherwise, the information in this prospectus has been adjusted to reflect this reverse stock split and assumes no exercise by the underwriters of their option to purchase additional shares.

        Defined terms used but not defined below have the meanings ascribed to them in the "Glossary."

Overview of Our Company

        We are a recently organized Maryland corporation focused on investing in, financing and managing a leveraged portfolio of Agency and Non-Agency residential mortgage-backed securities, or RMBS, residential mortgage loans and other mortgage-related investments, which we collectively refer to as our target assets. We believe that our hybrid model of investing in both Agency RMBS and Non-Agency RMBS positions us to benefit from anticipated changes in the residential mortgage market in the coming years as the role of GSEs are reduced, providing us with attractive investment opportunities across the Agency and Non-Agency RMBS sectors and potentially enhancing our ability to deliver attractive risk-adjusted returns to our investors.

        We commenced operations in May 2012 after raising $26.2 million net proceeds in a private placement and investing those proceeds in Agency RMBS and Non-Agency RMBS. Since our business was initially funded on May 16, 2012, our Manager has increased our net asset value from $26.2 million to $32.3 million as of December 31, 2012, representing a 23.3% increase. This increase resulted primarily from a rise in the prices of the majority of our portfolio securities during the period. Given that the increase in net asset value was due to unrealized gains on portfolio securities, such increases may not be sustainable or realizable going forward.

        Our current portfolio of Agency and Non-Agency RMBS consists of assets that as of December 31, 2012 had a fair value of $81.0 million on a GAAP basis, or $103.6 million including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. As of December 31, 2012, our portfolio was comprised of approximately 86% Agency RMBS and 14% Non-Agency RMBS on a GAAP basis, or 68% Agency RMBS and 32% Non-Agency RMBS including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. For GAAP financial statement reporting purposes, certain of our Non-Agency RMBS are reported as "Linked Transactions" and the fair value of those assets are not included in the fair value of our RMBS portfolio on a GAAP basis. This is because when we finance the purchase of securities with repurchase agreements from the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed to be part of the same arrangement, or a "Linked Transaction," unless certain criteria are met. Under GAAP, we account for the two components of a Linked Transaction (the RMBS purchase and the related repurchase agreement financing) on a net basis and record a forward purchase (derivative) contract, at fair value, on our balance sheet in the line item "Linked Transactions, net, at fair value." In managing and evaluating the composition and performance of our RMBS portfolio, however, we do not view the purchase of our Non-Agency RMBS and the associated repurchase agreement financing as transactions that are linked. We therefore have also presented certain information that includes the Non-Agency RMBS underlying our Linked Transactions. This information constitutes non-GAAP financial measures

 

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within the meaning of Regulation G, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to analyze our RMBS portfolio and the performance of our Non-Agency RMBS in the same way that we assess our portfolio and such assets.

        Our objective is to provide attractive risk-adjusted returns to our investors over time, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective by selectively acquiring and managing a diversified investment portfolio of our target assets designed to produce attractive returns across a variety of market conditions and economic cycles. We fund the acquisition of our assets through the use of leverage from multiple counterparties, currently through borrowings under a series of short-term repurchase agreements. We generate returns from the spread or difference between what we earn on our assets and our costs, including the cost of funds we borrow after giving effect to our hedging activities.

        We are managed by Oak Circle Capital Partners LLC, or our Manager. Our Manager manages us exclusively and, unless and until our Manager agrees to manage any additional investment vehicle, our Manager will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity.

        Our Manager's investment professionals and other staff have extensive experience in managing fixed-income assets, including Agency and Non-Agency RMBS. The core team has worked together for approximately the last ten years and has an average of more than 20 years of industry experience. Our Manager's management team co-founded and/or previously held executive positions with Ceres Capital Partners, LLC, or Ceres Capital. Ceres Capital was a specialized investment management company that managed Victoria Finance Ltd, or Victoria, a structured investment vehicle. Following the 2007 liquidity crisis, in 2008, Ceres Capital entered Chapter 11 under the Bankruptcy Code and Victoria entered a controlled wind-down. Farmington Finance Ltd, or Farmington, was an investment vehicle established in November 2007 for the purpose of refinancing a portion of the Victoria asset portfolio and was managed by Ceres and then by Ivy Square, Ltd, or Ivy Square. Members of our Manager's management team also previously held executive positions at Ivy Square. Farmington was liquidated in August 2011 at the direction of the transaction lender. For additional information regarding our Manager's management team and Ceres Capital, Victoria and Farmington, see "Management—Our Directors and Executive Officers," "Management—Additional Information Concerning Our and Our Manager's Executive Officers" and "Our Manager and the Management Agreement—Executive Officers of Our Manager."

        Our Manager is majority owned by its employees (including all of our officers) with a minority stake held by XL Global, a subsidiary of XL Group plc (NYSE: XL). XL Group plc, through its wholly owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and actively invests in alternative investment funds, private investment funds and investment management companies.

        XL Investments, an indirect wholly owned subsidiary of XL Group plc, currently owns 1,562,500 shares of our common stock and has agreed to purchase in a private placement $25.0 million of additional shares of our common stock concurrently with this offering. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares concurrently with this offering (or 40.4% if the underwriters exercise in full their option to purchase additional shares); and 60.4% and 57.1%, respectively, after also giving effect to the exercise of warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering.

        We will elect to be taxed as a REIT beginning with our short taxable year ended December 31, 2012 under the Internal Revenue Code and generally will not be subject to U.S. federal taxes on our income to the extent we currently distribute our income to our stockholders and maintain our

 

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qualification as a REIT. Our qualification as a REIT will depend on our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the source of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income taxes at regular corporate rates. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to certain federal, state and local taxes on our income or property. We also intend to operate our business in a manner that will permit us to maintain our exclusion from registration under the Investment Company Act.

Current Market Opportunities

        We believe that the changing regulatory landscape and declining roles of the GSE portfolios should present attractive investment opportunities for us in both Agency and Non-Agency mortgage assets. We currently invest in both Agency RMBS and Non-Agency RMBS issued prior to the end of 2008, or Legacy Non-Agency RMBS. We may also benefit from the curtailment of direct government involvement in housing finance, and we intend to invest in Non-Agency RMBS issued since the beginning of 2009, or New Issue Non-Agency RMBS, that have recently increased in issuance in the residential mortgage sector. We expect to be well positioned to evaluate the additional investment opportunities in New Issue Non-Agency RMBS as such issuance becomes more economically attractive. Overall, we believe that our hybrid model maximizes the range of attractive investment opportunities available to us across the Agency RMBS and Non-Agency RMBS markets and potentially enhances our ability to deliver attractive risk-adjusted returns to our investors over time.

        Since the height of the financial crisis in 2008, there have been a number of proposals put forward regarding the reform of the housing finance market. We believe the most important theme of these proposals, as highlighted in the U.S. Department of Treasury and Department of Housing and Urban Development report to Congress on February 11, 2011, is the reduction of the government's role in, and the return of private capital to, the housing finance market. Several tools intended to encourage investment of private capital were recommended in the U.S. Department of Treasury and Department of Housing and Urban Development report, including increasing guarantee fees, decreasing loan limits, tightening underwriting criteria for conforming loans and developing risk sharing and/or credit enhancement markets. We believe these recommended proposals, some of which have begun to be implemented, such as the tightening of conforming loan limits in October 2011 and two separate 2012 announcements regarding increases in guarantee fees, will increase the need for private capital in the Non-Agency RMBS market, which we believe presents an opportunity for us. These proposals will also reduce the future supply of Agency RMBS, limit mortgage refinancing and associated prepayment risk, and reduce the future volatility of the Agency RMBS market, which we view as positive developments for existing Agency RMBS. In addition, we believe these proposals have contributed to the recent increase in New Issue Non-Agency RMBS transactions and will present new investment opportunities for us. Non-Agency RMBS issuance backed by prime loans has increased from $0.7 billion in 2011 to $3.5 billion in 2012, a 400% increase. For 2013, industry research projects a significant increase in such Non-Agency RMBS issuance, with several estimates for the annual issuance in the $20-30 billion range, and projects the potential for meaningful increases in such estimates if the housing recovery continues, if underwriting standards relax modestly, if securitization issuance economics continue to improve or if further increases occur in Agency guarantee fees.

        We believe investors continue to seek incremental spreads relative to U.S. Treasury Department Notes in a low yield environment and financial institutions continue to prefer high quality, liquid Agency RMBS. In addition, our Manager has observed that the long-standing correlation between the prepayment rates of borrowers and their ability to refinance mortgage loans (as defined by the difference between available rates in the market and the legacy rates being paid by borrowers) has

 

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become partially de-linked in the past several years. Our Manager believes this is primarily a result of the significant decrease in the equity value of those borrowers' homes. The reduction in prepayment rates and other factors have resulted in yield spreads on Agency RMBS at what our Manager views as attractive levels.

        Our Manager has diversified our Agency RMBS portfolio with Non-Agency RMBS collateralized by non-conforming residential mortgages. Mortgage loan delinquencies and credit losses may continue to rise and housing conditions may continue to deteriorate, but even after incorporating additional negative home price assumptions, we believe that current prices for certain Non-Agency RMBS offer the potential for attractive risk-adjusted returns. Furthermore, there are increasing signs that the housing market may have stabilized, and the housing sector is now a net positive contributor to economic activity, if from a depressed level. According to the National Association of Realtors, December 2012 existing home sales rose to a seasonally adjusted 4.94 million, a 12.8% increase from December 2011, and the December 2012 national median existing-home price was $180,800, an 11.5% increase from the prior year. December represented the tenth consecutive month of year-over-year median home price increases. We believe that stabilization and any improvement in the housing market have the potential to enhance returns on Non-Agency RMBS.

        The U.S. Federal Reserve Board has maintained a near-zero target for the federal funds rate. On January 25, 2012, the Federal Open Market Committee, or FOMC, released a statement indicating that it would maintain the target range for the federal funds rate at 0% to 0.25% and that it continues to anticipate that economic conditions, including low rates of resource utilization and a subdued outlook for inflation over the medium term, are likely to warrant exceptionally low levels for the federal funds rate at least through 2014. The FOMC reiterated this statement on April 25, 2012. In June 2012, the FOMC updated its assessment by noting that the economy was expanding moderately in 2012 with business fixed investment continuing to advance and inflation in decline. However, the FOMC also cautioned that growth in employment had slowed in recent months, and the unemployment rate remained elevated. In September 2012, the U.S. Federal Reserve further updated its economic assessment by noting that, despite continued modest economic expansion, employment growth remains slow and the unemployment rate remains elevated. Accordingly, the U.S. Federal Reserve increased its focus on employment growth by announcing a third round of quantitative easing, or QE3, by agreeing to purchase additional Agency RMBS at a pace of $40 billion per month, as well as extending the existing commitment to exceptionally low levels for the federal funds rate through at least mid-2015. On January 30, 2013, the U.S. Federal Reserve reaffirmed its commitment to QE3, including a continuation of exceptionally low levels for the federal funds rate for so long as unemployment remains above 6.5% and inflation remains at or below 2.5%, as well as the continued purchase of Agency RMBS at a pace of $40 billion per month.

        The current market environment and outlook have created strong demand for Agency RMBS as well as Non-Agency RMBS assets and has also reduced the costs of our financing and hedging. Our Manager believes this slow growth environment should promote a low federal funds rate and a higher demand for Agency RMBS and Non-Agency RMBS.

        We use leverage to seek to increase potential returns to our stockholders by borrowing against existing assets through short-term repurchase agreements, and in the future we may utilize longer-term secured financings, in each case, using the proceeds to acquire additional assets. As the capital markets have recovered, commercial banks have re-entered the secured lending market, which has quickened the pace of the recovery of asset values in the credit markets and increased the availability of leverage. Financing of Agency RMBS and Non-Agency RMBS is currently widely available through, among other vehicles, short-term repurchase agreements. Haircuts, or the discount attributed to the value of securities sold under repurchase agreements, average between 3% and 10% for Agency RMBS and average between 10% and 50% for Non-Agency RMBS, depending on the specific security used as collateral for such repurchase agreements.

 

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        Our Manager's views of the current market opportunities are based on its own assessments. There can be no assurance that our investment and financing strategies based on our Manager's views will be able to generate attractive returns for our stockholders. Furthermore, there is no way of knowing what impact government programs and any future actions may have on the prices and liquidity of RMBS or other securities in which we invest.

Our Manager

        We are externally managed and advised by Oak Circle Capital Partners LLC pursuant to a management agreement between us and Oak Circle. Oak Circle, which was formed for the purpose of becoming our Manager, manages us exclusively and, unless and until our Manager agrees to manage any additional investment vehicle, our Manager will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity. As our Manager, Oak Circle implements our business strategy, performs investment advisory services and activities with respect to our assets and is responsible for performing all of our day-to-day operations.

        All of our officers are employees of our Manager, and we rely on the extensive experience of our Manager's investment professionals and other staff in managing fixed-income assets, including Agency and Non-Agency RMBS. Our Manager's core team has worked together for approximately the last ten years and has an average of more than 20 years of industry experience. Our and our Manager's Chief Executive Officer and President, David Carroll, and Chief Investment Officer, Kian Fui (Paul) Chong, have been managing our assets since our inception and, subject to the oversight of our board of directors, will have primary responsibility for overseeing the management of our assets going forward. Our Manager's management team co-founded and/or previously held executive positions with Ceres Capital. Ceres Capital was a specialized investment management company that managed Victoria, a structured investment vehicle. Following the 2007 liquidity crisis, in 2008, Ceres Capital entered Chapter 11 under the Bankruptcy Code and Victoria entered a controlled wind-down. Farmington was an investment vehicle established in November 2007 for the purpose of refinancing a portion of the Victoria asset portfolio and was managed by Ceres and then by Ivy Square. Members of our Manager's management team also previously held executive positions at Ivy Square. Farmington was liquidated in August 2011 at the direction of the transaction lender. For additional information regarding our and our Manager's management team, and Ceres Capital, Victoria and Farmington, see "Management—Our Directors and Executive Officers," "Management—Additional Information Concerning Our and Our Manager's Executive Officers" and "Our Manager and the Management Agreement—Executive Officers of Our Manager."

        Our Manager is majority owned by its employees (including all of our officers), with a minority stake held by XL Global, a subsidiary of XL Group plc (NYSE: XL). XL Group plc, through its wholly owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and has actively invested in alternative investment funds, private investment funds and investment management companies. Our Manager is an investment adviser registered with the SEC.

Our Investment Strategy

        Our objective is to provide attractive risk-adjusted returns to our investors over time through a combination of dividends and capital appreciation. We rely on the expertise of our Manager's team to selectively construct and actively manage a diversified mortgage investment portfolio by identifying asset classes, and target assets within our asset classes, including prime, Alt-A and subprime loans, that, when properly financed and hedged, are designed to produce attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that the residential mortgage market will undergo dramatic change in the coming years as the role of GSEs is diminished, which we expect will create attractive investment opportunities for us.

 

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Our Target Assets

        We intend to continue to invest in, finance and manage mortgage-related investments, which we define as Agency RMBS, Legacy Non-Agency RMBS, New Issue Non-Agency RMBS and other mortgage-related investments, including the principal assets set forth in each of the asset classes described below. We assess the allocation of investments across our target asset classes, and within our asset classes, including our allocations among prime, Alt-A and subprime loans, based on the risk-adjusted relative value of each asset and the overall contribution of each asset to the performance of our investment portfolios and the value added to our investment portfolios. Additional factors that may impact the allocation of our investments include security, structure, seniority, credit enhancement, issuance size, legal matters, geography and the profiles of underlying borrowers. We plan to use the net proceeds from the offering and the concurrent private placement to XL Investments to purchase approximately 30 - 50% Agency RMBS, approximately 15 - 35% Legacy Non-Agency RMBS and approximately 15 - 35% New Issue Non-Agency RMBS (see "Use of Proceeds"). Because our Manager intends to employ different amounts of leverage to different classes of target assets, we expect that, over the first 12 months following the completion of this offering, our assets will be invested in approximately 60% Agency RMBS, 20% Legacy Non-Agency RMBS and 20% New Issue Non-Agency RMBS. Within Legacy Non-Agency RMBS, our intended allocations to prime, Alt-A and subprime loans are not predetermined, but are generally determined based on the risk-adjusted relative value of each asset individually and specifically on the amount of the discount to par at the time of purchase. Accordingly, we may (but currently do not expect to) allocate all of our Legacy Non-Agency RMBS investments to subprime loans. Our allocations in New Issue Non-Agency RMBS will only be to prime loans. Our investment allocation expectations in the first 12 months following the offering and subsequently are subject to change based on market changes and our Manager's assessment of the factors described above. See "—Our Financing Strategy and Leverage."

    Agency RMBS

        We invest a portion of our capital in Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as Ginnie Mae, or a U.S. Government-sponsored entity, such as Fannie Mae or Freddie Mac. The Agency RMBS we own and may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on ARMs generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid ARMs have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. ARMs and hybrid ARMs generally have periodic and lifetime constraints on how much the loan interest rate can change on any predetermined interest rate reset date.

 

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        The types of Agency RMBS in which we invest and intend to continue to invest are as follows:

Mortgage pass-through certificates

  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. The principal and interest payments of these Agency RMBS are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, and are backed primarily by single family mortgage loans.

Collateralized mortgage obligations

 

CMOs are securities that are structured from residential mortgage pass-through certificates, which receive monthly payments of principal and interest. CMOs divide the cash flows that come from the underlying mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying pass-through certificates. 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 include stripped securities, which are mortgage-backed securities structured with two or more classes that receive different distributions of principal or interest on a pool of Agency RMBS. Stripped securities include interest only Agency RMBS and inverse interest only Agency RMBS, each of which we may invest in subject to maintaining our qualification as a REIT.

Interest only Agency RMBS (IOs)

 

IOs are a stripped security that entitles the holder to receive monthly interest payments 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—interest rates and the rate of principal payments (particularly prepayments). If we decide to invest in these types of securities, we anticipate doing so primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.

 

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Inverse interest only Agency RMBS (IIOs)

 

IIOs are IOs that have interest rates that move in the opposite direction of an interest rate index, such a LIBOR, and are subject to caps and floors. Inverse interest only Agency RMBS entitles the holder to interest only payments based on a notional principal balance, which is typically equal to a fixed rate of interest on the notional principal balance less a floating rate of interest on the notional principal balance that adjusts according to an index subject to set minimum and maximum rates. The value of IIOs will generally decrease when its related index rate increases and increase when its related index rate decreases.

TBAs

 

We may utilize "to-be-announced" forward contracts in order to invest in Agency RMBS. Pursuant to these TBAs, we would agree to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered would not be identified until shortly before the TBA settlement date. Our ability to purchase Agency RMBS through TBAs may be limited by the 75% income and asset tests applicable to REITs. See "U.S. Federal Income Tax Considerations—Taxation of Five Oaks Investment Corp."

    Non-Agency RMBS

        We invest a portion of our capital in Non-Agency RMBS. Non-Agency RMBS are residential mortgage-backed securities that are not guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity, including investment grade classes, non-investment grade classes and unrated classes. Our investment focus has been on Legacy Non-Agency RMBS that when originally issued were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations but that trade at a discount to par at the time of purchase. We intend to expand our focus to include New Issue Non-Agency RMBS, including one or more classes of such issues, which may be purchased at par, at a discount to par or at a premium to par based upon the class.

        The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines and borrower characteristics, loan characteristics and level of documentation that are below Agency underwriting guidelines and therefore are not issued or guaranteed by an agency. The mortgage loan collateral may be classified as subprime, Alt-A or prime depending upon the borrower's credit rating and the loan documentation. The Non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

 

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Other Mortgage-Related Investments

        Other residential mortgage-related investments in which we may invest are as follows:

Prime mortgage loans

  Prime mortgage loans are residential mortgage loans that conform to the underwriting guidelines of a U.S. Government agency or a GSE but that do not carry any credit guarantee from either a U.S. Government agency or a GSE. Jumbo prime mortgage loans are prime mortgage loans that conform to such underwriting guidelines except as to loan size.

Non-prime mortgage loans

 

Non-prime mortgage loans are residential mortgage loans that do not meet all of the underwriting guidelines of the GSEs. Consequently, these loans may carry higher credit risk than prime mortgage loans. Non-prime mortgage loans may allow borrowers to qualify for a mortgage loan with reduced or alternative forms of documentation. This category includes loans commonly referred to as Alt-A or as subprime.

Other MBS

 

We may also invest in mortgage-backed securities, or MBS, for which the principal and interest payments are guaranteed by a U.S. Government-sponsored entity but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to, Fannie Mae's DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac's Multifamily Mortgage Participation Certificates and Ginnie Mae's project loan pools or CMOs structured from such collateral. We may invest in credit enhancement or B Notes derived from Agency pools and/or non-Agency pools.

Mortgage-related derivatives

 

As part of our investment and risk management strategy, we may enter into derivative transactions as a method of managing our risk/return profile and/or hedging existing or emerging risks within our investment portfolio. These transactions may include, but are not limited to, buying or selling forward positions and credit default swaps. Our Manager intends to implement this strategy based upon overall market conditions, the level of volatility in the mortgage market, the size of our investment portfolio and our intention to qualify as a REIT.

Other real estate related investments

 

Other real estate related investments may include excess interest-only instruments and other investments that may arise as the mortgage market evolves.

 

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Our Current Portfolio

        As of December 31, 2012, our portfolio consisted of Agency RMBS and Non-Agency RMBS with an aggregate fair value of $81.0 million, a weighted average yield of 3.64% and a net weighted average borrowing cost of 0.59% as reported in accordance with GAAP. These metrics do not include Non-Agency RMBS underlying our Linked Transactions. On a non-GAAP combined basis (which reflects the inclusion of the Non-Agency RMBS underlying our Linked Transactions combined with our GAAP-reported RMBS), our portfolio as of December 31, 2012 had an aggregate fair value of $103.6 million, a weighted average yield of 4.84% and a net weighted average borrowing cost of 0.85% (taking into account the associated repurchase financing). As of December 31, 2012, we borrowed 2.0 times our stockholders' equity (calculated in accordance with GAAP) and 2.4 times after including repurchase agreements underlying our Linked Transactions (calculated on a non-GAAP basis). For a discussion of our presentation of non-GAAP information and a reconciliation to the comparable GAAP presentation, see the following tables, related footnotes and accompanying narrative.

        The charts below summarize the categories of RMBS in which we were invested as of December 31, 2012 on a GAAP basis (which excludes Non-Agency RMBS underlying our Linked Transactions) and on a non-GAAP basis (which includes Non-Agency RMBS underlying our Linked Transactions):


Portfolio Composition

 
   

RMBS Portfolio (GAAP basis)
$81.0 million

  RMBS Portfolio (non-GAAP basis)
$103.6 million


GRAPHIC

 


GRAPHIC

        Since our business was initially funded on May 16, 2012, our Manager has increased our net asset value from $26.2 million to $32.3 million as of December 31, 2012, representing a 23.3% increase. This increase resulted primarily from a rise in the prices of the majority of our portfolio securities during the period. Given that the increase in net asset value was due to unrealized gains on portfolio securities, such increases may not be sustainable or realizable going forward.

 

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        The following table summarizes certain characteristics of our investment portfolio as of December 31, 2012: (1) as reported in accordance with GAAP, which excludes the Non-Agency RMBS underlying our Linked Transactions; (2) to show separately the Non-Agency RMBS underlying our Linked Transactions; and (3) on a non-GAAP combined basis (which reflects the inclusion of the Non-Agency RMBS underlying our Linked Transactions combined with our GAAP-reported RMBS):

$ in thousands
  Principal
Balance
  Unamortized
Premium
(Discount)
  Designated
Credit
Reserve
  Amortized
Cost
  Unrealized
Gain/
(Loss)
  Fair
Value
  Net
Weighted
Average
Coupon(1)
  Average
Yield(2)
 

Agency RMBS

                                                 

15 year fixed-rate

  $ 3,251   $ 88   $   $ 3,339   $ 60   $ 3,399     2.50 %   1.94 %

30 year fixed-rate

    62,059     3,106         65,165     1,410     66,575     3.50 %   2.71 %

Total Agency RMBS

    65,310     3,194         68,504     1,470     69,974     3.45 %   2.68 %

Non-Agency RMBS Excluding Linked Transactions

    18,507     (3,534 )   (4,883 )   10,090     964     11,054     0.51 %   10.18 %
                                       

Total/Weighted Average (GAAP)

  $ 83,817   $ (340 ) $ (4,883 ) $ 78,594   $ 2,434   $ 81,028     2.80 %   3.64 %
                                       

Non-Agency RMBS Underlying Linked Transactions

    38,320     (6,722 )   (12,929 )   18,669     3,950     22,620     0.71 %   9.89 %
                                       

Combined/Weighted Average (non-GAAP)

  $ 122,137   $ (7,062 ) $ (17,812 ) $ 97,263   $ 6,384   $ 103,648     2.15 %   4.84 %
                                       

(1)
Weighted average coupon is presented net of servicing and other fees.

(2)
Average yield incorporates future prepayment assumptions.

        The following table summarizes the portions of our Non-Agency RMBS portfolio that are collateralized by prime, Alt-A and subprime loans as of December 31, 2012:

 
  GAAP Basis
(Excluding Linked
Transactions)
  Non-GAAP
Adjustments
(Non-Agency
RMBS underlying
Linked
Transactions)
  Non-GAAP Basis
(Combined)
 

Prime

  $   $   $  

Alt-A

    5,357,158     15,005,002     20,362,160  

Subprime

    5,697,236     7,614,540     13,311,776  
               

Total

  $ 11,054,394   $ 22,619,542   $ 33,673,936  
               

 

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        The following table presents certain information about the carrying value of our available for sale, or AFS, RMBS and the Non-Agency RMBS underlying our Linked Transactions, as of December 31, 2012:

 
  GAAP Basis
(AFS RMBS—
Excluding Linked
Transactions)
  Non-GAAP
Adjustments
(Non-Agency
RMBS underlying
Linked
Transactions)
  Non-GAAP Basis
(Combined)
 

Principal balance

  $ 83,817,577   $ 38,320,365   $ 122,137,942  

Unamortized premium

    3,193,345         3,193,345  

Unamortized discount

                   

Designated credit reserve

    (4,882,582 )   (12,929,231 )   (17,811,813 )

Net, unamortized

    (3,534,339 )   (6,721,749 )   (10,256,088 )
               

Amortized Cost

    78,594,001     18,669,385     97,263,386  

Gross unrealized gains

    2,433,997     3,950,157     6,384,154  
               

Carrying value/estimated fair values

  $ 81,027,998   $ 22,619,542   $ 103,647,540  
               

        For financial statement reporting purposes, GAAP requires us to account for certain of our Non-Agency RMBS and the associated repurchase agreement financing as Linked Transactions. Accordingly, the measures in the foregoing tables and charts prepared on a GAAP basis do not include Non-Agency RMBS underlying our Linked Transactions. However, in managing and evaluating the composition and performance of our RMBS portfolio, we do not view the purchase of our Non-Agency RMBS and the associated repurchase agreement financing as transactions that are linked. We therefore have also presented certain information that includes the Non-Agency RMBS underlying our Linked Transactions. This information constitutes non-GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to analyze our RMBS portfolio and the performance of our Non-Agency RMBS in the same way that we assess our portfolio and such assets. While we believe the non-GAAP information included in this prospectus provides supplemental information to assist investors in analyzing that portion of our portfolio composed of Non-Agency RMBS, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated.

Our Competitive Advantages

        We believe that our competitive advantages include the following:

Seasoned management team with significant real estate experience

        We believe that the extensive experience of our Manager's team investing in and financing RMBS assets provides us with significant expertise across our target assets. Our Manager's team has managed a wide range of mortgage-backed securities, mortgage derivatives and other fixed-income assets through a variety of credit and interest rate environments on both a levered and unlevered basis.

        The senior members of our Manager's team have an average of more than 20 years of industry experience, including working together for the past ten years. Our and our Manager's Chief Executive Officer and President, David Carroll, and Chief Investment Officer, Kian Fui (Paul) Chong, have been managing our assets since our inception and will have primary responsibility for overseeing the management of our assets going forward. Mr. Carroll has more than 30 years experience in trading,

 

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structuring and managing a wide range of mortgage-backed securities, mortgage derivatives and other fixed-income assets. Mr. Chong has been involved in the financial markets for over 12 years, including extensive experience analyzing, trading and managing RMBS. Our Chief Financial Officer, David Oston, has more than 30 years credit market experience, including underwriting, structuring and managing structured products and mortgages. Messrs. Carroll, Chong and Oston and other members of our Manager's management team co-founded and/or previously held executive positions with Ceres Capital. Ceres Capital was a specialized investment management company that managed Victoria, a structured investment vehicle. Following the 2007 liquidity crisis, in 2008, Ceres Capital entered Chapter 11 under the Bankruptcy Code and Victoria entered a controlled wind-down. Farmington was an investment vehicle established in November 2007 for the purpose of refinancing a portion of the Victoria asset portfolio and was managed by Ceres and then by Ivy Square. Messrs. Carroll, Chong and Oston held executive positions at Ivy Square. Farmington was liquidated in August 2011 at the direction of the transaction lender. For additional information regarding Messrs. Carroll, Chong and Oston and other members of our Manager's management team, and Ceres Capital, Victoria and Farmington, see "Management—Our Directors and Executive Officers," "Management—Additional Information Concerning Our and Our Manager's Executive Officers" and "Our Manager and the Management Agreement—Executive Officers of Our Manager."

Existing portfolio with an implemented investment strategy

        As a recently formed entity, we intend to continue to build on our existing investment portfolio. The management team and XL Investments capitalized us with an aggregate initial investment of $26.5 million and our Manager has deployed this capital to purchase, fund and hedge our current portfolio of both Agency and Non-Agency RMBS. As of December 31, 2012, our portfolio had a fair value of $81.0 million on a GAAP basis, or $103.6 million including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. As of December 31, 2012, our portfolio was comprised of approximately 86% Agency RMBS and 14% Non-Agency RMBS on a GAAP basis, or 68% Agency RMBS and 32% Non-Agency RMBS after including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. Since our business was initially funded on May 16, 2012, our Manager has increased our net asset value from $26.2 million to $32.3 million as of December 31, 2012, representing a 23.3% increase. This increase resulted primarily from a rise in the prices of the majority of our portfolio securities during the period. Given that the increase in net asset value was due to unrealized gains on portfolio securities, such increases may not be sustainable or realizable going forward. Our Manager's team has managed our portfolio since inception by utilizing the same investment and leverage strategy that we expect our Manager to continue to employ after the completion of this offering.

Flexible and adaptable "hybrid" investment strategy

        Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and secondarily through capital appreciation. We believe that our hybrid model of investing in both Agency RMBS and Non-Agency RMBS can enhance our risk-adjusted returns across a variety of market conditions and economic cycles since it allows our Manager to allocate capital opportunistically across the entire RMBS sector, including both Legacy Non-Agency RMBS and New Issue Non-Agency RMBS, maximizing relative value and creating a portfolio with different leverage, duration and convexity profiles than companies that only invest in one asset type. Through the disciplined selection of assets, and continual portfolio monitoring, we seek to build and maintain an investment portfolio that provides value to stockholders over time both in absolute terms and relative to other RMBS portfolios.

        In addition, our hybrid model positions us to obtain incremental benefits from anticipated changes in the residential mortgage market in the coming years. We believe that the changing regulatory

 

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landscape and declining roles of the GSE portfolios are beginning to present attractive investment opportunities for us in both Agency and Non-Agency mortgage assets. We may also benefit from the expected curtailment of direct government involvement in housing finance and the re-emergence of New Issue Non-Agency RMBS transactions. We believe the recent increase in issuance of New Issue Non-Agency RMBS offers us the potential opportunity to invest in more diverse classes of Non Agency RMBS, including those rated investment grade, non-investment grade and unrated. We expect to be well positioned to evaluate additional investment opportunities that such New Issue Non-Agency RMBS transactions may present in the future. Overall, we believe that our hybrid model maximizes the range of attractive investment opportunities available to us across the Agency and Non-Agency RMBS sectors, and potentially enhances our ability to deliver attractive risk-adjusted returns to our investors over time.

Relative value investment approach

        We are a relative value investor in RMBS. Our Manager uses a cross-product approach, conducting top-down market assessments with respect to various subsets of the RMBS market in order to identify the most attractive segments and investment opportunities. In employing this detailed analysis, our Manager seeks to best capture market inefficiencies, evaluate potential target assets and identify the most attractive alternatives. We select our RMBS based on factors that include extensive analysis of the underlying loans, including prepayment trends, average remaining life, amortization schedules, fixed versus floating interest rates, geographic concentration, property type, loan-to-value ratios and credit scores. The multi-trillion dollar size of the U.S. RMBS market enables us to be selective with our investments and target only the securities we deem to be the most attractive. We believe this holistic, relative-value approach to the Non-Agency and Agency RMBS investments has the potential to generate higher risk-adjusted returns than an approach that focuses on a single sector of the residential mortgage market.

        Our Manager constructs and manages our RMBS investment portfolio through the use of focused qualitative and quantitative analysis, which helps us manage risk on a security-by-security and portfolio basis. We rely on a variety of proprietary and third-party analytical tools and models, which we customize to our needs. We focus on in-depth analysis of the numerous factors that influence our target assets, including:

    fundamental market and sector review;

    cash flow analysis;

    disciplined security selection;

    controlled risk exposure; and

    balance sheet management.

        We also use these tools to guide the hedging strategies developed by our Manager to the extent consistent with the requirements for qualification as a REIT. We believe we will also benefit from the investment and operational experience of our Manager's team.

Alignment of our Manager's and our interests and no conflicts of interest with any other investment vehicles

        We have taken steps to structure our relationship with our Manager so that our interests and those of our Manager are closely aligned. As of December 31, 2012, the employees of our Manager owned an aggregate of 93,750 shares of our common stock, which represents 1.3% of the shares of our common stock that will be outstanding immediately after the completion of this offering and the concurrent private placement to XL Investments (or 1.2% if the underwriters' option to purchase additional shares in this offering is exercised in full). These shares will be subject to a 180-day lock-up

 

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agreement that is substantially similar to the 180-day lock-up agreements to be executed by our Manager, our directors and officers, the executive officers of our Manager and XL Investments. We believe that the significant investment in us by personnel of our Manager will align our interests with those of our Manager, which will create an incentive for our Manager to seek to maximize returns for our stockholders.

        The executive officers of our Manager devote substantially all of their business time to the performance of their duties and responsibilities for our Manager. Our Manager manages us exclusively and, unless and until our Manager agrees to manage any additional investment vehicle, our Manager will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity.

Extensive strategic and funding relationships

        Our Manager's team has maintained extensive long-term relationships with other financial intermediaries, including primary dealers, leading investment banks, brokerage firms, leading mortgage originators and commercial banks. Our Manager has access to deal flow and secondary trading opportunities as a result of the long-term relationships the team has developed over their careers. We believe these relationships will enhance our ability to source, finance and hedge investment opportunities, and, thus, enable us to grow in various credit and interest rate environments. Our Manager has already established funding relationships for us with 13 counterparties, and we intend to continue to add additional counterparties from time to time.

Investment by XL Group Companies

        XL Group plc (NYSE: XL), through its wholly owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and has actively invested in alternative investment funds, private investment funds and investment management companies. XL Investments, an indirect wholly owned subsidiary of XL Group plc, purchased $25.0 million of our shares in a private placement in May 2012, and we agreed to also issue to XL Investments warrants to purchase two shares of our common stock (before giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) for each share of our common stock owned by XL Investments. The warrants were issued on September 29, 2012 and each warrant entitles the holder to purchase, commencing 120 days following completion of this offering until September 29, 2019, two shares of our common stock at an exercise price equal to 105% of the initial public offering price in this offering. As part of its investment in May 2012, XL Investments also agreed to make an additional investment in us of up to $25.0 million, subject to certain conditions and over a period of time. The conditions will be deemed satisfied upon the closing of this offering, and accordingly XL Investments has agreed to accelerate the timing of its investment and is buying $25.0 million of our common stock in a concurrent private placement at the initial public offering price. The underwriters will not receive any underwriting discount on the shares purchased by XL Investments in the concurrent private placement. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares) and 60.4% and 57.1%, respectively, after also giving effect to the exercise of the warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering. In addition, we have entered into a registration rights agreement with XL Investments pursuant to which we have agreed to register the resale of shares of common stock and warrants owned by XL Investments and its transferees, which we collectively refer to as the registrable securities. See "Risk Factors—Risks Related to Our Organization and Structure." Because of its significant ownership of our common stock, XL

 

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Investments will have the ability to influence the outcome of matters that require a vote of our stockholders, including a change of control. Additionally, we have agreed with XL Investments that, for so long as XL Investments and any other of the XL group of companies collectively beneficially own at least 9.8% of our issued and outstanding common stock (on a fully diluted basis), XL Investments will have the right to appoint an observer to attend all board meetings but such observer will have no right to vote at any board meeting.

        XL Global, a subsidiary of XL Group plc, made a strategic investment in our Manager in March 2012. XL Global acquired a 30% equity interest in our Manager and representatives of XL Global are members of the management committee of our Manager. XL Global's equity interest in our Manager may increase up to approximately 38% following certain additional capital contributions XL Global will make to enable our Manager to pay to the underwriters the underwriting discount and commission on this offering and to reimburse us for offering expenses that exceed $1.5 million. The investment management professionals of our Manager are solely responsible for all decisions involving the acquisition, disposition, financing and hedging of our target assets. None of the XL group of companies nor any of their officers, directors or employees participate in these decisions.

Investment Guidelines

        Our board of directors has adopted a set of investment guidelines that sets forth our target asset classes and other criteria to be used by our Manager to evaluate specific assets as well as our overall portfolio composition. Our Manager makes determinations as to the percentage of our assets that will be invested in each of our target asset classes, consistent with the investment guidelines adopted by our board of directors and the limits necessary to maintain our qualification as a REIT and our exclusion under the Investment Company Act. Our Manager's investment decisions depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. Our Manager has invested in both Agency and Non-Agency RMBS in our current portfolio. However, we cannot predict the percentage of our assets that will be invested in any of our target asset classes at any given time in the future. We believe that the diversification of our portfolio of assets, the extensive experience of our Manager's team in investing in our target assets and the flexibility of our strategy, combined with the general investment and advisory expertise of our Manager's team and comprehensive finance and administrative infrastructure of our Manager, will enable us to achieve attractive risk-adjusted returns under a variety of market conditions and economic cycles. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the Investment Company Act, we do not have restrictions on portfolio turnover. We currently expect to generally hold assets that we acquire until their respective maturities. However, in order to maximize returns and manage portfolio risk while remaining opportunistic, we may dispose of securities earlier than anticipated or hold securities longer than anticipated depending upon our capital position, prevailing market conditions, credit performance, availability and terms of financing or other factors impacting a particular security, including our Manager's view of its relative value.

        Our investment guidelines may be changed from time to time by our board of directors without the approval of our stockholders. Changes to our investment guidelines may include modification or expansion of the types of assets in which we may invest. Any changes to these investment guidelines will be disclosed in our next required periodic report following the approval of such changes by our board of directors.

Our Financing Strategy and Leverage

        We fund the acquisition of our assets through the use of leverage from a number of financing sources, subject to maintaining our qualification as a REIT. We finance our Agency and Non-Agency RMBS primarily through the use of short-term repurchase agreements, and in the future we may also utilize other longer-term secured financings.

 

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        We use leverage to seek to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we intend to use borrowings to fund the origination or acquisition of our target assets. We accomplish this by borrowing against existing assets through repurchase agreements. We intend to use the net proceeds from this offering and the concurrent private placement, combined with repurchase financing, and in the future we may also utilize other longer-term secured financings, to acquire additional target assets. Neither our organizational documents nor our investment guidelines place any limit on the maximum amount of leverage that we may use, and we are not required to maintain any particular debt-to-equity leverage ratio. We may also change our financing strategy and leverage without the consent of our stockholders.

        As of December 31, 2012, we borrowed 2.0 times our stockholders' equity (calculated in accordance with GAAP); 2.4 times after including repurchase agreements underlying our Linked Transactions (calculated on a non-GAAP basis). We expect our leverage (on both a GAAP and non-GAAP basis) will range between three and six times the amount of our stockholders' equity, although when deploying the net proceeds of this offering, our leverage may be higher in the short term. Additionally, we expect to borrow between six to nine times the amount of our stockholders' equity in acquiring Agency RMBS, between one and two times when acquiring Legacy Non-Agency RMBS and between one to three times when acquiring New Issue Non-Agency RMBS. The leverage our Manager is comfortable applying to each asset class at any point in time is a function of the yield profile across housing environments and also a function of price or market values in environments of excessive volatility, which cannot be ruled out. Depending on the different cost of borrowing funds at different maturities, we vary the maturities of our borrowed funds to attempt to produce lower borrowing costs and reduce interest rate risk. We enter into collateralized borrowings only with institutions that are rated investment grade by at least one nationally recognized statistical rating organization.

        The leverage that we employ is specific to each asset class in which we invest and will be determined based on several factors, including potential asset price volatility, margin requirements, the current cycle for interest rates, the shape of the yield curve, credit, security price, the outlook for interest rates and our ability to use and the effectiveness of interest rate hedges. We analyze both historical interest rate and credit volatility and market-driven implied volatility for each asset class in order to determine potential asset price volatility. Our leverage targets attempt to risk-adjust asset classes based on each asset class's potential price volatility. The goal of our leverage strategy is to ensure that, at all times, our investment portfolio's leverage ratio is appropriate for the level of risk inherent in the investment portfolio and that each asset class has individual leverage targets that are appropriate for its potential price volatility.

Hedging Strategy

        As part of our risk management strategy, our Manager actively manages the financing, interest rate, credit, prepayment and convexity risks associated with holding a portfolio of Agency and Non-Agency RMBS. We rely on the expertise of our Manager to manage these risks on our behalf, and, subject to maintaining our qualification as a REIT, our Manager may incorporate various hedging, asset/liability risk management and credit risk mitigation techniques in order to facilitate our risk management.

        Interest Rate Risk.    We intend to hedge some of our exposure to potential interest rate mismatches between the interest we earn on our longer term investments and the borrowing costs on our shorter term borrowings. Because a majority of our leverage will continue to be in the form of repurchase agreements, our financing costs will fluctuate based on short-term interest rate indices, such as the London Interbank Offered Rate, or LIBOR. Because some of our investments will be in assets that have fixed rates of interest and mature in up to 30 years, the interest we will earn on those assets will

 

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generally not move in tandem with the interest rates that we pay on our repurchase agreements, which generally have a maturity of less than one year. We may experience reduced income or losses based on these rate movements. In order to mitigate such risk, we may utilize certain hedging techniques to effectively lock in the spread between the interest we earn on our assets and the interest we pay on our financing costs. Subject to maintaining our qualification as a REIT, these hedging techniques may include interest rate swap agreements, interest rate swaptions, interest rate caps or floor contracts, futures or forward contracts and other derivative securities.

        Prepayment Risk.    Because residential borrowers are able to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments earlier than anticipated, and we may have to re-invest that principal at potentially lower yields. Because prepayments on residential mortgages generally accelerate when interest rates decrease and slow when interest rates increase, mortgage securities typically have "negative convexity." In other words, certain mortgage securities in which we invest may increase in price more slowly than most other RMBS, or even fall in value, as interest rates decline. Conversely, certain mortgage securities in which we invest may decrease in value more quickly than most other RMBS of similar duration as interest rates increase. In order to manage our prepayment and interest rate risks, we monitor, among other things, our "duration gap" and our convexity exposure. Duration is the relative expected percentage change in market value of our assets that would be caused by a parallel change in short and long-term interest rates. Convexity exposure relates to the way the duration of a mortgage security changes when the interest rate and prepayment environment changes.

        Credit Risk.    We intend to accept mortgage credit exposure at levels our Manager deems prudent as an integral part of our diversified investment strategy. Therefore, we retain the risk of potential credit losses on the loans underlying the Non-Agency RMBS we hold. We will seek to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, sale of assets which we identify as experiencing negative credit trends, the use of various types of credit enhancements and by using non-recourse financing, which limits our exposure to credit losses to the specific pool of mortgages subject to the provisions of the non-recourse financing. Subject to maintaining our qualification as a REIT, our overall management of credit exposure may also include credit default swaps or other financial derivatives that our Manager believes are appropriate. Additionally, we intend to vary the percentage mix of our non-agency mortgage investments and agency mortgage investments in an effort to actively adjust our credit exposure and to improve the risk/return profile of our investment portfolio. Nevertheless, actual credit losses could adversely affect our operating results.

        Our Manager expects to actively employ portfolio-wide and security-specific risk measurement and management processes in our daily operations through tools that will include software and services licensed or purchased from third parties, in addition to proprietary systems and analytical methods developed internally. There can be no assurance, however, that these tools and the other risk management techniques described above will protect us from these risks.

Our Structure

        We were organized as a Maryland corporation on March 28, 2012 and our business as a mortgage REIT commenced on May 16, 2012.

        The following chart illustrates our expected corporate structure upon completion of this offering. It also illustrates the relative ownership of our common stock by investors and the employees of our Manager and XL Investments in this offering immediately after the completion of (1) this offering of 4,033,333 shares of our common stock (excluding any shares issued pursuant to the underwriters' option to purchase additional shares), (2) the purchase by XL Investments of 1,666,667 shares of our common stock in the concurrent private placement (based on a public offering price of $15.00, which is the

 

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anticipated public offering price set forth on the cover of this prospectus), and (3) the grant of 28,500 shares of our restricted common stock to our Manager pursuant to our Manager Equity Plan upon the closing of this offering (equivalent to 0.5% of the aggregate number of shares sold in this offering and the concurrent private placement to XL Investments without giving effect to any exercise by the underwriters of their option in this offering to purchase additional shares). The following chart excludes (1) the 605,000 shares of our common stock that are issuable upon exercise of the option to purchase additional shares to be granted to the underwriters, (2) the shares of our common stock that are issuable upon exercise of the warrants issued pursuant to the May 2012 private placement to XL Investments and (3) an aggregate of 4,500 shares of our restricted common stock granted to our three independent directors pursuant to our Manager Equity Plan effective as of the closing of this offering.

GRAPHIC


(1)
This ownership percentage may increase up to approximately 38% following certain additional capital contributions XL Global will make to enable our Manager to pay to the underwriters the underwriting discount and commission on this offering and to reimburse us for offering expenses that exceed $1.5 million.

(2)
Consists of 28,500 shares of our restricted common stock (equivalent to 0.5% of the aggregate number of shares sold in this offering and the concurrent private placement to XL Investments without giving effect to any exercise by the underwriters of their option in this offering to purchase additional shares) granted to our Manager pursuant to our Manager Equity Plan effective as of the closing of this offering.

Management Agreement

        We are externally managed and advised by our Manager. We expect to benefit from the personnel, infrastructure, relationships and experience of our Manager's team to enhance the growth of our business. All of our officers and two of our directors, David Carroll and David Oston, are employees of our Manager. We do not have any employees.

        Pursuant to the management agreement with our Manager, or the management agreement, our Manager implements our business strategy and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, (1) performing all of our day-to-day functions, (2) determining investment criteria in conjunction with our board of directors, (3) sourcing, analyzing and executing investments, asset sales and financings and (4) performing asset management duties.

        The initial term of the management agreement expires on May 16, 2014, with automatic one-year renewal terms. Following the completion of this offering, our independent directors will review our Manager's performance annually and, following the initial two-year term, the management agreement may be terminated annually upon the affirmative vote of either at least two-thirds of our independent

 

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directors or at least two-thirds of our outstanding shares of common stock (other than those shares held by our Manager or its affiliates), in either case, based upon: (1) our Manager's unsatisfactory performance that is materially detrimental to us; or (2) our determination that any fees payable to our Manager are not fair, subject to our Manager's right to prevent termination based on unfair fees by accepting a reduction of management fees determined to be fair by at least two-thirds of our independent directors. We will provide our Manager with 180 days prior notice of such termination. Upon such a termination, we will pay our Manager a termination fee as described in the table below. We may also terminate the management agreement at any time, including during the initial term, with 30 days prior notice from our board of directors, without payment of a termination fee, for cause, as defined in the management agreement. Our Manager may terminate the management agreement upon 60 days prior notice in the event of our default in the performance or observance of any material term, condition or covenant in the management agreement that remains uncured for at least 30 days after such notice, in which case we would be required to pay the termination fee described in the table below. Our Manager may also terminate the management agreement if we become required to register as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event, in which case we would not be required to pay a termination fee. Our Manager may also decline to renew the management agreement by providing us with 180 days written notice, in which case we would not be required to pay a termination fee.

        The following table summarizes the fees and expense reimbursements that we will pay to our Manager:

Type
  Description   Payment

Management fee

  Our Manager is entitled to receive a management fee equal to 1.5% per annum, calculated and payable monthly in arrears, of our stockholders' equity.   Monthly in cash.

 

For purposes of calculating the management fee, our "stockholders' equity" means the sum of the net proceeds from any issuances of our equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus our retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount that we pay for repurchases of our shares of common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders' equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding adjustments relating to one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors.

   

 

Assuming no exercise of the underwriters' option to purchase additional shares, the management

   

       

 

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Type
  Description   Payment

 

fee payable to our Manager for the year ending December 31, 2013 (assuming no additional equity is issued during such period) would be $1.3 million.

   

Expense reimbursement

 

Reimbursement of operating expenses related to us incurred by our Manager, including legal, accounting, due diligence and other services. We will not reimburse our Manager or its affiliates for the salaries and other compensation of their personnel other than our chief financial officer, general counsel and other corporate finance, tax, accounting, internal audit, legal risk management, operations, compliance and other non-investment personnel of the Manager and its affiliates who spend all or a portion of their time managing our affairs, based on the percentage of time each spends on our affairs. Assuming no exercise of the underwriters' option to purchase additional shares, the expense reimbursement to be paid to our Manager for the year ending December 31, 2013 (assuming no additional equity is issued during such period) would be $2.4 million.

 

Monthly in cash.

Termination fee

 

Termination fee equal to three times the average annual management fee earned by our Manager during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter prior to such termination. See "Our Manager and the Management Agreement—Management Agreement—Term and termination."

 

Upon termination of the management agreement by us without cause or by our Manager if we materially breach the management agreement.

Manager Equity Plan

 

Our Manager Equity Plan includes provisions for grants of restricted common stock and other equity based awards to our Manager and to our independent directors, consultants or officers whom we may directly employ in the future. In turn, our Manager will grant such awards to its employees, officers (including our current officers), members, directors or consultants. Grants to our Manager will be allocated firstly to non-member employees and officers of our Manager, and then the balance of the grants to members (including our officers) proportionally based on each member's respective ownership of our Manager. The grants to be made to our Manager and then by our Manager pursuant to such allocation are intended to provide customary incentive compensation to those

 

Administered by the compensation committee of our board of directors.

       

 

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Type
  Description   Payment

 

persons employed by our Manager on whose performance we rely (including our officers). The total number of shares that may be granted subject to awards under the Manager Equity Plan will be equal to an aggregate of 3.0% of the total number of issued and outstanding shares of our common stock (on a fully diluted basis) at the time of each award (other than any shares issued or subject to awards made pursuant to the Manager Equity Plan). Therefore, the number of shares of common stock initially reserved for issuance will be 314,438 shares (or 332,588 shares if the underwriters exercise their option to purchase additional shares in full). See "Management—Manager Equity Plan" for a further description of the terms of the Manager Equity Plan.

   

 

Our board of directors has, effective as of the closing of this offering, granted to our Manager pursuant to our Manager Equity Plan, a number of shares of our restricted common stock equal to 0.5% of the aggregate number of shares of common stock sold in this offering (without giving effect to any exercise by the underwriters of their option to purchase additional shares) and in the concurrent private placement to XL Investments, or 28,500 shares of restricted common stock. One-third of these shares vest on each of the first, second and third anniversaries of the grant date. Our board of directors has also, effective as of the closing of this offering, granted to each of our three independent directors pursuant to our Manager Equity Plan 1,500 shares of restricted common stock, each of which grants vest in full on the first anniversary of the grant date.

   

 

See "Management—Manager Equity Plan" for a further description of the vesting terms of the initial grants of restricted common stock to our Manager and our three independent directors.

   

Conflicts of Interest

        We are subject to the following conflicts of interest relating to our Manager and its affiliates:

Dependence on our Manager and its personnel

        We are dependent on our Manager for our day-to-day management. All of our officers are employees of our Manager; we have no direct employees. Therefore, these individuals have a direct interest in the financial success of our Manager, which may encourage these individuals to support

 

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strategies that impact us based on these considerations. As a result of these relationships, our officers may have a conflict of interest with respect to our agreements and arrangements with our Manager and its affiliates.

Management agreement and fees

        Our management agreement with our Manager was negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated at arm's length with an unaffiliated third party.

        Under the terms of the management agreement, our Manager and any person providing sub-advisory services to our Manager will not be liable to us, our directors or our stockholders for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the management agreement, as determined by a final non-appealable order of a court of competent jurisdiction. We have agreed to indemnify our Manager and its officers, stockholders, members, managers, directors and personnel and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of such parties not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement. Our Manager will not be liable for trade errors that may result from ordinary negligence, such as errors in the investment decision making process (such as a transaction that was effected in violation of our investment guidelines) or in the trade process (such as a buy order that was entered instead of a sell order, or the wrong purchase or sale of security, or a transaction in which a security was purchased or sold in an amount or at a price other than the correct amount or price).

        The management fee our Manager earns is not tied to our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. This could hurt both our ability to make distributions to our stockholders and the market price of our common stock.

Investment allocation policies

        Our Manager may in the future manage other funds, accounts and investments vehicles that have strategies that are similar to our strategy, although our Manager currently neither manages nor intends to manage any other funds, accounts or investment vehicles. Because many of our targeted assets are typically available only in specified quantities and because many of our targeted assets may be targeted assets for other accounts our Manager may manage in the future, our Manager may not be able to buy as much of any given asset as required to satisfy us and any other account our Manager may manage in the future. In the future, if our Manager begins to manage other accounts or businesses that result in allocation conflicts, our Manager will develop, in consultation with the board of directors, an allocation compliance policy.

REIT Qualification

        We will elect to be taxed as a REIT commencing with our short taxable year ended December 31, 2012. Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares. We believe that we have been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code and that our manner of operation enables us to continue to meet the requirements for qualification and taxation as a REIT.

 

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        So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular U.S. federal corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property. See "Risk Factors—Tax Risks—If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to U.S. federal tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders."

Investment Company Act Exclusion

        We conduct our business so as not to become regulated as an investment company under the Investment Company Act in reliance on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and at least 80% of our assets in qualifying real estate interests plus "real estate-related assets." In satisfying this 55% requirement, based on SEC staff guidance, we may treat Agency RMBS 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 interests. The SEC staff has not issued guidance with respect to whole pool Non-Agency RMBS. Accordingly, based on our own judgment and analysis of the SEC staff's guidance with respect to whole pool Agency RMBS, we may also treat Non-Agency RMBS 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 interests. We may also treat whole mortgage loans that we acquire directly as qualifying real estate interests provided that 100% of the loan is secured by real estate when we acquire it and we have the unilateral right to foreclose on the mortgage. We currently intend to treat partial pool Agency and Non-Agency RMBS as real estate-related assets. We will treat any interest rate swaps or other derivative hedging transactions we enter into as miscellaneous assets that will not exceed 20% of our total assets. We expect to rely on guidance published by the SEC or its staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

        The SEC recently solicited public comment on a wide range of issues relating to Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of the exclusion and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including the guidance of the SEC or its staff regarding this exclusion, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could require us to hold assets we might wish to sell or to sell assets we might wish to hold. To the extent that the SEC or its staff provides more specific guidance regarding any of the matters bearing upon the exclusion we rely on from the Investment Company Act, we may be required to adjust our strategy accordingly. Any additional guidance could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

        Qualification for exclusion from registration under the Investment Company Act will limit our ability to make certain investments. See "Risk Factors—Risks Related to Our Business—Loss of our exclusion from regulation pursuant to the Investment Company Act would adversely affect us."

 

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Restrictions on Ownership of Our Common Stock

        To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code, among other purposes, our articles of incorporation prohibit, with certain exceptions, any stockholder from beneficially or constructively owning, applying certain attribution rules under the Internal Revenue Code, more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding capital stock. Our board of directors has granted XL Investments an exemption from the 9.8% ownership limitation. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares) and 60.4% and 57.1%, respectively, after also giving effect to the exercise of warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering.

        Our articles of incorporation also prohibit any person from, among other things:

    beneficially or constructively owning shares of our capital stock that would result in our being "closely held" under Section 856(h) of the Internal Revenue Code, or otherwise cause us to fail to qualify as a REIT; and

    transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons.

        In addition, our articles of incorporation provide that any ownership or purported transfer of our capital stock in violation of the first bullet point in the above paragraph will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary and the purported owner or transferee acquiring no rights in such shares. If a transfer to a charitable trust would be ineffective for any reason to prevent a violation of the restriction, the transfer resulting in such violation will be void from the time of such purported transfer.

Emerging Growth Company Status

        We are an "emerging growth company," as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

        In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of such an extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective

 

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dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

        We could remain an "emerging growth company" for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (2) December 31 of the fiscal year that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

Summary Risk Factors

        An investment in shares of our common stock involves various risks. You should consider carefully the risks discussed below and under the heading "Risk Factors" beginning on page 34 of this prospectus before purchasing our common stock. If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline and you may lose some or all of your investment.

    Our Manager has had experience operating a REIT only since May 2012, and we cannot assure you that such limited experience will be sufficient for our Manager to successfully manage our business as a REIT.

    We may change our target assets, investment or financing strategies and other operational policies without stockholder consent, which may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

    Mortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, Agency RMBS, Non-Agency RMBS and other mortgage-related investments.

    Actions of the U.S. Government, including the U.S. Congress, U.S. Federal Reserve, U.S. Treasury Department and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market responses to those actions, may not achieve the intended effect and may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

    The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. Government, may adversely affect our business.

    We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in Agency RMBS, Non-Agency RMBS and other mortgage-related investments and could also affect the pricing of these securities.

    Adverse developments in the broader residential mortgage market may adversely affect the value of the assets in which we intend to invest.

    The lack of liquidity in our investments may adversely affect our business.

    We will be subject to the risk that U.S. Government agencies and/or GSEs may not be able to fully satisfy their guarantees of Agency RMBS or that these guarantee obligations may be repudiated, which may adversely affect the value of our assets and our ability to sell or finance these securities.

    The mortgage loans underlying the Non-Agency RMBS that we acquire and the residential mortgage loans in which we invest will be subject to defaults, foreclosure timeline extension,

 

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      fraud and residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to us.

    We may be affected by alleged or actual deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.

    We may experience a decline in the market value of our assets.

    Many of our investments will be recorded at fair value, and quoted prices or observable inputs may not be available to determine such value, resulting in the use of significant unobservable inputs to determine value.

    An increase in interest rates may cause a decrease in the volume of certain of our assets, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and make distributions to our stockholders.

    Changes in prepayment rates may adversely affect our profitability.

    Loss of our exclusion from regulation pursuant to the Investment Company Act would adversely affect us.

    Our strategy involves significant leverage, which may amplify losses; while we currently expect to incur approximately six to nine times leverage on our Agency RMBS, approximately one to two times leverage on our Legacy Non-Agency RMBS and approximately one to three times leverage on our New Issue Non-Agency RMBS, there is no specific limit on the amount of leverage that we may use.

    If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.

    Failure to procure adequate repurchase agreement financing, which generally have short terms, or to renew or replace repurchase agreement financing as it matures, would adversely affect our results of operations.

    An increase in our borrowing costs relative to the interest we receive on investments in Agency and Non-Agency RMBS may adversely affect our profitability and cash available for distribution to our stockholders.

    Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders and such transactions may fail to protect us from the losses that they were designed to offset.

    Our board of directors has approved very broad investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager.

    We are dependent on our Manager and its key personnel for our success.

    The management agreement with our Manager was not negotiated on an arm's-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third-party and may be costly and difficult to terminate, including for our Manager's poor performance.

    Our Manager's management fee is payable regardless of our performance.

    Our independent registered public accountants have identified a material weakness and two significant deficiencies in our internal control over financial reporting, and we cannot provide assurance that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting is not effective, we may not be able to

 

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      accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price. In addition, because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial reporting for the foreseeable future.

    The dilutive effect of future issuances of our common stock could have an adverse effect on the future market price of our common stock or otherwise adversely affect the interests of our common stockholders.

    We may make distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations.

    If we do not qualify as a REIT or if we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

    Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and require us to dispose of our target assets sooner than anticipated.

Our Corporate Information

        Our principal executive offices are located at 641 Lexington Avenue, Suite 1432, New York, New York 10022. Our telephone number is (212) 328-9521. Our website is www.fiveoaksinvestment.com. The contents of our website are not a part of this prospectus. The information on our website is not intended to form a part of or be incorporated by reference into this prospectus.

 

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The Offering

Common stock offered by us

  4,033,333 shares (plus up to an additional 605,000 shares of our common stock that we may issue and sell upon the exercise of the underwriters' option to purchase additional shares). XL Investments has agreed to purchase in a concurrent private placement an aggregate of $25.0 million of shares of our common stock from us at the initial public offering price, or 1,666,667 shares based on a public offering price of $15.00 which is the anticipated public offering price set forth on the cover of this prospectus.

Common stock to be outstanding after this offering

 

7,389,250 shares.(1)(2)(3)

Use of proceeds

 

We estimate that the net proceeds from this offering and the concurrent private placement to XL Investments will be $84.0 million (or $93.1 million if the underwriters fully exercise their option to purchase additional shares) after deducting estimated offering expenses of $1.5 million payable by us.

 

Our Manager will pay directly to the underwriters the underwriting discount of $       million (or, if the underwriters fully exercise their option to purchase additional shares, $       million). No underwriting discount will be paid on the 1,666,667 shares (based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus) purchased by XL Investments in the concurrent private placement. In addition, our Manager will reimburse us for any offering expenses that exceed $1.5 million in the aggregate.

 

We plan to use the net proceeds from this offering and the concurrent private placement to XL Investments to purchase Agency and Non-Agency RMBS. Subject to prevailing market conditions at the time of purchase, we currently intend to invest the net proceeds from this offering and the concurrent private placement initially to purchase Agency and Non-Agency RMBS in the following ranges: approximately 30-50% Agency RMBS, 15-35% Legacy Non-Agency RMBS and 15-35% New Issue Non-Agency RMBS. See "Use of Proceeds."

Distribution policy

 

We intend to make regular monthly distributions to holders of our common stock from and after October 1, 2012. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its "REIT taxable income." In addition, U.S. federal income tax law subjects a REIT to a non-deductible 4% excise tax on certain other amounts that are not distributed. We intend to make timely distributions so that we are not subject to this 4% excise tax. On October 26, 2012, our board of directors declared, and has paid, a $0.018837 per share dividend ($0.301392 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) on our common stock with respect to the period from inception through September 30, 2012, which was and is expected to be our only quarterly dividend given our current policy of making monthly distributions going forward. On November 29, 2012, December 18, 2012 and December 31, 2012, our board of directors declared a $0.00833 per share dividend ($0.13328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of October 2012, November 2012 and December 2012, respectively. The dividends for the months of October 2012, November 2012 and December 2012 have been paid. On each of February 15 and March 12, 2013, our board of directors declared a $0.0083 per share dividend ($0.1328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of January 2013 and February 2013. The January dividend has been paid and the February dividend will paid on March 28, 2013. Investors in this offering will participate in our monthly dividends declared for the month of March 2013 and thereafter.

 

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Any future distributions that we make will be at the discretion of our board of directors and will depend upon, among other things, our actual results of operations. These results and our ability to make distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. For more information, see "Distribution Policy."

Listing

 

Our common stock has been approved for listing on the NYSE under the symbol "OAKS" subject to notice of issuance.

Ownership and transfer restrictions

 

To assist us in complying with limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code, among other purposes, our articles of incorporation generally prohibit, among other prohibitions, any stockholder from beneficially or constructively owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding capital stock. Our board of directors has granted XL Investments an exemption from the 9.8% ownership limitation. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares) and 60.4% and 57.1%, respectively, after also giving effect to the exercise of warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering. See "Description of Our Securities—Restrictions on Ownership and Transfer of Our Capital Stock."

 

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Risk factors

 

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading "Risk Factors" beginning on page 34 of this prospectus and all other information in this prospectus before investing in our common stock.


(1)
Assumes the underwriters' option to purchase up to an additional 605,000 shares of our common stock is not exercised.

(2)
Excludes a maximum of 314,438 shares of common stock reserved for issuance pursuant to the Manager Equity Plan, with grants subject to a cap of 3.0% of the total number of issued and outstanding shares of our common stock (on a fully diluted basis) at the time of each award (other than any shares issued or subject to awards made pursuant to the Manager Equity Plan).

(3)
Excludes 3,125,000 shares issuable upon the exercise of warrants issued to XL Investments. See "Description of Our Securities—Warrants."

 

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Summary Selected Financial Data

        The following table presents summary selected financial data as of December 31, 2012 and for the period beginning on May 16, 2012 (date of inception) to December 31, 2012. The statement of operations data for the period beginning on May 16, 2012 (date of inception) to December 31, 2012 and the balance sheet data as of December 31, 2012 have been derived from our audited financial statements.

        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.

        The shares outstanding and per share amounts reflected in the chart below have been adjusted in footnote 1 below to reflect the one-for-16 reverse stock split we intend to effect immediately prior to the closing of this offering.

Balance Sheet Data

$ in thousands
  December 31, 2012  

Mortgage-backed securities, at fair value

  $ 81,028  

Linked Transactions, net, at fair value

    8,613  

Cash and cash equivalents

    3,609  

Other assets

    3,799  
       

Total assets

  $ 97,049  
       

Repurchase agreements

    63,423  

Other liabilities

    1,357  

Total stockholders' equity (deficit)

    32,269  
       

Total liabilities and stockholders' equity (deficit)

  $ 97,049  
       

 

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Statement of Operations Data

$ in thousands, except per share data
  Period from
May 16, 2012
(Date of Inception) to
December 31, 2012
 

Interest income

  $ 1,684  

Interest expense

    (267 )
       

Net interest income

    1,417  

Other income (loss)

    4,350  

Total expenses

    948  

Net income (loss)

    4,819  
       

Net income (loss) attributable to common stockholders

  $ 4,819  
       

Earnings (loss) per share:

       

Net income attributable to common stockholders (basic and diluted)

  $ 4,819  

Dividends declared on common stock

    (1,162 )

Weighted average number of shares of common stock outstanding(1):

    26,500,000  

Basic and diluted income per share(1)

  $ 0.18  

(1)
After giving effect to the one-for-16 reverse stock split we intend to effect immediately prior to the closing of this offering, the weighted average number of shares of common stock outstanding for the period is 1,656,250 and accordingly, the basic and diluted income per share is $2.91.

 

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks occur, our business, financial condition, results of operations and our ability to make distributions to our stockholders could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment. 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

Our Manager has had experience operating a REIT only since May 2012, and we cannot assure you that such limited experience will be sufficient for our Manager to successfully manage our business as a REIT.

        Our Manager only began operating us on May 16, 2102 and has had no previous experience operating a REIT. The REIT provisions of the Internal Revenue Code are complex, and any failure to comply with those provisions in a timely manner could prevent us from qualifying as a REIT or force us to pay unexpected taxes and penalties. In such event, our net income would be reduced and we could incur a loss. See "—Risks Associated with Our Relationship with Our Manager" for other risks related to our Manager, including conflicts of interest.

We only commenced operations in May 2012 and may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our stockholders.

        We only commenced operations in May 2012. We cannot assure you that we will be able to operate our business successfully or implement our operating policies and strategies. Our Manager may not be able to successfully execute our investment, financing and hedging strategies as described in this prospectus, which could result in a loss of some or all of your investment. 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 may change our target assets, investment or financing strategies and other operational policies without stockholder consent, which may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        We may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization, distributions, financing strategy and leverage at any time without the consent of our stockholders, which could result in an investment portfolio with a different, and possibly greater, risk profile. A change in our target assets, investment strategy or guidelines, financing strategy or other operational policies may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this prospectus. In addition, our articles of incorporation provide 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 qualify as a REIT. These changes could adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

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The allocation of the net proceeds of this offering and any future equity offerings among our target assets, and the timing of the deployment of these proceeds is subject to, among other things, then prevailing market conditions and the availability of target assets.

        Our allocation of the net proceeds from this offering, the concurrent private placement and any future equity offerings among our target assets is subject to our investment guidelines and maintenance of our REIT qualification. Our Manager will make determinations as to the percentage of our equity that will be invested in each of our target assets and the timing of the deployment of the net proceeds of our equity offerings. These determinations will depend on then prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. Until appropriate assets can be identified, our Manager may decide to use the net proceeds of our offerings to pay down our short-term debt or to invest the net proceeds in interest-bearing short-term investments, including funds which are consistent with maintenance of our REIT qualification. These investments are expected to provide a lower net return than we seek to achieve from our target assets. Prior to the time we have fully used the net proceeds of our offerings to acquire our target assets, we may fund our monthly distributions out of such net proceeds.

Current market conditions for our target assets have been and may continue to be significantly influenced by U.S. Government and U.S. Federal Reserve intervention and attractive opportunities for investment in our target assets may not continue, which could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        Current conditions in the RMBS markets have created attractive opportunities for investment in Non-Agency and, particularly, Agency RMBS assets. In response to the recent financial crisis, the U.S. Government and U.S. Federal Reserve have taken unprecedented actions to stabilize the market for mortgage-related investments along with the broader economy. Such intervention includes maintenance of a near-zero target of the federal funds rate by the U.S. Federal Reserve, or the Fed, U.S. Government programs, such as HAMP and HARP, along with the recently announced third round of quantitative easing, or QE3. In September 2012, the Fed announced an open-ended program to expand its holdings of long-term securities by purchasing an additional $40 billion of Agency RMBS per month until key economic indicators, such as the unemployment rate, showed signs of improvement. This program, when combined with existing programs to extend the average maturity of the Fed's holdings of securities and reinvest principal payments from the Fed's holdings of agency debt and Agency RMBS in Agency RMBS, is expected to increase the Fed's holdings of long-term securities by $85 billion each month into 2013. The Fed also announced that it will keep the target range for the federal funds rate between zero and 0.25% through at least mid-2015, which is six months longer than previously expected. On January 30, 2013, the Fed reaffirmed its commitment to QE3, including a continuation of exceptionally low levels for the federal funds rate for so long as unemployment remains above 6.5% and inflation remains at or below 2.5%, as well as the continued purchase of Agency RMBS at a pace of $40 billion per month. The Fed expects these measures to put downward pressure on long-term interest rates. Further, the mortgage industry has and continues to undergo fundamental changes, such as the conservatorship and possible future changes in the nature of participation in the mortgage market by Fannie Mae and Freddie Mac. While we believe that prices and yields for many of our target assets have been more favorable than in the past, and the yield curve environment for a leveraged Agency portfolio is currently very favorable, and that there are attractive opportunities for investment across our target asset classes, there is no way of knowing what impact government intervention or any future actions by the Fed will have on the prices and liquidity of Agency RMBS or other securities in which we may invest. The prices and yields of our target assets may be adversely affected, and could be subject to significant volatility upon changes, or perceived future changes, to such policies. Further, such prices and yields may not reflect the underlying value of our target assets and may be significantly inflated due to these policies and the uncertainty of future changes to the mortgage industry. If current market conditions do not continue, and we are unable to structure or reposition our investment

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portfolio accordingly, there could be a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Mortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, Agency RMBS, Non-Agency RMBS and other mortgage-related investments.

        The U.S. Government, through the U.S. Federal Reserve, the FHA and the Federal Deposit Insurance Corporation, has implemented a number of federal programs designed to assist homeowners, including the Home Affordable Modification Program, or HAMP, which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, the Hope for Homeowners Program, or H4H Program, which allows certain distressed borrowers to refinance their mortgages into FHA-insured loans in order to avoid residential mortgage loan foreclosures, and the Home Affordable Refinance Program, or HARP, which allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments at loan-to-value ratios up to 125% (and, in some cases, above 125%) without new mortgage insurance. HAMP, the H4H Program and other loss mitigation programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or the extension of payment terms of the loans.

        In September 2011, the White House announced they are working on a major plan to allow certain homeowners who owe more on their mortgages than their homes are worth to refinance. In October 2011, the Federal Housing Finance Agency, or the FHFA, had announced changes to HARP to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the HARP loan-to-value (LTV) ratio above 125%. However, the LTV-relaxation only applies to mortgages guaranteed by the GSEs. In addition, the expansion does not change the time period in which these loans were originated, maintaining the requirement that the loans must have been guaranteed by Fannie Mae or Freddie Mac prior to June 2009. On August 7, 2012, the FHFA released its June 2012 Refinance Report, which showed that one of every three refinances through Fannie Mae and Freddie Mac were made through HARP, the highest number since the inception of the program in April 2009 as an apparent consequence of the LTV-relaxation. The October 2012 Refinance Report indicated that, year-to-date, approximately 21% of all refinances through Fannie Mae and Freddie Mac were made through HARP.

        Especially with Non-Agency RMBS, a significant number of loan modifications with respect to a given security, including, but not limited to, those related to principal forgiveness and coupon reduction, could result in increased prepayment rates and thereby negatively impact the realized yields and cash flows on such securities. These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws that result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae may adversely affect the value of, and the returns on, Agency RMBS and other mortgage-related investments that we may purchase.

        Any income that we realize may not be sufficient to offset our expenses.

Actions of the U.S. Government, including the U.S. Congress, U.S. Federal Reserve, U.S. Treasury Department and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market responses to those actions, may not achieve the intended effect and may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        In response to the financial issues affecting the banking system and financial markets and going concern threats to commercial banks, investment banks and other financial institutions, the Administration and various regulatory agencies have taken numerous actions to stabilize and restructure the financial system. There can be no assurance that any such actions or related future

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actions of the U.S. Government will have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to any such actions by the U.S. Government or such actions do not function as intended, there may be broad adverse market implications, and our business may not receive the anticipated positive impact from the legislation.

        In July 2010, the U.S. Congress enacted the Dodd-Frank Act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial markets. For instance, the Dodd-Frank Act will impose significant restrictions on the proprietary trading activities of certain banking entities and subject other systemically significant organizations to increased capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act affects almost every aspect of the U.S. financial services industry, including certain aspects of the markets in which we operate or may operate in the future. The Dodd-Frank Act imposes new regulations on us and how we conduct our business. It also seeks to reform the asset-backed securitization market (including the mortgage-backed securities market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. Although certain of the new requirements and restrictions exempt Agency RMBS, other government issued or guaranteed securities, or other securities, the Dodd-Frank Act imposes significant regulatory restrictions on the origination and securitization of residential mortgage loans, which will affect Non-Agency RMBS. In addition, the Dodd-Frank Act will impose mandatory clearing, exchange-trading and margin requirements on many derivatives transactions (including formerly unregulated over-the-counter derivatives), including derivatives transactions in which we may engage. The Dodd-Frank Act creates new categories of regulated market participants, such as "swap-dealers," "security-based swap dealers," "major swap participants" and "major security-based swap participants," which will be subject to significant new capital, registration, recordkeeping, reporting, disclosure, business conduct, margin and other regulatory requirements that will give rise to new administrative costs. Some of these costs may ultimately be borne by us.

        Furthermore, the new regulation of over-the-counter derivatives and the inclusion of swaps as an investment that can cause a pooled investment vehicle to be a commodity pool would require us to register with and be regulated by the U.S. Commodity Futures Trading Commission, or the CFTC, as a commodity pool operator, or CPO, unless an exemption or other relief is available. Our Manager will rely for relief from registration as a CPO on a no-action letter issued on December 7, 2012 (the "No Action Letter") by the CFTC staff that is applicable to CPOs of mortgage REITs, subject to complying with certain criteria. Further, advisors to commodity pools, which could potentially include our Manager, will be required to register as commodity trading advisors, or CTAs, unless exemptive, no-action or similar relief is available. We believe such relief is available to our Manager on the basis of the No-Action Letter and existing regulations of the CFTC. On December 19, 2012, our Manager submitted its claim for relief under the No Action Letter. If in the future our Manager does not meet the conditions set forth in the No-Action Letter for relief from registration as a CPO, the relief provided by the No-Action letter from registration as a CPO becomes unavailable for any other reason, or our belief regarding the availability of relief from registration as a CTA proves incorrect, and we or our Manager are unable to rely upon or obtain other exemptions from registration as a CPO or CTA, we may be required to reduce or eliminate our use of interest rate swaps or vary the manner in which we deploy interest rate swaps in our business, the interest-rate risk associated with our investments may increase, our investment performance may be adversely affected or the cost associated with employing other kinds of hedges against interest rate fluctuations could be higher. Alternatively, our Manager may be required to register as a CPO. If our Manager is required to and does register as a CPO, we nevertheless expect it to remain exempt from registration as a CTA with the CFTC because its advisory activities would relate only to its activities as CPO of the company. The Commodity Exchange Act and CFTC regulations impose various requirements on CPOs and CTAs, including record keeping, reporting, operational and marketing requirements, disclosure obligations and prohibitions on

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fraudulent activities. Complying with these requirements could increase our expenses and negatively impact our business, financial condition, results of operations and our ability to make distributions to our stockholders. It may also be difficult to comply with the reporting and disclosure requirements with respect to the kinds of products that we offer.

        While the full impact of the Dodd-Frank Act cannot be assessed until all implementing regulations are released, the Dodd-Frank Act's extensive requirements may have a significant effect on the financial markets, and may affect the availability or terms of financing from our lender counterparties and the availability or terms of mortgage-backed securities, both of which may have an adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        Even if certain of the new statutes and regulations imposed by the Dodd-Frank Act are not directly applicable to us, they may still increase our costs of entering into transactions with the parties to whom the requirements are directly applicable. Moreover, new exchange-trading and trade reporting requirements may lead to reductions in the liquidity of derivative transactions, causing higher pricing or reduced availability of derivatives, or the reduction of arbitrage opportunities for us, which could adversely affect the performance of certain of our hedging strategies. Importantly, many key aspects of the changes imposed by the Dodd-Frank Act will be established by various regulatory bodies and other groups over the next several years. As a result, we do not know how significantly the Dodd-Frank Act will affect us. It is possible that the Dodd-Frank Act could, among other things, increase our costs of operating as a public company, impose restrictions on our ability to securitize assets and reduce our investment returns on securitized assets.

Certain actions by the U.S. Federal Reserve could cause a flattening of the yield curve, which could materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        On September 21, 2011, the U.S. Federal Reserve announced "Operation Twist," which is a program by which it intends to purchase, by the end of 2012, as extended, $400 billion of U.S. Treasury Department securities with remaining maturities between six and 30 years and sell an equal amount of U.S. Treasury Department securities with remaining maturities of three years or less. In September 2012, the U.S. Federal Reserve further updated its economic assessment by noting that, despite continued modest economic expansion, employment growth remains slow and the unemployment rate remains elevated. While also noting further signs of improvement in the housing sector, albeit from a depressed level, particular concern was expressed that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Accordingly, the U.S. Federal Reserve increased its focus on employment growth by announcing QE3, agreeing to purchase additional Agency RMBS at a pace of approximately $40 billion per month, as well as extending the existing commitment to exceptionally low levels for the federal funds rate through at least mid-2015. On January 30, 2013, the U.S. Federal Reserve reaffirmed its commitment to QE3, including a continuation of exceptionally low levels for the federal funds rate for so long as unemployment remains above 6.5% and inflation remains at or below 2.5%, as well as the continued purchase of Agency RMBS at a pace of $40 billion per month. The effect of Operation Twist, QE3 and any other future securities purchase programs by the U.S. Federal Reserve could be a flattening in the yield curve, which could result in increased prepayment rates due to lower long-term interest rates and a narrowing of our net interest margin. Consequently, Operation Twist, QE3 and any other future securities purchase programs by the U.S. Federal Reserve could materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

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The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. Government, may adversely affect our business.

        The payments of principal and interest we receive on our Agency RMBS, which depend directly upon payments on the mortgages underlying such securities, are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Fannie Mae and Freddie Mac are GSEs, but their guarantees are not backed by the full faith and credit of the United States. 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.

        In response to general market instability and, more specifically, the financial conditions of Fannie Mae and Freddie Mac, in July 2008, HERA established the FHFA as the new regulator for Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury Department, the FHFA and the U.S. Federal Reserve announced a comprehensive action plan to help stabilize the financial markets, support the availability of mortgage financing and protect taxpayers. Under this plan, among other things, the FHFA was appointed as conservator of both Fannie Mae and Freddie Mac, allowing the FHFA to control the actions of the two GSEs, without forcing them to liquidate, which would be the case under receivership. Importantly, the primary focus of the plan was to increase the availability of mortgage financing by allowing these GSEs to continue to grow their guarantee business without limit, while limiting the size of their retained mortgage and agency security portfolios and requiring that these portfolios be reduced over time.

        Although the U.S. Government has committed to support the positive net worth of Fannie Mae and Freddie Mac, there can be no assurance that these actions will be adequate for their needs. These uncertainties lead to questions about the availability of, and trading market for, Agency RMBS. Despite the steps taken by the U.S. Government, Fannie Mae and Freddie Mac could default on their guarantee obligations, which would materially adversely affect the value of our Agency RMBS. Accordingly, if these government actions are inadequate and the GSEs continue to suffer losses or cease to exist, our business, financial condition, results of operations and our ability to make distributions to our stockholders could be materially adversely affected.

        In addition, the problems faced by Fannie Mae and Freddie Mac resulting in their being placed into federal conservatorship and receiving significant U.S. Government support have sparked serious debate among federal policy makers regarding the continued role of the U.S. Government in providing liquidity for mortgage loans. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantee obligations could be considerably limited relative to historical measurements. Any such changes to the nature of their guarantee obligations could redefine what constitutes an agency security and could have broad adverse implications for the market and our business, financial condition, results of operations and our ability to make distributions to our stockholders. If Fannie Mae or Freddie Mac were eliminated, or their structures were to change radically (i.e., limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, we could be unable to acquire additional Agency RMBS and our existing Agency RMBS could be materially adversely impacted.

        We could be negatively affected in a number of ways depending on the manner in which related events unfold for Fannie Mae and Freddie Mac. We will rely on our Agency RMBS (as well as Non-Agency RMBS) as collateral for our financings under the repurchase agreements that we intend to enter into upon the completion of this offering. Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on our Agency RMBS on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions. Further, the current support provided by the U.S. Treasury Department to Fannie Mae and Freddie Mac, and any additional support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from Agency RMBS, thereby tightening the spread

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between the interest we earn on our Agency RMBS and the cost of financing those assets. A reduction in the supply of Agency RMBS could also negatively affect the pricing of Agency RMBS by reducing the spread between the interest we earn on our investment portfolio of Agency RMBS and our cost of financing that portfolio.

        As indicated above, recent legislation has changed the relationship between Fannie Mae and Freddie Mac and the U.S. Government. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. Government, and could also nationalize, privatize or eliminate such entities entirely. Any law affecting these GSEs may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws could increase the risk of loss on our investments in Agency RMBS guaranteed by Fannie Mae and/or Freddie Mac. It also is possible that such laws could adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

The increasing number of proposed U.S. federal, state and local laws and regulations may affect certain mortgage-related assets in which we intend to invest and could increase our cost of doing business.

        Legislation has been proposed which, among other provisions, could hinder the ability of a servicer to foreclose promptly on defaulted mortgage loans or would permit limited assignee liability for certain violations in the mortgage loan origination process. For example, the Dodd-Frank Act permits borrowers to assert certain defenses to foreclosure against an assignee for certain violations in the mortgage loan origination process. We cannot predict whether or in what form the U.S. Congress, the various state and local legislatures or the various federal, state or local regulatory agencies may enact legislation affecting our business. We will evaluate the potential impact of any initiatives which, if enacted, could affect our practices and results of operations. We are unable to predict whether U.S. federal, state or local authorities will enact laws, rules or regulations that will require changes in our practices in the future, and any such changes could adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

If we fail to develop, enhance and implement strategies to adapt to changing conditions in the mortgage industry and capital markets, our business, financial condition, results of operations and our ability to make distributions to our stockholders may be adversely affected.

        The manner in which we compete and the products for which we compete are affected by changing conditions, which can take the form of trends or sudden changes in our industry, regulatory environment, changes in the role of GSEs, changes in the role of credit rating agencies or their rating criteria or process, or the U.S. economy more generally. If we do not effectively respond to these changes, or if our strategies to respond to these changes are not successful, our business, financial condition, results of operations and our ability to make distributions to our stockholders may be adversely affected.

We may be exposed to environmental liabilities with respect to properties to which we take title.

        In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial

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condition, results of operations and our ability to make distributions to our stockholders could be materially adversely affected.

Risks Related to Our Investing Strategy

We may not realize gains or income from our assets.

        We seek to generate current income and capital appreciation for our stockholders. However, the assets that we acquire may not appreciate in value and, in fact, may decline in value, and the securities that we acquire may experience defaults of interest and/or principal payments. Accordingly, we may not be able to realize gains or income from our assets. Any gains that we do realize may not be sufficient to offset other losses that we experience.

We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in Agency RMBS, Non-Agency RMBS and other mortgage-related investments and could also affect the pricing of these securities.

        We operate in a highly competitive market for investment opportunities. Our profitability depends, in large part, on our ability to acquire Agency RMBS, Non-Agency RMBS and other mortgage-related investments at attractive prices. In acquiring these assets, we will compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. Several other REITs have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. Government. Many of our competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exclusion 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 and establish more relationships than us. Furthermore, competition for investments in Agency and Non-Agency RMBS may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders. Also, as a result of this competition, desirable investments in these assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.

Adverse developments in the broader residential mortgage market may adversely affect the value of the assets in which we intend to invest.

        Since 2007, the residential mortgage market in the United States has experienced a variety of unprecedented difficulties and significant adverse changes in economic conditions, including defaults, credit losses and liquidity concerns. 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 and other high-quality RMBS assets. As a result, values for RMBS assets, including some Agency RMBS and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of the Agency and Non-Agency RMBS in

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which we intend to invest. Accordingly, our results of operations may be materially affected by conditions in the residential mortgage market, including MBS.

        We invest in Agency and Non-Agency RMBS. We rely on our securities 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. The securities we acquire will be classified for accounting purposes as available-for-sale. All assets classified as available-for-sale will be reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. As a result, a decline in fair values may reduce the book value of our assets. Moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such decline will reduce earnings. If market conditions result in a decline in the fair value of our assets, our business, financial condition, results of operations and our ability to make distributions to our stockholders could be adversely affected.

A prolonged economic recession and further declining real estate values could impair our assets and harm our operations.

        The risks associated with our business are more severe during economic recessions and are compounded by declining real estate values. The Non-Agency RMBS in which we invest a part of our capital will be particularly sensitive to these risks. Declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential real estate weakens further. Further, declining real estate values significantly increase the likelihood that we will incur losses on Non-Agency RMBS in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our net interest income from Non-Agency RMBS in our portfolio, which could have an adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

The lack of liquidity in our investments may adversely affect our business.

        We expect that the assets that we acquire will not be publicly traded. A lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. In addition, mortgage-related assets generally experience periods of illiquidity, including the recent period of delinquencies and defaults with respect to residential and commercial mortgage loans. The illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be attributed with material, non-public information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

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Changes in the underwriting standards by Freddie Mac or Fannie Mae could have an adverse impact on agency mortgage investments in which we may invest or make it more difficult to acquire attractive Non-Agency mortgage investments.

        In April 2010, Freddie Mac and Fannie Mae announced tighter underwriting guidelines for ARMs and hybrid interest-only ARMs in particular. Specifically, Freddie Mac announced that it would no longer purchase interest-only mortgages and Fannie Mae changed its eligibility criteria for purchasing and securitizing ARMs to protect consumers from potentially dramatic payment increases. Our target assets include ARMs and hybrid ARMs. Tighter underwriting standards by Freddie Mac or Fannie Mae could reduce the supply of ARMs, resulting in a reduction in the availability of the asset class. More lenient underwriting standards could also substantially reduce the supply and attractiveness of investments in Non-Agency RMBS.

We will be subject to the risk that U.S. Government agencies and/or GSEs may not be able to fully satisfy their guarantees of Agency RMBS or that these guarantee obligations may be repudiated, which may adversely affect the value of our assets and our ability to sell or finance these securities.

        The interest and principal payments we will receive on the Agency RMBS in which we intend to invest will be guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Unlike the Ginnie Mae securities in which we may invest, the principal and interest on securities issued by Fannie Mae and Freddie Mac are not guaranteed by the U.S. Government. All the Agency RMBS in which we intend to invest depend on a steady stream of payments on the mortgages underlying the securities.

        As conservator of Fannie Mae and Freddie Mac, the FHFA may disaffirm or repudiate contracts (subject to certain limitations for qualified financial contracts) that Freddie Mac or Fannie Mae entered into prior to the FHFA's appointment as conservator if it determines, in its sole discretion, that performance of the contract is burdensome and that disaffirmation or repudiation of the contract promotes the orderly administration of its affairs. HERA requires the FHFA to exercise its right to disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator. Fannie Mae and Freddie Mac have disclosed that the FHFA has disaffirmed certain consulting and other contracts that these entities entered into prior to the FHFA's appointment as conservator. Freddie Mac and Fannie Mae have also disclosed that the FHFA has advised that it does not intend to repudiate any guarantee obligation relating to Fannie Mae and Freddie Mac's mortgage-related securities, because the FHFA views repudiation as incompatible with the goals of the conservatorship. In addition, HERA provides that mortgage loans and mortgage-related assets that have been transferred to a Freddie Mac or Fannie Mae securitization trust must be held for the beneficial owners of the related mortgage-related securities and cannot be used to satisfy the general creditors of Freddie Mac or Fannie Mae.

        If the guarantee obligations of Freddie Mac or Fannie Mae were repudiated by the FHFA, payments of principal and/or interest to holders of Agency RMBS issued by Freddie Mac or Fannie Mae would be reduced in the event of borrowers' late payments or failure to pay or a servicer's failure to remit borrower payments to the trust. In that case, trust administration and servicing fees could be paid from mortgage payments prior to distributions to holders of Agency RMBS. Any actual direct compensatory damages owed due to the repudiation of Freddie Mac or Fannie Mae's guarantee obligations may not be sufficient to offset any shortfalls experienced by holders of Agency RMBS. The FHFA also has the right to transfer or sell any asset or liability of Freddie Mac or Fannie Mae, including its guarantee obligation, without any approval, assignment or consent. If the FHFA were to transfer Freddie Mac or Fannie Mae's guarantee obligations to another party, holders of Agency RMBS would have to rely on that party for satisfaction of the guarantee obligation and would be exposed to the credit risk of that party.

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Our investments in Non-Agency RMBS are generally subject to losses.

        We acquire Non-Agency RMBS. In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the "first loss" subordinated security holder and then by the holder of a higher-rated security. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline, less collateral is available to satisfy interest and principal payments due on the related Non-Agency RMBS. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.

We acquire RMBS collateralized by subprime mortgage loans, and we may acquire subprime mortgage loans, which are subject to increased risks.

        Among other assets, we acquire RMBS backed by collateral pools of subprime mortgage loans, and we may acquire subprime mortgage loans, which are mortgage loans that have been originated using underwriting standards that are less conservative than those used in underwriting prime mortgage loans (mortgage loans that generally conform to GSE underwriting guidelines) and Alt-A mortgage loans (mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to GSE underwriting guidelines and generally allow homeowners to qualify for a mortgage loan with reduced or alternate forms of documentation). These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including increased interest rates, lower home prices and the general economic downturn, as well as aggressive lending practices, subprime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that may be substantially higher than those experienced by mortgage loans underwritten in a more traditional manner. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor in possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. In acquiring these assets, we endeavor to factor the risk of losses on the underlying mortgages into the purchase price of the asset. If we underestimate those losses the performance of RMBS backed by subprime mortgage loans and any subprime mortgage loans that we acquire could be adversely affected, which could adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Our portfolio of assets may be concentrated in terms of credit risk.

        Although as a general policy we seek to acquire and hold a diverse portfolio of assets, we are not required to observe specific diversification criteria, except as may be set forth in the investment guidelines adopted by our board of directors. Therefore, our asset portfolio may at times be concentrated in certain property types that are subject to higher risk of foreclosure or secured by

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properties concentrated in a limited number of geographic locations. To the extent that our portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of our assets within a short time period, which could have a material adverse affect on our business, financial condition, results of operations and our ability to make distributions to our stockholders. Our portfolio may contain other concentrations of risk, and we may fail to identify, detect or hedge against those risks, resulting in large or unexpected losses. Lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments.

Our Manager's due diligence of potential investments may not reveal all of the potential liabilities associated with such investments and may not reveal other weaknesses in such investments, which could lead to investment losses.

        Before making an investment, our Manager will assess the strengths and weaknesses of the originators, borrowers and the underlying property values, as well as other factors and characteristics that are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, our Manager will rely on resources available to it and, in some cases, an investigation by third parties. There can be no assurance that our Manager's due diligence process will uncover all relevant facts or that any investment will be successful.

Our investments may include subordinated tranches of RMBS, which are subordinate in right of payment to more senior securities.

        Our investments may include subordinated tranches of RMBS, which are subordinated classes of securities in a structure of securities collateralized by a pool of mortgage loans and, accordingly, are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and may not provide holders thereof with liquid investments.

Investments in non-investment grade RMBS may be illiquid, may have a higher risk of default and may not produce current returns.

        We may invest in RMBS that are non-investment grade or unrated, which means that major rating agencies rate them below the top four investment-grade rating categories (i.e., "AAA" through "BBB") or do not provide any rating for such RMBS. Non-investment grade RMBS bonds and preferred shares tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds. Recessions or poor economic or pricing conditions in the markets associated with RMBS may cause defaults or losses on loans underlying such securities. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not certain.

Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

        Some of our investments may be rated by Moody's Investors Service, Fitch Ratings or Standard & Poor's. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value of these investments could significantly decline, which would

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adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

The mortgage loans underlying the Non-Agency RMBS that we acquire and the residential mortgage loans in which we may invest will be subject to defaults, foreclosure timeline extension, fraud and residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to us.

        Our investments in Non-Agency RMBS and residential mortgage loans will be subject to the risks of defaults, foreclosure timeline extension, fraud and home price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal. The ability of a borrower to repay a mortgage loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors may impair borrowers' abilities to repay their loans, including:

    adverse changes in national and local economic and market conditions;

    changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

    costs of remediation and liabilities associated with environmental conditions such as indoor mold;

    the potential for uninsured or under-insured property losses;

    acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and

    acts of war or terrorism, including the consequences of terrorist attacks.

        In the event of defaults on the residential mortgage loans in which we may invest or that underlie our investments in Non-Agency RMBS and the exhaustion of any underlying or any additional credit support, we may not realize our anticipated return on our investments and we may incur a loss on these investments. In addition, our investments in Non-Agency RMBS will be backed by residential real property but, in contrast to Agency RMBS, their principal and interest will not be guaranteed by a U.S. Government agency or a GSE. The ability of a borrower to repay these loans or other financial assets is dependent upon the income or assets of these borrowers.

The failure of servicers to effectively service the mortgage loans underlying the RMBS in our investment portfolio or any mortgage loans we own would materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        Most securitizations of residential mortgage loans require a servicer to manage collections on each of the underlying loans. Both default frequency and default severity of loans may depend upon the quality of the servicer. If servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If servicers take longer to liquidate non-performing assets, loss severities may tend to be higher than originally anticipated. The failure of servicers to effectively service the mortgage loans underlying the RMBS in our investment portfolio or any mortgage loans we own could negatively impact the value of our investments and our performance. Servicer quality is of prime importance in the default performance of RMBS. Many servicers have gone out of business in recent years, requiring a transfer of servicing to another servicer. This transfer takes time and loans may become delinquent because of confusion or lack of attention. When servicing is transferred, servicing fees may increase, which may have an adverse effect on the credit support of RMBS held by us. In the case of pools of securitized loans, servicers may be required to advance interest on delinquent loans to the extent the

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servicer deems those advances recoverable. In the event the servicer does not advance funds, interest may be interrupted even on more senior securities. Servicers may also advance more than is in fact recoverable once a defaulted loan is disposed, and the loss to the trust may be greater than the outstanding principal balance of that loan (greater than 100% loss severity).

We may be affected by alleged or actual deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.

        Allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents used in foreclosure proceedings (so-called "robo signing"), inadequate documentation of transfers and registrations of mortgages and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization and failure to enforce put-backs.

        As a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. In late 2010, a group of state attorneys general and state bank and mortgage regulators representing nearly all 50 states and the District of Columbia, along with the U.S. Justice Department and the Department of Housing and Urban Development, began an investigation into foreclosure practices of banks and servicers. The investigations and lawsuits by several state attorneys general led to a proposed settlement agreement in early February 2012 with five of the nation's largest banks, pursuant to which the banks agreed to pay more than $25.0 billion to settle claims relating to improper foreclosure practices. The proposed settlement does not prohibit the states, the federal government, individuals or investors in RMBS from pursuing additional actions against the banks and servicers in the future.

        The integrity of the servicing and foreclosure processes are critical to the value of the mortgage loan portfolios underlying the RMBS in which we invest, and our financial results could be adversely affected by deficiencies in the conduct of those processes. For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and our losses on, the Non-Agency RMBS we acquire. Foreclosure delays may also increase the administrative expenses of the securitization trusts for the Non-Agency RMBS, thereby reducing the amount of funds available for distribution to investors. In addition, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments while the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of credit support available for the senior classes we own, thus possibly adversely affecting these securities. Additionally, a substantial portion of the proposed $25.0 billion settlement is intended to be a "credit" to the banks and servicers for principal write-downs or reductions they may make to certain mortgages underlying RMBS. There remains considerable uncertainty as to how these principal reductions will work and what effect they will have on the value of related RMBS; as a result, there can be no assurance that any such principal reductions will not adversely affect the value of certain of the RMBS in which we invest.

        While we believe that the sellers and servicers would be in violation of their servicing contracts to the extent that they have improperly serviced mortgage loans or improperly executed documents in foreclosure or bankruptcy proceedings, or do not comply with the terms of servicing contracts when deciding whether to apply principal reductions, it may be difficult, expensive and time consuming for us to enforce our contractual rights. We continue to monitor and review the issues raised by the alleged improper foreclosure practices. While we cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect our business, there can be no assurance that these matters will not have an adverse impact on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

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Our investments may benefit from private mortgage insurance, but this insurance may not be sufficient to cover losses.

        In certain instances, Non-Agency mortgage loans may have private insurance. This insurance is often structured to absorb only a portion of the loss if a loan defaults and, as such, we may be exposed to losses on these loans in excess of the insured portion of the loans. The private mortgage insurance industry has been adversely affected by the housing market decline and this may limit an insurer's ability to perform on its insurance. Lastly, rescission and denial of mortgage insurance has increased significantly, and this may affect our ability to collect on our insurance. If private mortgage insurers fail to remit insurance payments to us for insured portions of loans when losses are incurred and where applicable, whether due to breach of contract or to an insurer's insolvency, we may experience a loss for the amount that was insured by such insurers, though we may maintain claims against the insurers.

We may experience a decline in the market value of our assets.

        A decline in the market value of our assets may require us to recognize an "other-than-temporary" impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair market value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we experience a decline in the fair value of our assets, our business, financial condition, results of operations and our ability to make distributions to our stockholders could be materially adversely affected.

Many of our investments will be recorded at fair value, and quoted prices or observable inputs may not be available to determine such value, resulting in the use of significant unobservable inputs to determine value.

        We expect that the values of some of our investments may not be readily determinable. We will measure the fair value of these investments quarterly, in accordance with guidance set forth in FASB Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures. The fair value at which our assets may be recorded may not be an indication of their realizable value. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions that are beyond the control of our Manager, us or our board of directors. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our common stock could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.

        In certain cases, our Manager's determination of the fair value of our investments will include inputs provided by third-party dealers and pricing services. Valuations of certain investments in which we may invest are often difficult to obtain or unreliable. In general, dealers and pricing services heavily disclaim their valuations. 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 a security, valuations of the same security can vary substantially from one dealer or pricing service to another. Therefore, our results of operations for a given period could be adversely affected if our

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determinations regarding the fair market value of these investments are materially different than the values that we ultimately realize upon their disposal. The valuation process has been particularly challenging recently as market events have made valuations of certain assets more difficult, unpredictable and volatile.

Because we acquire fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value.

        Increases in interest rates may negatively affect the market value of our assets. Any fixed-rate securities that we invest in generally will be more negatively affected by these increases than adjustable-rate securities. In accordance with accounting rules, we will be required to reduce our book value by the amount of any decrease in the market value of our assets that are classified for accounting purposes as available-for-sale. Our entire investment portfolio is priced by independent pricing providers and by third-party brokers. If the fair value of a security is not available from a third-party pricing service or dealer, we will estimate the fair value of the security using a variety of models and analyses, taking into consideration aggregate characteristics including, but not limited to, type of collateral, index, margin, periodic interest rate caps, lifetime interest rate caps, underwriting standards, age and delinquency experience. However, the fair value reflects estimates and may not be indicative of the amounts we would receive in a current market exchange. If we determine that a security is other-than-temporarily impaired, we would be required to reduce the value of such security on our balance sheet by recording an impairment charge in our income statement and our stockholders' equity would be correspondingly reduced. Reductions in stockholders' equity decrease the amounts that we may borrow to purchase additional assets, which could restrict our ability to increase our net income.

An increase in interest rates may cause a decrease in the volume of certain of our assets, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and make distributions to our stockholders.

        Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of Agency RMBS, Non-Agency RMBS and other mortgage-related investments available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause our assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of Agency RMBS, Non-Agency RMBS and other mortgage-related investments with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and make distributions to our stockholders may be materially adversely affected.

        The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because we expect our investments, on average, generally will bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our net assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.

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Increases in interest rates could adversely affect the value of our investments and cause our interest expense to increase, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to our stockholders.

        We invest in Agency and Non-Agency RMBS. In a normal yield curve environment, an investment in such assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.

        A significant risk associated with Agency RMBS, Non-Agency RMBS and other mortgage-related investments is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these investments would decline, and the duration and weighted average life of the investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on any repurchase agreements we may enter into.

        Market values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those investments that are subject to prepayment risk or widening of credit spreads.

        In addition, in a period of rising interest rates, our operating results will depend in large part on the difference between the income from our assets and our financing costs. We anticipate that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and market value of our assets.

Interest rate mismatches between our RMBS backed by ARMs or hybrid ARMs and our borrowings used to fund our purchases of these assets may cause us to suffer losses.

        We may fund our RMBS with borrowings that have interest rates that adjust more frequently than the interest rate indices and repricing terms of RMBS backed by ARMs or hybrid ARMs. Accordingly, if short-term interest rates increase, our borrowing costs may increase faster than the interest rates on RMBS backed by ARMs or hybrid ARMs adjust. As a result, in a period of rising interest rates, we could experience a decrease in net income or a net loss.

        In most cases, the interest rate indices and repricing terms of RMBS backed by ARMs or hybrid ARMs and our borrowings will not be identical, thereby potentially creating an interest rate mismatch between our investments and our borrowings. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing interest rates, these interest rate index mismatches could reduce our net income or produce a net loss and adversely affect the level of our distributions to our stockholders and the market price of our common stock.

        In addition, RMBS backed by ARMs or hybrid ARMs will typically be subject to lifetime interest rate caps that limit the amount an interest rate can increase through the maturity of the RMBS. However, our borrowings under repurchase agreements typically will not be subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while caps could limit the interest rates on these types of RMBS. This problem is magnified for RMBS backed by ARMs or hybrid ARMs that are not fully indexed. Further, some RMBS backed by ARMs or hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on these types of RMBS than we need to pay interest on our

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related borrowings. These factors could reduce our net interest income and cause us to suffer a loss during periods of rising interest rates.

Interest rate fluctuations may adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        Interest rates are highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our success will depend on our ability to analyze the relationship changing interest rates may have on our financial position and results of operations in general and the impact such rate changes may have on critical elements underlying our target assets and borrowings. In particular,

    Changes in interest rates may inversely affect the fair value of our target assets, which will consist of primarily Agency RMBS, Non-Agency RMBS, residential mortgage loans and other mortgage-related investments. When interest rates rise, the value of our fixed-rate target assets will generally decline, and when interest rates fall, the value of our fixed-rate target assets will generally increase.

    Changes in interest rates may inversely affect prepayment speeds. Typically, as interest rates rise, prepayments on the underlying mortgages tend to slow; conversely, as interest rates fall, prepayments on the underlying mortgages tend to accelerate. The effect that rising or falling interest rates has on these prepayments affects the price of our target assets, and the effect can be particularly pronounced with fixed-rate Agency RMBS.

    Changes in interest rates may create mismatches between our target assets, which will consist primarily of Agency RMBS, Non-Agency RMBS, residential mortgage loans and other mortgage-related investments, and our borrowings used to fund our purchases of those assets. The risk of these mismatches may be pronounced in that, should interest rates increase, interest rate caps on our hybrid ARMs and adjustable rate RMBS would limit the income stream on those investments while our borrowing would not be subject to similar restrictions.

        In accordance with accounting rules, we are required to reduce our stockholders' equity, or book value, by the amount of any decrease in the market value of our securities that are classified for accounting purposes as available-for-sale. We are required to evaluate our securities on a quarterly basis to determine their fair value by using third-party bid price indications provided by dealers who make markets in these securities or by third-party pricing services. If the fair value of a security is not available from a dealer or third-party pricing service, we will estimate the fair value of the security using a variety of methods including, but not limited to, discounted cash flow analysis, matrix pricing, option-adjusted spread models and fundamental analysis. Aggregate characteristics taken into consideration include, but are not limited to, type of collateral, index, margin, periodic cap, lifetime cap, underwriting standards, age and delinquency experience. However, the fair value reflects estimates and may not be indicative of the amounts we would receive in a current market sale transaction. If we determine that a security is other-than-temporarily impaired, we would be required to reduce the value of such security on our balance sheet by recording an impairment charge in our income statement, and our stockholders' equity would be correspondingly reduced. Reductions in stockholders' equity decrease the amounts we may borrow to purchase additional securities, which could restrict our ability to implement our investment strategy, which could adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders. In addition, 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 originated may affect the volume of RMBS available to us, which could affect our ability to acquire assets that satisfy our investment objectives.

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Changes in prepayment rates may adversely affect our profitability.

        The RMBS assets we acquire are backed by pools of residential mortgage loans. We may also invest in residential mortgage loans. We receive payments, generally, from the payments that are made on these underlying residential mortgage loans. When borrowers prepay their residential mortgage loans at rates that are faster than expected, this results in prepayments that are faster than expected on the related RMBS. These faster than expected payments may adversely affect our profitability. In addition, a decrease in prepayment rates may adversely affect our results of operations. When borrowers prepay their residential mortgage loans at slower than expected rates, prepayments on the RMBS may be slower than expected. These slower than expected payments may adversely affect our profitability.

        We purchase RMBS assets, and may purchase residential mortgage loans, that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we pay or may pay a premium to par value to acquire the asset. In accordance with accounting rules, we amortize this premium over the expected term of the asset based on our prepayment assumptions. If the asset is prepaid in whole or in part at a faster than expected rate, however, we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which will adversely affect our profitability.

        We may also purchase RMBS assets or residential mortgage loans that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the asset. In accordance with accounting rules, we will accrete this discount over the expected term of the asset based on our prepayment assumptions. If the asset is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of the asset and result in a lower than expected yield on assets purchased at a discount to par.

        Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayments can also occur when borrowers default on their residential mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property, or when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation. Prepayment rates also may be affected by conditions in the housing and financial markets, increasing defaults on residential mortgage loans, which could lead to an acceleration of the payment of the related principal, general economic conditions and the relative interest rates on FRMs and ARMs. While we will seek to manage prepayment risk, in selecting RMBS investments we must balance prepayment risk against other risks, the potential returns of each investment and the cost of hedging our risks. No strategy can completely insulate us from prepayment or other such risks, and we may deliberately retain exposure to prepayment or other risks.

Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our portfolio.

        Our success will depend on our ability to analyze the relationship of changing interest rates and prepayments of the mortgages that underlie our target assets. Changes in interest rates and prepayments will affect the market price of the target assets that we purchase and any target assets that we hold at a given time. As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends separately and collectively to assess their effects on our portfolio. In conducting our analysis, we depend on industry-accepted assumptions with respect to the relationship between interest rates and prepayments under normal market conditions. If the dislocation in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, our ability to assess the market value of our portfolio

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would be significantly affected and could materially adversely affect our financial position and results of operations.

We are highly dependent on information systems and systems failures could significantly disrupt our operations, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

        Our business is highly dependent on the communications and information systems of our Manager. Any failure or interruption of our Manager's systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

Rapid changes in the values of our residential mortgage loans and other real estate-related assets may make it more difficult for us to maintain our qualification as a REIT or exclusion from registration under the Investment Company Act.

        If the market value or income potential of our residential mortgage loans and other real estate-related assets declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase certain real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from registration under the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of our investments. We may have to make investment decisions that we otherwise would not make absent our REIT and Investment Company Act considerations.

The downgrade of the U.S. Government's or certain European countries' credit ratings and any future downgrades of the U.S. Government's or certain European countries' credit ratings may materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

        On August 5, 2011, Standard & Poor's downgraded the U.S. Government's credit rating for the first time in history. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, downgrades to the U.S. Government's credit rating could impact the credit risk associated with our target assets and, therefore, decrease the value of the target assets in our portfolio. In addition, the downgrade of the U.S. Government's credit rating and the credit ratings of certain European countries has created broader financial turmoil and uncertainty, which has recently weighed heavily on the global banking system. Therefore, the recent downgrade of the U.S. Government's credit rating and the credit ratings of certain European countries and any future downgrades of the U.S. Government's credit rating or the credit ratings of certain European countries may materially adversely affect the value of our target assets and our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Risks Related to Financing and Hedging

Our strategy involves significant leverage, which may amplify losses; while we currently expect to incur approximately six to nine times leverage on our Agency RMBS, approximately one to two times leverage on our Legacy Non-Agency RMBS and approximately one to three times leverage on our New Issue Non-Agency RMBS, there is no specific limit on the amount of leverage that we may use.

        We intend to leverage our portfolio investments in our target assets principally through borrowings under repurchase agreements. We expect our leverage (on both a GAAP and non-GAAP basis) will range between three and six times the amount of our stockholders' equity, although when deploying the

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net proceeds of this offering and the concurrent private placement to XL Investments, our leverage may be higher in the short term. Additionally, we expect to borrow between six to nine times the amount of our stockholders' equity in acquiring Agency RMBS, between one and two times when acquiring Legacy Non-Agency RMBS and between one to three times when acquiring New Issue Non-Agency RMBS. The leverage our Manager is comfortable applying to each asset class at any point in time is a function of the yield profile across housing environments and also a function of price or market values in environments of excessive volatility, which cannot be ruled out. After employing leverage, we expect that, over the first 12 months following the completion of this offering, our assets will be invested in approximately 60% Agency RMBS, 20% Legacy Non-Agency RMBS and 20% New Issue Non-Agency RMBS. We will incur this leverage by borrowing against a substantial portion of the market value of our assets. Our leverage, which is fundamental to our investment strategy, creates significant risks.

        To the extent that we incur significant leverage, we may incur substantial losses if our borrowing costs increase. Our borrowing costs may increase for any of the following, or other, reasons:

    short-term interest rates increase;

    the market value of our securities decreases;

    interest rate volatility increases; or

    the availability of financing in the market decreases.

        Our return on our investments and cash available for distribution to our stockholders may be reduced if market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets acquired, which could adversely affect the price of our common stock. In addition, our debt service payments will reduce cash flow available for distributions to stockholders. In addition, if the cost of our financing increases, we may not be able to meet our debt service obligations. To the extent that we cannot meet our debt service obligations, we risk the loss of some or all of our assets to satisfy our debt obligations. To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be negatively affected, which would jeopardize our qualification as a REIT. Losing our REIT status would cause us to lose tax advantages applicable to REITs and would decrease our overall profitability and distributions to our stockholders.

We may incur significant debt in the future, which will subject us to increased risk of loss and may reduce cash available for distributions to our stockholders.

        Subject to market conditions and availability, we may incur significant debt in the future. Although we are not required to maintain any particular assets-to-equity leverage ratio, the amount of leverage we may deploy for particular assets will depend upon our Manager's assessment of the credit and other risks of those assets. Our board of directors may establish and change our leverage policy at any time without stockholder approval. Incurring debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that:

    our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in (1) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (2) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (3) the loss of some or all of our assets to foreclosure or sale;

    our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing costs;

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    we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, investments, stockholder distributions or other purposes; and

    we may not be able to refinance debt that matures prior to the investment it was used to finance on favorable terms or at all.

There can be no assurance that our Manager will be able to prevent mismatches in the maturities of our assets and liabilities.

        Because we employ financial leverage in funding our portfolio, mismatches in the maturities of our assets and liabilities can create risk in the need to continually renew or otherwise refinance our liabilities. Our net interest margins will be dependent upon a positive spread between the returns on our asset portfolio and our overall cost of funding. Our Manager expects to actively employ portfolio-wide and security-specific risk measurement and management processes in our daily operations. Our Manager's risk management tools will include software and services licensed or purchased from third parties, in addition to proprietary systems and analytical methods developed internally. There can be no assurance that these tools and the other risk management techniques described above will protect us from asset/liability risks.

We may be subject to margin calls under our master repurchase agreements, which could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

        We enter into master repurchase agreements with various financial institutions and borrow under these master repurchase agreements to finance the acquisition of assets for our investment portfolio. Pursuant to the terms of borrowings under our master repurchase agreements, a decline in the value of the subject assets may result in our lenders initiating 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 will not be determined until we engage in a repurchase transaction under these agreements. Our fixed-rate securities 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 of or occurrence of a margin call could force us to sell our assets, either directly or through a foreclosure, 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.

If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.

        When we engage in repurchase transactions, we will generally sell securities to lenders (repurchase agreement counterparties) and receive cash from these lenders. The lenders will be obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender will be less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate all of the outstanding repurchase transactions with us and can cease entering into any other repurchase transactions with us. We expect our repurchase agreements will contain cross-default provisions, so that if a default occurs under any one agreement,

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the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.

If a counterparty to one of our swap agreements or TBAs defaults on its obligations, we may incur losses.

        If a counterparty to one of the swap agreements or TBAs that we enter into defaults on its obligations under the agreement, we may not receive payments due under the agreement, and thus, we may lose any unrealized gain associated with the agreement. If any such swap agreement hedged a liability, such liability could cease to be hedged upon the default of a counterparty. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under a swap agreement if the counterparty becomes insolvent or files for bankruptcy.

Our use of derivative instruments and repurchase agreements may expose us to counterparty risk.

        We enter into transactions to mitigate interest rate risks associated with our business with counterparties that have a high-quality credit rating and with futures exchanges. If counterparties, or the exchange, cannot perform under the terms of our futures contracts, for example, we would not receive payments due under those contracts, and may lose any unrealized gain associated with such contracts, and the mitigated liability would cease to be mitigated by such contracts. We may also be at risk for any collateral we have pledged to secure our obligations under a futures contract if the counterparty became insolvent or filed for bankruptcy. Similarly, if an interest rate cap agreement counterparty fails to perform under the terms of the interest rate cap agreement, in addition to not receiving payments due under that agreement that would offset our interest expense, we would also incur a loss for all remaining unamortized premium paid for that agreement. Our derivative instrument agreements require our counterparties to post collateral in certain events, generally related to their credit condition, to provide us some protection against their potential failure to perform. We, in turn, are subject to similar requirements. In addition, we enter into repurchase agreements to finance our target assets with certain counterparties. A failure or insolvency of any of these counterparties under such agreements could result in a loss of our collateral pledged to the counterparty or a loss of the securities that have not yet been repurchased from such counterparty, which, in either case, could adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Failure to procure adequate repurchase agreement financing, which generally have short terms, or to renew or replace repurchase agreement financing as it matures, would adversely affect our results of operations.

        We use repurchase agreement financing as a strategy to increase the return on our investment portfolio. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including if the following events occur:

    our lenders do not make repurchase agreement financing available to us at acceptable rates;

    certain of our lenders exit the repurchase market;

    our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or

    we determine that the leverage would expose us to excessive risk.

        We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us on terms that are acceptable to us. In recent years, investors and financial institutions that lend in the securities repurchase market have tightened lending standards in response to the difficulties and changed economic conditions that have materially adversely affected the RMBS market. These market disruptions have been most pronounced in the Non-Agency RMBS market, and the impact has also extended to Agency RMBS, which has made the value of these assets unstable and relatively illiquid compared to prior periods. Any decline in their value, or perceived market uncertainty about their

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value, would make it more difficult for us to obtain financing on favorable terms, or at all, or maintain our compliance with terms of any financing arrangements then in place. Additionally, the lenders from which we may seek to obtain repurchase agreement financing 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 haircut required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the value of our common stock and our ability to make distributions, and you may lose part or all of your investment.

        While the overall financing environment has improved over the last 12 months, further credit losses or mergers, acquisitions or bankruptcies of investment banks and commercial banks that have historically acted as repurchase agreement counterparties may occur. This would result in a fewer number of potential repurchase agreement counterparties operating in the market and could potentially impact the pricing and availability of financing for our business.

        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, particularly with respect to assignee liability.

The repurchase agreement financing may require us to provide additional collateral and may restrict us from leveraging our assets as fully as desired.

        We use repurchase agreements to finance acquisitions of Agency and Non-Agency RMBS. If the market value of the asset pledged or sold by us to a financing institution pursuant to a repurchase agreement declines, we may be required by the financing institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so, which could result in defaults. Posting additional collateral to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. In the event we do not have sufficient liquidity to meet such requirements, financing institutions can accelerate repayment of our indebtedness, increase interest rates, liquidate our collateral or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.

        Further, financial institutions providing the repurchase facilities may require us to maintain a certain amount of cash uninvested or to set aside non-levered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

Lenders may require us to enter into restrictive covenants relating to our operations.

        When we obtain financing, lenders could impose restrictions on us that would affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations and employ leverage beyond certain amounts.

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Our inability to meet certain financial covenants related to our repurchase agreements could adversely affect our business, financial condition and results.

        In connection with certain of our repurchase agreements, we are required to maintain certain financial covenants with respect to our net worth, the most restrictive of which requires that, on any date, our tangible net worth, on a consolidated basis, shall not be less than the greater of (1) $15,000,000 plus 50% of any subsequent equity offering (including this offering) or (2) $25,000,000. Compliance with these financial covenants will depend on market factors and the strength of our business and operating results. Various risks, uncertainties and events beyond our control could affect our ability to comply with our financial covenants. Failure to comply with our financial covenants could result in an event of default, termination of the repurchase facility and acceleration of all amounts owing under the repurchase facility and gives the counterparty the right to exercise certain other remedies under the repurchase agreement, including the sale of the asset subject to repurchase at the time of default, unless we were able to negotiate a waiver. Any such waiver could be conditioned on an amendment to the repurchase facility and any related guaranty agreement on terms that may be unfavorable to us. If we are unable to negotiate a covenant waiver or replace or refinance our assets under a new repurchase facility on favorable terms or at all, our financial condition, results of operations and cash flows could be adversely affected.

Our rights under repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our counterparties under the repurchase agreements.

        In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to take possession of and liquidate the assets that we have pledged under their repurchase agreements. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor. 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 securities under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.

An increase in our borrowing costs relative to the interest that we receive on investments in Agency and Non-Agency RMBS may adversely affect our profitability and cash available for distribution to our stockholders.

        As our financings mature, we will be required either to enter into new borrowings or to sell certain of our investments. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would adversely affect our returns on our assets, which might reduce earnings and, in turn, cash available for distribution to our stockholders.

We enter into hedging transactions that expose us to contingent liabilities in the future, which may adversely affect our financial results or cash available for distribution to stockholders.

        We engage in hedging transactions intended to hedge various risks to our portfolio, including the exposure to adverse changes in interest rates. Our hedging activity varies in scope based on, among other things, the level and volatility of interest rates, the type of assets held and other changing market

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conditions. Although these transactions are intended to reduce our exposure to various risks, hedging may fail to protect or could adversely affect us because, among other things:

    hedging can be expensive, particularly during periods of volatile or rapidly changing interest rates;

    available hedges may not correspond directly with the risks for which protection is sought;

    the duration of the hedge may not match the duration of the related liability;

    the amount of income that a REIT may earn from certain hedging transactions is limited by U.S. federal income tax provisions governing REITs;

    the credit quality of a hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

    the hedging counterparty may default on its obligation to pay.

        Subject to maintaining our qualification as a REIT, there are no current limitations on the hedging transactions that we may undertake. However, our Manager's reliance on the CFTC's December 7, 2012 no action letter relieving CPOs of mortgage REITs from the obligation to register with the CFTC as CPOs depends on the satisfaction of several conditions, including that we maintain our qualification as a REIT and that we comply with additional limitations on our hedging activity. Therefore, our and our Manager's reliance on this no action letter places additional restrictions on our hedging activity. Our hedging transactions could require us to fund large cash payments in certain circumstances (e.g., the early termination of the hedging instrument caused by an event of default or other early termination event or a demand by a counterparty that we make increased margin payments). Our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could adversely affect our financial condition. Further, hedging transactions, which are intended to limit losses, may actually result in losses, which would adversely affect our earnings and could in turn reduce cash available for distribution to stockholders.

        Hedging instruments involve various kinds of risk because they are not always traded on regulated exchanges, guaranteed by an exchange or its clearinghouse or regulated by any U.S. or foreign governmental authorities. Consequently, there may be no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. The CFTC is in the process of proposing rules under the Dodd-Frank Act that may make our hedging more difficult or increase our costs. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty will most likely result in its default. Default by a hedging counterparty may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although we generally seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders, and such transactions may fail to protect us from the losses that they were designed to offset.

        Subject to maintaining our qualification as a REIT, we will employ techniques that limit the adverse effects of rising interest rates on a portion of our short-term repurchase agreements and on a portion of the value of our assets. In general, our interest rate risk mitigation strategy will depend on our view of our entire portfolio, consisting of assets, liabilities and derivative instruments, in light of

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prevailing market conditions. We could misjudge the condition of our portfolio or the market. Our interest rate risk mitigation activity will vary in scope based on the level and volatility of interest rates and principal repayments, the type of securities held and other changing market conditions. Our actual interest rate risk mitigation decisions will be determined in light of the facts and circumstances existing at the time and may differ from our currently anticipated strategy. These techniques may include purchasing or selling futures contracts, entering into interest rate swap, interest rate cap or interest rate floor agreements, swaptions, purchasing put and call options on securities or securities underlying futures contracts, or entering into forward rate agreements.

        Because a mortgage borrower typically has no restrictions on when a loan may be paid off either partially or in full, there are no perfect interest rate risk mitigation strategies, and interest rate risk mitigation may fail to protect us from loss. Alternatively, we may fail to properly assess a risk to our portfolio or may fail to recognize a risk entirely leaving us exposed to losses without the benefit of any offsetting interest rate mitigation activities. The derivative instruments we select may not have the effect of reducing our interest rate risk. The nature and timing of interest rate risk mitigation transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. In addition, interest rate risk mitigation activities could result in losses if the event against which we mitigate does not occur.

Our results may experience greater fluctuations by not electing hedge accounting treatment on the derivatives that we enter into.

        We have elected to not qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging, for our current derivative instruments. The economics of our derivative hedging transactions are not affected by this election; however, our GAAP earnings may be subject to greater fluctuations from period to period as a result of this accounting treatment for changes in fair value of certain interest rate swap agreements or for the accounting of the underlying hedged assets or liabilities in our financial statements, if it does not necessarily match the accounting used for interest rate swap agreements.

Risks Associated with Our Relationship with Our Manager

Our board of directors has approved very broad investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager.

        Our Manager is authorized to follow very broad investment guidelines. Our board of directors periodically reviews and updates our investment guidelines and also reviews our investment portfolio but does not review or approve specific investments. In addition, in conducting periodic reviews, our board of directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager will have great latitude within the broad parameters of our investment guidelines in determining the types and amounts of Agency RMBS, Non-Agency RMBS or other investments it may decide are attractive investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially adversely affect our business operations and results. In addition, our Manager may invest in any investment on our behalf without restriction as to the dollar amount of such investment and without prior approval of our board of directors. Our Manager will generally be permitted to invest our assets in its discretion, provided that such investments comply with our investment guidelines. Our Manager's failure to generate attractive risk-adjusted returns on an investment which represents a significant dollar amount would materially and adversely affect us. Further, decisions made and investments and financing arrangements entered into by our Manager may not fully reflect the best interests of our stockholders.

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There are conflicts of interest in our relationship with our Manager that 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 our Manager. All of our officers are officers of our Manager. Our management agreement with our Manager was negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated at arm's length with an unaffiliated third-party.

        We have agreed to pay our Manager a management fee that is not tied to our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. This could hurt both our ability to make distributions to our stockholders and the market price of our common stock. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, including issuances upon exercise of the warrants, even if the issuances are dilutive to existing stockholders.

We are dependent on our Manager and its key personnel for our success.

        We have no separate facilities and are completely reliant on our Manager. All of our officers are officers of our Manager. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies. Accordingly, we believe that our success will depend to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the officers and key personnel of our Manager. The officers and key personnel of our Manager will evaluate, negotiate, close and monitor our investments; therefore, our success will depend on their continued service. The departure of any of the officers or key personnel of our Manager could have a material adverse effect on our performance. In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager's officers and professionals. The initial term of our management agreement with our Manager only extends until May 16, 2014, with automatic one-year renewals thereafter. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

The management agreement with our Manager was not negotiated on an arm's-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third-party and may be costly and difficult to terminate, including for our Manager's poor performance.

        Our officers are officers of our Manager. Our management agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third-party.

        Termination of the management agreement with our Manager without cause, including for our Manager's poor performance, is difficult and costly. Following the completion of this offering, but prior to the completion of the initial two-year term, the agreement with our Manager may not be terminated for poor performance (unless such performance amounts to a material breach of the management agreement). While our independent directors will review our Manager's performance and any fees payable to our Manager annually, the management agreement may only be terminated without cause, including for our Manager's poor performance, after completion of the initial two-year term. After the initial two-year term, the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors based upon: (1) our Manager's unsatisfactory performance that is materially detrimental to us; or (2) our determination that any fees payable to our Manager are not fair, subject to our Manager's right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent directors. We will provide our Manager 180 days prior notice of any such termination. Unless terminated for cause, we will 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 such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. This provision increases the effective cost to us of electing not to

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renew, or defaulting in our obligations under, the management agreement, thereby adversely affecting our inclination to end our relationship with our Manager, even if we believe our Manager's performance is not satisfactory.

        Our Manager is only contractually committed to serve us until May 16, 2014. Thereafter, the management agreement is automatically renewable for one-year terms; provided, however, that our Manager may terminate the management agreement annually upon 180 days prior notice. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

Our Manager's liability will be limited under the management agreement and we agreed to indemnify our Manager and its affiliates against certain liabilities. As a result, we could experience poor performance or losses for which our Manager would not be liable.

        Pursuant to the management agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship with us, although our officers who are also employees of our Manager will have a fiduciary duty to us under the MGCL as our officers. Under the terms of the management agreement, our Manager, its officers, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager will not be liable to us, our directors, our stockholders or any partners for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the management agreement, as determined by a final non-appealable order of a court of competent jurisdiction. In addition, we have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement. As a result, we could experience poor performance or losses for which our Manager would not be liable.

Our Manager's management fee is payable regardless of our performance.

        We pay our Manager a management fee regardless of the performance of our portfolio. Our Manager's entitlement to non-performance-based compensation might reduce its incentive to devote its time and effort to seeking assets that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our common stock.

Our Manager will be subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business.

        Our Manager is an investment adviser registered with the SEC and is subject to regulation by various regulatory authorities that are charged with protecting the interests of its clients, including us. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and other abuses by participants in the financial services industry have led the U.S. Government and regulators to consider increasing the rules and regulations governing, and oversight of, the U.S. financial system. This activity is expected to result in changes to the laws and regulations governing the investment management industry and more aggressive enforcement of the existing laws and regulations. Our Manager could be subject to civil liability, criminal liability or sanction, including revocation (after it has registered) or denial of its registration as an investment adviser, revocation of the licenses of its employees, censures, fines or temporary suspension or

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permanent bar from conducting business, if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage our business.

Risks Related to Our Common Stock

There is no public market for our common stock and a market may never develop, which could result in holders of our common stock being unable to monetize their investment.

        Our shares of common stock are newly-issued securities for which there is no established trading market. Our common stock has been approved for listing on the NYSE under the symbol "OAKS" subject to notice of issuance. Trading on the NYSE will not ensure that an actual market will develop for our common stock or, if one develops, be maintained. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.

        Some of the factors that could negatively affect the market price of our common stock include:

    actual or anticipated variations in our quarterly operating results;

    changes in our earnings estimates or publication of research reports about us or the real estate industry;

    changes in market valuations of similar companies;

    adverse market reaction to any increased indebtedness we incur in the future;

    additions to or departures of our Manager's key personnel;

    actions by our stockholders; and

    speculation in the press or investment community.

Market factors unrelated to our performance could negatively impact the market price of our common stock, and broad market fluctuations could also negatively impact the market price of our common stock.

        Market factors unrelated to our performance could negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher distributions or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market value of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies' operating performances. These broad market fluctuations 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 lead to a material decline in the market price of our common stock.

The performance or our common stock will correlate to the performance of our REIT investments, which may be speculative and aggressive compared to other types of investments.

        The investments we make in accordance with our investment objectives may result in a greater amount of risk as compared to alternative investment options, including relatively higher risk of volatility or loss of principal. Our investments may be speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.

        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 the trading price of our common stock

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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 affect adversely 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 make distributions to our stockholders.

Our independent registered public accountants have identified a material weakness and two significant deficiencies in our internal control over financial reporting, and we cannot provide assurance that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting is not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price. In addition, because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial reporting for the foreseeable future.

        Prior to the initial filing of the registration statement of which this prospectus is a part, and in connection with the preparation of our earlier financial statements as of and for the period from May 16, 2012 (commencement of operations) to July 31, 2012, our independent registered public accountants identified a material weakness and two significant deficiencies in our internal control over financial reporting. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness required adjustments to our financial statements during the audit. A "significant deficiency" is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of financial reporting, including the audit committee of a company's board of directors.

        The material weakness was identified as the result of an error in our interpretation of the accounting guidance relating to the evaluation of specific criteria used to determine whether certain Non-Agency RMBS purchases and repurchase financing transactions are "linked transactions", accounted for on a net basis and recorded as a forward purchase (derivative) contract at fair value on our balance sheet.

        The significant deficiencies related to inadequate review of the report of a service organization's system and the suitability of the design and operating effectiveness of controls (SSAE 16) and inadequate review of the timing of the booking of certain repurchase transactions.

        When we become a public company, we will be subject to reporting obligations under Section 404 of the Sarbanes-Oxley Act that will require us to include a management report on our internal control over financial reporting in our annual report, which will contain management's assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our annual report on Form 10-K for the year ending December 31, 2014. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation. This process is time consuming, costly and complicated. Our management may conclude that our internal control over financial reporting is not effective.

        In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the later of the year following our first annual report required by the SEC and

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the date on which we are no longer an "emerging growth company." We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed or if it interprets the relevant requirements differently from us. Material weaknesses and significant deficiencies may be identified during the audit process or at other times. During the course of the evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not be able to remedy in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with Section 404.

        We and our independent registered public accountants concluded the identified material weakness and one of the significant deficiencies remain at December 31, 2012. We have implemented and will continue to implement measures designed to remediate the material weakness and the remaining significant deficiency and to improve our internal control over financial reporting. These measures include, among other things, supplementing the existing infrastructure for overseeing financial reporting with additional specialized accounting resources to be furnished by a third party service provider, a third party assessment of the design and operation of internal controls, specifically those relating to financial reporting, and further review of the service organization's systems and controls. In addition, we have instituted additional procedures for validating and documenting whether Non-Agency RMBS purchases and repurchase financing transactions are linked. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. While we believe that the actions we are taking and will continue to take to address the existing weakness in internal control over financial reporting will mitigate the risk related to the aforementioned internal control material weakness, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses or significant deficiencies in the future. Any failure to so identify and avoid could cause investors to lose confidence in our reported financial information, harm our business and negatively impact the trading price of our common stock.

We depend on our accounting services provider for assistance with the preparation of our financial statements, access to appropriate accounting technology and assistance with portfolio valuation.

        Pursuant to our agreement with Stone Coast Fund Services LLC, or Stone Coast, Stone Coast provides a monthly calculation of our net asset value, maintains our general ledger and all related accounting records, reconciles all broker and custodial statements we routinely receive, provides us with monthly portfolio, cash and position reports, assists us with portfolio valuations, prepares draft quarterly financial statements for our review and provides us with access to data and technology services to facilitate the preparation of our annual financial statements. Our agreement with Stone Coast is terminable without cause upon 90 days notice by either party. If our agreement with Stone Coast were to be terminated and no suitable replacement can be timely engaged, we may not be able to timely and accurately prepare our financial statements.

Common stock eligible for future sale may have adverse effects on our share price.

        We are offering 4,033,333 shares of our common stock to the public pursuant to this prospectus. In addition, XL Investments has agreed to purchase an aggregate of $25.0 million of shares of our common stock from us in a concurrent private placement at the initial public offering price, or 1,666,667 shares based on a public offering price of $15.00 which is the anticipated public offering price set forth on the cover page of this prospectus. In addition, under our Manager Equity Plan, we will be able to issue a number of shares of common stock equivalent to 3.0% of our issued and outstanding common stock (on a fully diluted basis) at the time of the award (other than any shares subject to awards made under the Manager Equity Plan).

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        We, our Manager, our directors and officers, the executive officers of our Manager and XL Investments have agreed with the underwriters to a 180-day lock-up period (subject to extension in certain circumstances), meaning that, until the end of the 180-day lock-up period, we, our Manager, each of our officers and directors, each executive officer of our Manager and XL Investments will not, subject to certain exceptions, sell or transfer any shares of common stock without the prior consent of Barclays Capital Inc., Credit Suisse Securities (USA) LLC and UBS Securities LLC, which are acting as the representatives of the underwriters. The representatives of the underwriters may, in their sole discretion, at any time from time to time and without notice, waive the terms and conditions of the lock-up agreements to which they are a party. Assuming the underwriters do not exercise their option to purchase additional shares, 45.4% of our shares of common stock will be subject to lock-up agreements (based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus). When the lock-up periods expire, these shares of common stock will become eligible for sale, in some cases subject to the requirements of Rule 144 under the Securities Act, which are described under "Shares Eligible For Future Sale."

        We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale (or lock-up agreements) by certain of our stockholders lapse. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.

        Also, we may issue additional shares in subsequent public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders' interests in us.

We have not established a minimum distribution payment level and we cannot assure you of our ability to make distributions in the future.

        On November 29, 2012, December 18, 2012 and December 31, 2012, our board of directors declared a $0.00833 per share dividend ($0.13328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of October 2012, November 2012 and December 2012, respectively. The dividends for the months of October 2012, November 2012 and December 2012 have been paid. On each of February 15 and March 12, 2013, our board of directors declared a $0.0083 per share dividend ($0.1328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of January 2013 and February 2013. The January dividend has been paid and the February dividend will paid on March 28, 2013. In addition, on October 26, 2012, our board of directors declared, and has paid, a $0.018837 per share dividend ($0.301392 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) on our common stock with respect to the period from inception until September 30, 2012, which was and is expected to be our only quarterly dividend given our current policy of making regular monthly distributions to holders of our common stock in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, is expected to enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. Even though our board of directors has declared a dividend on our common stock with respect to the period from inception until September 30, 2012 and for the months of October 2012, November 2012, December 2012 and January 2013, we have not established a minimum distribution payment level and our ability to make distributions may be adversely affected by the risk factors described in this prospectus. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem

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relevant from time to time. There are no assurances of our ability to make distributions in the future. In addition, some of our distributions may include a return of capital.

Future offerings of debt or equity securities that rank senior to our common stock may adversely affect the market price of our common stock.

        If we decide to issue debt or equity securities in the future that rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities even if the issuances are dilutive to existing stockholders.

The dilutive effect of future issuances of our common stock could have an adverse effect on the future market price of our common stock or otherwise adversely affect the interests of our common stockholders.

        The warrants issued to XL Investments on September 29, 2012 entitle XL Investments to purchase two shares of our common stock for each warrant, have an initial exercise price equal to 105% of the initial public offering price for our common stock (subject to adjustment and limitation on exercise in certain circumstances), become exercisable 120 days after the completion of this offering and are exercisable for seven years after the date of the warrants' issuance. The number of shares issuable upon the exercise of the warrant will be adjusted for the reverse stock split. The exercise of the warrants in the future would be dilutive to holders of our common stock if our book value per share or the market price of our common stock is higher than the exercise price at the time of exercise. The potential for dilution from the warrants could have an adverse effect on the future market price of our common stock.

Risks Related to Our Organization and Structure

Maintenance of our exclusion from the Investment Company Act will impose limits on our business.

        We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we were to fall within the definition of an investment company, we would be unable to conduct our business as described in this prospectus. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act also defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer's total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis. Excluded from the term "investment securities," among other things, in Section 3(a)(1)(C) of the Investment Company Act are U.S. Government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

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        We conduct our business so as not to become regulated as an investment company under the Investment Company Act in reliance on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and at least 80% of our assets in qualifying real estate interests plus "real estate-related assets." In satisfying this 55% requirement, based on SEC staff guidance, we may treat Agency RMBS 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 interests. Neither the SEC nor its staff has issued guidance with respect to whole pool Non-Agency RMBS. Accordingly, based on our own judgment and analysis of the SEC staff's guidance with respect to whole pool Agency RMBS, we may also treat Non-Agency RMBS 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 interests. We may also treat whole mortgage loans that we acquire directly as qualifying real estate interests provided that 100% of the loan is secured by real estate when we acquire it and we have the unilateral right to foreclose on the mortgage. We currently intend to treat partial pool Agency and Non-Agency RMBS as real estate-related assets. We will treat any interest rate swaps or other derivative hedging transactions we enter into as miscellaneous assets that will not exceed 20% of our total assets. We expect to rely on guidance published by the SEC or its staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. As a result of the foregoing restrictions, we will be limited in our ability to make or dispose of certain investments. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. These restrictions could also result in our holding assets we might wish to sell or selling assets we might wish to hold. Although we will monitor our portfolio for compliance with the Section 3(c)(5)(C) exclusion periodically and prior to each acquisition and disposition, there can be no assurance that we will be able to maintain this exclusion.

        To the extent that we elect in the future to conduct our operations through majority owned subsidiaries, such business will be conducted in such a manner as to ensure that we do not meet the definition of investment company under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the 1940 Act, because less than 40% of the value of our total assets on an unconsolidated basis would consist of investment securities. We intend to monitor our portfolio periodically to insure compliance with the 40% test, to the extent we have made such election. In such case, we would be a holding company which conducts business exclusively through majority owned subsidiaries and we would be engaged in the non-investment company business of our subsidiaries.

        The mortgage-related investments that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. If the SEC or its staff determines that any of these securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exclusions or changes its interpretation of the above exclusions, we could be required to restructure our activities or sell certain of our assets.

Loss of our exclusion from regulation pursuant to the Investment Company Act would adversely affect us.

        On August 31, 2011, the SEC issued a concept release requesting comments to a number of matters relating to the Section 3(c)(5)(C) exclusion from the Investment Company Act, including the nature of assets that qualify for purposes of the exclusion and whether mortgage-related REIT's should be regulated as investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including guidance and interpretations from the SEC or its staff regarding the Section 3(c)(5)(C) exclusion, will not change in a manner that adversely affects our operations or business. As a result of this release, the SEC or its staff may issue

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new interpretations of the Section 3(c)(5)(C) exclusion causing us to change the way we conduct our business, including changes that may adversely affect our ability to achieve our investment objective. We may be required at times to adopt less efficient methods of financing certain of our mortgage related investments 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. Our business will be materially and adversely affected if we fail to qualify for an exemption or exclusion from regulation under the Investment Company Act.

Our authorized but unissued shares of common and preferred stock may prevent a change in our control.

        Our articles of incorporation authorize us to issue additional authorized but unissued shares of common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our articles of incorporation to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.

Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.

        In order for us to qualify as a REIT for each taxable year after 2012, during the last half of any taxable year no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To assist us in maintaining our qualification as a REIT and subject to certain exceptions, our articles of incorporation generally prohibit any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. Our board of directors has granted XL Investments an exemption from the 9.8% ownership limitation. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares) and 60.4% and 57.1%, respectively, after also giving effect to the exercise of warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering.

Certain provisions of Maryland law may limit the ability of a third-party to acquire control of our company.

        Certain provisions of the MGCL may have the effect of delaying, deferring or preventing a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests.

        Subject to certain limitations, provisions of the MGCL 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

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who beneficially owned 10% or more of the voting power of our then outstanding stock during the two-year period immediately prior to the date in question) or an affiliate of the interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder. After the five-year period, business combinations between us and an interested stockholder or an affiliate of the interested stockholder must generally either provide a minimum price to our stockholders (as defined in the MGCL) in the form of cash or other consideration in the same form as previously paid by the interested stockholder or be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding shares of voting stock and at least two-thirds of the votes entitled to be cast by stockholders other than the interested stockholder and its affiliates and associates. These provisions of the MGCL relating to business combinations do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted business combinations between us and any member of the XL group of companies, the parent of which is XL Group plc. Consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations with the XL group of companies. As a result, the members of the XL group of companies may be able to enter into business combinations with us that may not be in the best interest of our stockholders without compliance by us with the supermajority vote requirements and other provisions of the statute. However, our board of directors may repeal or modify this exemption at any time in the future, in which case the applicable provisions of this statute will become applicable to business combinations between us and the XL group of companies. In addition, pursuant to the statute, our board of directors has by resolution irrevocably exempted the issuance of shares of common stock to any member of the XL group of companies in connection with the exercise of the warrants issued to XL Investments on September 29, 2012 by any member of the XL group of companies.

        The "control share" provisions of the MGCL provide that holders of "control shares" of a Maryland corporation (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of "control shares") have no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquiror of control shares, our officers and our employees who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

        Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our articles of incorporation or bylaws, to elect to be subject to certain provisions relating to corporate governance that may have the effect of delaying, deferring or preventing a transaction or a change of control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders' best interests. Upon the completion of this offering, we will already be subject to some of these provisions, either by provisions of our articles of incorporation and bylaws unrelated to Subtitle 8 or by reason of an election in our articles of incorporation to be subject to certain provisions of Subtitle 8.

Stockholders have limited control over changes in our policies and operations.

        Our board of directors determines our major policies, including with regard to financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise

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these and other policies without a vote of the stockholders. Under our articles of incorporation and the MGCL, our stockholders generally have a right to vote only on the following matters:

    the election or removal of directors;

    the amendment of our articles of incorporation, except that our board of directors may amend our articles of incorporation without stockholder approval to:

    change our name;

    change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock;

    increase or decrease the aggregate number of shares of stock that we have the authority to issue; and

    increase or decrease the number of our shares of any class or series of stock that we have the authority to issue;

    our liquidation and dissolution; and

    our being a party to a merger, consolidation, sale or other disposition of all or substantially all of our assets or statutory share exchange.

All other matters are subject to the discretion of our board of directors.

Our articles of incorporation contain provisions that make removal of our directors difficult, which could make it difficult for stockholders to effect changes in management.

        Our articles of incorporation provide that, subject to the rights of any series of preferred stock, a director may be removed only by the affirmative vote of at least two-thirds of all the votes entitled to be cast generally in the election of directors. Our articles of incorporation and bylaws provide that vacancies generally may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change management by removing and replacing directors and may prevent a change in control that is in the best interests of stockholders.

Our rights and stockholders' rights to take action against directors and officers are limited, which could limit recourse in the event of actions not in the best interests of stockholders.

        As permitted by Maryland law, our articles of incorporation eliminate 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.

        In addition, our articles of incorporation require us, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who is a present or former director or officer and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity or any individual who, while a director or officer and at our request, serves or has served as a director, officer, partner, trustee of another corporation, REIT, partnership, joint venture, trust, employee benefit plan or any 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. As part of these indemnification obligations, we may be obligated to fund the defense costs incurred by our directors and officers.

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        We also are permitted to purchase and maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents, including our Manager and its affiliates, against any liability asserted which was incurred in any such capacity with us or arising out of such status. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.

We may make distributions of offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations.

        We may make distributions of offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations. Such distributions would reduce the amount of cash we have available for investing and other purposes and could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder's basis in its shares of common stock.

Because of its significant ownership of our common stock, XL Investments will have the ability to influence the outcome of matters that require a vote of our stockholders, including a change of control.

        XL Investments will hold a significant interest in our outstanding common stock. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares) and 60.4% and 57.1%, respectively, after also giving effect to the exercise of warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering. As a result, XL Investments potentially has the ability to influence the outcome of matters that require a vote of our stockholders, including election of our board of directors and other corporate transactions, regardless of whether others believe that the transaction is in our best interests. We have agreed with XL Investments that, for so long as XL Investments and any other of the XL group of companies collectively beneficially owns at least 9.8% of our issued and outstanding common stock (on a fully diluted basis), XL Investments will have the right to appoint an observer to attend all board meetings, but such observer will have no right to vote at any board meeting. Furthermore, XL Global, an affiliate of XL Investments, has a 30% equity interest in our Manager and representatives of XL Global are members of the management committee of our Manager. XL Global's equity interest in our Manager may increase up to approximately 38% following certain additional capital contributions XL Global will make to enable our Manager to pay to the underwriters the underwriting discount and commission on this offering and to reimburse us for offering expenses that exceed $1.5 million. The investment management professionals of our Manager are solely responsible for all decisions involving the acquisition, disposition, financing and hedging of our target assets. None of the XL group of companies nor any of their officers, directors or employees participate in these decisions.

We are an "emerging growth company" and the reduced disclosure requirements applicable to emerging growth companies may make it more difficult for you to evaluate an investment in our company and may make our common stock less attractive to investors.

        In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for "emerging growth companies," including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to (1) provide an auditor's attestation report on management's

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assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (5) provide certain disclosure regarding executive compensation required of larger public companies or (6) hold shareholder advisory votes on executive compensation. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

        Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We intend to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards are required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

        As an "emerging growth company," we have also chosen to take advantage of certain provisions of the JOBS Act that allow us to provide you with less information in this prospectus than would otherwise be required if we are not an "emerging growth company." As a result, this prospectus includes less information about us than would otherwise be required if we were not an "emerging growth company" within the meaning of the JOBS Act, which may make it more difficult for you to evaluate an investment in our company.

The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we have provided to you in this prospectus and will provide in our reports filed with the SEC subsequent to this offering, which may have an adverse effect on the trading price of our common stock.

        The JOBS Act is intended to reduce the regulatory burden on "emerging growth companies." As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an "emerging growth company" until the earliest of:

    the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

    the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;

    the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

    the date on which it is deemed to be a "large accelerated filer," which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months, and (3) has filed at least one annual report pursuant to the Exchange Act.

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        Under this definition, we will be an "emerging growth company" upon completion of this offering and could remain an emerging growth company until as late as December 31, 2018.

        We have chosen to take advantage of certain provisions of the JOBS Act that allow us to reduce the amount of information we have provided to you in this prospectus. As a result, this prospectus includes less information about us than would otherwise be required if we were not an "emerging growth company," which may make it more difficult for you to evaluate an investment in our company. Likewise, although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements applicable to reports and proxy statements that we file with the SEC in the future, which will be available to us so long as we qualify as an "emerging growth company," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that material weaknesses or other deficiencies in our internal control over financial reporting go undetected. So long as we qualify as an "emerging growth company," we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be adversely affected.

We will be subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.

        We will be subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act. These reporting and other obligations, may place significant demands on our management, administrative, operational, internal audit and accounting resources and cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, expand or outsource our internal audit function and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal controls could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We have limited experience in making critical accounting estimates, and our financial statements may be materially affected if our estimates prove to be inaccurate.

        Financial statements prepared in accordance with GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on our financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management's judgment include, but are not limited to (1) determining the fair value of investment securities and (2) assessing the adequacy of the allowance for loan losses. These estimates, judgments and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required. In addition,

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because we have limited operating history in some of these areas and limited experience in making these estimates, judgments and assumptions, the risk of future charges to income may be greater than if we had more experience in these areas. Any such charges could significantly harm our business, financial condition, results of operations and our ability to make distributions to our stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" for a discussion of the accounting estimates, judgments and assumptions that we believe are the most critical to an understanding of our business, financial condition and results of operations.

Tax Risks

If we do not qualify as a REIT or if we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

        We intend to operate in a manner that will allow us to qualify as a REIT commencing with our short taxable year ended December 31, 2012. We do not intend to request a ruling from the Internal Revenue Service, or the IRS, as to our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or in securities of other issuers will not cause a violation of the REIT requirements.

        If we were to fail to qualify as a REIT in any taxable year, and not to qualify for certain statutory relief provisions, we would be subject to U.S. federal income 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. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

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 U.S. stockholders (as defined below) that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Thus, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

REIT distribution requirements could adversely affect our ability to execute our business plan.

        We generally must distribute annually at least 90% of our "REIT taxable income," determined without regard to the deduction for dividends paid and excluding net capital gain, in order for U.S. federal-income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our "REIT taxable income," we will be

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subject to U.S. federal income tax on our undistributed-taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal income tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.

        From time to time, differences in timing between our recognition of taxable income and our actual receipt of cash may occur. If we do not have other funds available in these situations we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, make a taxable distribution of our shares as part of a distribution in which stockholders may elect to receive shares or (subject to certain limits) cash or use cash reserves, in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid the U.S. federal income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

        Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. See "U.S. Federal Income Tax Considerations—Taxation of Five Oaks Investment Corp." Any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and may require us to dispose of our target assets sooner than originally anticipated.

        To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and securities. The remainder of our investments (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 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 (although no such subsidiaries are currently contemplated to be owned by us). See "U.S. Federal Income Tax Considerations—Taxation of Five Oaks Investment Corp." 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 suffering adverse tax consequences. As a result, we may be required to liquidate from our investment portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

        In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of our stock. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

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We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

        We may acquire mortgage-backed securities in the secondary market for less than their face amount. In addition, as a result of our ownership of certain mortgage-backed securities, we may be treated for tax purposes as holding certain debt instruments acquired in the secondary market for less than their face amount. The discount at which such securities or debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as "market discount" for U.S. federal income tax purposes. Accrued market discount is generally reported as income when, and to the extent that, any payment of principal of the mortgage-backed security or debt instrument is made. If we collect less on the mortgage-backed security or 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. In addition, as a result of our ownership of certain mortgage-backed securities, we may be treated for tax purposes as holding distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under applicable U.S. Treasury Department regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed.

        Moreover, some of the mortgage-backed securities that we acquire may have been issued with original issue discount. We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such mortgage-backed securities will be made. If such mortgage-backed securities turn out not to be fully collectable, an offsetting loss deduction will become available only in the later year that uncollectability is provable.

        Finally, in the event that mortgage-backed securities or any debt instruments we are treated for tax purposes as holding as a result of our investments in mortgage-backed securities are delinquent as to mandatory principal and interest payments, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate mortgage-backed securities at the stated rate regardless of whether corresponding cash payments are received or are ultimately collectable. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectable, the utility of that deduction could depend on our having taxable income in that later year or thereafter.

Certain apportionment rules may affect our ability to comply with the REIT asset and gross income tests.

        The Internal Revenue Code provides that a regular or a residual interest in a real estate mortgage investment conduit, or REMIC, is generally treated as a real estate asset for the purpose of the REIT asset tests, and any amount includible in our gross income with respect to such an interest is generally treated as interest on an obligation secured by a mortgage on real property for the purpose of the REIT gross income tests. If, however, less than 95% of the assets of a REMIC in which we hold an interest consist of real estate assets (determined as if we held such assets), we will be treated as holding our proportionate share of the assets of the REMIC for the purpose of the REIT asset tests and receiving directly our proportionate share of the income of the REMIC for the purpose of determining the amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property. In connection with the recently expanded Agency RMBS-backed HARP loan program in which we may invest, the IRS recently issued guidance providing that, among other things, if a REIT holds a regular interest in an "eligible REMIC," or a residual interest in an "eligible

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REMIC" that informs the REIT that at least 80% of the REMIC's assets constitute real estate assets, then the REIT may treat 80% of the interest in the REMIC as a real estate asset for the purpose of the REIT income and asset tests. Although the portion of the income from such a REMIC interest that does not qualify for purposes of the REIT 75% gross income test would likely be qualifying income for the purpose of the 95% REIT gross income test, the remaining 20% of the REMIC interest generally would not qualify as a real estate asset and the income therefrom generally would not qualify for purposes of the 75% REIT gross income test, which could adversely affect our ability to satisfy the REIT income and asset tests. Accordingly, owning such a REMIC interest could adversely affect our ability to qualify as a REIT.

The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

        Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools for U.S. federal income tax purposes, resulting in "excess inclusion income." As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as non-U.S. stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt U.S. stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the excess inclusion income. In the case of a stockholder that is a REIT, a regulated investment company, or RIC, common trust fund or other pass-through entity, our allocable share of our excess inclusion income could be considered excess inclusion income of such entity. In addition, to the extent that our common stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of any excess inclusion income. Because this tax generally would be imposed on us, all of our stockholders, including stockholders that are not disqualified organizations, generally would bear a portion of the tax cost associated with the classification of us or a portion of our assets as a taxable mortgage pool. A RIC, or other pass-through entity owning our common stock in record name will be subject to tax at the highest U.S. federal corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations. Moreover, we could face limitations in selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. Finally, if we were to fail to qualify as a REIT, any taxable mortgage pool securitizations would be treated as separate taxable corporations for U.S. federal income tax purposes that could not be included in any consolidated U.S. federal income tax return. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

Our ability to invest in and dispose of "to be announced" securities could be limited by our election to be subject to tax as a REIT.

        We may, in the future, purchase agency mortgage investments through TBAs and may recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise. There is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, and we would not treat these items as qualifying assets or income (as the case may be) unless we receive a reasoned, written opinion (within the meaning of applicable U.S. Treasury Department regulations) of our counsel that such items should be treated as qualifying assets or income. Consequently, our ability to enter into dollar roll transactions and other dispositions of TBAs

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could be limited. Moreover, even if we were to receive the opinion of counsel described above, it is possible that the IRS could assert that such assets or income are not qualifying assets or income, which could cause us to fail the 75% asset test or the 75% gross income test.

The failure of securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

        We intend to enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we would nominally sell certain of our securities to a counterparty and simultaneously enter into an agreement to repurchase these securities at a later date in exchange for a purchase price. Economically, these agreements are financings which are secured by the securities sold pursuant thereto. We believe that we would be treated for REIT asset and income test purposes as the owner of the securities that are the subject of any such sale and repurchase agreement notwithstanding that such agreements may transfer record ownership of the securities to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the securities during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.

Liquidation of our assets may jeopardize our REIT qualification.

        To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

        The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge our assets and liabilities. Under these provisions, any income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute "gross income" for purposes of the 75% or 95% gross income tests, if certain requirements are met. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the REIT gross income tests. See "U.S. Federal Income Tax Considerations—Taxation of Five Oaks Investment Corp."

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

        Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes. Thus, while we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year.

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The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes.

        A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held as inventory or primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to sell or securitize loans in a manner that was treated as a sale of the loans as inventory for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, other than through a TRS, and we may be required to limit the structures we use for our securitization transactions, even though such sales or structures might otherwise be beneficial for us.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of shares 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 changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Distributions to tax-exempt investors may be classified as UBTI.

        Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute UBTI to a tax-exempt investor. However, there are certain exceptions to this rule, including: (1) part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if shares of our common stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI; (2) part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute UBTI if the investor incurs debt in order to acquire the common stock; (3) part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from U.S. federal income taxation under the Internal Revenue Code may be treated as UBTI; and (4) to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a "taxable mortgage pool," or if we hold residual interests in a REMIC, a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as UBTI.

Your investment has various U.S. federal income tax risks.

        Although the provisions of the Internal Revenue Code generally relevant to an investment in shares of our common stock are described in "U.S. Federal Income Tax Considerations," we urge you to consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in shares of our common stock.

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FORWARD-LOOKING STATEMENTS

        We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. You can identify forward-looking statements by the use of words such as "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions or other comparable terms, or by discussions of strategy, plans or intentions. Statements regarding the following subjects, among others, may be forward-looking:

    use of proceeds of this offering and of the concurrent private placement to XL Investments;

    our business and investment strategy;

    our projected operating results;

    our ability to obtain financing arrangements;

    financing and advance rates for RMBS and other mortgage-related investments;

    our expected leverage;

    general volatility of the securities markets in which we invest and the market price of our common stock;

    our expected investments;

    interest rate mismatches between RMBS and other mortgage-related investments and our borrowings used to fund such investments;

    changes in interest rates and the market value of RMBS and other mortgage-related investments;

    changes in prepayment rates on RMBS;

    effects of hedging instruments on RMBS and other mortgage-related investments;

    rates of default or decreased recovery rates on RMBS and other mortgage-related investments;

    the degree to which any hedging strategies may or may not protect us from interest rate volatility;

    impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

    our ability to qualify, and maintain our qualification, as a REIT;

    our ability to maintain our exclusion from registration under the Investment Company Act;

    availability of investment opportunities in mortgage-related, real estate-related and other securities;

    availability of qualified personnel;

    estimates relating to our ability to make distributions to our stockholders in the future;

    our understanding of our competition; and

    market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.

        The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place

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undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in this prospectus under the headings "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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USE OF PROCEEDS

        We estimate that the net proceeds from this offering and the concurrent private placement to XL Investments will be $84.0 million (or $93.1 million if the underwriters fully exercise their option to purchase additional shares) after deducting estimated offering expenses of $1.5 million payable by us.

        Our Manager will pay directly to the underwriters the underwriting discount of approximately $            million (or, if the underwriters fully exercise their option to purchase additional shares, approximately $            million). No underwriting discount will be paid on the 1,666,667 shares purchased by XL Investments in the concurrent private placement. In addition, our Manager will reimburse us for any offering expenses that exceed $1.5 million in the aggregate.

        We plan to use the net proceeds from this offering and the concurrent private placement to XL Investments to purchase Agency and Non-Agency RMBS. Subject to prevailing market conditions at the time of purchase, we currently intend to invest the net proceeds from this offering and the concurrent private placement to purchase Agency, Legacy Non-Agency RMBS and New Issue Non-Agency RMBS in the following ranges:

    approximately 30-50% Agency RMBS (or $25.2 million to $42.0 million of our net proceeds),

    approximately 15-35% Legacy Non-Agency RMBS (or $12.6 million to $29.4 million of our net proceeds), and

    approximately 15-35% New Issue Non-Agency RMBS (or $12.6 million to $29.4 million of our net proceeds).

        The actual percentage will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. Until appropriate investments can be identified, our Manager may invest the net proceeds from this offering and the concurrent private placement in interest-bearing short-term investments, including money market accounts and/or funds that are consistent with our intention to qualify as a REIT and maintain our exclusion from registration under the Investment Company Act. These initial investments, if any, are expected to provide a lower net return than we will seek to achieve from investments in Agency and Non-Agency RMBS. Although we anticipate that we will be able to identify a sufficient amount of investments in Agency and Non-Agency RMBS within approximately one to three months after the closing of this offering, depending on the availability of appropriate investment opportunities and subject to market prevailing conditions, there can be no assurance that we will be able to identify a sufficient amount of investments within this timeframe.

        Prior to the time we have fully used the net proceeds of this offering to acquire Agency and Non-Agency RMBS, we may fund our monthly distributions out of such net proceeds.

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DISTRIBUTION POLICY

        We intend to continue to make regular monthly distributions to holders of our common stock from and after October 1, 2012. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its "REIT taxable income," determined without regard to the deduction for dividends paid and excluding net capital gain, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its "REIT taxable income." On October 26, 2012, our board of directors declared, and has paid, a $0.018837 per share dividend ($0.301392 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) on our common stock with respect to the period from inception until September 30, 2012, which was and is expected to be our only quarterly dividend given our current policy of making monthly distributions going forward. On November 29, 2012, December 18, 2012 and December 31, 2012, our board of directors declared a $0.00833 per share dividend ($0.13328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of October 2012, November 2012 and December 2012, respectively. The dividends for the months of October 2012, November 2012 and December 2012 have been paid. On each of February 15 and March 12, 2013, our board of directors declared a $0.0083 per share dividend ($0.1328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of January 2013 and February 2013. The January dividend has been paid and the February dividend will paid on March 28, 2013. Investors in this offering will participate in our monthly dividends declared for the month of March 2013 and thereafter.

        If we pay a taxable stock distribution, our stockholders will be sent a form that would allow each stockholder to elect to receive its proportionate share of such distribution in all cash or in all stock, and the distribution will be made in accordance with such elections, provided that if the stockholders' elections, in the aggregate, would result in the payment of cash in excess of the maximum amount of cash to be distributed, then cash payments to stockholders who elect to receive cash will be prorated, and the excess of each such stockholder's entitlement in the distribution, less such prorated cash payment, will be paid to such stockholder in shares of our common stock.

        To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. In addition, prior to the time we have fully invested the net proceeds of this offering, we may fund our monthly distributions out of such net proceeds, which would reduce the amount of cash we have available for investing and other purposes. We will generally not be required to make distributions with respect to activities conducted through any TRSs. For more information, see "U.S. Federal Income Tax Considerations—Taxation of Five Oaks Investment Corp."

        To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular monthly distributions of all or substantially all of our taxable income to holders of our common stock out of assets legally available therefor. The amount of cash available for distribution will be decreased by any fees or expenses payable by us to our Manager under the management agreement. Any distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, debt covenants, funding or margin requirements under repurchase agreements, warehouse facilities or other secured and unsecured borrowing agreements, maintenance of our REIT qualification, restrictions under Maryland law, and such other factors as our board of directors deems relevant. Our earnings and financial condition will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. For more information regarding risk factors that could materially adversely affect our earnings and financial condition, see "Risk Factors."

        We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may be designated by us as qualified dividend income or capital gain, or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. For more information, see "U.S. Federal Income Tax Considerations—Taxation of stockholders."

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CAPITALIZATION

        The following table sets forth (1) our actual capitalization as of December 31, 2012 and (2) our capitalization as adjusted to reflect the effect of:

    the sale of 4,033,333 shares of our common stock in this offering and the $25.0 million of shares to be purchased by XL Investments in the concurrent private placement (or 1,666,667 shares) at the anticipated public offering price of $15.00 per share (as set forth on the cover of this prospectus);

    the deduction of estimated offering expenses of $1.5 million payable by us;

    the concurrent grant of (1) 28,500 shares of our restricted common stock to our Manager pursuant to the Manager Equity Plan (or 0.5% of the aggregate number of shares sold in this offering and the concurrent private placement to XL Investments without giving effect to any exercise by the underwriters of their option in this offering to purchase additional shares) and (2) an aggregate of 4,500 shares of our restricted common stock to our three independent directors pursuant to the Manager Equity Plan; and

    the one-for-16 reverse stock split we intend to effect immediately prior to the closing of this offering.

        You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds" and our financial statements and related notes included elsewhere in this prospectus.

        The shares outstanding and per share amounts reflected in the table below under the column "Actual" have not been adjusted to reflect the one-for-16 reverse stock split we intend to effect immediately prior to the closing of this offering.

 
  As of December 31, 2012  
 
  Actual   As
Adjusted(1)
 

Total Liabilities(2)

  $ 64,780,402   $ 64,780,402  
           

Stockholders' Equity:

             

Common Stock, $0.01 par value per share, 450,000,000 shares authorized, 26,500,000 shares issued and outstanding, actual(3); 7,389,250 shares issued and outstanding, as adjusted(1)

    265,000     73,893  

Preferred Stock, $0.01 par value per share, 50,000,000 shares authorized, no shares issued and outstanding(4)

         

Additional Paid-In Capital(5)

    25,912,089     110,103,197  

Accumulated Other Comprehensive Income (Loss)

    2,433,997     2,433,997  

Cumulative Distributions to Stockholders

    (1,161,672 )   (1,161,672 )

Accumulated Earnings

    4,819,306     4,819,306  
           

Total Stockholders' Equity

    32,268,720     116,268,720  
           

Total Capitalization

  $ 32,268,720   $ 116,268,720  
           

(1)
The shares outstanding reflected under the column "As Adjusted" have been adjusted to reflect the one-for-16 reverse stock split we intend to effect immediately prior to the closing date of this offering.

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(2)
We borrow against our Agency and Non-Agency RMBS using repurchase agreements with generally less than one year maturity. As of December 31, 2012, all of our borrowings under repurchase agreements had maturities of less than 90 days.

(3)
Includes 26.5 million shares of common stock sold in our May 2012 private placement; however, does not include (1) 28,500 shares of restricted stock issued to our Manager (or 0.5% of the aggregate number of shares sold in this offering and in the concurrent private placement to XL Investments without giving effect to any exercise by the underwriters of their option in this offering to purchase additional shares) pursuant to the Manager Equity Plan; (2) the warrants issued to XL Investments effective on September 29, 2012 to purchase two shares of our common stock for each share of our common stock owned by XL Investments, subject to standard anti-dilution adjustments, which are not exercisable until 120 days after the completion of this offering; and (3) an aggregate of 4,500 shares of our restricted common stock to be issued at the completion of this offering to our three independent directors pursuant to the Manager Equity Plan.

(4)
On January 22, 2013, we issued 100 shares of 12.5% Cumulative Non-Voting Redeemable Preferred Stock, or Preferred Stock, to 100 investors at $1,000 per share in connection with our REIT qualification under the Internal Revenue Code. All of the outstanding shares of Preferred Stock will be redeemed by us at $1,100 per share shortly after the closing of this offering from working capital. See "Description of Our Securities-Preferred Stock—12.5% Cumulative Non-Voting Redeemable Preferred Stock."

(5)
Additional paid-in-capital, as adjusted has been reduced by estimated offering expenses of $1.5 million payable by us. Our Manager will reimburse us for any offering expenses that exceed $1.5 million in the aggregate. In addition, our Manager has agreed to pay all of the underwriting discounts payable with respect to the shares sold in this offering. No underwriting discount will be paid on the $25.0 million of shares of our common stock to be purchased by XL Investments in the concurrent private placement.

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SELECTED FINANCIAL INFORMATION

        The following table presents selected financial data as of December 31, 2012 and for the period beginning on May 16, 2012 (date of inception) to December 31, 2012. The statement of operations data for the period beginning on May 16, 2012 (date of inception) to December 31, 2012 and the balance sheet data as of December 31, 2012 have been derived from our audited financial statements.

        Our historical financial results are not necessarily indicative of future performance or results of operations. Because the information presented 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.

        The shares outstanding and per share amounts reflected in the chart below have been adjusted in footnote 1 below to reflect the one-for-16 reverse stock split we intend to effect immediately prior to the closing of this offering.

Balance Sheet Data

$ in thousands
  December 31, 2012  

Mortgage-backed securities, at fair value

  $ 81,028  

Linked Transactions, net, at fair value

    8,613  

Cash and cash equivalents

    3,609  

Other assets

    3,799  
       

Total assets

  $ 97,049  
       

Repurchase agreements

    63,423  

Other liabilities

    1,357  

Total stockholders' equity (deficit)

    32,269  
       

Total liabilities and stockholders' equity (deficit)

  $ 97,049  
       

Statement of Operations Data

$ in thousands, except per share data
  Period from
May 16, 2012
(Date of Inception)
to December 31, 2012
 

Interest income

  $ 1,684  

Interest expense

    (267 )
       

Net interest income

    1,417  

Other income (loss)

    4,350  

Total expenses

    948  
       

Net income (loss)

    4,819  
       

Net income (loss) attributable to common stockholders

  $ 4,819  
       

Earnings (loss) per share:

       

Net income attributable to common stockholders (basic and diluted)

  $ 4,819  

Dividends declared on common stock

  $ (1,162 )

Weighted average number of shares of common stock outstanding(1):

    26,500,000  

Basic and diluted income per share(1)

  $ 0.18  

(1)
After giving effect to the one-for-16 reverse stock split we intend to effect immediately prior to the closing of this offering, the weighted average number of shares of common stock outstanding for the period is 1,656,250 and accordingly, the basic and diluted income per share is $2.91.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

        You should read the following discussion in conjunction with the sections of this prospectus entitled "Risk Factors," "Forward-Looking Statements" and "Business" and our audited 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

        We are a recently organized Maryland corporation focused on investing in, financing and managing a leveraged portfolio of Agency and Non-Agency residential mortgage-backed securities, or RMBS, residential mortgage loans and other mortgage-related investments, which we collectively refer to as our target assets.

        Our objective is to provide attractive risk-adjusted returns to our investors, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we invest in the following securities:

    Agency RMBS, which are residential mortgage-backed securities, for which a U.S. Government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac, guarantees payments of principal and interest on the securities;

    Non-Agency RMBS, which are RMBS that are not issued or guaranteed by a U.S. Government-sponsored entity; and

    Residential mortgage loans and other mortgage-related investments.

        We finance our investments in Agency RMBS and Non-Agency RMBS (including non-Agency RMBS underlying Linked Transactions) primarily through short-term borrowings structured as repurchase agreements.

        We are externally managed and advised by Oak Circle Capital Partners LLC pursuant to a management agreement between us and Oak Circle. Oak Circle, which was formed for the purpose of becoming our Manager, manages us exclusively and, unless and until Oak Circle agrees to manage any additional investment vehicle, it will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity. As our Manager, Oak Circle implements our business strategy, performs investment advisory services and activities with respect to our assets and is responsible for performing all of our day-to-day operations. Oak Circle is an investment adviser registered with the SEC.

        We will elect to be taxed as a REIT commencing with our short taxable year ended December 31, 2012, and intend to comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, we will generally not be subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders so long as we maintain our qualification as a REIT. Our qualification as a REIT will depend on our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the source of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. Even if we maintain our qualification as a REIT, we may be subject to some federal, state and local taxes on our income.

Private Placement

        In May 2012, we completed a private placement in which we sold $26.5 million of our common stock to XL Investments and employees of our Manager. We, as part of that private placement, also agreed to issue warrants to purchase our common stock to XL Investments. On September 29, 2012, we

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issued warrants to XL Investments to purchase two shares of our common stock for each share of our common stock owned by XL Investments. The warrants have an exercise price equal to 105% of the initial public offering price for our common stock in this offering. For additional information on these warrants, please see "Description of our Securities—Warrants." After deducting our offering expenses, the aggregate net proceeds from the private placement were $26.2 million. We used the $26.2 million of net proceeds from the private placement to fund our existing portfolio.

Portfolio

        We have actively worked to deploy the proceeds from our May 2012 private placement and have completed the following transactions:

    As of December 31, 2012, we owned $81.0 million of RMBS on a GAAP basis, of which $70.0 million was in Agency RMBS and $11.0 million was in Non-Agency RMBS. As of December 31, 2012, we owned $103.6 million of RMBS on a non-GAAP basis (including Non-Agency RMBS underlying Linked Transactions), of which $70.0 million was in Agency RMBS and $33.6 million was in Non-Agency RMBS. Of the $33.6 million, $22.6 million was in Non-Agency RMBS underlying Linked Transactions.

    We have entered into master repurchase agreements with 13 counterparties. As of December 31, 2012, we had borrowed $63.4 million, on a GAAP basis, and $77.4 million, on a non-GAAP basis (including the repurchase agreement financing associated with the Non-Agency RMBS underlying Linked Transactions), under those master repurchase agreements at a weighted average interest rate of 0.59%, on a GAAP basis, and 0.85%, on a non-GAAP basis, to finance our purchases of Agency RMBS and Non-Agency RMBS (including Non-Agency RMBS underlying Linked Transactions). $14.0 million of the $77.4 million is repurchase agreements underlying Linked Transactions.

    We have entered into two interest rate swap agreements, for a notional amount of $35.0 million as of December 31, 2012, designed to mitigate the effects of increases in interest rates under a portion of our repurchase agreements.

    We have entered into one interest rate swaption agreement, for a notional amount of $5.0 million as of December 31, 2012, designed to mitigate the effects of increases in interest rates under a portion of our repurchase agreements.

Overview of Factors Impacting Our Operating Results

        The results of our operations will be affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, our target assets in the marketplace. Our net interest income, which reflects the amortization of purchase premiums and accretion of purchase discounts, will vary primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate, or CPR, on our RMBS. Interest rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by unanticipated credit events experienced by borrowers whose mortgage loans are included in our RMBS. Our operating results will also be affected by general U.S. residential real estate fundamentals and the overall U.S. economic environment. In particular, our strategy is influenced by the specific characteristics of the residential real estate markets, including prepayment rates, credit and interest rate levels.

Market and Interest Rate Outlooks

        The current economic and market outlooks are shaped in a significant manner by the unprecedented level of fiscal and monetary stimulus that the U.S. Government and U.S. Federal Reserve provided in the aftermath of the 2008 credit crisis. The current rate environment is

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characterized by an attractive yield curve environment for a leveraged Agency RMBS portfolio with the spread between two year U.S. Treasury Notes and ten year U.S. Treasury Notes within the range of the average spread over the last three decades. The U.S. Federal Reserve has maintained a near-zero target for the federal funds rate, and recently reinforced its commitment to fulfilling the mandate of the second round of quantitative easing, or QE2, implemented at the end of 2010, by announcing a third round of policy accommodation, or QE3. QE2 was intended to promote higher growth and lower unemployment and to maintain price stability in the U.S. economy through the purchase of approximately $600 billion in U.S. Treasury Department securities through June 2011, while QE3 adds additional accommodation through the renewed purchase of approximately $40 billion per month of Agency RMBS through at least mid-2015. On January 30, 2013, the U.S. Federal Reserve reaffirmed its commitment to QE3, including a continuation of exceptionally low levels for the federal funds rate for so long as unemployment remains above 6.5% and inflation remains at or below 2.5%, as well as the continued purchase of Agency RMBS at a pace of $40 billion per month.

        On September 21, 2011, the U.S. Federal Reserve, in a program dubbed "Operation Twist," announced that they intend to sell $400 billion shorter-term U.S. Treasury Department securities by the end of 2012 (as extended by the U.S. Federal Reserve in June) and reinvest the proceeds to purchase longer-term U.S. Treasury Department securities with a goal of further monetary stimulus. The U.S. Federal Reserve also announced that they will continue to reinvest principal repayments from Agency securities back into Agency securities. This program is intended to extend the average maturity of the securities in the U.S. Federal Reserve's portfolio. By reducing the supply of longer-term U.S. Treasury Department securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term U.S. Treasury Department securities, like certain types of Agency securities. The reduction in longer-term interest rates, in turn, may contribute to a broad easing in financial market conditions that the U.S. Federal Reserve hopes will provide additional stimulus to support the economic recovery. Nonetheless, the effect of Operation Twist could be a flattening in the yield curve, which could result in increased prepayment rates due to lower long-term interest rates and a narrowing of our net interest margin.

        The U.S. Federal Reserve noted in late January 2012 that despite some evidence of moderate expansion in the economy and improvement in overall labor conditions and increase in household spending, the unemployment rate remained elevated, business fixed investment had slowed and the housing sector remained depressed. Because of low rates of resource utilization and a subdued outlook for inflation the U.S. Federal Reserve said in its January meeting that it anticipated current economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. In June 2012, the U.S. Federal Reserve updated its assessment by noting that the economy was expanding moderately in 2012 with business fixed investment continuing to advance and inflation in decline. However, the U.S. Federal Reserve also cautioned that growth in employment had slowed in recent months, and the unemployment rate remained elevated. Additionally, the U.S. Federal Reserve noted, household spending appeared to be rising at a somewhat slower pace than earlier in the year and despite some signs of improvement, the housing sector remains depressed. As a result, the U.S. Federal Reserve announced that it expected to maintain a highly accommodative stance for monetary policy and to continue to maintain exceptionally low levels for the federal funds rate through 2014.

        We believe investors continue to seek incremental spreads relative to U.S. Treasury Department Notes in a low yield environment and financial institutions continue to prefer high quality, liquid Agency RMBS. Yield spreads on Agency RMBS are attractive relative to historical spread levels and the U.S. Federal Reserve's near zero-target for the fed funds rate. Prepayments that are being made at rates less than the historical average should provide opportunity to capture such spread, which we refer to as the carry premium. Non-Agency RMBS continue to be priced to high default and loss severity rates and low prepayment scenarios and offer attractive loss-adjusted yields in the fixed income market.

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        As the capital markets have recovered, commercial banks have re-entered the secured lending market, which has quickened the pace of asset recovery and the return to more normalized credit spreads. Financing of Agency and Non-Agency RMBS is currently widely available through, among other vehicles, repurchase agreements. Haircuts, or the discount attributed to the value of securities sold under repurchase agreements, average between 3% and 10% for Agency RMBS and average between 10% and 50% for Non-Agency RMBS, depending on the specific security used as collateral for such repurchase agreements.

        The U.S. Government, through the Federal Housing Authority, or FHA, the Federal Deposit Insurance Corporation, or FDIC, and the U.S. Treasury Department has commenced or proposed implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. These loan modification and refinance programs, future U.S. federal, state and/or local legislative or regulatory actions that result in the modification of outstanding mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae, may adversely affect the value of, and the returns on, residential mortgage loans, RMBS, real estate-related securities and various other asset classes in which we may invest. In addition to the foregoing, the U.S. Congress and/or various states and local legislators 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.

        In September 2011, the White House announced they are working on a major plan to allow certain homeowners who owe more on their mortgages than their homes are worth to refinance. In October 2011, the Federal Housing Finance Agency, or the FHFA, announced changes to the Home Affordable Refinance Program, or HARP, to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the HARP loan-to-value, or LTV, ratio above 125%. However, the LTV relaxation only applies to mortgages guaranteed by the U.S. Government-sponsored entities. In addition, the expansion does not change the time period which these loans were originated, maintaining the requirement that the loans must have been guaranteed by Fannie Mae or Freddie Mac prior to June 2009. On August 7, 2012, the FHFA released its June 2012 Refinance Report, which showed that one of every three refinances through Fannie Mae and Freddie Mac were made through HARP, the highest number since the inception of the program in April 2009 as an apparent consequence of the LTV relaxation. The October 2012 Refinance Report indicated that, year-to-date, approximately 21% of all refinances through Fannie Mae and Freddie Mac were made through HARP.

        On January 4, 2012, the U.S. Federal Reserve released a report titled "The U.S. Housing Market: Current Conditions and Policy Considerations" to Congress providing a framework for thinking about certain issues and tradeoffs that policy makers might consider. On July 31, 2012, Edward J. Demarco, the Acting Director of the FHFA, responded to numerous Congressional inquiries as to whether the FHFA would direct Fannie Mae and Freddie Mac to implement the Home Affordable Modification Program Principal Reduction Alternative, or HAMP PRA. After extensive analysis of the revised HAMP PRA, including the determination by the Treasury Department to begin using Troubled Asset Relief Program, or TARP, monies to make incentive payments to Fannie Mae and Freddie Mac, the FHFA concluded that the anticipated benefits do not outweigh the costs and risks and elected not to implement HAMP PRA. It is unclear how future legislation in this area may impact the housing finance market and the investing environment for Agency securities as the method of reform is undecided and has not yet been defined by the regulators.

Factors Impacting Our Operating Results

        Changes in market interest rates.    With respect to our business operations, increases in interest rates, in general, may over time cause: (1) the value of our RMBS portfolio to decline; (2) coupons on our adjustable-rate and hybrid RMBS to reset, although on a delayed basis, to higher interest rates; (3) prepayments on our RMBS portfolio to slow, thereby slowing the amortization of our purchase

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premiums and the accretion of our purchase discounts; (4) the interest expense associated with our borrowings to increase; and (5) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (1) prepayments on our RMBS portfolio to increase, thereby accelerating the amortization of our purchase premiums and the accretion of our purchase discounts; (2) the value of our RMBS portfolio to increase; (3) coupons on our adjustable-rate and hybrid RMBS to reset, although on a delayed basis, to lower interest rates; (4) the interest expense associated with our borrowings to decrease; and (5) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.

        Prepayment speeds.    Prepayment speeds, as reflected by the CPR, vary according to interest rates, the type of residential mortgage loan, conditions in financial markets and housing markets, availability of residential mortgages, borrowers' credit profiles, competition and other factors, none of which can be predicted with any certainty. CPR, expressed as a percentage over a pool of residential mortgages, is the rate at which principal is expected to prepay in the given year (usually the next one). For example, if a certain residential mortgage loan pool has a CPR of 9%, then 9% of the existing pool principal outstanding is expected to prepay over the next year. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their residential mortgage loans, and as a result, prepayment speeds tend to decrease. When interest rates fall, however, prepayment speeds tend to increase. When house price appreciation is positive, prepayment rates may increase, and when house prices depreciate in value, prepayment rates may decline. For RMBS purchased at a premium, as prepayment speeds increase, the amount of income we will earn on these investments will be less than expected because the purchase premium we will pay for the bonds amortizes faster than expected. Conversely, decreases in prepayment speeds result in income greater than expected and can extend the period over which we amortize the purchase premium. For RMBS purchased at a discount, as prepayment speeds increase, the amount of income we will earn will be greater than expected because of the acceleration of the accretion of the discount into interest income. Conversely, decreases in prepayment speeds result in income less than expected and can extend the period over which we accrete the purchase discount into interest income.

        Changes in market value of our assets.    It is our business strategy to hold our target assets as long-term investments. As such, we expect that our securities will be carried at their fair value, as available-for-sale, or AFS, when applicable, in accordance with ASC 320-10 "Investments—Debt and Equity Securities," with changes in fair value recorded through accumulated other comprehensive income/(loss), a component of stockholders' equity, rather than through earnings. As a result, we do not expect that changes in the market value of the assets will normally impact our operating results. However, at least on a quarterly basis, we will monitor our target assets for other-than-temporary impairment, which could result in our recognizing a charge through earnings. See "—Critical Accounting Policies" for further details.

        Credit risk.    We expect to be subject to varying degrees of credit risk in connection with our Non-Agency RMBS portfolio. Our Manager will seek to mitigate this credit risk by estimating expected losses on these Non-Agency RMBS assets and purchasing such assets at appropriately discounted prices. These discounted purchase prices will take into account any available credit support and estimated expected losses in seeking to produce attractive loss-adjusted returns. Nevertheless, unanticipated credit losses could occur, which could adversely impact our operating results.

        Market conditions.    Due to the dramatic repricing of real estate assets and the continuing uncertainty in the direction of the real estate markets, we believe a void in the debt and equity capital available for investing in real estate has been created as many financial institutions, insurance companies, finance companies and fund managers face insolvency or have determined to reduce or discontinue investment in debt or equity related to real estate. We believe the dislocations in the residential real estate market have resulted or will result in an "over-correction" in the repricing of real

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estate assets, creating a potential opportunity for us to capitalize on these market dislocations and capital void.

        We believe that in spite of the difficult market environment for mortgage-related assets, current market conditions offer potentially attractive investment opportunities for us, even in the face of a riskier and more volatile market environment, as the depressed trading prices of our target assets have caused a corresponding increase in available yields. We also believe that the recent actions taken by the U.S. Government, the U.S. Federal Reserve and other governmental and regulatory bodies to address the financial crisis may have a positive impact on market conditions and on our business. We expect that market conditions will continue to impact our operating results and will cause us to adjust our investment and financing strategies over time as new opportunities emerge and risk profiles of our business change.

Investment Activities

        As of December 31, 2012, we owned $81.0 million of RMBS on a GAAP basis, of which $70.0 million was in Agency RMBS and $11.0 million was in Non-Agency RMBS. As of December 31, 2012, we owned $103.6 million of RMBS on a non-GAAP basis (including Non-Agency RMBS underlying Linked Transactions), of which $70.0 million was in Agency RMBS and $33.6 million was in Non-Agency RMBS. Of the $33.6 million, $22.6 million was in Non-Agency RMBS underlying Linked Transactions. We intend to use leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we intend to use borrowings to fund the origination or acquisition of our target assets. We accomplish this by borrowing against existing assets through repurchase agreements. We intend to use the net proceeds from this offering and the concurrent private placement combined with repurchase financing, to acquire additional target assets. Neither our organizational documents nor our investment guidelines places any limit on the maximum amount of leverage that we may use, and we are not required to maintain any particular debt-to-equity leverage ratio. We may also change our financing strategy and leverage without the consent of our stockholders.

        As of December 31, 2012, we borrowed 2.0 times our stockholders' equity (calculated in accordance with GAAP); 2.4 times after including repurchase agreements underlying Linked Transactions (calculated on a non-GAAP basis). We expect our leverage (on both a GAAP and non-GAAP basis) will range between three and six times the amount of our stockholders' equity, although when deploying the net proceeds of this offering and the concurrent private placement to XL Investments, our leverage may be higher in the short term. Additionally, we expect to borrow between six to nine times the amount of our stockholders' equity in acquiring Agency RMBS, between one and two times when acquiring Legacy Non-Agency RMBS and between one to three times when acquiring New Issue Non-Agency RMBS. The leverage our Manager is comfortable applying to each asset class at any point in time is a function of the yield profile across housing environments and also a function of price or market values in environments of excessive volatility, which cannot be ruled out. Depending on the different cost of borrowing funds at different maturities, we vary the maturities of our borrowed funds to attempt to produce lower borrowing costs and reduce interest rate risk. We enter into collateralized borrowings only with institutions that are rated investment grade by at least one nationally-recognized statistical rating organization.

        The leverage that we employ is specific to each asset class in which we invest and will be determined based on several factors, including potential asset price volatility, margin requirements, the current cycle for interest rates, the shape of the yield curve, credit, security price, the outlook for interest rates and our ability to use and the effectiveness of interest rate hedges. We analyze both historical interest rate and credit volatility and market-driven implied volatility for each asset class in order to determine potential asset price volatility. Our leverage targets attempt to risk-adjust asset classes based on each asset class's potential price volatility. The goal of our leverage strategy is to ensure that, at all times, our investment portfolio's leverage ratio is appropriate for the level of risk

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inherent in the investment portfolio and that each asset class has individual leverage targets that are appropriate for its potential price volatility.

        As of December 31, 2012, our Agency RMBS portfolio had a weighted average nominal coupon of 3.45% at a weighted average amortized cost of $104.9 per $100 of nominal, or face, value, or $68.5 million total cost. As of December 31, 2012, the weighted average market price of our Agency portfolio was $107.1 per $100 of nominal, or face, value, or $70.0 million in the aggregate. All of our Agency securities represent whole pool securities.

        As of December 31, 2012, our Non-Agency RMBS portfolio, on a GAAP basis, had a weighted average nominal coupon of 0.51% at a weighted average amortized cost of $54.5 per $100 of nominal, or face, value, or $10.1 million total cost. As of December 31, 2012, the weighted average market price of our Non-Agency RMBS portfolio, on a GAAP basis, was $59.7 per $100 of nominal, or face, value, or $11.0 million in the aggregate.

        As of December 31, 2012, our Non-Agency RMBS portfolio on a non-GAAP basis (including Non-Agency RMBS underlying Linked Transactions) had a weighted average nominal coupon of 0.65% at a weighted average amortized cost of $50.6 per $100 of nominal, or face, value, or $28.8 million total cost. As of December 31, 2012, the weighted average market price of our Non-Agency RMBS portfolio on a non-GAAP basis (including Non-Agency RMBS underlying Linked Transactions) was $59.3 per $100 of nominal, or face, value, or $33.6 million in the aggregate.

Investment Portfolio

        The following table summarizes certain characteristics of our investment portfolio as of December 31, 2012: (1) as reported in accordance with GAAP, which excludes the Non-Agency RMBS underlying our Linked Transactions, (2) to show separately the Non-Agency RMBS underlying our Linked Transactions; and (3) on a non-GAAP combined basis (which reflects the inclusion of the Non-Agency RMBS underlying our Linked Transactions combined with our GAAP-reported RMBS):

$ in thousands
  Principal
Balance
  Unamortized
Premium
(Discount)
  Designated
Credit
Reserve
  Amortized
Cost
  Unrealized
Gain/
(Loss)
  Fair
Value
  Net
Weighted
Average
Coupon(1)
  Average
Yield(2)
 

Agency RMBS

                                                 

15 year fixed-rate

  $ 3,251   $ 88   $   $ 3,339   $ 60   $ 3,399     2.50 %   1.94 %

30 year fixed-rate

    62,059     3,106         65,165     1,410     66,575     3.50 %   2.71 %

Total Agency RMBS

    65,310     3,194         68,504     1,470     69,974     3.45 %   2.68 %

Non-Agency RMBS Excluding Linked Transactions

    18,507     (3,534 )   (4,883 )   10,090     964     11,054     0.51 %   10.18 %
                                       

Total/Weighted Average (GAAP)

  $ 83,817   $ (340 ) $ (4,883 ) $ 78,594   $ 2,434   $ 81,028     2.80 %   3.64 %
                                       

Non-Agency RMBS Underlying Linked Transactions

    38,320     (6,722 )   (12,929 )   18,669     3,950     22,620     0.71 %   9.89 %
                                       

Combined/Weighted Average (non-GAAP)

  $ 122,137   $ (7,062 ) $ (17,812 ) $ 97,263   $ 6,384   $ 103,648     2.15 %   4.84 %
                                       

(1)
Weighted average coupon is presented net of servicing and other fees.

(2)
Average yield incorporates future prepayment assumptions.

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        The following table summarizes certain characteristics of our investment portfolio on a non-GAAP combined basis (including Non-Agency RMBS underlying Linked Transactions), at fair value, according to their estimated weighted average life classifications as of December 31, 2012:

$ in thousands
  December 31,
2012
Fair Value
 

Less than one year

  $  

Greater than one year and less than five years

    14,352  

Greater than or equal to five years

    89,296  
       

Total

  $ 103,648  
       

        The following table presents certain information about the carrying value of our available for sale, or AFS, RMBS and the Non-Agency RMBS underlying our Linked Transactions, as of December 31, 2012:

 
  GAAP Basis
(AFS RMBS—
Excluding
Linked
Transactions)
  Non-GAAP
Adjustments
(Non-Agency
RMBS underlying
Linked
Transactions)
  Non-GAAP
Basis
(Combined)
 

Principal balance

  $ 83,817,577   $ 38,320,365   $ 122,137,942  

Unamortized premium

    3,193,345         3,193,345  

Unamortized discount

                   

Designated credit reserve

    (4,882,582 )   (12,929,231 )   (17,811,813 )

Net, unamortized

    (3,534,339 )   (6,721,749 )   (10,256,088 )
               

Amortized cost

    78,594,001     18,669,385     97,263,386  

Gross unrealized gains

    2,433,997     3,950,157     6,384,154  
               

Carrying value/estimated fair values

  $ 81,027,998   $ 22,619,542   $ 103,647,540  
               

        For financial statement reporting purposes, GAAP requires us to account for certain of our Non-Agency RMBS and the associated repurchase agreement financing as Linked Transactions. Accordingly, the measures in the foregoing tables and charts prepared on a GAAP basis do not include Non-Agency RMBS underlying our Linked Transactions. However, in managing and evaluating the composition and performance of our RMBS portfolio, we do not view the purchase of our Non-Agency RMBS and the associated repurchase agreement financing as transactions that are linked. We therefore have also presented certain information that includes the Non-Agency RMBS underlying our Linked Transactions. This information constitutes non-GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to analyze our RMBS portfolio and the performance of our Non-Agency RMBS in the same way that we assess our RMBS portfolio and such assets. While we believe the non-GAAP information included in this prospectus provides supplemental information to assist investors in analyzing that portion of our portfolio composed of Non-Agency RMBS, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated.

        Variances between GAAP and Tax Income.    Due to the potential timing differences in the recognition of GAAP net income compared to REIT taxable income on our investments, our net income and the unamortized amount of purchase discounts and premiums calculated in accordance with GAAP may differ significantly from such amounts calculated for purposes of determining our

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REIT taxable income. In accordance with GAAP, a portion of the purchase discounts on our Non-Agency RMBS are allocated to a Credit Reserve and, as such, are not expected to be accreted into interest income. In addition, under GAAP, certain Non-Agency RMBS underlying our Linked Transactions are not reported as RMBS; however, for purposes of determining our REIT taxable income, all Non-Agency RMBS, including those underlying Linked Transactions, are treated as being owned and the purchase discounts associated with these securities are accreted into taxable income over the life of the applicable security. Our total Non-Agency RMBS portfolio for tax purposes differs from our portfolio reported for GAAP. These differences are primarily due to the fact that for tax purposes Non-Agency RMBS underlying Linked Transactions are included in our tax portfolio. In addition, for bonds common to both tax and GAAP-reported portfolios, potential timing differences arise with respect to the accretion of market discount into income for tax purposes as compared to GAAP.

        Financing and other liabilities.    Following the closing of our May 2012 private placement, we entered into repurchase agreements to finance the majority of our Agency and Non-Agency RMBS. These agreements are secured by our Agency and Non-Agency RMBS and bear interest at rates that have historically moved in close relationship to the London Interbank Offer Rate, or LIBOR. As of December 31, 2012, we had entered into repurchase agreements totaling $63.4 million, on a GAAP basis, and $77.4 million, on a non-GAAP basis, of which $14.0 million are repurchase agreements underlying Linked Transactions.

        The following table summarizes the average balance, the end of period balance and the maximum balance at month-end of our repurchase agreements for the period from May 16, 2012 (date of inception) to December 31, 2012 on both a GAAP basis (which excludes repurchase agreement financing associated with the Non-Agency RMBS underlying Linked Transactions) and non-GAAP basis (which includes repurchase agreement financing associated with Non-Agency RMBS underlying Linked Transactions):

 
  Repurchase Agreements  
GAAP
  Period
Average
Balance
  End of Period
Balance
  Maximum Balance
at Month-End
During the Period
 

Period from May 16, 2012 (Date of Inception) to December 31, 2012

  $ 54,806,022   $ 63,423,000   $ 63,657,000  

 

 
  Repurchase Agreements  
Non-GAAP (Includes repurchase agreements underlying Linked Transactions)
  Period
Average
Balance
  End of Period
Balance
  Maximum Balance
at Month-End
During the Period
 

Period from May 16, 2012 (Date of Inception) to December 31, 2012

  $ 66,011,362   $ 77,412,000   $ 77,696,000  

        Hedging instruments.    Subject to maintaining our qualification as a REIT, we generally hedge as much of our interest rate risk as we deem prudent in light of market conditions. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Our investment policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge.

        Interest rate hedging may fail to protect or could adversely affect us because, among other things:

    available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

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    the duration of the hedge may not match the duration of the related liability;

    the party owing money in the hedging transaction may default on its obligation to pay;

    the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

    the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments or mark-to-market losses would reduce our stockholders' equity.

        As of December 31, 2012, we had entered into two interest rate swap agreements designed to mitigate the effects of increases in interest rates under a portion of our repurchase agreements. These swap agreement provides for fixed interest rates indexed off of one-month LIBOR and effectively fixes the floating interest rates on $35.0 million of borrowings under our repurchase agreements. We had also entered into one interest rate swaption agreement designed to mitigate the effects of sudden large increases in interest rates. We intend to continue to add interest rate hedge positions according to our hedging strategy. There is no limit to the percentage of assets that we may invest in swap agreements. The mark-to-market value of an interest rate swap agreement under any reasonable interest rate scenario is likely to be a fraction of the notional amount of the asset or liability being hedged.

        The following table summarizes our hedging activity as of December 31, 2012:

Swap and swaption transactions

Counterparty
  Notional
Amount
$ in thousands
  Maturity Date   Fixed
Interest Rate
in Contract
 

Wells Fargo Bank N.A. 

    20,000   June 13, 2016     0.776 %

Credit Suisse International

    15,000   August 3, 2015     0.5125 %

Wells Fargo Bank N.A. 

    5,000 * June 5, 2023     2.75 %

*
Swaption effective date June 3, 2013

Book Value Per Share

        As of December 31, 2012, our book value per common share was $1.22 on a basic and fully diluted basis, ($19.48 after giving effect to the one- for-16 reverse stock split we intend to effect immediately prior to the closing of this offering).

Critical Accounting Policies

        Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we will apply based on our expectation of our current operations. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements will be based will be reasonable at the time made and based upon information available to us at that time. We will rely on independent pricing of our assets

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at each quarter's end to arrive at what we believe to be reasonable estimates of fair value. We have identified what we believe will be our most critical accounting policies to be the following:

Investments

        ASC 320-10, Debt and Equity Securities, requires that, at the time of purchase, we designate a security as either held-to-maturity, available for sale, or AFS, or trading depending on our ability and intent to hold such security to maturity. Securities AFS are reported at fair value, while securities held-to-maturity are reported at amortized cost. We may sell any of our securities as part of our overall management of our investment portfolio. Accordingly, we elect to classify substantially all of our securities as AFS. All assets classified as AFS will be reported at fair value, with unrealized gains and losses excluded from net income or loss and reported as a separate component of stockholders' equity. See "—Valuation of Financial Instruments."

        For an AFS security, where its fair value has declined below its amortized cost basis, we evaluate the security for other-than-temporary impairment, or OTTI. If we either (1) intend to sell the impaired security, (2) will more likely than not be required to the sell the impaired security before it recovers in value or (3) do not expect to recover the impaired security's amortized cost basis even if we do not intend to sell the security, then the impairment is deemed an OTTI and we record the entire difference between the security's fair value and its amortized cost in net income or loss. Conversely, if one of these three conditions are met, we analyze the expected cash flows, or cost recovery of the security, to determine what, if any, OTTI is recognized through our net income or loss. This analysis includes an assessment of any changes in the regulatory and/or economic environment that might affect the performance of the security.

        If we conclude through our analysis that there has been no significant adverse change in our cash flow assumptions for the security, then the impairment is deemed temporary in nature and the associated difference between the security's fair value and its amortized cost basis is recorded as an unrealized loss through other comprehensive income or loss, a component of stockholders' equity. Alternatively, if we conclude that there has been a significant adverse change in our cash flow assumptions for the security, then the impairment is deemed an OTTI and we perform an additional analysis to determine what portion of OTTI, if any, should be recorded through net income or loss. This analysis entails discounting the security's cash flows to a present value using the prior period yield for the security to determine an "expected recoverable value." The difference between this expected recoverable value and the amortized cost basis of the security is deemed to be the "credit" component of the OTTI that is recorded in our net income or loss. The amortized cost of the security is then adjusted to the expected recoverable value, and the difference between this expected recoverable value and the fair value is deemed to be the "non-credit" component of the OTTI that is recorded to other comprehensive income or loss. Future amortization and accretion for the security is computed based upon the new amortized cost basis.

Valuation of financial instruments

        ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value in accordance with GAAP and expands financial statement disclosure requirements for fair value measurements. ASC Topic 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

    Level 1—Valuation techniques in which all significant inputs are quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

    Level 2—Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or

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      quoted prices from markets that are not active for assets or liabilities that are identical or similar to the assets or liabilities being measured. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

    Level 3—Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our assumptions about the assumptions that market participants would use in pricing an asset or liability.

        Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. We categorize the fair value measurement of these assets as Level 1.

        The carrying value of repurchase agreements that mature in less than one year generally approximates fair value due to the short maturities. We categorize the fair value measurement of these liabilities as Level 1.

        We follow the fair value hierarchy set forth above in order to prioritize the data utilized to measure fair value. We strive to obtain quoted market prices in active markets (Level 1 inputs). If Level 1 inputs are not available, we will attempt to obtain Level 2 inputs, observable market prices in inactive markets, or derive the fair value measurement using observable market prices for similar assets or liabilities. When neither Level 1 nor Level 2 inputs are available, we use Level 3 inputs and independent pricing service models to estimate fair value measurements.

        A significant portion of our assets and liabilities are at fair value and, therefore, our consolidated balance sheet and income statement are significantly affected by fluctuations in market prices. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices. Starting in 2007, markets for asset-backed securities, including RMBS, have experienced severe dislocations. While these market disruptions continue, our assets and liabilities will be subject to valuation adjustment as well as changes in the inputs we use to measure fair value.

        As of December 31, 2012, our unrealized fair value losses on interest rate swap and swaption agreements, which are accounted for as derivative trading instruments under GAAP, negatively affected our financial results. Any temporary change in the fair value of our AFS securities is recorded as a component of accumulated other comprehensive income and does not impact our earnings.

        We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval. Our entire investment portfolio is priced by independent pricing providers and/or by third-party brokers.

        We determine the fair values for the Agency RMBS and Non-Agency RMBS (including Non-Agency RMBS underlying Linked Transactions) in our portfolio based on obtaining a valuation for each Agency and Non-Agency RMBS from third-party pricing services and dealer quotes, as described below. The third-party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement, as applicable. The dealers incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security, as applicable.

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        We obtain pricing data from a third-party pricing service for each Agency and Non-Agency RMBS and validate such data by obtaining pricing data from a second third-party pricing service. If the difference between pricing data obtained for any RMBS from the two third-party pricing services exceeds a certain threshold, or pricing data is unavailable from the third-party pricing services, we obtain valuations from dealers who make markets in similar financial instruments.

        We review all pricing of Agency and Non-Agency RMBS used to ensure that current market conditions are properly represented. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. Values obtained from the third-party pricing service for similar instruments are classified as Level 2 securities if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the pricing service, but dealer quotes are, we classify the security as a Level 2 security. If neither is available, we determine the fair value based on characteristics of the security that are received from the issuer and based on available market information received from dealers and classify it as a Level 3 security.

        Fair value under GAAP represents an exit price in the normal course of business, not a forced liquidation price. If we were forced to sell assets within a short period to meet liquidity needs, the prices we receive could be substantially less than their recorded fair values. Furthermore, the analysis of whether it is more likely than not that we will be required to sell securities in an unrealized loss position prior to an expected recovery in value (if any), the amount of such expected required sales and the projected identification of which securities would be sold is also subject to significant judgment, particularly in times of market illiquidity.

Interest income

        Our interest income on our Agency and Non-Agency RMBS is accrued based on the actual coupon rate and the outstanding principal balance of such securities. Premiums and discounts are amortized or accreted into interest income over the lives of the securities using the effective yield method, as adjusted for actual prepayments. We estimate prepayments for our Agency interest-only securities, which represent our right to receive a specified portion of the contractual interest flows of specific Agency and CMO securities. As a result, if prepayments increase (or are expected to increase), we will accelerate the rate of amortization on the premiums. Conversely, if prepayments decrease (or are expected to decrease), we will decelerate the rate of amortization on the premiums.

        Our interest income on our Non-Agency RMBS securities rated below AA, including unrated securities, is recognized in accordance with estimated cash flows. Cash flows from a security are estimated by applying assumptions used to determine the fair value of such security and the excess of the future cash flows over the investment are recognized as interest income under the effective yield method. We review and, if appropriate, make adjustments to our cash flow projections at least quarterly and monitor these projections based on input and analysis received from external sources, internal models and our judgment about interest rates, prepayment rates, the timing and amount of credit losses and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in interest income recognized on, or the carrying value of, such securities.

        For Non-Agency RMBS purchased at a discount, we account for differences between contractual cash flows and cash flows expected to be collected from our initial investment in debt securities acquired if those differences are attributable, at least in part, to credit quality. We limit the yield that may be accreted (accretable yield) to the excess of an estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the initial investment. The excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference or designated credit reserve) is not recognized as an adjustment of yield, loss

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accrual or valuation allowance. Subsequent increases in cash flows expected to be collected is recognized prospectively through adjustment of the yield over the remaining life of the security. Decreases in cash flows expected to be collected are recognized as an impairment.

Repurchase agreements

        We finance the acquisition of our investment securities through borrowings under repurchase agreements. Repurchase agreements, other than those treated as Linked Transactions, are treated as collateralized financing transactions and carried at their contractual amounts, including accrued interest, as specified in the respective agreements. See "—Derivatives and hedging activities."

Derivatives and hedging activities

        We apply the provisions of ASC 815, Derivatives and Hedging, which requires an entity to recognize all derivatives as either assets or liabilities in the balance sheets and to measure those instruments at fair value. The fair value adjustments of our current derivative instruments affect net income as the hedge for accounting purposes is being treated as an economic, or trading, hedge and not as a qualifying hedging instrument.

        Derivatives are used for hedging purposes rather than speculation. We rely on internal models corroborated by quotations from a third-party to determine these fair values. If our hedging activities do not achieve their desired results, our reported earnings may be adversely affected.

        If we finance the purchase of RMBS with repurchase agreements with the same counterparty from which the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed under GAAP to be part of the same arrangement, or a "Linked Transaction," unless certain criteria are met. We have determined that certain of our Non-Agency RMBS are Linked Transactions. Under GAAP, we account for the two components of a Linked Transaction (the RMBS purchase and the related repurchase agreement financing) on a net basis and record a forward purchase (derivative) contract, at fair value, on our balance sheet in the line item "Linked Transactions, net, at fair value." Changes in the fair value of the Linked Transactions and associated interest income and expense are reported as "Unrealized gain and net interest income from Linked Transactions" on our statement of operations.

Income taxes

        We will elect to be taxed as a REIT commencing with our short taxable year ended December 31, 2012 and intend to comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, we will generally not be subject to U.S. federal income tax to the extent of current distributions to stockholders and as long as we maintain our qualification as a REIT.

Warrants

        We will account for the warrants issued pursuant to the May 2012 private offering to XL Investments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities, which provides guidance on the specific accounting treatment of a multitude of derivative instruments. In the case of equity related instruments, such instruments or embedded features are accounted for at fair value, using appropriate fair value methodologies. Common provisions such as certain anti-dilution clauses in equity warrants may lead to an accounting treatment of the warrants as a liability, where subsequent changes in fair value are reported in earnings. If warrants qualify for equity treatment, the cost basis of the warrants is accounted for in equity each reporting period.

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Share-based compensation

        We will follow ASC 718, Compensation—Stock Compensation with regard to our Manager Equity Plan. ASC 718 covers a wide range of share-based compensation arrangements, including stock options, restricted stock plans, performance based awards and related other arrangements. ASC 718 requires that compensation cost relating to stock-based payment transactions be recognized in the financial statements at the time of grant or re-measurement date. The costs are measured based on the fair value of the equity or liability instruments issued.

        Compensation cost related to restricted common stock to be granted to our independent directors will be measured at its estimated fair value at the grant date, and will be amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common stock issued to or at the direction of our Manager will be initially measured at estimated fair value at the grant date, and will be re-measured on subsequent dates to the extent the awards are unvested. We have elected to use the straight-line method to amortize compensation expense for the restricted common stock to be granted to or at the direction of our Manager.

Use of estimates

        Our accounting and reporting policies conform to GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments and interest income on RMBS. Actual results may differ from those estimates.

Cash and cash equivalents

        We consider all highly liquid investments that have original or remaining maturity dates of three months or less when purchased to be cash equivalents. We maintain our cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

Accounting Standards Applicable to Emerging Growth Companies

        The JOBS Act contains provisions that relax certain requirements for "emerging growth companies," which includes us. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to (1) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (2) provide an auditor's attestation report on management's assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (3) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, or (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise.

        As noted above, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We intend to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

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Recent Accounting Pronouncements Not Yet Adopted

        In December 2011, the FASB issued ASU No. 2011-11, which amends ASC 210, Balance Sheet. The amendments in this ASU enhance disclosures required by GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with ASU 210, Balance Sheet or ASU 815, Other Presentation Matters or (2) subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 is effective for the first interim or annual period beginning on or after January 1, 2013. Adopting this ASU will not have a material impact on our financial condition or results of operations.

Results of Operations

        The table below presents certain information from our Statement of Operations for the periods May 16, 2012 (date of inception) to December 31, 2012:

 
  Period from
May 16, 2012
(date of
inception) to
December 31,
2012
 

Revenues:

       

Interest income

  $ 1,683,588  

Interest expense

    (267,080 )
       

Net interest income

    1,416,508  
       

Other income:

       

Realized loss on sale of investments, net

    (98,382 )

Unrealized gain and net interest income from Linked Transactions

    4,822,727  

Realized loss on swaption agreements

    (75,551 )

Unrealized loss on interest rate swap and swaption agreements

    (298,359 )
       

Total other income

    4,350,435  
       

Expenses:

       

Management fee

    244,882  

General and administrative expenses

    113,606  

Operating expenses reimbursable to our Manager

    563,806  

Other operating expenses

    25,343  
       

Total expenses

    947,637  
       

Net income

  $ 4,819,306  
       

Earnings per share

       

Net income attributable to common stockholders (basic and diluted)

  $ 4,819,306  
       

Weighted average number of shares of common stock outstanding

    26,500,000  

Basic and diluted income per share

  $ 0.18  
       

Net Income Summary

        For the period ended December 31, 2012, our net income was $4,819,306 or $0.18, basic and diluted net income per average share available to common stockholders. This does not give effect to the one-for-16 reverse stock split we intend to effect immediately prior to the completion of this offering.

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Interest Income and Interest Expense

        An important source of income is net interest income. Our interest income (including purchased accrued interest) was $1,683,588 for the period ended December 31, 2012. Our interest expense for these periods ended December 31, 2012 (including derivative payments made and purchased accrued interest) was $267,080.

Net Interest Income

        Our net interest income, which equals interest income less interest expense, totaled $1,416,508 for the period ended December 31, 2012.

Other Income

        For the period ended December 31, 2012, we had other income of $4,350,435, which primarily reflects the impact of net gains of $4,822,727 on our Linked Transactions. The gains on our Linked Transactions for the period ended December 31, 2012 included interest income of $1,020,437 on the underlying Non-Agency RMBS, interest expense of $147,867 on the borrowings under repurchase agreements and an increase of $3,950,157 in the fair value of the underlying Non-Agency RMBS. Other income also included an unrealized loss on interest rate swap and swaption agreements of $298,359; a realized loss on swap and swaption agreements of $75,551; and a realized loss on sale of investments, net of $98,382.

Expenses

        We incurred management fees of $244,882 for the period ended December 31, 2012 representing amounts payable to our Manager under our management agreement. For the period ended December 31, 2012, we incurred other operating expense of $702,755, of which $563,806 was payable to our Manager and $25,343 was payable directly by us. See "Certain Relationships and Related Transactions" for a discussion of the management fee and our relationship with our Manager.

        Our general and administrative expenses of $113,606 for the period ended December 31, 2012 represent the cost of legal, accounting, auditing and consulting services provided to us by third-party service providers.

Net Income and Return on Equity

        Our net income was $4,819,306 for the period ended December 31, 2012 representing an annualized return of 29.34% on beginning stockholders' equity of $26,177,089.

        The offering costs to be incurred by us in connection with this offering will be reflected as a reduction of our additional paid-in-capital when it is probable that we will be responsible for such costs and they can be reasonably estimated. Costs incurred that are not directly associated with the completion of this offering will be accrued and expensed as incurred by us.

Liquidity and Capital Resources

        Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our May 2012 private placement, net proceeds from this offering and the concurrent private placement, net cash provided by operating activities, cash from repurchase agreements and other financing arrangements and future issuances of common equity, preferred equity, convertible securities, trust preferred and/or debt securities. We currently finance Agency and Non-Agency RMBS primarily through the use of repurchase agreements.

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        As of December 31, 2012, our source of funds, apart from our May 2012 private placement, consisted of net proceeds from repurchase agreements totaling $63.4 million, on a GAAP basis, and $77.4 million, on a non-GAAP basis, including $14.0 million from repurchase agreements underlying Linked Transactions, with a weighted-average borrowing rate of 0.59%, on a GAAP basis, and 0.85%, on a non-GAAP basis, which we used to finance the acquisition of Agency and Non-Agency RMBS, including Non-Agency RMBS underlying Linked Transactions. We generally target a debt-to-equity ratio with respect to our Agency RMBS of six to nine times, between one and two times when acquiring Legacy Non-Agency RMBS and between one to three times when acquiring New Issue Non-Agency RMBS. As of December 31, 2012, we had an overall debt-to-equity ratio of 2.0:1 (calculated in accordance with GAAP), or 2.4:1 when including repurchase agreements underlying Linked Transactions (calculated on a non-GAAP basis). The repurchase obligations mature and reinvest every 30 to 90 days. See "—Contractual Obligations and Commitments" below. We expect to continue to borrow funds in the form of repurchase agreements. As of December 31, 2012, we had established eleven repurchase borrowing arrangements with various investment banking firms and other lenders, and as of December 31, 2012, we had outstanding borrowings with four of these lenders totaling $63.4 million, on a GAAP basis, and $77.4 million, on a non-GAAP basis, including $14.0 million from repurchase agreements underlying Linked Transactions.

        Under repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties (lenders) in the event that the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional securities or cash. Generally, repurchase agreements contain a financing rate, term and trigger levels for margin calls and haircuts depending on the types of collateral and the counterparties involved. If the estimated fair value of the investment securities increases due to changes in market interest rates or market factors, lenders may release collateral back to us. Specifically, margin calls may result from a decline in the value of the investments securing our repurchase agreements, prepayments on the residential mortgages securing our RMBS investments and from changes in the estimated fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of us and/or the performance of the bonds in question. Across all of our repurchase facilities, the haircuts range from a low of 3% to a high of 50%, and the weighted average haircut was approximately 10% as of December 31, 2012. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. Should prepayment speeds on the residential mortgages underlying our RMBS investments or market interest rates increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.

        As of December 31, 2012, we had unrestricted cash and cash equivalents of $3.6 million and unpledged securities of $14.7 million available to meet margin calls on our repurchase agreements (including those repurchase agreements underlying Linked Transactions) and derivative instruments. Accordingly, based on our leverage level and liquidity position as of December 31, 2012, if the decline in market value of our securities collateralizing our repurchase facilities, or the combination of declining market value of our pledged securities and increasing haircuts, were to exceed the amount of our available liquidity, then we would have to sell assets and may not realize sufficient proceeds to repay the amounts we owe to our lenders. However, as our liquidity decreased, we would attempt to de-leverage in an effort to avoid such a situation. In the period ended December 31, 2012, we did not experience any margin calls. However, future declines in the market value of our securities may be possible.

        Upon repayment of each borrowing under a repurchase agreement, we may use the collateral immediately for borrowing under a new repurchase agreement. We have not at the present time

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entered into any other commitment agreements under which the lender would be required to enter into new repurchase agreements during a specified period of time.

        We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in Agency and Non-Agency RMBS. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our operating results.

Forward-Looking Statements Regarding Liquidity

        Based upon our current portfolio, leverage rate and available borrowing arrangements, we believe that the net proceeds of our May 2012 private placement and this offering and the concurrent private placement to XL Investments, combined with cash flow from operations and available borrowing capacity, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and for other general corporate expenses.

        Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. We may increase our capital resources by obtaining long-term credit facilities or making additional public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock and senior or subordinated notes. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

        To maintain our qualification as a REIT, we generally must distribute annually at least 90% of our "REIT taxable income" (determined without regard to the deduction for dividends paid and excluding net capital gain). These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations.

Contractual Obligations and Commitments

        We entered into a contractual arrangement with our Manager when we commenced operations on May 16, 2012. Our Manager is entitled to receive a management fee and the reimbursement of certain expenses. See "Our Manager and the Management Agreement—Management Agreement—Management Fee and Expense Reimbursements." Because our management agreement provides that our Manager is responsible for managing our affairs, our executive officers, who are employees of our Manager and not our employees, will not receive cash compensation from us for serving as our executive officers. We have no employees.

        Our Manager Equity Plan includes provisions for grants of restricted common stock and other equity based awards to our Manager and to our independent directors, consultants or officers whom we may directly employ in the future. In turn, our Manager will grant such awards to its employees, officers (including our current officers), members, directors or consultants. Grants to our Manager will be allocated firstly to non-member employees and officers of our Manager, and then the balance of the grants to members (including our officers) proportionally based on each member's respective ownership of our Manager. The grants to be made to our Manager and then by our Manager pursuant to such are intended to provide customary incentive compensation to those persons employed by our Manager on whose performance we rely (including our officers). The total number of shares that may be granted subject to awards under the Manager Equity Plan will be equal to an aggregate of 3.0% of the total number of issued and outstanding shares of our common stock (on a fully diluted basis) at the time of each award (other than any shares issued or subject to awards made pursuant to the Manager Equity Plan). Our board of directors has approved certain grants of equity awards to our Manager and

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independent director nominees effective as of the closing of this offering. See "Management—Manager Equity Plan."

        We had the following contractual borrowing under repurchase agreements as of December 31, 2012 (dollar amounts in thousands) on both a GAAP basis (which excludes repurchase agreement financing associated with the Non-Agency RMBS underlying Linked Transactions) and non-GAAP basis (which includes repurchase agreement financing associated with the Non-Agency RMBS underlying Linked Transactions):

GAAP

 
  Payments Due by Period  
$ in thousands
  Total   Less Than
1 Year
  1 - 3
Years
  3 - 5
Years
  After
5 Years
 

Repurchase agreements

  $ 63,423   $ 63,423              
                       

Total contractual obligations

  $ 63,423   $ 63,423              
                       

Non-GAAP

 
  Payments Due by Period  
$ in thousands
  Total*   Less Than
1 Year*
  1 - 3
Years
  3 - 5
Years
  After
5 Years
 

Repurchase agreements

  $ 77,412   $ 77,412              
                       

Total contractual obligations

  $ 77,412   $ 77,412              
                       

*
Includes $13,989 of repurchase agreements underlying Linked Transactions.

        In addition, we enter into certain contracts that contain a variety of indemnification obligations, principally with our Manager, brokers and counterparties to repurchase agreements. The maximum potential future payment amount we could be required to pay under these indemnification obligations is unlimited. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification obligations. As a result, the estimated fair value of these agreements is minimal. Accordingly, we recorded no liabilities for these agreements as of December 31, 2012.

Off-Balance Sheet Arrangements

        Our Linked Transactions are comprised of Non-Agency RMBS, associated repurchase agreement financing and interest receivable/payable on such accounts. To the extent these transactions become unlinked in the future, the underlying Non-Agency RMBS, the associated repurchase agreement financing and the associated interest income and expense will be presented on a gross basis on our consolidated balance sheet and statement of operations, prospectively.

        As of December 31, 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of December 31, 2012, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

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Distributions

        We intend to continue to make regular monthly distributions to holders of our common stock from and after October 1, 2012. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its "REIT taxable income" (determined without regard to the deduction for dividends paid and excluding net capital gain) and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its "REIT taxable income." On October 26, 2012, our board of directors declared and has paid a $0.018837 per share dividend ($0.301392 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) on our common stock with respect to the period from inception through September 30, 2012, which was and is expected to be our only quarterly dividend given our current policy of making monthly distributions going forward. On November 29, 2012, December 18, 2012 and December 31, 2012, our board of directors declared a $0.00833 per share dividend ($0.13328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of October 2012, November 2012 and December 2012, respectively. The dividend for the months of October 2012, November 2012 and December 2012 have been paid. On each of February 15 and March 12, 2013, our board of directors declared a $0.0083 per share dividend ($0.1328 per share after giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) with respect to the months of January 2013 and February 2013. The January dividend has been paid and the February dividend will paid on March 28, 2013. Investors in this offering will participate in our monthly dividends declared for the month of March 2013 and thereafter. We generally intend to make regular monthly distributions to our stockholders in an amount equal to all or substantially all of our taxable income. Before we make any distribution, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If cash available for distribution to our stockholders is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Inflation

        Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP, and our distributions will be determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our "REIT taxable income" (determined without regard to the deduction for dividends paid and excluding net capital gain) on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Quantitative and Qualitative Disclosures About Market Risks

        We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while providing an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our common stock. Although we do not seek to avoid risk completely, we believe that risk can be quantified from historical experience and we seek to manage our risk levels in order to earn sufficient compensation to justify the risks we undertake and to maintain capital levels consistent with taking such risks.

        To reduce the risks to our portfolio, we employ portfolio-wide and security-specific risk measurement and management processes in our daily operations. Our Manager's risk management tools include software and services licensed or purchased from third parties, in addition to proprietary software and analytical methods developed by our Manager. There can be no guarantee that these tools will protect us from market risks.

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        While changes in the fair value of our Agency RMBS are generally not credit-related, changes in the fair value of our Non-Agency RMBS, including Non-Agency RMBS underlying Linked Transactions, may reflect both market and interest rate conditions as well as credit risk. In evaluating our asset/liability management and Non-Agency RMBS credit performance, our Manager considers the credit characteristics underlying our Non-Agency RMBS, including Non-Agency RMBS that are a component of our Linked Transactions. The following table presents certain information about our Agency RMBS portfolio and Non-Agency RMBS portfolio (including Non-Agency RMBS underlying our Linked Transactions) as of December 31, 2012 on a combined non-GAAP basis. Information presented with respect to weighted average loan to value, weighted average FICO scores and other information is aggregated based on information reported at the time of mortgage origination and therefore does not reflect changes to home values or borrower characteristics since the mortgage origination.

 
  December 31, 2012  
 
  Non-Agency
RMBS(1)
  Agency RMBS  

Portfolio Characteristics:

             

Number of securities

    9     8  

Carrying value/ estimated fair value

  $ 33,673,936   $ 69,973,604  

Amortized cost

  $ 28,759,843   $ 68,503,542  

Current par value

  $ 56,827,745   $ 65,310,197  

Ratio of carrying value to current par value

    59.3 %   107.1 %

Ratio of amortized cost to current par value

    50.6 %   104.9 %

Net weighted average coupon

    0.65 %   3.45 %

Three month CPR(1)

    12.9 %   7.1 %

 

 

December 31, 2012(1)

 

 


 

Non-Agency RMBS Characteristics:

             

Collateral Attributes:

             

Weighted average loan age (months)

    79        

Weighted average original loan-to-value

    81.2 %      

Weighted average original FICO(2)

    691        

Weighted average loan size

    276        

Current Performance:

             

60+ day delinquencies

    32.3 %      

Average credit enhancement(3)

    2.8 %      

 
  December 31, 2012(1)  
 
  Fair Value   % of Non-Agency
RMBS
 

Coupon Type:

             

Fixed rate

  $     0.0 %

Hybrid or floating

  $ 33,673,936     100.0 %

Collateral Type:

             

Prime

  $     0.0 %

Alt-A

  $ 20,362,160     60.5 %

Subprime

  $ 13,311,776     39.5 %

New Issue

  $     0.0 %

Loan Origination Year:

             

2007

  $ 8,932,388     26.5 %

2006

  $ 12,913,994     38.4 %

Pre-2006

  $ 11,827,554     35.1 %

(1)
Includes Non-Agency RMBS underlying our Linked Transactions at December 31, 2012 on a combined, non-GAAP basis.

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        The following table presents the rating of our Non-Agency RMBS at December 31, 2012, including Non-Agency RMBS underlying our Linked Transactions, on a combined non-GAAP basis. The rating indicates the opinion of the rating agency as to the creditworthiness of the investment, indicating the obligor's ability to meet its full financial commitment on the obligation. A rating of "NR" is assigned when major rating agencies do not provide any rating for such security.

 
  Fair Value   % of Non-Agency
RMBS
 

Current Rating(4)

             

CCC

  $ 5,697,236     16.9 %

C

  $ 7,614,540     22.6 %

D

  $ 11,516,722     34.2 %

Not Rated

  $ 8,845,438     26.3 %

        The mortgages securing our Non-Agency RMBS are collateralized by properties located within many geographic regions across the United States. The following table presents the five largest geographic concentrations of the mortgages collateralizing our Non-Agency RMBS, including Non-Agency RMBS underlying our Linked Transactions, at December 31, 2012 on a combined, non-GAAP basis:

 
  Fair Value   % of Non-Agency
RMBS
 

Property Location

             

California

  $ 12,590,677     37.4 %

Florida

  $ 3,530,747     10.5 %

New York

  $ 2,020,093     6.0 %

New Jersey

  $ 951,828     2.8 %

Maryland

  $ 372,110     1.1 %

(1)
Three-month CPR is reflective of the prepayment speed on the underlying securitization; however, CPR is not necessarily indicative of the proceeds received on our investments. Proceeds received on our RMBS depend on the location of our RMBS within the payment structure of each underlying property.

(2)
FICO represents a mortgage industry accepted credit score of a borrower, which was developed by Fair Isaac Corporation.

(3)
Average credit enhancement remaining on our Non-Agency RMBS portfolio, which is the average amount of protection available to absorb future credit losses due to defaults on the underlying collateral.

(4)
Reported based on the lowest rating issued by a rating agency, if more than one rating is issued on the security, at the date presented.

Interest rate risk

        Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and related financing obligations. Subject to maintaining our qualification as a REIT, we engage in a variety of interest rate management techniques that seek to mitigate the influence of interest rate changes on the values of our assets.

        Subject to maintaining our qualification as a REIT, we utilize derivative financial instruments, currently limited to interest rate swaps and a swaption as of December 31, 2012, to hedge the interest

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rate risk associated with our portfolio. We seek to hedge interest rate risk with respect to both the fixed income nature of our assets and the financing of our portfolio. In hedging interest rates with respect to our fixed income assets, we seek to reduce the risk of losses on the value of our investments that may result from changes in interest rates in the broader markets. In utilizing interest rate hedges with respect to our financing, we seek to improve risk-adjusted returns and, where possible, to obtain a favorable spread between the yield on our assets and the cost of our financing. We rely on our Manager's expertise to manage these risks on our behalf.

Interest rate effect on net interest income

        Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged fixed-rate RMBS will remain static. Moreover, interest rates may rise at a faster pace than the yields earned on our leveraged adjustable-rate and hybrid RMBS. Both of these factors could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

        Our hedging techniques are partly based on assumed levels of prepayments of our target assets. If prepayments are slower or faster than assumed, the life of the investment will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.

        We acquire adjustable-rate and hybrid RMBS. These are assets in which some of the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which may limit the amount by which the security's interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements are not subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation, while the interest-rate yields on our adjustable-rate and hybrid RMBS could effectively be limited by caps. This issue will be magnified to the extent we acquire adjustable-rate and hybrid RMBS that are not based on mortgages that are fully indexed. In addition, adjustable-rate and hybrid RMBS may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. If this happens, we could receive less cash income on such assets than we would need to pay for interest costs on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Interest rate mismatch risk

        We fund the majority of our adjustable-rate and hybrid RMBS assets with borrowings that are based on LIBOR, while the interest rates on these assets may be indexed to other index rates, such as the one-year Constant Maturity Treasury index, the Monthly Treasury Average index or the 11th District Cost of Funds Index. Accordingly, any increase in LIBOR relative to these indices may result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on these assets. Any such interest rate index mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders. To mitigate interest rate mismatches, we utilize the hedging strategies discussed above.

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        Our analysis of risks is based on our Manager's experience, estimates, models and assumptions. These analyses rely on models that utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by our Manager may produce results that differ significantly from the estimates and assumptions used in our models.

        We use a variety of recognized industry models, as well as proprietary models, to perform sensitivity analyses, which are derived from primary assumptions for prepayment rates, discount rates and credit losses. The primary assumption used in this model is implied market volatility of interest rates. The information presented in the following interest sensitivity table projects the potential impact of sudden parallel changes in interest rates on our financial results and financial condition over the next 12 months, based on our interest sensitive financial instruments at December 31, 2012, including Non-Agency RMBS underlying Linked Transactions. Such RMBS may not be linked in future periods.

        All changes in value are measured as the change from the December 31, 2012 financial position. All projected changes in annualized net interest income are measured as the change from the projected annualized net interest income based off current performance returns.

Change in Interest rates
  Percentage Change in
Projected Net Interest
Income(1)
  Percentage Change in
Projected Portfolio
Value(2)
 
+1.00%     11.44 %   -2.18 %
+0.50%     5.72 %   -0.97 %
-0.50%     0.40 %   0.53 %
-1.00%     -5.85 %   0.40 %

(1)
Includes underlying interest income and interest expense associated with RMBS and repurchase agreement borrowings underlying our Linked Transactions. Such RMBS and repurchase agreements may not be linked in future periods.

(2)
Agency RMBS only.

        The interest rate sensitivity table quantifies the potential changes in net interest income and portfolio value, which includes the value of swaps and our other derivatives, should interest rates immediately change. The interest rate sensitivity table presents the estimated impact of interest rates instantaneously rising 50 and 100 basis points and falling 50 and 100 basis points. The cash flows associated with our portfolio of RMBS for each rate change are calculated based on assumptions, including prepayment speeds, yield on future acquisitions, slope of the yield curve and size of the portfolio. Assumptions made on the interest rate sensitive liabilities, which are assumed to relate to repurchase agreements, including anticipated interest rates, collateral requirements as a percent of the repurchase agreement, amount and term of borrowing.

        The AFS securities, at fair value, included in the foregoing interest rate sensitivity table under "Percentage Change in Projected Portfolio Value" were limited to Agency RMBS. Due to the significantly discounted prices and underlying credit risks of our Non-Agency RMBS, including those underlying Linked Transactions, we believe our Non-Agency RMBS's valuation is inherently de-sensitized to changes in interest rates. As such, we cannot project the impact to these financial instruments and have excluded these RMBS from the interest rate sensitivity analysis. However, these Non-Agency RMBS have been included in the "Percentage Change in Projected Net Interest Income" analysis.

        Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at December 31, 2012. The analysis utilizes assumptions and estimates based on the judgment and experience of our Manager's team. Furthermore, while we

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generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.

        The change in annualized net interest income does not include any benefit or detriment from faster or slower prepayment rates on our Agency premium RMBS and Non-Agency discount RMBS, We anticipate that faster prepayment speeds in lower interest rate scenarios will generate lower realized yields on Agency premium RMBS and higher realized yields on Non-Agency discount RMBS. Similarly, we anticipate that slower prepayment speeds in higher interest rate scenarios will generate higher realized yields on Agency premium RMBS and lower realized yields on Non-Agency discount RMBS. Although we have sought to construct our portfolio to limit the effect of changes in prepayment speeds, there can be no assurance this will actually occur, and the realized yield of our portfolio may be significantly different than we anticipate in changing interest rate scenarios.

        Given the low interest rates at December 31, 2012, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Because of this floor, we anticipate that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayments speeds are unaffected by this floor, we expect that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization on Agency RMBS and accretion of discount on our Non-Agency RMBS purchased at a discount. As a result, because this floor limits the positive impact of any interest rate decrease on our funding costs, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.

        The information set forth in the interest rate sensitivity table and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.

Prepayment risk

        Prepayment risk is the risk that principal will be repaid at a different rate than anticipated. As we receive prepayments of principal on our assets, premiums paid on such assets will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the assets.

        Normally, we believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.

Extension risk

        We compute the projected weighted-average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.

        However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other

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hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the fixed-rate or hybrid adjustable-rate assets would remain fixed. This situation could also cause the market value of our fixed-rate or hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we could be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Market risk

        Market value risk.    Our AFS securities are reflected at their estimated fair value, with the difference between amortized cost and estimated fair value reflected in accumulated other comprehensive income. The estimated fair value of these securities fluctuates primarily due to changes in interest rates, market valuation of credit risks and other factors. Generally, in a rising interest rate environment, we would expect the fair value of these securities to decrease; conversely, in a decreasing interest rate environment, we would expect the fair value of these securities to increase. As market volatility increases or liquidity decreases, the fair value of our assets may be adversely impacted.

        The sensitivity analysis table presented in "—Interest rate mismatch risk" sets forth the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, at December 31, 2012, assuming a static portfolio. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager's expectations. The analysis presented utilized assumptions, models and estimates of our Manager based on the judgment and experience of our Manager's team.

        Real estate risk.    RMBS and residential property values are subject to volatility and may be adversely affected by a number of factors, including national, regional and local economic conditions; local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. Decreases in property values reduce the value of the collateral for mortgage loans and the potential proceeds available to borrowers to repay the loans, which could cause us to suffer losses on our Non-Agency RMBS investments.

Liquidity risk

        Our liquidity risk is principally associated with our financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be nor are they, matched.

        Should the value of our assets pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Additionally, if one or more of our repurchase agreement counterparties chose not to provide on-going funding, our ability to finance would decline or exist at possibly less advantageous terms. As such, we cannot assure that we will always be able to roll over our repurchase agreements. See "—Liquidity and Capital Resources" for further information about our liquidity and capital resource management.

Credit risk

        We believe that our investment strategy will generally keep our risk of credit losses low to moderate. However, we retain the risk of potential credit losses on all of the loans underlying our Non-Agency RMBS. With respect to our Non-Agency RMBS that are senior in the credit structure, credit support contained in RMBS deal structures provides a level of protection from losses. We seek to manage the remaining credit risk through our pre-acquisition due diligence process and by factoring assumed credit losses into the purchase prices we pay for Non-Agency RMBS. In addition, with respect

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to any particular target asset, our Manager's investment team evaluates relative valuation, supply and demand trends, shape of yield curves, prepayment rates, delinquency and default rates, recovery of various sectors and vintage of collateral. In particular, the evaluation process involves modeling under various different scenarios the future cashflows expected to be generated by a specific security based on the current and projected delinquency and default status of the portfolio, and expected recoveries derived primarily from LTV metrics, relative to the purchase price of the RMBS. At purchase, our Manager estimates the proportion of the discount that we do not expect to recover and incorporates it into our Manager's expected yield and accretion calculations. As part of our Non-Agency RMBS surveillance process, our Manager tracks and compares each security's actual performance over time to the performance expected at the time of purchase or, if our Manager has modified its original purchase assumptions, to its revised performance expectations. To the extent that actual performance of our Non-Agency RMBS deviates materially from our Manager's expected performance parameters, our Manager may revise its performance expectations, such that the amount of purchase discount designated as credit discount may be increased or decreased over time. At times, we may enter into credit default swaps or other derivative instruments in an attempt to manage our credit risk. Nevertheless, unanticipated credit losses could adversely affect our operating results.

Internal Controls over Financial Reporting; Material Weakness

        Prior to the initial filing of the registration statement of which this prospectus is a part, and in connection with the preparation of our earlier audited financial statements as of and for the period from May 16, 2012 (commencement of operations) to July 31, 2012, our independent registered public accountants identified a material weakness and two significant deficiencies in our internal control over financial reporting. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness required adjustments to our financial statements during the audit. A "significant deficiency" is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of financial reporting, including the audit committee of a company's board of directors.

        The material weakness was identified as the result of an error in our interpretation of the accounting guidance relating to the evaluation of specific criteria used to determine whether certain Non-Agency RMBS purchases and repurchase financing transactions are "linked transactions", accounted for on a net basis and recorded as a forward purchase (derivative) contract at fair value on our balance sheet.

        The significant deficiencies related to inadequate review of the report of a service organization's system and the suitability of the design and operating effectiveness of controls (SSAE 16) and inadequate review of the timing of the booking of certain repurchase transactions.

        When we become a public company, we will be subject to reporting obligations under Section 404 of the Sarbanes-Oxley Act that will require us to include a management report on our internal control over financial reporting in our annual report, which will contain management's assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our annual report on Form 10-K for the year ending December 31, 2014. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation. This process is time consuming, costly and complicated. Our management may conclude that our internal control over financial reporting is not effective.

        In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the later of the year following our first annual report required by the SEC and

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the date on which we are no longer an "emerging growth company." We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed or if it interprets the relevant requirements differently from us. Material weaknesses and significant deficiencies may be identified during the audit process or at other times. During the course of the evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not be able to remedy in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with Section 404.

        We and our independent registered public accountants concluded the identified material weakness and one of the significant deficiencies remain at December 31, 2012. We have implemented and will continue to implement measures designed to remediate the material weakness and the remaining significant deficiency and to improve our internal control over financial reporting. These measures include, among other things, supplementing the existing infrastructure for overseeing financial reporting with additional specialized accounting resources to be furnished by a third party service provider, a third party assessment of the design and operation of internal controls, specifically those relating to financial reporting, and further review of the service organization's systems and controls. In addition, we have instituted additional procedures for validating and documenting whether Non-Agency RMBS purchases and repurchase financing transactions are linked. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. While we believe that the actions we are taking and will continue to take to address the existing weakness in internal control over financial reporting will mitigate the risk related to the aforementioned internal control material weakness, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses or significant deficiencies in the future. Any failure to so identify and avoid could cause investors to lose confidence in our reported financial information, harm our business and negatively impact the trading price of our common stock.

Risk Management

        To the extent consistent with maintaining our REIT qualification, we will seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We may generally seek to manage this risk by:

    relying on our Manager's investment selection process described in this prospectus under "Business—Our Manager's Investment Process and Analysis";

    monitoring and adjusting, if necessary, the reset index and interest rate related to Agency and Non-Agency RMBS and other mortgage-related investments and our financings;

    attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

    using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of Agency RMBS and other mortgage-related investments and our borrowings; and

    actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods and gross reset margins of Agency RMBS and other mortgage-related investments and the interest rate indices and adjustment periods of our financings.

In executing on our current risk management strategy, we have entered into interest rate swap agreements and a swaption.

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BUSINESS

Overview of Our Company

        We are a recently organized Maryland corporation focused on investing in, financing and managing a leveraged portfolio of Agency and Non-Agency RMBS, residential mortgage loans and other mortgage-related investments, which we collectively refer to as our target assets. We believe that our hybrid model of investing in both Agency RMBS and Non-Agency RMBS positions us to benefit from anticipated changes in the residential mortgage market in the coming years as the role of GSEs are reduced, providing us with attractive investment opportunities across the Agency and Non-Agency RMBS sectors and potentially enhancing our ability to deliver attractive risk-adjusted returns to our investors.

        We commenced operations in May 2012 after raising $26.2 million net proceeds in a private placement and investing those proceeds in Agency RMBS and Non-Agency RMBS. Since our business was initially funded on May 16, 2012, our Manager has increased our net asset value from $26.2 million to $32.3 million as of December 31, 2012, representing a 23.3% increase. This increase resulted primarily from a rise in the prices of the majority of our portfolio securities during the period. Given that the increase in net asset value was due to unrealized gains on portfolio securities, such increases may not be sustainable or realizable going forward.

        Our current portfolio of Agency and Non-Agency RMBS consists of assets that as of December 31, 2012 had a fair value of $81.0 million on a GAAP basis, or $103.6 million including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. As of December 31, 2012, our portfolio was comprised of approximately 86% Agency RMBS and 14% Non-Agency RMBS on a GAAP basis, or 68% Agency RMBS and 32% Non-Agency RMBS including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. For GAAP financial statement reporting purposes, certain of our Non-Agency RMBS are reported as "Linked Transactions" and the fair value of those assets are not included in the fair value of our RMBS portfolio on a GAAP basis. This is because when we finance the purchase of securities with repurchase agreements from the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed to be part of the same arrangement, or a "Linked Transaction," unless certain criteria are met. Under GAAP, we account for the two components of a Linked Transaction (the RMBS purchase and the related repurchase agreement financing) on a net basis and record a forward purchase (derivative) contract, at fair value, on our balance sheet in the line item "Linked Transactions, net, at fair value." In managing and evaluating the composition and performance of our RMBS portfolio, however, we do not view the purchase of our Non-Agency RMBS and the associated repurchase agreement financing as transactions that are linked. We therefore have also presented certain information that includes the Non-Agency RMBS underlying our Linked Transactions. This information constitutes non-GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to analyze our RMBS portfolio and the performance of our Non-Agency RMBS in the same way that we assess our portfolio and such assets.

        Our objective is to provide attractive risk-adjusted returns to our investors over time, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective by selectively acquiring and managing a diversified investment portfolio of our target assets designed to produce attractive returns across a variety of market conditions and economic cycles. We fund the acquisition of our assets through the use of leverage from multiple counterparties, currently through borrowings under a series of short-term repurchase agreements. We generate returns from the spread or difference between what we earn on our assets and our costs, including the cost of funds we borrow after giving effect to our hedging activities.

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        We are managed by Oak Circle Capital Partners LLC, or our Manager. Our Manager manages us exclusively and, unless and until our Manager agrees to manage any additional investment vehicle, our Manager will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity. Our Manager's investment professionals and other staff have extensive experience in managing fixed-income assets, including Agency and Non-Agency RMBS. The core team has worked together for approximately the last ten years and has an average of more than 20 years of industry experience. Our Manager is majority owned by its employees (including all of our officers) with a minority stake held by XL Global, a subsidiary of XL Group plc (NYSE: XL). XL Group plc, through its wholly owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and actively invests in alternative investment funds, private investment funds and investment management companies.

        XL Investments, an indirect wholly owned subsidiary of XL Group plc, currently owns 1,562,500 shares of our common stock and has agreed to purchase $25.0 million of additional shares of our common stock in a concurrent private placement. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares); and 60.4% and 57.1%, respectively, after also giving effect to the exercise of warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering.

        We will elect to be taxed as a REIT beginning with our short taxable year ended December 31, 2012 under the Internal Revenue Code and generally will not be subject to U.S. federal taxes on our income to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. Our qualification as a REIT will depend on our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the source of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income taxes at regular corporate rates. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to certain federal, state and local taxes on our income or property. We also intend to operate our business in a manner that will permit us to maintain our exclusion from registration under the Investment Company Act.

May 2012 Private Placement; Reverse Stock Split

        In May 2012, we completed a private placement in which we sold $26.5 million of our common stock to XL Investments and employees of our Manager. We, as part of that placement, also agreed to issue warrants to purchase our common stock to XL Investments. On September 29, 2012, we issued warrants to XL Investments to purchase two shares of our common stock for each share of our common stock owned by XL Investments. The warrants have an exercise price equal to 105% of the initial public offering price for our common stock in this offering. The number of shares issuable upon the exercise of the warrant will be adjusted for the reverse stock split. For additional information on these warrants, please see "Description of our Securities—Warrants." After deducting our offering expenses, the aggregate net proceeds from the private placement were $26.2 million. We used the $26.2 million of net proceeds from the private placement to fund our existing portfolio.

Concurrent Private Placement

        XL Investments has agreed to purchase $25.0 million of shares of our common stock from us in a concurrent private placement at the initial public offering price, or 1,666,667 shares based on the anticipated public offering price of $15.00. As part of its investment in May 2012 (discussed above), XL

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Investments also agreed to make an additional investment in us of up to $25.0 million, subject to certain conditions and over a period of time. The conditions will be deemed satisfied upon the closing of this offering, and accordingly XL Investments has agreed to accelerate the timing of its investment and has committed to us to purchase such shares. The underwriters will not receive any underwriting discount on the shares purchased by XL Investments in this private placement.

Current Market Opportunities

        We believe that the changing regulatory landscape and declining roles of the GSE portfolios should present attractive investment opportunities for us in both Agency and Non-Agency mortgage assets. We currently invest in both Agency RMBS and Legacy Non-Agency RMBS. We may also benefit from the curtailment of direct government involvement in housing finance, and we intend to invest in New Issue Non-Agency RMBS that have recently increased in issuance in the residential mortgage sector. We expect to be well positioned to evaluate the additional investment opportunities in New Issue Non-Agency RMBS as such issuance becomes more economically attractive. Overall, we believe that our hybrid model maximizes the range of attractive investment opportunities available to us across the Agency RMBS and Non-Agency RMBS markets and potentially enhances our ability to deliver attractive risk-adjusted returns to our investors over time.

        Since the height of the financial crisis in 2008, there have been a number of proposals put forward regarding the reform of the housing finance market. We believe the most important theme of these proposals, as highlighted in the U.S. Department of Treasury and Department of Housing and Urban Development report to Congress on February 11, 2011, is the reduction of the government's role in, and the return of private capital to, the housing finance market. Several tools intended to encourage investment of private capital were recommended in the U.S. Department of Treasury and Department of Housing and Urban Development report, including increasing guarantee fees, decreasing loan limits, tightening underwriting criteria for conforming loans and developing risk sharing and/or credit enhancement markets. We believe these recommended proposals, some of which have begun to be implemented, such as the tightening of conforming loan limits in October 2011 and two separate 2012 announcements regarding increases in guarantee fees, will increase the need for private capital in the Non-Agency RMBS market, which we believe presents an opportunity for us. These proposals will also reduce the future supply of Agency RMBS, limit mortgage refinancing and associated prepayment risk, and reduce the future volatility of the Agency RMBS market, which we view as positive developments for existing Agency RMBS. In addition, we believe these proposals have contributed to the recent increase in New Issue Non-Agency RMBS transactions and will present new investment opportunities for us. Non-Agency RMBS issuance backed by prime loans has increased from $0.7 billion in 2011 to $3.5 billion in 2012, a 400% increase. For 2013, industry research projects a significant increase in such Non-Agency RMBS issuance, with several estimates for the annual issuance in the $20-30 billion range, and projects the potential for meaningful increases in such estimates if the housing recovery continues, if underwriting standards relax modestly, if securitization issuance economics continue to improve or if further increases occur in Agency guarantee fees.

        We believe investors continue to seek incremental spreads relative to U.S. Treasury Department Notes in a low yield environment and financial institutions continue to prefer high quality, liquid Agency RMBS. In addition, our Manager has observed that the long-standing correlation between the prepayment rates of borrowers and their ability to refinance mortgage loans (as defined by the difference between available rates in the market and the legacy rates being paid by borrowers) has become partially de-linked in the past several years. Our Manager believes this is primarily a result of the significant decrease in the equity value of those borrowers' homes. The reduction in prepayment rates and other factors have resulted in yield spreads on Agency RMBS at what our Manager views as attractive levels.

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        Our Manager has diversified our Agency RMBS portfolio with Non-Agency RMBS collateralized by non-conforming residential mortgages. Mortgage loan delinquencies and credit losses may continue to rise and housing conditions may continue to deteriorate, but even after incorporating additional negative home price assumptions, we believe that current prices for certain Non-Agency RMBS offer the potential for attractive risk-adjusted returns. Furthermore, there are increasing signs that the housing market may have stabilized, and the housing sector is now a net positive contributor to economic activity, if from a depressed level. According to the National Association of Realtors, December 2012 existing home sales rose to a seasonally adjusted 4.94 million, a 12.8% increase from December 2011, and the December 2012 national median existing-home price was $180,800, an 11.5% increase from the prior year. December represented the tenth consecutive month of year-over-year median home price increases. We believe that stabilization and any improvement in the housing market have the potential to enhance returns on Non-Agency RMBS.

        The U.S. Federal Reserve Board has maintained a near-zero target for the federal funds rate. On January 25, 2012, the Federal Open Market Committee, or FOMC, released a statement indicating that it would maintain the target range for the federal funds rate at 0% to 0.25% and that it continues to anticipate that economic conditions, including low rates of resource utilization and a subdued outlook for inflation over the medium term, are likely to warrant exceptionally low levels for the federal funds rate at least through 2014. The FOMC reiterated this statement on April 25, 2012. In June 2012, the FOMC updated its assessment by noting that the economy was expanding moderately in 2012 with business fixed investment continuing to advance and inflation in decline. However, the FOMC also cautioned that growth in employment had slowed in recent months, and the unemployment rate remained elevated. In September 2012, the U.S. Federal Reserve further updated its economic assessment by noting that, despite continued modest economic expansion, employment growth remains slow and the unemployment rate remains elevated. Accordingly, the U.S. Federal Reserve increased its focus on employment growth by announcing a third round of quantitative easing, or QE3, by agreeing to purchase additional Agency RMBS at a pace of $40 billion per month, as well as extending the existing commitment to exceptionally low levels for the federal funds rate through at least mid-2015. On January 30, 2013, the U.S. Federal Reserve reaffirmed its commitment to QE3, including a continuation of exceptionally low levels for the federal funds rate for so long as unemployment remains above 6.5% and inflation remains at or below 2.5%, as well as the continued purchase of Agency RMBS at a pace of $40 billion per month.

        The current market environment and outlook have created strong demand for Agency RMBS as well as Non-Agency RMBS assets and has also reduced the costs of our financing and hedging. Our Manager believes this slow growth environment should promote a low federal funds rate and a higher demand for Agency RMBS and Non-Agency RMBS.

        We use leverage to seek to increase potential returns to our stockholders by borrowing against existing assets through short-term repurchase agreements, and in the future we may utilize longer-term secured financings, in each case, using the proceeds to acquire additional assets. As the capital markets have recovered, commercial banks have re-entered the secured lending market, which has quickened the pace of the recovery of asset values in the credit markets and increased the availability of leverage. Financing of Agency RMBS and Non-Agency RMBS is currently widely available through, among other vehicles, short-term repurchase agreements. Haircuts, or the discount attributed to the value of securities sold under repurchase agreements, average between 3% and 10% for Agency RMBS and average between 10% and 50% for Non-Agency RMBS, depending on the specific security used as collateral for such repurchase agreements.

        Our Manager's views of the current market opportunities are based on its own assessments. There can be no assurance that our investment and financing strategies based on our Manager's views will be able to generate attractive returns for our stockholders. Furthermore, there is no way of knowing what

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impact government programs and any future actions may have on the prices and liquidity of RMBS or other securities in which we invest.

Our Manager

        We are externally managed and advised by Oak Circle Capital Partners LLC pursuant to a management agreement between us and Oak Circle. Oak Circle, which was formed for the purpose of becoming our Manager, manages us exclusively and, unless and until our Manager agrees to manage any additional investment vehicle, our Manager will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity. As our Manager, Oak Circle implements our business strategy, performs investment advisory services and activities with respect to our assets and is responsible for performing all of our day-to-day operations.

        All of our officers are employees of our Manager, and we rely on the extensive experience of our Manager's investment professionals and other staff in managing fixed-income assets, including Agency and Non-Agency RMBS. Our Manager's core team has worked together for approximately the last ten years and has an average of more than 20 years of industry experience. Our and our Manager's Chief Executive Officer and President, David Carroll, and Chief Investment Officer, Kian Fui (Paul) Chong, have been managing our assets since our inception and, subject to the oversight of our board of directors, will have primary responsibility for overseeing the management of our assets going forward. Our Manager's management team co-founded and/or previously held executive positions with Ceres Capital. Ceres Capital was a specialized investment management company that managed Victoria, a structured investment vehicle. Following the 2007 liquidity crisis, in 2008, Ceres Capital entered Chapter 11 under the Bankruptcy Code and Victoria entered a controlled wind-down. Farmington was an investment vehicle established in November 2007 for the purpose of refinancing a portion of the Victoria asset portfolio and was managed by Ceres and then by Ivy Square. Members of our Manager's management team also previously held executive positions at Ivy Square. Farmington was liquidated in August 2011 at the direction of the transaction lender. For additional information regarding our and our Manager's management team, and Ceres Capital, Victoria and Farmington, see "Management—Our Directors and Executive Officers," "Management—Additional Information Concerning Our and Our Manager's Executive Officers" and "Our Manager and the Management Agreement—Executive Officers of Our Manager."

        Our Manager is majority owned by its employees (including all of our officers), with a minority stake held by XL Global, a subsidiary of XL Group plc (NYSE: XL). XL Group plc, through its wholly owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and has actively invested in alternative investment funds, private investment funds and investment management companies. Oak Circle is an investment adviser registered with the SEC.

Our Investment Strategy

        Our objective is to provide attractive risk-adjusted returns to our investors over time through a combination of dividends and capital appreciation. We rely on the expertise of our Manager's team to selectively construct and actively manage a diversified mortgage investment portfolio by identifying asset classes and target assets within our asset classes, including prime, Alt-A and subprime loans, that, when properly financed and hedged, are designed to produce attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that the residential mortgage market will undergo dramatic change in the coming years as the role of GSEs is diminished, which we expect will create attractive investment opportunities for us.

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Our Target Assets

        We intend to continue to invest in, finance and manage mortgage-related investments, which we define as Agency RMBS, Legacy Non-Agency RMBS, New Issue Non-Agency RMBS and other mortgage-related investments, including the principal assets set forth in each of the asset classes described below. We assess the allocation of investments across our target asset classes, and within our asset classes, including our allocations among prime, Alt-A and subprime loans, based on the risk-adjusted relative value of each asset and the overall contribution of each asset to the performance of our investment portfolios and the value added to our investment portfolios. Additional factors that may impact the allocation of our investments include security, structure, seniority, credit enhancement, issuance size, legal matters, geography and the profiles of underlying borrowers. We plan to use the net proceeds from the offering and the concurrent private placement to XL Investments to purchase approximately 30 - 50% Agency RMBS, approximately 15 - 35% Legacy Non-Agency RMBS and approximately 15 - 35% New Issue Non-Agency RMBS (see "Use of Proceeds"). Because our Manager intends to employ different amounts of leverage to different classes of target assets, we expect that, over the first 12 months following the completion of this offering, our assets will be invested in approximately 60% Agency RMBS, 20% Legacy Non-Agency RMBS and 20% New Issue Non-Agency RMBS. Within Legacy Non-Agency RMBS, our intended allocations to prime, Alt-A and subprime loans are not predetermined, but are generally determined based on the risk-adjusted relative value of each asset individually and specifically on the amount of the discount to par at the time of purchase. Accordingly, we may (but currently do not expect to) allocate all of our Legacy Non-Agency RMBS investments to subprime loans. Our allocations in New Issue Non-Agency RMBS will only be to prime loans. Our investment allocation expectations in the first 12 months following the offering and subsequently are subject to change based on market changes and our Manager's assessment of the factors described above. See "—Our Financing Strategy and Leverage."

    Agency RMBS

        We invest a portion of our capital in Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as Ginnie Mae, or a U.S. Government-sponsored entity, such as Fannie Mae or Freddie Mac. The Agency RMBS we own and may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on ARMs generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid ARMs have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. ARMs and hybrid ARMs generally have periodic and lifetime constraints on how much the loan interest rate can change on any predetermined interest rate reset date.

        The types of Agency RMBS in which we invest and intend to continue to invest are as follows:

Mortgage pass-through certificates

  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. The principal and interest payments of these Agency RMBS are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, and are backed primarily by single family mortgage loans.

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Collateralized mortgage obligations

 

CMOs are securities that are structured from residential mortgage pass-through certificates, which receive monthly payments of principal and interest. CMOs divide the cash flows that come from the underlying mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying pass-through certificates. 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 include stripped securities, which are mortgage-backed securities structured with two or more classes that receive different distributions of principal or interest on a pool of Agency RMBS. Stripped securities include interest only Agency RMBS and inverse interest only Agency RMBS, each of which we may invest in subject to maintaining our qualification as a REIT.

Interest only Agency RMBS (IOs)

 

IOs are a stripped security that entitles the holder to receive monthly interest payments 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—interest rates and the rate of principal payments (particularly prepayments). If we decide to invest in these types of securities, we anticipate doing so primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.

Inverse interest only Agency RMBS (IIOs)

 

IIOs are IOs that have interest rates that move in the opposite direction of an interest rate index, such a LIBOR, and are subject to caps and floors. Inverse interest only Agency RMBS entitles the holder to interest only payments based on a notional principal balance, which is typically equal to a fixed rate of interest on the notional principal balance less a floating rate of interest on the notional principal balance that adjusts according to an index subject to set minimum and maximum rates. The value of IIOs will generally decrease when its related index rate increases and increase when its related index rate decreases.

TBAs

 

We may utilize "to-be-announced" forward contracts in order to invest in Agency RMBS. Pursuant to these TBAs, we would agree to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered would not be identified until shortly before the TBA settlement date. Our ability to purchase Agency RMBS through TBAs may be limited by the 75% income and asset tests applicable to REITs. See "U.S. Federal Income Tax Considerations—Taxation of Five Oaks Investment Corp."

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Non-Agency RMBS

        We invest a portion of our capital in Non-Agency RMBS. Non-Agency RMBS are residential mortgage-backed securities that are not guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity, including investment grade classes, non-investment grade classes and unrated classes. Our investment focus has been on Legacy Non-Agency RMBS that when originally issued were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations but that trade at a discount to par at the time of purchase. We intend to expand our focus to include New Issue Non-Agency RMBS, including one or more classes of such issues, which may be purchased at par, at a discount to par or at a premium to par based upon the class.

        The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines and borrower characteristics, loan characteristics and level of documentation that are below Agency underwriting guidelines and therefore are not issued or guaranteed by an agency. The mortgage loan collateral may be classified as prime, Alt-A or subprime depending upon the borrower's credit rating and the loan documentation. The Non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Other Mortgage-Related Investments

        Other residential mortgage-related investments in which we may invest are as follows:

Prime mortgage loans

  Prime mortgage loans are residential mortgage loans that conform to the underwriting guidelines of a U.S. Government agency or a GSE but that do not carry any credit guarantee from either a U.S. Government agency or a GSE. Jumbo prime mortgage loans are prime mortgage loans that conform to such underwriting guidelines except as to loan size.

Non-prime mortgage loans

 

Non-prime mortgage loans are residential mortgage loans that do not meet all of the underwriting guidelines of the GSEs. Consequently, these loans may carry higher credit risk than prime mortgage loans. Non-prime mortgage loans may allow borrowers to qualify for a mortgage loan with reduced or alternative forms of documentation. This category includes loans commonly referred to as Alt-A or as subprime.

Other MBS

 

We may also invest in mortgage-backed securities, or MBS, for which the principal and interest payments are guaranteed by a U.S. Government-sponsored entity but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to, Fannie Mae's DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac's Multifamily Mortgage Participation Certificates and Ginnie Mae's project loan pools or CMOs structured from such collateral. We may invest in credit enhancement or B Notes derived from Agency pools and/or non-Agency pools.

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Mortgage-related derivatives

 

As part of our investment and risk management strategy, we may enter into derivative transactions as a method of managing our risk/return profile and/or hedging existing or emerging risks within our investment portfolio. These transactions may include, but are not limited to, buying or selling forward positions and credit default swaps. Our Manager intends to implement this strategy based upon overall market conditions, the level of volatility in the mortgage market, the size of our investment portfolio and our intention to qualify as a REIT.

Other real estate related investments

 

Other real estate related investments may include excess interest-only instruments and other investments that may arise as the mortgage market evolves.

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Our Current Portfolio

        As of December 31, 2012, our portfolio consisted of Agency RMBS and Non-Agency RMBS with an aggregate fair value of $81.0 million, a weighted average yield of 3.64% and a net weighted average borrowing cost of 0.59% as reported in accordance with GAAP. These metrics do not include Non-Agency RMBS underlying our Linked Transactions. On a non-GAAP combined basis (which reflects the inclusion of the Non-Agency RMBS underlying our Linked Transactions combined with our GAAP-reported RMBS), our portfolio as of December 31, 2012 had an aggregate fair value of $103.6 million, a weighted average yield of 4.84% and a net weighted average borrowing cost of 0.85% (taking into account the associated repurchase financing). As of December 31, 2012, we borrowed 2.0 times our stockholders' equity (calculated in accordance with GAAP) and 2.4 times after including repurchase agreements underlying our Linked Transactions (calculated on a non-GAAP basis). For a discussion of our presentation of non-GAAP information and a reconciliation to the comparable GAAP presentation, see the following tables, related footnotes and accompanying narrative.

        The charts below summarize the categories of RMBS in which we were invested as of December 31, 2012 on a GAAP basis (which excludes Non-Agency RMBS underlying our Linked Transactions) and on a non-GAAP basis (which includes Non-Agency RMBS underlying our Linked Transactions):


Portfolio Composition

RMBS Portfolio (GAAP basis)
$81.0 million

  RMBS Portfolio (non-GAAP basis)
$103.6 million


GRAPHIC

 


GRAPHIC

        Since our business was initially funded on May 16, 2012, our Manager has increased our net asset value from $26.2 million to $32.3 million as of December 31, 2012, representing a 23.3% increase. This increase resulted primarily from a rise in the prices of the majority of our portfolio securities during the period. Given that the increase in net asset value was due to unrealized gains on portfolio securities, such increases may not be sustainable or realizable going forward.

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        The following table summarizes certain characteristics of our investment portfolio as of December 31, 2012: (1) as reported in accordance with GAAP, which excludes the Non-Agency RMBS underlying our Linked Transactions; (2) to show separately the Non-Agency RMBS underlying our Linked Transactions; and (3) on a non-GAAP combined basis (which reflects the inclusion of the Non-Agency RMBS underlying our Linked Transactions combined with our GAAP-reported RMBS):

$ in thousands
  Principal
Balance
  Unamortized
Premium
(Discount)
  Designated
Credit
Reserve
  Amortized
Cost
  Unrealized
Gain/(Loss)
  Fair
Value
  Net
Weighted
Average
Coupon(1)
  Average
Yield(2)
 

Agency RMBS

                                                 

15 year fixed-rate

  $ 3,251   $ 88   $   $ 3,339   $ 60   $ 3,399     2.50 %   1.94 %

30 year fixed-rate

    62,059     3,106         65,165     1,410     66,575     3.50 %   2.71 %

Total Agency RMBS

    65,310     3,194         68,504     1,470     69,974     3.45 %   2.68 %

Non-Agency RMBS Excluding Linked Transactions

    18,507     (3,534 )   (4,883 )   10,090     964     11,054     0.51 %   10.18 %
                                       

Total/Weighted Average (GAAP)

  $ 83,817   $ (340 ) $ (4,883 ) $ 78,594   $ 2,434   $ 81,028     2.80 %   3.64 %
                                       

Non-Agency RMBS Underlying Linked Transactions

    38,320     (6,722 )   (12,929 )   18,669     3,950     22,620     0.71 %   9.89 %
                                       

Combined/Weighted Average (non-GAAP)

  $ 122,137   $ (7,062 ) $ (17,812 ) $ 97,263   $ 6,384   $ 103,648     2.15 %   4.84 %
                                       

(1)
Weighted average coupon is presented net of servicing and other fees.

(2)
Average yield incorporates future prepayment assumptions.

        The following table summarizes the portions of our Non-Agency RMBS portfolio that are collateralized by prime, Alt-A and subprime loans as of December 31, 2012:

 
  GAAP Basis
(Excluding Linked
Transactions)
  Non-GAAP
Adjustments
(Non-Agency
RMBS underlying
Linked Transactions)
  Non-GAAP Basis
(Combined)
 

Prime

  $   $   $  

Alt-A

    5,357,158     15,005,002     20,362,160  

Subprime

    5,697,236     7,614,540     13,311,776  
               

Total

  $ 11,054,394   $ 22,619,542   $ 33,673,936  
               

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        The following table presents certain information about the carrying value of our available for sale, or AFS, RMBS and the Non-Agency RMBS underlying our Linked Transactions, as of December 31, 2012:

 
  GAAP Basis
(AFS RMBS—
Excluding Linked
Transactions)
  Non-GAAP
Adjustments
(Non-Agency
RMBS underlying
Linked
Transactions)
  Non-GAAP Basis
(Combined)
 

Principal balance

  $ 83,817,577   $ 38,320,365   $ 122,137,942  

Unamortized premium

    3,193,345         3,193,345  

Unamortized discount

                 

Designated credit reserve

    (4,882,582 )   (12,929,231 )   (17,811,813 )

Net, unamortized

    (3,534,339 )   (6,721,749 )   (10,256,088 )
               

Amortized Cost

    78,594,001     18,669,385     97,263,386  

Gross unrealized gains

    2,433,997     3,950,157     6,384,154  
               

Carrying value/estimate fair values

  $ 81,027,998   $ 22,619,542   $ 103,647,540  
               

        For financial statement reporting purposes, GAAP requires us to account for certain of our Non-Agency RMBS and the associated repurchase agreement financing as Linked Transactions. Accordingly, the measures in the foregoing tables and charts prepared on a GAAP basis do not include Non-Agency RMBS underlying our Linked Transactions. However, in managing and evaluating the composition and performance of our RMBS portfolio, we do not view the purchase of our Non-Agency RMBS and the associated repurchase agreement financing as transactions that are linked. We therefore have also presented certain information that includes the Non-Agency RMBS underlying our Linked Transactions. This information constitutes non-GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC. We believe that this non-GAAP information enhances the ability of investors to analyze our RMBS portfolio and the performance of our Non-Agency RMBS in the same way that we assess our portfolio and such assets. While we believe the non-GAAP information included in this prospectus provides supplemental information to assist investors in analyzing that portion of our portfolio composed of Non-Agency RMBS, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated.

Our Competitive Advantages

        We believe that our competitive advantages include the following:

Seasoned management team with significant real estate experience

        We believe that the extensive experience of our Manager's team investing in and financing RMBS assets provides us with significant expertise across our target assets. Our Manager's team has managed a wide range of mortgage-backed securities, mortgage derivatives and other fixed-income assets through a variety of credit and interest rate environments on both a levered and unlevered basis.

        The senior members of our Manager's team have an average of more than 20 years of industry experience, including working together for the past ten years. Our and our Manager's Chief Executive Officer and President, David Carroll, and Chief Investment Officer, Kian Fui (Paul) Chong, have been managing our assets since our inception and will have primary responsibility for overseeing the management of our assets going forward. Mr. Carroll has more than 30 years experience in trading, structuring and managing a wide range of mortgage-backed securities, mortgage derivatives and other

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fixed-income assets. Mr. Chong has been involved in the financial markets for over 12 years, including extensive experience analyzing, trading and managing RMBS. Our Chief Financial Officer, David Oston, has more than 30 years credit market experience, including underwriting, structuring and managing structured products and mortgages. Messrs. Carroll, Chong and Oston and members of our Manager's management team co-founded and/or previously held executive positions with Ceres Capital. Ceres Capital was a specialized investment management company that managed Victoria, a structured investment vehicle. Following the 2007 liquidity crisis, in 2008, Ceres Capital entered Chapter 11 under the Bankruptcy Code and Victoria entered a controlled wind-down. Farmington was an investment vehicle established in November 2007 for the purpose of refinancing a portion of the Victoria asset portfolio and was managed by Ceres and then by Ivy Square. Messrs. Carroll, Chong and Oston held executive positions at Ivy Square. Farmington was liquidated in August 2011 at the direction of the transaction lender. For additional information regarding Messrs. Carroll, Chong and Oston and members of our Manager's management team, and Ceres Capital, Victoria and Farmington, see "Management—Our Directors and Executive Officers," "Management—Additional Information Concerning Our and Our Manager's Executive Officers" and "Our Manager and the Management Agreement—Executive Officers of Our Manager."

Existing portfolio with an implemented investment strategy

        As a recently formed entity, we intend to continue to build on our existing investment portfolio. The management team and XL Investments capitalized us with an aggregate initial investment of $26.5 million and our Manager has deployed this capital to purchase, fund and hedge our current portfolio of both Agency and Non-Agency RMBS. As of December 31, 2012, our portfolio had a fair value of $81.0 million on a GAAP basis, or $103.6 million including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. As of December 31, 2012, our portfolio was comprised of approximately 86% Agency RMBS and 14% Non-Agency RMBS on a GAAP basis, or 68% Agency RMBS and 32% Non-Agency RMBS after including Non-Agency RMBS underlying our Linked Transactions on a non-GAAP basis. Since our business was initially funded on May 16, 2012, our Manager has increased our net asset value from $26.2 million to $32.3 million as of December 31, 2012, representing a 23.3% increase. This increase resulted primarily from a rise in the prices of the majority of our portfolio securities during the period. Given that the increase in net asset value was due to unrealized gains on portfolio securities, such increases may not be sustainable or realizable going forward. Our Manager's team has managed our portfolio since inception by utilizing the same investment and leverage strategy that we expect our Manager to continue to employ after the completion of this offering.

Flexible and adaptable "hybrid" investment strategy

        Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and secondarily through capital appreciation. We believe that our hybrid model of investing in both Agency RMBS and Non-Agency RMBS can enhance our risk-adjusted returns across a variety of market conditions and economic cycles since it allows our Manager to allocate capital opportunistically across the entire RMBS sector, including both Legacy Non-Agency RMBS and New Issue Non-Agency RMBS, maximizing relative value and creating a portfolio with different leverage, duration and convexity profiles than companies that only invest in one asset type. Through the disciplined selection of assets, and continual portfolio monitoring, we seek to build and maintain an investment portfolio that provides value to stockholders over time both in absolute terms and relative to other RMBS portfolios.

        In addition, our hybrid model positions us to obtain incremental benefits from anticipated changes in the residential mortgage market in the coming years. We believe that the changing regulatory landscape and declining roles of the GSE portfolios are beginning to present attractive investment

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opportunities for us in both Agency and Non-Agency mortgage assets. We may also benefit from the expected curtailment of direct government involvement in housing finance and the re-emergence of New Issue Non-Agency RMBS transactions. We believe the recent increase in issuance of New Issue Non-Agency RMBS offers us the potential opportunity to invest in more diverse classes of Non-Agency RMBS, including those rated investment grade, non-investment grade and unrated. We expect to be well positioned to evaluate additional investment opportunities that such New Issue Non-Agency RMBS transactions may present in the future. Overall, we believe that our hybrid model maximizes the range of attractive investment opportunities available to us across the Agency and Non-Agency RMBS sectors, and potentially enhances our ability to deliver attractive risk-adjusted returns to our investors over time.

Relative value investment approach

        We are a relative value investor in RMBS. Our Manager uses a cross-product approach, conducting top-down market assessments with respect to various subsets of the RMBS market in order to identify the most attractive segments and investment opportunities. In employing this detailed analysis, our Manager seeks to best capture market inefficiencies, evaluate potential target assets and identify the most attractive alternatives. We select our RMBS based on factors that include extensive analysis of the underlying loans, including prepayment trends, average remaining life, amortization schedules, fixed versus floating interest rates, geographic concentration, property type, loan-to-value ratios and credit scores. The multi-trillion dollar size of the U.S. RMBS market enables us to be selective with our investments and target only the securities we deem to be the most attractive. We believe this holistic, relative-value approach to the Non-Agency and Agency RMBS investments has the potential to generate higher risk-adjusted returns than an approach that focuses on a single sector of the residential mortgage market.

        Our Manager constructs and manages our RMBS investment portfolio through the use of focused qualitative and quantitative analysis, which helps us manage risk on a security-by-security and portfolio basis. We rely on a variety of proprietary and third-party analytical tools and models, which we customize to our needs. We focus on in-depth analysis of the numerous factors that influence our target assets, including:

    fundamental market and sector review;

    cash flow analysis;

    disciplined security selection;

    controlled risk exposure; and

    balance sheet management.

        We also use these tools to guide the hedging strategies developed by our Manager to the extent consistent with the requirements for qualification as a REIT. We believe we will also benefit from the investment and operational experience of our Manager's team.

Alignment of our Manager's and our interests and no conflicts of interest with any other investment vehicles

        We have taken steps to structure our relationship with our Manager so that our interests and those of our Manager are closely aligned. As of December 31, 2012, the employees of our Manager owned an aggregate of 93,750 shares of our common stock, which represents 1.3% of the shares of our common stock that will be outstanding immediately after the completion of this offering and the concurrent private placement to XL Investments (or 1.2% if the underwriters' option to purchase additional shares in this offering is exercised in full). These shares will be subject to a 180-day lock-up agreement that is substantially similar to the 180-day lock-up agreements to be executed by our

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Manager, our directors and officers, the executive officers of our Manager and XL Investments. We believe that the significant investment in us by personnel of our Manager will align our interests with those of our Manager, which will create an incentive for our Manager to seek to maximize returns for our stockholders.

        The executive officers of our Manager devote substantially all of their business time to the performance of their duties and responsibilities for our Manager. Our Manager manages us exclusively and, unless and until our Manager agrees to manage any additional investment vehicle, our Manager will not have to allocate investment opportunities in our target assets with any other REIT, investment pool or other entity.

Extensive strategic and funding relationships

        Our Manager's team has maintained extensive long-term relationships with other financial intermediaries, including primary dealers, leading investment banks, brokerage firms, leading mortgage originators and commercial banks. Our Manager has access to deal flow and secondary trading opportunities as a result of the long-term relationships the team has developed over their careers. We believe these relationships will enhance our ability to source, finance and hedge investment opportunities, and, thus, enable us to grow in various credit and interest rate environments. Our Manager has already established funding relationships for us with 13 counterparties, and we intend to continue to add additional counterparties from time to time.

Investment by XL Group Companies

        XL Group plc (NYSE: XL), through its wholly owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and has actively invested in alternative investment funds, private investment funds and investment management companies. XL Investments, an indirect wholly owned subsidiary of XL Group plc, purchased $25.0 million of our shares in a private placement in May 2012, and we agreed to also issue to XL Investments warrants to purchase two shares of our common stock (before giving effect to the one-for-16 reverse stock split we will effect immediately prior to the completion of this offering) for each share of our common stock owned by XL Investments. The warrants were issued on September 29, 2012 and each warrant entitles the holder to purchase, commencing 120 days following completion of this offering until September 29, 2019, two shares of our common stock at an exercise price equal to 105% of the initial public offering price in this offering. As part of its investment in May 2012, XL Investments also agreed to make an additional investment in us of up to $25.0 million, subject to certain conditions and over a period of time. The conditions will be deemed satisfied upon the closing of this offering, and accordingly XL Investments has agreed to accelerate the timing of its investment and is buying $25.0 million of our common stock in a concurrent private placement at the initial public offering price. The underwriters will not receive any underwriting discount on the shares purchased by XL Investments in the concurrent private placement. Based on a public offering price of $15.00, which is the anticipated public offering price set forth on the cover of this prospectus, XL Investments will own upon the completion of this offering 43.7% of our common stock after giving effect to its purchase of additional shares in the concurrent private placement (or 40.4% if the underwriters exercise in full their option to purchase additional shares); and 60.4% and 57.1%, respectively, after also giving effect to the exercise of the warrants owned by XL Investments in full, which become exercisable 120 days after the completion of this offering. In addition, we have entered into a registration rights agreement with XL Investments pursuant to which we have agreed to register the resale of shares of common stock and warrants owned by XL Investments and its transferees, which we collectively refer to as the registrable securities. See "Risk Factors—Risks Related to Our Organization and Structure." Because of its significant ownership of our common stock, XL Investments will have the ability to influence the outcome of matters that require a vote of our

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stockholders, including a change of control. Additionally, we have agreed with XL Investments that, for so long as XL Investments and any other of the XL group of companies collectively beneficially own at least 9.8% of our issued and outstanding common stock (on a fully diluted basis), XL Investments will have the right to appoint an observer to attend all board meetings but such observer will have no right to vote at any board meeting.

        XL Global, a subsidiary of XL Group plc, made a strategic investment in our Manager in March 2012. XL Global acquired a 30% equity interest in our Manager and representatives of XL Global are members of the management committee of our Manager. XL Global's equity interest in our Manager may increase up to approximately 38% following certain additional capital contributions XL Global will make to enable our Manager to pay the underwriters the underwriting discount and commission on this offering and to reimburse us for offering expenses that exceed $1.5 million. The investment management professionals of our Manager are solely responsible for all decisions involving the acquisition, disposition, financing and hedging of our target assets. None of the XL group of companies nor any of their officers, directors or employees participate in these decisions.

Our Manager's Investment Process and Analysis

General

        Our Manager's investment process combines traditional analysis with innovative technology applied to all sectors of the market. Our Manager believes inefficiencies exist in the fixed-income markets and attempts to add incremental value by exploiting these inefficiencies across all eligible market sectors.

Issue selection

        Issue selection starts with a fundamental analysis to determine mispriced or undervalued securities.

        Agency RMBS.    Our Manager takes a value-oriented approach to managing Agency RMBS. Using that approach, our Manager seeks to optimize yield while adjusting for prepayment and interest rate risk. Our Manager believes that hedging the embedded prepayment option and the changing effective duration of these securities to achieve a stable leveraged return profile can be an effective investment strategy. Subject to maintaining our qualification as a REIT and exclusion from registration under the Investment Company Act, our Manager may utilize derivative financial instruments to hedge all or a portion of the interest rate risk associated with the financing of our investment portfolio. Specifically, our Manager may, subject to maintaining our qualification as a REIT, seek to hedge our exposure to potential interest rate mismatches between the interest that we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our Manager seeks to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of our financing.

        Non-Agency RMBS.    A key element of the Non-Agency RMBS investment process is the forecast of expected losses due to defaults on the underlying Non-Agency RMBS loan collateral. The level of losses is dependent on the quantity of loans which default and the loss severity upon liquidation of defaulted loans. We rely on a variety of proprietary and third party analytical tools and models, which we customize to our needs, to analyze residential mortgage loan defaults and loss severities. These tools encompass home price models, default models, and loan loss severity models. When projecting future performance, many assumptions have to be made. Our Manager also makes qualitative adjustments to reflect the current state of the housing market, securities market liquidity, and potential implications of policy changes and macroeconomic conditions.

        Given the existing housing environment, our Manager currently believes home price declines and negative equity will be the primary drivers of default risk. The strength of the housing market is an

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important factor in projecting the rate of defaults as the amount of positive or negative equity can be a significant factor in the decision of a borrower to default on a loan.

        The analytical tools and models enable our Manager to project prepayment, delinquency, default, and loss severity rates on residential loan pools backing Non-Agency RMBS. These assumptions, in conjunction with the payment structure and credit enhancement of the Non-Agency RMBS transactions allow our Manager to project bond cashflows, yields, yield spreads, and projected returns across a number of scenarios. This level and variability of these cashflows, yields, yield spreads, and projected returns serve as the basis of our Manager's relative value framework and asset acquisition process.

        Our Manager provides ongoing surveillance of Non-Agency RMBS which is utilized in our relative value framework and decisions to sell holdings. As updated security and loan information becomes available including the level of credit enhancement, the paydown of securities, delinquency rates, prepayment rates, default rates, and loss severities, this data is tracked by our Manager. This updated data along with changes in the housing, economic, and interest rate environment serve as the basis for updated projections. As projections of bond cashflows, yields, yield spreads, and returns are updated based on this new information, our Manager's appraisal of overall risk level for each Non-Agency RMBS is updated. This process serves as the basis for our Manager's asset disposition process.

Investment sourcing

        We expect our Manager's team to take advantage of the broad network of relationships it has established to identify investment opportunities. Our Manager's team has extensive long-term relationships with financial intermediaries, including primary dealers, leading investment banks, brokerage firms, leading mortgage originators and commercial banks.

        Investing in, and sourcing financing for, Agency and Non-Agency RMBS is highly competitive. Although our Manager competes with many other investment managers for profitable investment opportunities in fixed-income asset classes and related investment opportunities and sources of financing, we believe that a combination of the expertise of our Manager's team and sole client focus will provide us with a significant advantage in identifying and capitalizing on attractive opportunities.

Investment Guidelines

        Our board of directors has adopted a set of investment guidelines that sets forth our target asset classes and other criteria to be used by our Manager to evaluate specific assets as well as our overall portfolio composition. Our Manager makes determinations as to the percentage of our assets that will be invested in each of our target asset classes, consistent with the investment guidelines adopted by our board of directors and the limits necessary to maintain our qualification as a REIT and our exclusion under the Investment Company Act. Our Manager's investment decisions depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. Our Manager has invested in both Agency and Non-Agency RMBS in our current portfolio. However, we cannot predict the percentage of our assets that will be invested in any of our target asset classes at any given time in the future. We believe that the diversification of our portfolio of assets, the extensive experience of our Manager's team in investing in our target assets and the flexibility of our strategy, combined with the general investment and advisory expertise of our Manager's team and comprehensive finance and administrative infrastructure of our Manager, will enable us to achieve attractive risk-adjusted returns under a variety of market conditions and economic cycles. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the Investment Company Act, we do not have restrictions on portfolio turnover. We currently expect to generally hold assets that we acquire until their respective maturities. However, in order to maximize returns and manage portfolio risk while remaining opportunistic, we may dispose of securities earlier than anticipated or hold securities longer than

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anticipated depending upon our capital position, prevailing market conditions, credit performance, availability and terms of financing or other factors impacting a particular security, including our Manager's view of its relative value.

        Our board of directors has adopted the following investment guidelines that will take effect upon the completion of the offering:

    no investment shall be made that would cause us to fail to qualify as a REIT;

    no investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act;

    we will primarily invest in Agency RMBS and Non-Agency RMBS, as well as in other mortgage-related investments; and

    until appropriate investments can be identified, our Manager may invest the net proceeds of this and any future offerings of our securities in interest-bearing, short-term investments, including money market accounts and/or funds, that are consistent with maintenance of our qualification as a REIT and maintain exclusion from registration under the Investment Company Act.

        Our investment guidelines may be changed from time to time by our board of directors without the approval of our stockholders. Changes to our investment guidelines may include modification or expansion of the types of assets in which we may invest. Any changes to these investment guidelines will be disclosed in our next required periodic report following the approval of such changes by our board of directors.

Our Financing Strategy and Leverage

        We fund the acquisition of our assets through the use of leverage from a number of financing sources, subject to maintaining our qualification as a REIT. We finance our Agency and Non-Agency RMBS primarily through the use of short-term repurchase agreements, and in the future we may also utilize other longer-term secured financings.

        We use leverage to seek to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we intend to use borrowings to fund the origination or acquisition of our target assets. We accomplish this by borrowing against existing assets through repurchase agreements. We intend to use the net proceeds from this offering and the concurrent private placement, combined with repurchase financing, and in the future we may also utilize other longer-term secured financing to acquire additional target assets. Neither our organizational documents nor our investment guidelines place any limit on the maximum amount of leverage that we may use, and we are not required to maintain any particular debt-to-equity leverage ratio. We may also change our financing strategy and leverage without the consent of our stockholders.

        As of December 31, 2012, we borrowed 2.0 times our stockholders' equity (calculated in accordance with GAAP); 2.4 times after including repurchase agreements underlying our Linked Transactions (calculated on a non-GAAP basis). We expect our leverage (on both a GAAP and non-GAAP basis) will range between three and six times the amount of our stockholders' equity, although when deploying the net proceeds of this offering and the concurrent private placement to XL Investments, our leverage may be higher in the short term. Additionally, we expect to borrow between six to nine times the amount of our stockholders' equity in acquiring Agency RMBS, between one and two times when acquiring Legacy Non-Agency RMBS and between one to three times when acquiring New Issue Non-Agency RMBS. The leverage our Manager is comfortable applying to each asset class at any point in time is a function of the yield profile across housing environments and also a function of price or market values in environments of excessive volatility, which cannot be ruled out. Depending

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on the different cost of borrowing funds at different maturities, we vary the maturities of our borrowed funds to attempt to produce lower borrowing costs and reduce interest rate risk. We enter into collateralized borrowings only with institutions that are rated investment grade by at least one nationally recognized statistical rating organization.

        The leverage that we employ is specific to each asset class in which we invest and will be determined based on several factors, including potential asset price volatility, margin requirements, the current cycle for interest rates, the shape of the yield curve, credit, security price, the outlook for interest rates and our ability to use and the effectiveness of interest rate hedges. We analyze both historical interest rate and credit volatility and market-driven implied volatility for each asset class in order to determine potential asset price volatility. Our leverage targets attempt to risk-adjust asset classes based on each asset class's potential price volatility. The goal of our leverage strategy is to ensure that, at all times, our investment portfolio's leverage ratio is appropriate for the level of risk inherent in the investment portfolio and that each asset class has individual leverage targets that are appropriate for its potential price volatility.

Repurchase agreements

        We finance the acquisition of our investment securities through borrowings under repurchase agreements. Repurchase agreements are financings pursuant to which we will sell our assets to the repurchase agreement counterparty, the buyer, for an agreed upon price with the obligation to repurchase these assets from the buyer at a future date and at a price higher than the original purchase price. The amount of financing we will receive under a repurchase agreement is limited to a specified percentage of the estimated market value of the assets we sell to the buyer. The difference between the sale price and repurchase price is the interest expense of financing under a repurchase agreement. Under repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties (lenders) in the event that the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral which may take the form of additional securities or cash. Generally, repurchase agreements contain a financing rate, term and trigger levels for margin calls and haircuts depending on the types of collateral and the counterparties involved. If the estimated fair value of the investment securities increases due to changes in market interest rates or market factors, lenders may release collateral back to us. Specifically, margin calls may result from a decline in the value of the investments securing our repurchase agreements, prepayments on the residential mortgages securing our RMBS investments and from changes in the estimated fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of our company and/or the performance of the bonds in question. Haircuts or the discount attributed to the value of securities sold under repurchase agreements, average between 3% and 10% for Agency RMBS and average between 10% and 50% for Non-Agency RMBS, depending on the specific security used as collateral for such repurchase agreements. Across all of our repurchase facilities, the haircuts range from a low of 3% to a high of 50%, and the weighted average haircut was approximately 10% as of December 31, 2012. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. Should prepayment speeds on the residential mortgages underlying our RMBS investments or market interest rates increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.

        As the capital markets have recovered, commercial banks have re-entered the secured lending market, which has quickened the pace of the recovery of asset values in the credit markets. Financing of Agency and Non-Agency RMBS is currently widely available through, among other vehicles, repurchase agreements. Haircuts or the discount attributed to the value of securities sold under repurchase agreements, average between 3% and 10% for Agency RMBS and average between 10%

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and 50% for Non-Agency RMBS, depending on the specific security used as collateral for such repurchase agreements. We intend to use leverage to seek to increase potential returns to our stockholders by borrowing against existing assets through repurchase agreements and using the proceeds to acquire additional assets.

        At December 31, 2012, we had established eleven repurchase borrowing arrangements with various investment banking firms and other lenders, and as of December 31, 2012 we had outstanding borrowings with four of these lenders totaling $63.4 million, on a GAAP basis, and $77.4 million, on a non-GAAP basis, of which $14.0 million represented repurchase agreements underlying Linked Transactions.