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 $2.4 million (or, if the underwriters fully exercise their
option to purchase additional shares, approximately $2.8 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.
Our net income will depend, in large part, on our ability to acquire assets at
favorable spreads over our borrowing costs. In acquiring Agency and Non-Agency
RMBS, we will compete with other REITs, specialty finance companies, savings
and loan associations, banks, mortgage bankers, insurance companies, mutual
funds, institutional investors, investment banking firms, financial
institutions, governmental bodies and other entities. In addition, there are
numerous REITs with similar asset acquisition objectives, including a number
that have been recently formed, and others may be organized in the future.
These other REITs will increase competition for the available supply of
mortgage assets suitable for purchase. Many of our anticipated competitors are
significantly larger than we are, have access to greater capital and other
resources and may have other advantages over us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments,
which could allow them to consider a wider variety of investments and establish
more relationships than we can. Current market conditions may attract more
competitors, which may increase the competition for sources of financing. An
increase in the competition for sources of funding could adversely affect the
availability and cost of financing and thereby adversely affect the market
price of our common stock.
In the face of this competition, we expect to have access to our Manager's
team and their industry expertise and sole focus, which may provide us with a
competitive advantage and help us assess investment risks and determine
appropriate pricing for certain potential investments. We expect that these
relationships will enable us to compete more effectively for attractive
investment opportunities. In addition, we believe that current market
conditions may have adversely affected the financial condition of certain
competitors. However, we may not be able to achieve our business goals or
expectations due to the competitive risks that we face.
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.
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.
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. 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 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.
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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.