Filed
pursuant to Rule 424(b)(3)
Registration No. 333-159468
This prospectus supplement relates to an effective registration statement under the Securities Act of 1933, but is not complete and may be changed. This 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 31, 2010
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MAY 26, 2009
85,000,000 Shares
Common Stock
We
are offering 85,000,000 shares of our common stock to be sold in this offering.
We have granted the underwriter an option to purchase up to 12,750,000
additional shares of our common stock to cover over-allotments.
We are externally managed and advised by Fixed Income Discount Advisory Company, which we refer to as FIDAC or our Manager, an investment adviser registered with the Securities and Exchange Commission. FIDAC is a wholly-owned subsidiary of Annaly Capital Management,
Inc., which we refer to as Annaly, a New York Stock Exchange-listed real estate investment trust.
Our common stock is subject to certain restrictions on ownership designed to preserve our qualification as a real estate investment trust for federal income tax purposes. See Description of Capital Stock on page 6 of the accompanying prospectus.
Our
common stock is listed on the New York Stock Exchange under the symbol CIM. The
last reported sales price of our common stock on March 31, 2010 was $3.89
per share.
Investing in our common stock involves risks that are described under the caption Risk Factors beginning on page S-9 of this prospectus supplement, in the accompanying prospectus, and in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, which is incorporated by reference.
We are selling to the underwriter the shares of common stock at a price of $ per share, resulting in aggregate proceeds to us of $ before expenses.
The underwriter proposes to offer the shares of common stock from time to time for sale in negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The shares of common stock
will not be sold on or through the facilities of a national securities exchange or to or through a market maker otherwise than on an exchange.
Delivery of the shares in book-entry form only, will be made on or about , 2010.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the prospectus to which it relates is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse
The date of this prospectus supplement is , 2010.
TABLE OF CONTENTS
You should rely only on the information contained in
this document or to which we have referred you. We have not authorized anyone
to provide you with information that is different. This document may only be
used where it is legal to sell these securities. The information in this
document may only be accurate on the date of this document.
S-i
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We
make forward-looking statements in this prospectus supplement that are subject
to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of our business, financial
condition, liquidity, results of operations, plans and objectives. When we use
the words believe, expect, anticipate, estimate, plan, continue,
intend, should, may, would, will or similar expressions, we intend to
identify forward-looking statements. Statements regarding the following
subjects, among others, are forward-looking by their nature:
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our business
and investment strategy;
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our
projected financial and operating results;
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our ability
to maintain existing financing arrangements, obtain future financing
arrangements and the terms of such arrangements;
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general
volatility of the securities markets in which we invest;
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the
implementation, timing and impact of, and changes to, various government
programs, including the U.S. Treasurys plan to buy U.S. government agency
residential mortgage-backed securities, the Term Asset-Backed Securities Loan
Facility, and the Public-Private Investment Program;
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our expected
investments;
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changes in
the value of our investments;
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interest
rate mismatches between our investments and our borrowings used to fund such
purchases;
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changes in
interest rates and mortgage prepayment rates;
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effects of
interest rate caps on our adjustable-rate investments;
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rates of
default or decreased recovery rates on our investments;
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prepayments
of the mortgage and other loans underlying our mortgage-backed or other
asset-backed securities;
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the degree
to which our hedging strategies may or may not protect us from interest rate
volatility;
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impact of
and changes in governmental regulations, tax law and rates, accounting
guidance, and similar matters;
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availability
of investment opportunities in real estate-related and other securities;
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availability
of qualified personnel;
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estimates
relating to our ability to make distributions to our stockholders in the
future;
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our
understanding of our competition;
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market
trends in our industry, interest rates, the debt securities markets or the
general economy; and
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use of
proceeds of this offering.
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The
forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. You should not place undue reliance on these
forward-looking statements. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us. Some of these factors are described under the captions Prospectus
Supplement Summary, Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and Business in this
prospectus supplement, the accompanying prospectus, and in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, which is incorporated by
reference in the accompanying prospectus. 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 from time to time, and it is impossible 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.
S-ii
PROSPECTUS SUPPLEMENT SUMMARY
This
summary highlights some of the information in this prospectus supplement. It
is not complete and 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 supplement, in the accompanying
prospectus, and in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, which is incorporated by reference in the accompanying
prospectus. Except where the context suggests otherwise, the terms Chimera,
company, we, us and our refer
to Chimera Investment Corporation; our
Manager and FIDAC refer to Fixed Income Discount Advisory Company,
our external manager; and Annaly refers to Annaly Capital Management,
Inc., the parent company of FIDAC. Unless indicated otherwise, the information
in this prospectus supplement assumes no exercise by the underwriter of its overallotment
option to purchase or place up to an additional 12,750,000 shares of our common
stock.
The Company
We
are a specialty finance company that acquires, either directly or indirectly
through our subsidiaries, residential mortgage-backed securities, or RMBS,
residential mortgage loans, real estate-related securities and various other
asset classes. We elected to be taxed as a real estate investment trust, or
REIT, for federal income tax purposes commencing with our taxable year ending
on December 31, 2007. Therefore, we generally will not be subject to federal
income tax on our taxable income that is distributed to our stockholders. We
were incorporated in Maryland in June 2007 and commenced operations in November
2007. We listed our common stock on the NYSE in November 2007 and trade under
the symbol CIM.
We
are externally managed by Fixed Income Discount Advisory Company, which we
refer to as our Manager or FIDAC. Our Manager is an investment advisor
registered with the Securities and Exchange Commission, or SEC. Additionally,
our Manager is a wholly-owned subsidiary of Annaly Capital Management, Inc., or
Annaly, a NYSE-listed REIT, which has a long track record of managing
investments in U.S. government agency mortgage-backed securities.
Our
objective is to provide attractive risk-adjusted returns to our investors over
the long-term, primarily through dividends and secondarily through capital
appreciation. We intend to achieve this objective by acquiring a broad class of
financial assets to construct an investment portfolio that is designed to
achieve attractive risk-adjusted returns and that is structured to comply with
the various federal income tax requirements for REIT status and to maintain our
exclusion from regulation under the Investment Company Act of 1940, or 1940
Act.
Our Manager
We
are externally managed and advised by FIDAC, a fixed-income management company,
pursuant to a management agreement. All of our officers are employees of our
Manager or one of its affiliates. We believe our relationship with our Manager
enables us to leverage our Managers well-respected and established portfolio
management resources for each of our targeted asset classes and its
sophisticated infrastructure supporting those resources, including investment
professionals focusing on residential mortgage loans, U.S. government agency
residential mortgage-backed securities, or Agency RMBS, which are mortgage
pass-through certificates, collateralized mortgage obligations, or CMOs, and
other mortgage-backed securities representing interests in or obligations
backed by pools of mortgage loans issued or guaranteed by the Federal National
Mortgage Association, or Fannie Mae, the Federal Home Loan Mortgage
Corporation, or Freddie Mac, and the Government National Mortgage Association,
or Ginnie Mae, non-Agency RMBS and other asset-backed securities, or ABS.
Additionally, we have benefited and expect to continue to benefit from our
Managers finance and administration functions, which address legal,
compliance, investor relations and operational matters, including portfolio
management, trade allocation and execution, securities valuation, risk
management and information technologies in connection with the performance of
its duties. Our Manager commenced active investment management operations in
1994. At December 31, 2009, our Manager was the adviser or sub-adviser for
investment vehicles, including us, with approximately $6.0 billion in net
assets and $13.6 billion in gross assets.
S-1
Our
Manager is responsible for administering our business activities and day-to-day
operations. Pursuant to the terms of the management agreement, our Manager
provides us with our management team, including our officers, along with
appropriate support personnel. Our Manager is at all times subject to the
supervision and oversight of our board of directors and has only such functions
and authority as we delegate to it.
Our Investment Strategy
Our
objective is to provide attractive risk-adjusted returns to our investors over
the long-term, primarily through dividends and secondarily through capital
appreciation. We intend to achieve this objective by investing in a diversified
investment portfolio of RMBS, residential mortgage loans, real estate-related
securities and various other asset classes, subject to maintaining our REIT
status and exemption from registration under the 1940 Act. The RMBS, ABS,
commercial mortgage-backed securities, or CMBS, and collateralized debt
obligations, or CDOs, we purchase may include investment-grade and
non-investment grade classes, including the BB-rated, B-rated and non-rated
classes.
We
rely on our Managers expertise in identifying assets within our target asset
classes. Our Manager makes investment decisions based on various factors,
including expected cash yield, relative value, risk-adjusted returns, current
and projected credit fundamentals, current and projected macroeconomic
considerations, current and projected supply and demand, credit and market risk
concentration limits, liquidity, cost of financing and financing availability,
as well as maintaining our REIT qualification and our exemption from
registration under the 1940 Act.
Over
time, we will modify our investment allocation strategy as market conditions
change to seek to maximize the returns from our investment portfolio. We
believe this strategy, combined with our Managers experience, will enable us
to pay dividends and achieve capital appreciation throughout changing interest
rate and credit cycles and provide attractive long-term returns to investors.
Our
targeted asset classes and the principal investments we expect to make are as
follows.
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Asset Class
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Principal Investments
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Residential
Mortgage-Backed Securities, or RMBS
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Non-Agency
RMBS, including investment-grade and non-investment grade classes, including
the BB-rated, B-rated and non-rated classes.
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Agency RMBS.
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Residential
Mortgage Loans
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Prime
mortgage loans, which are mortgage loans that conform to the underwriting
guidelines of Fannie Mae and Freddie Mac, which we refer to as Agency
Guidelines; and jumbo prime mortgage loans, which are mortgage loans that
conform to the Agency Guidelines except as to loan size.
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Alt-A
mortgage loans, which are mortgage loans that may have been originated using
documentation standards that are less stringent than the documentation
standards applied by certain other first lien mortgage loan purchase
programs, such as the Agency Guidelines, but have one or more compensating
factors such as a borrower with strong credit or mortgage history or
significant assets.
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S-2
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Other
Asset-Backed Securities, or ABS
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CMBS.
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Debt and
equity tranches of CDOs.
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Consumer and
non-consumer ABS, including investment-grade and non-investment grade
classes, including the BB-rated, B-rated and non-rated classes.
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Since we
commenced operations in November 2007, we have focused our investment
activities on acquiring non-Agency RMBS and on purchasing residential mortgage
loans that have been originated by select high-quality originators, including
the retail lending operations of leading commercial banks. Our investment
portfolio at December 31, 2009 was weighted toward non-Agency RMBS. At December
31, 2009, approximately 67.7% of our investment portfolio was non-Agency RMBS,
25.0% of our investment portfolio was Agency RMBS, and 7.3% of our investment
portfolio was securitized residential mortgage loans. After the consummation of
this offering, we expect that over the near term our investment portfolio will
continue to be weighted toward RMBS, subject to maintaining our REIT
qualification and our 1940 Act exemption.
In
addition, we have engaged in and anticipate continuing to engage in
transactions with residential mortgage lending operations of leading commercial
banks and other high-quality originators in which we identify and re-underwrite
residential mortgage loans owned by such entities, and rather than purchasing
and securitizing such residential mortgage loans ourselves, we and the
originator would structure the securitization and we would purchase the
resulting mezzanine and subordinate non-Agency RMBS. We may also engage in
similar transactions with non-Agency RMBS in which we acquire non-Agency RMBS
that were formerly AAA-rated and immediately re-securitize those securities.
We may sell the resulting AAA-rated super senior RMBS and retain some AAA-rated
senior RMBS and the mezzanine RMBS which are either rated below AAA or are
non-rated. Our investment decisions, however, will depend on prevailing
market conditions and will change over time. As a result, we cannot predict
the percentage of our assets that will be invested in each asset class or
whether we will invest in other classes of investments. We may change our
investment strategy and policies without a vote of our stockholders.
We have
elected to be taxed as a REIT commencing with our taxable year ended December
31, 2007 and operate our business to be exempt from registration under the 1940
Act, and therefore we are required to invest a substantial majority of our
assets in loans secured by mortgages on real estate and real estate-related
assets. Subject to maintaining our REIT qualification and our 1940 Act
exemption, we do not have any limitations on the amounts we may invest in any
of our targeted asset classes.
Our Financing Strategy
We
use leverage to increase potential returns to our stockholders. We are not
required to maintain any specific debt-to-equity ratio as we believe the
appropriate leverage for the particular assets we are financing depends on the
credit quality and risk of those assets. At December 31, 2009, our ratio of
debt-to-equity was 1.1:1. For purposes of calculating this ratio, our equity is
equal to the total stockholders equity on our consolidated statements of
financial condition. Our debt consists of repurchase agreements and securitized
debt. Subject to maintaining our REIT qualification, we may use a number of
sources to finance our investments, including repurchase agreements, warehouse
facilities, securitizations, asset-backed commercial paper, and term financing
structures.
Our
ability to fund our investments on a leveraged basis depends to a large extent
upon our ability to secure warehouse, repurchase, credit, and/or commercial paper
financing on acceptable terms. The current dislocation in the non-Agency
mortgage sector has made it difficult for us to obtain short-term financing on
favorable terms. As a result, we have completed loan securitizations in order
to obtain long-term financing and terminated our un-utilized whole loan
repurchase agreements in order to avoid paying non-usage fees under those
agreements.
S-3
We
have entered into a RMBS repurchase agreement with Annaly. This agreement
contains customary representations, warranties and covenants contained in such
agreements. At December 31, 2009, we had outstanding under this agreement
$259.0 million which consisted of approximately 10.95% of our total financing
at the time. We currently have no borrowings under this repurchase agreement.
We cannot assure you that Annaly will provide us with financing in the future.
We
have entered into a RMBS repurchase agreement with RCap Securities, Inc., or
RCap, a wholly-owned subsidiary of Annaly. This agreement contains customary
representations, warranties and covenants contained in such agreements. As of
March 29, 2010, we were borrowing $147.4 million under this repurchase
agreement at an interest rate of 1.22%. Our RMBS repurchase agreement with RCap
has a three-month term and is secured by the RMBS pledged under the agreement.
This agreement is callable by RCap each week. We cannot assure you that RCap
will continue to provide us with such financing. If RCap does not provide us
with financing, we cannot assure you that we will be able to replace such
financing. If we are not able to replace this financing, we could be forced to
sell our assets at an inopportune time when prices are depressed.
Our Interest Rate Hedging and Risk Management
Strategy
We
may, from time to time, utilize derivative financial instruments to hedge all
or a portion of the interest rate risk associated with our borrowings.
We
engage in a variety of interest rate management techniques that seek to
mitigate changes in interest rates or other potential influences on the values
of our assets. The federal income tax rules applicable to REITs may require us
to implement certain of these techniques through a taxable REIT subsidiary
that is fully subject to corporate income taxation. Our interest rate management
techniques may include:
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puts and
calls on securities or indices of securities;
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Eurodollar
futures contracts and options on such contracts;
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interest rate caps, swaps and
swaptions;
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U.S.
treasury securities and options on U.S. treasury securities; and
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other similar transactions.
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We
attempt to reduce interest rate risks and to minimize exposure to interest rate
fluctuations through the use of match funded financing structures, when
appropriate, whereby we seek (i) to match the maturities of our debt
obligations with the maturities of our assets and (ii) to match the interest
rates on our investments with like-kind debt (i.e., floating rate assets are
financed with floating rate debt and fixed-rate assets are financed with
fixed-rate debt), directly or through the use of interest rate swaps, caps or
other financial instruments, or through a combination of these strategies. This
will allow us to minimize the risk that we have to refinance our liabilities
before the maturities of our assets and to reduce the impact of changing
interest rates on our earnings.
Our Competitive Advantages
We
believe that our competitive advantages include the following:
Investment Strategy Designed to Perform in a
Variety of Interest Rate and Credit Environments
We
seek to manage our investment strategy to balance both interest rate risk and
credit risk. We believe this strategy is designed to generate attractive, risk-adjusted
returns in a variety of market conditions because operating conditions in which
either of these risks are increased, or decreased, may occur at different
points in the economic cycle. For example, there may be periods when
interest-rate sensitive strategies outperform credit-sensitive strategies
whereby we would receive increased income over our cost of financing, in which
case our portfolios increased exposure to this risk would be beneficial. There
may be other periods when credit-sensitive strategies
S-4
outperform
interest-rate sensitive strategies. Although we face interest rate risk and
credit risk, we believe that with appropriate hedging strategies, as well as
our ability to evaluate the quality of targeted asset investment opportunities,
we can reduce these risks and provide attractive risk-adjusted returns.
Credit-Oriented Investment Approach
We
seek to minimize principal loss while maximizing risk-adjusted returns through
our Managers credit-based investment approach, which is based on rigorous
quantitative and qualitative analyses.
Experienced Investment Advisor
Our
Manager has a long history of strong performance across a broad range of
fixed-income assets. Our Managers most senior investment professionals have a
long history of investing in a variety of mortgage and real estate-related
securities and structuring and marketing CDOs. Our Manager is also acting as
liquidating agent for a number of CDOs, and has competitive advantages as a
result of its knowledge regarding the pipeline, values, supply and market
participants for liquidations of CDOs because of its involvement in these
liquidations. Investments will be overseen by an Investment Committee of our
Managers professionals, consisting of Michael A.J. Farrell, Wellington J.
Denahan-Norris, James P. Fortescue, Kristopher Konrad, Rose-Marie Lyght, Ronald
Kazel, Jeremy Diamond, Eric Szabo and Matthew Lambiase.
Access to Annalys and Our Managers
Relationships
Annaly
and our Manager have developed long-term relationships with a number of
commercial banks and other financial intermediaries. We believe these
relationships provide us with a range of high-quality investment opportunities.
Access to Our Managers Systems and
Infrastructure
Our
Manager has created a proprietary portfolio management system, which we believe
provides us with a competitive advantage. Our Managers personnel have created
a comprehensive finance and administrative infrastructure, an important
component of a complex investment vehicle such as a REIT. In addition, most of
our Managers personnel are also Annalys personnel; therefore, they have had
extensive experience managing Annaly, which is a REIT.
Alignment of Interests between Annaly, Our
Manager and Our Investors
Annaly
owned approximately 45.0 million shares of our common stock at March 29, 2010.
We believe that Annalys investment aligns our Managers interests with our
interests.
Compliance with REIT and Investment Company
Requirements
We
monitor our investment securities and the income from these securities and, to
the extent we enter into hedging transactions, we monitor income from our
hedging transactions as well, so as to ensure at all times that we maintain our
qualification as a REIT and our exempt status under the 1940 Act, which may
include qualifying for an exemption from registration under the 1940 Act
pursuant to Section 3(a)(1) or Section 3(a)(6) of the 1940 Act in addition to
Section 3(c)(5)(C) of the 1940 Act.
S-5
Recent Developments
Dividend
On
March 18, 2010, we announced that our board of directors declared a first
quarter cash distribution of $0.17 per share of our common stock. This dividend
will be paid on April 30, 2010 to common stockholders of record on March 29,
2010. Common stock sold in this offering will not participate in this quarterly
distribution. We have not yet completed our 2010 first quarter or our
consolidated financial statements for the first quarter. Our Core Earnings per
share for the first quarter could be different from our dividends per share.
Core Earnings is a non-GAAP measure and is defined as GAAP net income (loss)
excluding non-cash equity compensation expense, excluding any unrealized gains,
losses or other items that do not affect realized net income (regardless of
whether such items are included in other comprehensive income or loss, or in
net income (loss)). GAAP is defined as accounting principles generally accepted
in the United States.
Corporate Information
Our
principal executive offices are located at 1211 Avenue of Americas, Suite 2902,
New York, New York 10036. Our telephone number is 1-866-315-9930. Our website
is http://www.chimerareit.com. The contents of our website are not a
part of this prospectus supplement or the accompanying prospectus. We have
included our website address only as an inactive textual reference and do not
intend it to be an active link to our website.
S-6
Summary Financial Information
The
following table presents summary financial data as of and for the periods
indicated. We derived the summary financial data from our audited consolidated
financial statements for the period from November 21, 2007 (commencement of
operations) through December 31, 2007 and for the fiscal years ended December
31, 2008 and 2009. The following summary financial information should be read
in conjunction with our more detailed information contained in the consolidated
financial statements and notes thereto in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, which is incorporated by reference
into the accompanying prospectus and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, which is incorporated by
reference into the accompanying prospectus.
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As of December 31, |
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2009 |
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2008 |
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2007 |
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(dollars in thousands, except share and per share data) |
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Statement of Financial Condition Highlights |
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Mortgage-backed securities |
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$ |
4,088,894 |
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$ |
855,467 |
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$ |
1,124,290 |
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Loans held for investment |
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$ |
162,371 |
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Securitized loans |
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$ |
470,533 |
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$ |
583,346 |
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Total assets |
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$ |
4,618,328 |
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$ |
1,477,501 |
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$ |
1,565,636 |
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Repurchase agreements |
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$ |
1,975,402 |
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$ |
562,119 |
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$ |
270,584 |
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Securitized debt |
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$ |
390,350 |
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$ |
488,743 |
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Total liabilities |
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$ |
2,491,766 |
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$ |
1,063,046 |
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$ |
1,026,747 |
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Stockholders equity |
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$ |
2,126,562 |
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$ |
414,455 |
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$ |
538,889 |
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Book value per share |
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$ |
3.17 |
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$ |
2.34 |
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$ |
14.29 |
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Number of shares outstanding |
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670,371,587 |
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177,198,212 |
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37,705,563 |
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For the
year ended
December 31, 2009 |
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For the
year ended
December 31, 2008 |
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For the
period
from November
21, 2007 through
December 31,
2007 |
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(dollars
in thousands, except share and per share data) |
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Statement of Operations Highlights |
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Net interest income |
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$ |
263,456 |
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$ |
44,715 |
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$ |
3,077 |
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Net income (loss) |
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$ |
323,983 |
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$ |
(119,809 |
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$ |
(2,906 |
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Earnings per share, or EPS (basic) |
|
$ |
0.64 |
|
$ |
(1.90 |
) |
$ |
(0.08 |
) |
|
EPS (diluted) |
|
$ |
0.64 |
|
$ |
(1.90 |
) |
$ |
(0.08 |
) |
|
Weighted average shares basic |
|
|
507,042,421 |
|
|
63,155,878 |
|
|
37,401,737 |
|
|
Weighted average shares diluted |
|
|
507,042,421 |
|
|
63,155,878 |
|
|
37,401,737 |
|
|
Dividend declared per share (1) |
|
$ |
0.43 |
|
$ |
0.62 |
|
$ |
0.025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data(2) |
|
|
|
|
|
|
|
|
|
|
|
Yield on average interest earning assets |
|
|
6.90 |
% |
|
5.96 |
% |
|
7.02 |
% |
|
Cost of funds on average interest bearing liabilities |
|
|
2.03 |
% |
|
4.64 |
% |
|
5.08 |
% |
|
Interest rate spread |
|
|
4.87 |
% |
|
1.32 |
% |
|
1.94 |
% |
|
G&A and management fee expense as percentage of average total
assets |
|
|
0.99 |
% |
|
0.85 |
% |
|
1.55 |
% |
|
G&A and management fee expense as percentage of average equity |
|
|
2.25 |
% |
|
3.50 |
% |
|
3.05 |
% |
|
|
|
|
(1)
|
For the applicable period.
|
|
|
|
|
(2)
|
Data for the
period from November 21, 2007 through December 31, 2007 is provided on an
annualized basis.
|
S-7
|
|
|
|
|
The Offering
|
|
|
|
Issuer
|
|
Chimera
Investment Corporation
|
|
|
|
|
|
Common stock
offered by us
|
|
85,000,000 shares (plus up to an additional 12,750,000 shares
of our common stock that we may issue and sell upon the exercise of the
underwriters overallotment option).
|
|
|
|
|
|
Common stock
to be outstanding after this
offering
|
|
755,371,002 shares, based upon 670,371,002 shares of common
stock outstanding as of March 29, 2010. Does not include up to an additional
12,750,000 shares of our common stock that we may issue and sell upon the
exercise of the underwriters overallotment option. Includes 1,031,200 shares
of our restricted common stock granted pursuant to our equity incentive
plan that were unvested as of December 31, 2009.
|
|
|
|
|
|
NYSE symbol
|
|
CIM
|
|
|
|
|
|
Use of
proceeds
|
|
We intend to
acquire non-Agency RMBS, Agency RMBS, prime and Alt-A mortgage loans, CMBS,
CDOs, and other consumer or non-consumer ABS. Our portfolio at December 31,
2009 was weighted toward RMBS. After the consummation of this offering, we
expect that over the near term our portfolio will continue to be weighted
toward RMBS, subject to maintaining our REIT qualification and our 1940 Act
exemption. Until appropriate assets can be identified, our Manager may
acquire interest-bearing short-term investments, including money market
accounts, which are consistent with our treatment as a REIT. These assets are
expected to provide a lower net return than we hope to achieve from deploying
the proceeds of this offering in our targeted assets. In addition, until
appropriate assets can be identified, we may also use the net proceeds to pay
down amounts borrowed under our repurchase agreement with RCap. See Use of
Proceeds.
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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 Risk Factors and all other
information in this prospectus supplement, in the accompanying prospectus,
and in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009, which is incorporated by reference in the accompanying prospectus,
before investing in our common stock.
|
S-8
RISK FACTORS
In
evaluating an investment in our common stock, you should carefully consider the
risks set forth under the caption Risk Factors in this prospectus supplement,
in the accompanying prospectus, and in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, which is incorporated by reference in the
accompanying prospectus.
We
may allocate the net proceeds from this offering to investments with which you
may not agree.
We
will have significant flexibility in investing the net proceeds of this
offering. You will be unable to evaluate the manner in which the net proceeds
of this offering will be invested or the economic merit of our expected
investments and, as a result, we may use the net proceeds from this offering to
invest in investments with which you may not agree. The failure of our
management to apply these proceeds effectively or find assets that meet our
investment criteria in sufficient time or on acceptable terms could result in
unfavorable returns, could cause a material adverse effect on you, and could
cause the value of our common stock to decline. In addition, although we
presently do not intend to use such net proceeds in the near term to pay down
permanently our repurchase facility with RCap, until appropriate assets can be
identified, we may also use the net proceeds to pay down amounts borrowed under
our repurchase agreement with RCap. To the extent we raise more proceeds in
this offering, we will acquire more assets.
S-9
USE OF PROCEEDS
We
estimate that our net proceeds from this public offering of our shares of
common stock, after deducting the underwriting discount and our estimated
offering expenses, will be approximately $ (or approximately $
million if the underwriter exercises its overallotment option in full).
We
intend to use the net proceeds of this offering to finance the acquisition of
non-Agency RMBS, Agency RMBS, prime and Alt-A mortgage loans, CMBS, CDOs and
other consumer or non-consumer ABS. Our portfolio at December 31, 2009 was
weighted toward RMBS. After the consummation of this offering, we expect that
over the near term our portfolio will continue to be weighted toward RMBS,
subject to maintaining our REIT qualification and our 1940 Act exemption. See
Prospectus Supplement SummaryOur Investment Strategy.
We
may also use the proceeds for other general corporate purposes such as
repayment of outstanding indebtedness, working capital, and for liquidity
needs, although we presently do not intend to use such net proceeds in the near
term to pay down permanently our repurchase facility with RCap. Pending any
such uses, we may acquire interest-bearing short-term investments, including
money market accounts that are consistent with our treatment as a REIT, or may
use them to reduce short term indebtedness. These assets are expected to
provide a lower net return than we hope to achieve from deploying the proceeds
of this offering in our targeted assets. In addition, until appropriate assets
can be identified, we may also use the net proceeds to pay down amounts
borrowed under our repurchase agreement with RCap. To the extent we raise more
proceeds in this offering, we will acquire more assets. To the extent we raise
less proceeds in this offering, we will acquire fewer assets.
S-10
DISTRIBUTIONS
To
maintain our qualification as a REIT, we must distribute substantially all of
our taxable income to our stockholders for each year. We have done this in the
past and intend to continue to do so in the future. We also have declared and
paid regular quarterly cash dividends in the past and intend to do so in the
future.
The
following table sets forth the cash distributions declared per common share
during each fiscal quarter of our current fiscal year and our last two fiscal
years.
|
|
|
|
|
|
|
|
|
Cash Distributions
Declared Per
Common Share
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
First quarter
|
|
|
$.17
|
|
|
2009
|
|
|
|
|
|
Fourth quarter
|
|
|
$.17
|
|
|
Third quarter
|
|
|
$.12
|
|
|
Second quarter
|
|
|
$.08
|
|
|
First quarter
|
|
|
$.06
|
|
|
2008
|
|
|
|
|
|
Fourth quarter
|
|
|
$.04
|
|
|
Third quarter
|
|
|
$.16
|
|
|
Second quarter
|
|
|
$.16
|
|
|
First quarter
|
|
|
$.26
|
|
We
have not established a minimum distribution payment level on our common stock
and our ability to pay distributions on our common stock may be adversely
affected as a result of the risks set forth under the caption Risk Factors in
this prospectus supplement, in the accompanying prospectus, and in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, which is
incorporated by reference in the accompanying 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 relevant from time to time.
S-11
ADDITIONAL
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion supplements the discussion under the heading Material
Federal Income Tax Considerations in the prospectus. Terms used in this section
but not defined in this section have the meanings ascribed to them elsewhere in
this prospectus supplement or in Material Federal Income Tax Considerations
in the prospectus. You should refer to the discussion in the prospectus under
Material Federal Income Tax Considerations for a discussion of the tax
consequences of our election to be taxed as a REIT and the tax consequences to
Owners of shares of our common stock. The following is a summary of certain
material U.S. federal income tax considerations relates to the acquisition,
ownership and disposition of the notes.
Taxation of Foreign Owners
The
following discussion should be read in connection with your review of the
discussion under the heading Material Federal Income Tax Considerations
Taxation of Foreign Owners in the prospectus.
Information Reporting and Backup Withholding
Under
current Treasury Regulations, information reporting and backup withholding will
not apply to payments on the common stock made by us or our paying agent (in
its capacity as such) to you if you have provided the required certification
that you are a Foreign Owner provided that neither we nor our paying agent has
actual knowledge or reason to know that you are a Domestic Owner. However, we or
our paying agent may be required to report to the IRS and you payments of
dividends on our common stock and the amount of tax, if any, withheld with
respect to those payments. Copies of the information returns reporting such
payments and any withholding may also be made available to the tax authorities
in the country in which you reside under the provisions of a treaty or
agreement. The gross proceeds from the disposition of your common stock may be
subject to information reporting and backup withholding tax (currently at a
maximum rate of 28%). If you sell your common stock outside the United States
through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid
to you outside the United States, then the U.S. information reporting and backup
withholding requirements generally will not apply to that payment. However,
U.S. information reporting, but not backup withholding, will apply to a payment
of sales proceeds, even if that payment is made outside the United States, if
you sell your debt securities or common stock through a non-U.S. office of a
broker that:
|
|
|
|
|
|
|
|
is a U.S.
person;
|
|
|
|
|
|
|
|
|
derives 50%
or more of its gross income in specific periods from the conduct of a trade
or business in the United States;
|
|
|
|
|
|
|
|
|
is a
controlled foreign corporation for U.S. federal income tax purposes; or
|
|
|
|
|
|
|
|
|
is a foreign
partnership, if at any time during its tax year:
|
|
|
|
|
|
|
|
|
o
|
one or more
of its partners are U.S. persons who in the aggregate hold more than 50% of
the income or capital interests in the partnership; or
|
|
|
|
|
|
|
|
|
o
|
the foreign
partnership is engaged in a U.S. trade or business,
|
unless the
broker has documentary evidence in its files that you are a Foreign Owner and
certain other conditions are met or you otherwise establish an exemption.
If
you receive payment of the proceeds of a sale of your common stock to or
through a U.S. office of a broker, the payment is subject to both U.S. backup
withholding and information reporting unless you provide an IRS Form W-8BEN
certifying that you are a Foreign Owner or you otherwise establish an
exemption, provided that the broker does not have actual knowledge or reason to
know that you are not a Foreign Owner or the conditions of any other exemption
are not, in fact, satisfied.
S-12
You
are encouraged to consult your own tax advisor regarding application of backup
withholding in your particular circumstance and the availability of and
procedure for obtaining an exemption from backup withholding under current
Treasury Regulations. Any amounts withheld under the backup withholding rules
from a payment to you will be allowed as a refund or credit against your U.S.
federal income tax liability, provided the required information is timely
furnished to the IRS.
Recently Enacted Legislation
On
March 18, 2010, President Obama signed the Hiring Incentives to Restore
Employment Act into law. Effective for payments made after December 31, 2012,
this law imposes a 30% U.S. federal withholding tax on distributions and the
gross proceeds of sale in respect of our shares of capital stock to a foreign
financial institution or non-financial foreign entity, unless (i) in the case
of a foreign financial institution, such institution enters into an agreement
with the U.S. government to withhold on certain payments and to collect and
provide to the U.S. tax authorities substantial information regarding U.S.
account holders of such institution (which includes certain equity and debt
holders of such institution, as well as certain account holders that are
foreign entities with U.S. owners) and to withhold on certain payments and (ii)
in the case of a non-financial foreign entity, such entity provides the
withholding agent with a certification identifying the direct and indirect U.S.
owners of the entity. Under certain circumstances, a Foreign Owner might be
eligible for refunds or credits of such taxes. Prospective investors are
encouraged to consult with their own tax advisors regarding the possible
implications of this recently enacted legislation on an investment in our
capital stock.
S-13
UNDERWRITING
Under
the terms and subject to the conditions contained in an underwriting agreement
dated , 2010, we
have agreed to sell to Credit Suisse Securities (USA) LLC all of the shares of
our common stock.
The
underwriter will offer the shares of common stock for sale from time to time in
one or more transactions (which may include block transactions), in negotiated
transactions or otherwise, or a combination of those methods of sale, at market
prices prevailing at the time of sale, at prices related to prevailing market
prices or at negotiated prices. The shares of common stock will not be sold on
or through the facilities of a national securities exchange or to or through a
market maker otherwise than on an exchange. The underwriter may do so by
selling the shares of common stock to or through broker/dealers, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the underwriter and/or the purchasers of the shares of common
stock for whom they may act as agents. In connection with the sale of the
shares of common stock, the underwriter may be deemed to have received
compensation from us in the form of underwriting discounts, and the underwriter
may also receive commissions from the purchasers of the shares of common stock
for whom it may act as agent. The underwriter and any broker/dealers that
participate with the underwriter in the distribution of the shares of common
stock may be deemed to be underwriters, and any discounts or commissions
received by them and any profit on the resale of the shares of common stock by
them may be deemed to be underwriting discounts or commissions.
The
underwriter is purchasing the shares of common stock from us at
$ per share (representing
$ million aggregate
proceeds to us, before we deduct our out-of-pocket expenses of approximately
$250,000 (or approximately
$ million if the
underwriters over-allotment option described below is exercised in full)). The
underwriting agreement provides that the underwriter is obligated to purchase
all the shares of common stock if any are purchased, other than those covered
by the over-allotment option described below.
We
have agreed to indemnify the underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments the underwriter may be required to make in respect of those
liabilities.
We
have granted to the underwriter a 30-day option to purchase up to 12,750,000
additional shares at a price of
$ per share. The
option may be exercised only to cover any over-allotments in the sale of the
shares.
Pursuant
to certain lock-up agreements, we and our executive officers and directors
have agreed, subject to certain exceptions, not to offer, sell, contract to
sell, announce any intention to sell, pledge or otherwise dispose of, directly
or indirectly, any common shares or securities convertible into or exchangeable
or exercisable for any common shares without the prior written consent of
Credit Suisse Securities (USA) LLC for a period of 90 days after the date of
this prospectus supplement. Specifically, we and these other individuals have
agreed, with certain exceptions, not to directly or indirectly:
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|
|
|
|
offer, pledge, sell or contract to sell any common
stock;
|
|
|
|
|
|
|
|
sell any option or contract to purchase any common
stock;
|
|
|
|
|
|
|
|
purchase any option or contract to sell any common
stock;
|
|
|
|
|
|
|
|
grant any option, right or warrant for the sale of
any common stock;
|
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|
|
|
|
|
|
lend or otherwise dispose of or transfer any common
stock; or
|
|
|
|
|
|
|
|
enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of ownership of any
common stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
|
This
lock-up provision applies to common stock and to securities convertible into or
exchangeable or exercisable for or repayable with common stock. It also applies
to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. The 90-day restricted period will be automatically
extended if (1) during the last 17 days of the 90-day restricted period we
issue an earnings release or material news or a material event relating to us
occurs or prior to the expiration of the 90-day restricted period, we announce that
we will release earnings results or become aware that
S-14
material news or a material event will occur during
the 16-day-period beginning on the last day of the 90-day restricted period,
in which case the restrictions described above will continue to apply until
the expiration of the 18-day period beginning on the issuance of the earnings
release or the occurrence of the material news or a material event. The
exceptions permit us, among other things and subject to restrictions, to: (a)
issue common stock or options pursuant to our long term stock incentive plan
or pursuant to the exercise of employee stock options or other awards, (b)
issue common stock pursuant to our stock dividend reinvestment plan, and
(c) file a registration statement relating to our common and preferred stock.
In
connection with the offering the underwriter may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions, and
penalty bids.
|
|
|
|
|
|
|
Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum.
|
|
|
|
|
|
|
|
Over-allotment involves sales by the underwriter of
shares in excess of the number of shares the underwriter is obligated to
purchase, which creates a syndicate short position. The short position may be
either a covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriter is not
greater than the number of shares that it may purchase in the over-allotment
option. In a naked short position, the number of shares involved is greater
than the number of shares in the over-allotment option. The underwriter may
close out any short position by either exercising its over-allotment option
and/or purchasing shares in the open market.
|
|
|
|
|
|
|
|
Syndicate covering transactions involve purchases of
the shares in the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the source of the
shares to close out the short position, the underwriter will consider, among
other things, the price of shares available for purchase in the open market
as compared to the price at which they may purchase shares through the
over-allotment option. If the underwriter sells more shares than could be
covered by the over-allotment option, a naked short position, that position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriter is concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering.
|
|
|
|
|
|
|
|
Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when the shares originally sold by
the syndicate member are purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
|
These
stabilizing transactions, syndicate covering transactions and penalty bids may
have the effect of raising or maintaining the market price of the shares or
preventing or retarding a decline in the market price of the shares. As a
result the price of the shares may be higher than the price that might otherwise
exist in the open market. These transactions may be effected on The New York
Stock Exchange or otherwise and, if commenced, may be discontinued at any time.
Selling
Restrictions
European
Economic Area
In
relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a Relevant Member State) an offer
to the public of any securities which are the subject of the offering
contemplated by this prospectus may not be made in that Relevant Member State
except that an offer to the public in the Relevant Member State of any
securities may be made at any time under the following exemptions under the
Prospectus Directive, if they have been implemented in that Relevant Member
State:
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|
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|
|
(a)
to legal entities which are authorized or regulated to operate in the
financial markets or, if not so authorized or regulated, whose corporate
purpose is solely to invest in securities;
|
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|
|
|
|
(b)
to any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more
than EUR43,000,000 and (3) an annual net turnover of
|
S-15
|
|
|
|
|
more than EUR50,000,000, as shown in its last annual
or consolidated accounts;
|
|
|
|
|
|
(c)
by the underwriter to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the underwriter for any such offer; or
|
|
|
|
|
|
(d)
in any other circumstances falling within Article 3(2) of the Prospectus
Directive.
|
For
the purposes of this provision, the expression an offer to the public in
relation to any securities in any Relevant Member State means the communication
in any form and by any means of sufficient information on the terms of the
offer and any securities to be offered so as to enable an investor to decide to
purchase the securities, as the same may be varied in that Member State by any
measure implementing the Prospectus Directive in that Member State and the
expression Prospectus Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
This
prospectus supplement has been prepared on the basis that all offers of the
securities will be made pursuant to an exemption under the Prospectus
Directive, as implemented in Member States from the requirement to produce a
prospectus for offers of securities. Accordingly any person making or intending
to make any offer within the European Economic Area of securities which are the
subject of the placement contemplated in this prospectus supplement should only
do so in circumstances in which no obligation arises for us or the underwriter
to produce a prospectus for the offer. Neither we nor the underwriter have
authorized, nor do they authorize the making of any offer of securities through
any financial intermediary, other than offers made by the underwriter which
constitute the final placement of securities contemplated in this prospectus
supplement.
Each
person in a Relevant Member State who receives any communication in respect of,
or who acquires any shares under, the offers contemplated in this prospectus
supplement will be deemed to have represented, warranted and agreed to and with
each underwriter and us that:
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|
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|
|
(a)
it is a qualified investor within the meaning of the law in that Relevant
Member State implementing Article 2(1)(e) of the Prospectus Directive; and
|
|
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|
|
|
(b)
in the case of any shares acquired by it as a financial intermediary, as the
term is used in Article 3(2) of the Prospectus Directive, (i) the shares
acquired by it in the offer have not been acquired on behalf of, nor have
they been acquired with a view to their offer or resale to, persons in any
Relevant Member State other than qualified investors, as that term is defined
in the Prospectus Directive, or in circumstances in which the prior consent
of the underwriter has been given to the offer or resale; or (ii) where
shares have been acquired by it on behalf of persons in any Relevant Member
State other than qualified investors, the offer of those shares to it is not
treated under the Prospectus Directive as having been made to such person.
|
For
the purposes of this representation, the expression Prospectus Directive
means Directive 2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
United
Kingdom
This
prospectus and any other material in relation to the securities described
herein is only being distributed to and is only directed at persons (i) who are
outside the United Kingdom and (ii) to investment professional falling within
Article 19(5) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005, (the Order) or (iii) high net worth entities and other
persons to whom it may lawfully be communicated, falling within Article
49(2)(a) to (d) of the Order (all such persons together being referred to as
relevant persons). The securities are only available to, and any invitation,
offer or agreement to subscribe, purchase or otherwise acquire such new shares
will be engaged in only with, relevant persons. Any person who is not a
relevant person should not act or rely on this document or any of its contents.
S-16
The
underwriter represents, warrants and agrees as follows: (1) it has only
communicated or caused to be communicated and will only communicate or cause to
be communicated an invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the Financial Services and Markets Act
2000 (the FSMA) received by it in connection with the issue or sale of the
securities in circumstances in which Section 21(1) of FSMA does not apply; and (2)
it has complied and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the securities in, from or
otherwise involving the United Kingdom.
Switzerland
We
have not been and will not be registered with the Swiss Financial Market
Supervisory Authority FINMA as a foreign collective investment scheme pursuant
to Article 120 of the Collective Investment Schemes Act of 23 June 2006
(CISA). Accordingly, our shares may not be publicly offered in or from
Switzerland, and neither this prospectus, nor any other offering materials
relating to our shares may be made available through a public offering in or
from Switzerland. Our shares may only be offered and this prospectus may only
be distributed in or from Switzerland by way of private placement exclusively
to qualified investors (as this term is defined in the CISA and its
implementing ordinance).
Other
Relationships
Credit
Suisse Securities (USA) LLC and its affiliates have, from time to time,
performed, and may in the future perform, various financial advisory and
investment banking services for us and our affiliates, for which they received
or will receive customary fees and expenses. In addition, Credit Suisse
Securities (USA) LLC and its affiliates have been or are lenders under one or
more of our secured repurchase credit facilities, and we have entered into
interest rate swap agreements with Credit Suisse Securities (USA) LLC. Credit
Suisse Securities (USA) LLC and its affiliates are or have been counterparties
to securities and other trading activities with us and our affiliates.
S-17
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the shares of common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province
where trades of shares of common stock are made. Any resale of the shares of common stock in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares of common stock.
Representations of Purchasers
By purchasing shares of common stock in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is
received that:
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the purchaser is entitled under applicable provincial securities laws to purchase the shares of common stock without the benefit of a prospectus qualified under those
securities laws as it is an accredited investor as defined under National Instrument 45-106 Prospectus and Registration Exemptions,
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the purchaser is a permitted client as defined in National Instrument 31-103Registration Requirements and Exemptions,
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where required by law, the purchaser is purchasing as principal and not as agent,
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the purchaser has reviewed the text above under Resale Restrictions, and
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the purchaser acknowledges and consents to the provision of specified information concerning the purchase of the shares of common stock to the regulatory authority that by
law is entitled to collect the information, including certain personal information. For purchasers in Ontario, questions about such indirect collection of personal information should
be directed to Administrative Support Clerk, Suite 1903, Box 55, 20 Queen Street West, Toronto, Ontario M5H 3S8 or to (416) 593-3684.
Rights of ActionOntario Purchasers Only
Under Ontario securities legislation, certain purchasers who purchase a security offered by this document during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares
of common stock, for rescission against us in the event that this document contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the
earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later
than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in
any action exceed the price at which the shares were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we
will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those
persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of shares should consult their own legal and tax advisors with respect to the tax consequences of an investment in the shares in their particular circumstances and about the eligibility of the investment by the
purchaser under relevant Canadian legislation.
S-18
LEGAL MATTERS
Certain
legal matters relating to this offering will be passed upon for us by K&L
Gates LLP, Washington, D.C. In addition, the opinion of counsel described in
the section of the accompanying prospectus entitled Material Federal Income
Tax Considerations was rendered by K&L Gates LLP, Washington, D.C. and the
description of material federal income tax consequences contained in the
section of the accompanying prospectus entitled Material Federal Income Tax
Considerations is based on the opinion of K&L Gates LLP, Washington, D.C.
Certain legal matters relating to this offering will be passed upon for the
underwriter by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New
York.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The
SEC allows us to incorporate by reference the information in documents that
we file with them. This means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus supplement and the accompanying
prospectus, and information in documents that we file after the date of this
prospectus supplement and before the termination of the offering will
automatically update information in this prospectus supplement and the
accompanying prospectus.
We
incorporate by reference into this prospectus supplement:
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our Annual Report on Form 10-K for the year ended
December 31, 2009;
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the sections of our Definitive Proxy Statement on
Schedule 14A for our 2009 annual meeting of stockholders incorporated by
reference in our Annual Report on Form 10-K for the year ended December 31,
2008; and
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any future filings which we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
until we sell all of the securities offered by this prospectus supplement and
the accompanying prospectus.
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S-19
PROSPECTUS
Common
Stock and Preferred Stock
By
this prospectus, we may offer, from time to time, shares of our:
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common
stock;
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preferred
stock; or
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any
combination of the foregoing.
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We
will provide specific terms of each issuance of these securities in supplements
to this prospectus. You should read this prospectus and any supplement
carefully before you decide to invest.
This
prospectus may not be used to consummate sales of these securities unless it is
accompanied by a prospectus supplement.
The
New York Stock Exchange lists our common stock under the symbol CIM.
To
assist us in qualifying as a real estate investment trust (or REIT) for federal
income tax purposes, no person may own more than 9.8% of the outstanding shares
of any class of our common stock or our preferred stock, unless our Board of
Directors waives this limitation.
Investing in
these securities involves risks. You should carefully consider the information
referred to under the heading Risk Factors beginning on page 4 of this
prospectus.
We
may sell these securities to or through underwriters, dealers or agents, or we
may sell the securities directly to investors on our own behalf.
Neither the
Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is May 26, 2009
TABLE OF CONTENTS
i
ABOUT THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (or SEC) using a shelf registration
process. Under this process, we may offer and sell any combination of common
stock and preferred stock in one or more offerings. This prospectus provides
you with a general description of the securities we may offer. Each time we
offer to sell securities, we will provide a supplement to this prospectus that
will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. It is important for you to consider the information contained
in this prospectus and any prospectus supplement together with additional
information described under the heading Where You Can Find More Information.
You
should rely only on the information incorporated by reference or set forth in
this prospectus or the applicable prospectus supplement. We have not authorized
anyone else to provide you with additional or different information. You should
not assume that the information in this prospectus, the applicable prospectus
supplement or any other offering material is accurate as of any date other than
the dates on the front of those documents.
1
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Certain
statements contained in this prospectus, any prospectus supplement and any
other offering material, and the information incorporated by reference in this
prospectus, any prospectus supplement and/or any other offering material, and
certain statements contained in our future filings with the Securities and
Exchange Commission (the SEC or the Commission), in our press releases or
in our other public or shareholder communications may not be based on
historical facts and are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (or the Exchange Act).
Forward-looking statements, which are based on various assumptions (some of
which are beyond our control), may be identified by reference to a future
period or periods or by the use of forward-looking terminology, such as may,
will, believe, expect, anticipate, continue, or similar terms or
variations on those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking statements due to a
variety of factors, including, but not limited to:
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our business and investment strategy;
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our projected financial and operating results;
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our ability to maintain existing financing
arrangements, obtain future financing arrangements and the terms of such
arrangements;
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general volatility of the securities markets in which
we invest;
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the implementation, timing and impact of, and changes
to, various government programs, including the Treasurys plan to buy U.S.
government agency residential mortgage-backed securities and its Public-Private Investment Program, and the
Federal Reserve Boards Term Asset-Backed Securities Loan Facility;
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our expected investments;
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changes in the value of
our investments;
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interest rate mismatches
between our investments and our borrowings used to fund such purchases;
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changes in interest rates
and mortgage prepayment rates;
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effects of interest rate
caps on our adjustable-rate investments;
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rates of default or
decreased recovery rates on our investments;
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prepayments of the
mortgage and other loans underlying our mortgage-backed or other asset-backed
securities;
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the degree to which our
hedging strategies may or may not protect us from interest rate volatility;
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impact of and changes in
governmental regulations, tax law and rates, accounting guidance, and similar
matters;
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availability of investment
opportunities in real estate-related and other securities;
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availability of qualified
personnel;
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estimates relating to our
ability to make distributions to our stockholders in the future;
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our understanding of our
competition;
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market trends in our
industry, interest rates, the debt securities markets or the general economy;
and
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use of proceeds of our
offerings.
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For
a discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, please see the
information under the caption Risk Factors described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 and any subsequent report
incorporated by reference in this prospectus. We do not undertake, and
specifically disclaim any obligation, to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the date
of such statements.
3
ABOUT CHIMERA INVESTMENT CORPORATION
Our
Company
We
are a specialty finance company that invests in residential mortgage-backed
securities, or RMBS, residential mortgage loans, real estate-related securities
and various other asset classes. We elected to be taxed as a real estate
investment trust, or REIT, for federal income tax purposes commencing with our
taxable year ending on December 31, 2007. Therefore, we generally will not be
subject to federal income tax on our taxable income that is distributed to our
stockholders. We commenced operations in November 2007.
We
are externally managed by Fixed Income Discount Advisory Company, which we
refer to as our Manager or FIDAC. Our Manager is an investment advisor
registered with the Securities and Exchange Commission, or SEC. Additionally,
our Manager is a wholly-owned subsidiary of Annaly Capital Management, Inc., a
New York Stock Exchange-listed REIT, which has a long track record of managing
investments in U.S. government agency RMBS, or Agency RMBS.
Our
Manager is responsible for administering our business activities and day-to-day
operations. We have no employees other than our officers. Pursuant to the terms
of the management agreement, our Manager provides us with our management team,
including our officers, along with appropriate support personnel. Our Manager
is at all times subject to the supervision and oversight of our board of
directors and has only such functions and authority as we delegate to it. We do
not pay any of our officers any cash compensation. Rather, we pay our Manager a
management fee pursuant to the terms of the management agreement.
Our objective is to provide
attractive risk-adjusted returns to our investors over the long-term, primarily
through dividends and secondarily through capital appreciation. We intend to
achieve this objective by investing in a diversified investment portfolio of
RMBS; residential mortgage loans; including prime mortgage loans, which are
mortgage loans that conform to the underwriting guidelines of Fannie Mae and
Freddie Mac, which we refer to as Agency Guidelines; jumbo prime mortgage
loans, which are mortgage loans that conform to the Agency Guidelines except as
to loan size; and Alt-A mortgage loans, which are mortgage loans that may have
been originated using documentation standards that are less stringent than the
documentation standards applied by certain other first lien mortgage loan
purchase programs, such as the Agency Guidelines, but have one or more
compensating factors such as a borrower with a strong credit or mortgage
history or significant assets; real estate-related securities; and various
other asset classes, subject to maintaining our REIT status and exemption from
registration under the Investment Company Act of 1940. The RMBS, asset-backed
securities (ABS), commercial mortgage-backed securities (CMBS) and
collateralized debt obligations (CDOs) we purchase may include investment-grade
and non-investment grade classes, including the BB-rated, B-rated and non-rated
classes.
Our
Corporate Information
We are a Maryland corporation formed in June 2007 and
commenced operations in November 2007. Our principal executive offices are
located at 1211 Avenue of Americas, Suite
4
2902, New York, New York 10036. Our telephone number
is 1-866-315-9930. Our website is http://www.chimerareit.com. The contents of
our website are not a part of this prospectus. We have included our website
address only as an inactive textual reference and do not intend it to be an
active link to our website.
RISK FACTORS
Investing
in our securities involves risks. You should carefully consider the risks
described under Risk Factors in our most recent Annual Report on Form 10-K
and any subsequent Quarterly Reports on Form 10-Q (which descriptions are
incorporated by reference herein), as well as the other information contained
or incorporated by reference in this prospectus or in any prospectus supplement
hereto before making a decision to invest in our securities. See Where You Can
Find More Information below.
USE OF PROCEEDS
Unless
otherwise indicated in an accompanying prospectus supplement, we intend to use
the net proceeds from the sale of the securities offered by this prospectus and
the related accompanying prospectus supplement to finance the acquisition of
non-Agency RMBS, Agency RMBS, prime and Alt-A mortgage loans, CMBS, CDOs and
other consumer or non-consumer ABS, and for other general corporate purposes
such as repayment of outstanding indebtedness, working capital, and for
liquidity needs. Pending any such uses, we may invest the net proceeds from the
sale of any securities in interest-bearing short-term investments, including
money market accounts that are consistent with our intention to qualify as a
REIT, or may use them to reduce our indebtedness.
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The
following table sets forth our ratios of earnings to combined fixed charges and
preferred stock dividends for each of the periods indicated:
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For the
period November 21,
2007 (date operations
commenced) through December
31, 2007
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For the
year
ended December
31, 2008
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For the
three
months ended
March 31, 2009
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Ratio of earnings to combined fixed charges and
preferred stock dividends
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(5.99)x(1)
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(0.98)x(2)
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3.09x
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(1)
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The dollar amount of the
deficiency for this period was $2,486,000.
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(2)
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The dollar amount of the
deficiency for the year ended December 31, 2008 was $59,253,000.
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The
ratios of earnings to combined fixed charges and preferred stock dividends were
computed by dividing earnings as adjusted by fixed charges and preferred stock
dividends (where applicable). For this purpose, earnings consist of net income
from continuing operations and fixed charges. We currently have no shares of
preferred stock outstanding and, therefore,
5
there are no amounts for preferred dividends included
in the above calculation. Fixed charges consist of interest expense.
DESCRIPTION OF CAPITAL STOCK
The
following summary description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Maryland General Corporation Law, or MGCL, and our charter and our bylaws,
copies of which will be available before the closing of this offering from us
upon request. See Where You Can Find More Information.
The
MGCL and our charter and bylaws contain provisions that could make it more
difficult for a potential acquirer to acquire us by a tender offer, proxy
contest or otherwise. These provisions are expected to discourage certain
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to negotiate first with our board of
directors. We believe that the benefits of these provisions outweigh the
potential disadvantages of discouraging any such acquisition proposals because,
among other things, the negotiation of such proposals may improve their terms.
General
Our
charter provides that we may issue up to
550,000,000 shares of stock, consisting of up to 500,000,000 shares of
common stock having a par value of $0.01 per share and up to 50,000,000 shares
of preferred stock having a par value of $0.01 per share. As of May 22, 2009,
472,401,769 shares of common stock and no shares of preferred stock were issued
and outstanding. Our board of directors, with the approval of a majority of the
entire board and without any action on the part of our stockholders, may amend
our charter from time to time to increase or decrease the aggregate number of
shares of stock or the number of shares of stock of any class or series that
we have authority to issue. Under Maryland law, our stockholders generally
are not personally liable for our debts and obligations solely as a result
of their status as stockholders.
Common Stock
All
shares of our common stock have equal rights as to earnings, assets, dividends
and voting and, when they are issued, will be duly authorized, validly issued,
fully paid and non-assessable. Distributions may be paid to the holders of our
common stock if, as and when authorized by our board of directors and declared
by us out of funds legally available therefor. Shares of our common stock have
no preemptive, appraisal, preferential exchange, conversion or redemption
rights and are freely transferable, except where their transfer is restricted
by federal and state securities laws, by contract or by the restrictions in our
charter. In the event of our liquidation, dissolution or winding up, each share
of our common stock would be entitled to share ratably in all of our assets
that are legally available for distribution after payment of or adequate
provision for all of our known debts and other liabilities and subject to any
preferential rights of holders of our preferred stock, if any preferred stock
is outstanding at such time. Subject to our charter restrictions on the
transfer and ownership of our stock and except as may otherwise be specified in
the terms of any class or series of common stock, each share of our common
stock entitles the holder to one vote on all matters submitted to a vote of
stockholders,
6
including the election of
directors. Except as provided with respect to any other class or series of
stock, the holders of our common stock will possess exclusive voting power.
There is no cumulative voting in the election of directors, which means that
holders of a majority of the outstanding shares of common stock can elect all
of our directors, and holders of less than a majority of such shares will be
unable to elect any director.
Preferred Stock
The
following description sets forth general terms and provisions of the preferred
stock to which any prospectus supplement may relate. The statements below
describing the preferred stock are in all respects subject to and qualified in
their entirety by reference to our charter, as amended, by-laws, as amended,
and any articles supplementary to our charter, as amended, designating terms of
a series of preferred stock. The preferred stock, when issued, will be validly
issued, fully paid, and non-assessable. Because our board of directors has the
power to establish the preferences, powers and rights of each series of
preferred stock, our board of directors may afford the holders of any series of
preferred stock preferences, powers and rights, voting or otherwise, senior to
the rights of common stockholders.
The
rights, preferences, privileges and restrictions of each series of preferred
stock will be fixed by the articles supplementary relating to the series. A
prospectus supplement, relating to each series, will specify the terms of the
preferred stock, as follows:
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the title and stated value
of the preferred stock;
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the voting rights of the
preferred stock, if applicable;
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the preemptive rights of
the preferred stock, if applicable;
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the restrictions on
alienability of the preferred stock, if applicable;
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the number of shares
offered, the liquidation preference per share and the offering price of the
shares;
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liability to further calls
or assessment of the preferred stock, if applicable;
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the dividend rate(s),
period(s) and payment date(s) or method(s) of calculation applicable to the
preferred stock;
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the date from which
dividends on the preferred stock will accumulate, if applicable;
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the procedures for any
auction and remarketing for the preferred stock;
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the provision for a
sinking fund, if any, for the preferred stock;
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the provision for and any
restriction on redemption, if applicable, of the preferred stock;
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the provision for and any
restriction on repurchase, if applicable, of the preferred stock;
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any listing of the
preferred stock on any securities exchange;
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the terms and provisions,
if any, upon which the preferred stock will be convertible into common stock,
including the conversion price (or manner of calculation) and conversion
period;
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the terms under which the
rights of the preferred stock may be modified, if applicable;
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any other specific terms,
preferences, rights, limitations or restrictions of the preferred stock;
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a discussion of certain
material federal income tax considerations applicable to the preferred stock;
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the relative ranking and
preferences of the preferred stock as to dividend rights and rights upon the
liquidation, dissolution or winding-up of our affairs;
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any limitation on issuance
of any series of preferred stock ranking senior to or on a parity with the
series of preferred stock as to dividend rights and rights upon the
liquidation, dissolution or winding-up of our affairs; and
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any limitations on direct
or beneficial ownership and restrictions on transfer of the preferred stock,
in each case as may be appropriate to preserve our qualification as a REIT.
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Power to Reclassify Shares of Our Stock
Our
charter authorizes our board of directors to classify and reclassify any unissued
shares of stock into other classes or series of stock, including preferred
stock. Before issuance of shares of each class or series, the board of
directors is required by Maryland law and by our charter to set, subject to our
charter restrictions on the transfer and ownership of our stock, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption for each class or series. Thus, the board of directors
could authorize the issuance of shares of common stock or preferred stock with
terms and conditions which could have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for holders of our common stock or otherwise be in their best interests.
No shares of our preferred stock are presently outstanding and we have no
present plans to issue any preferred stock.
Power to Issue Additional Shares of Common Stock and Preferred
Stock
We
believe that the power of our board of directors to amend the charter without
stockholder approval to increase the total number of authorized shares of our
stock or any class or series of our stock, to issue additional authorized but
unissued shares of our common stock or preferred stock and to classify or
reclassify unissued shares of our common stock or preferred stock and
thereafter to cause us to issue such classified or reclassified shares of stock
will
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provide us with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which might arise. The additional classes or series, as
well as our common stock, will be available for issuance without further action
by our stockholders, unless stockholder action is required by applicable law or
the rules of any stock exchange or automated quotation system on which our
securities may be listed or traded. Although our board of directors has no
intention at the present time of doing so, it could authorize us to issue a
class or series that could, depending upon the terms of such class or series,
delay, defer or prevent a transaction or a change in control of us that might
involve a premium price for holders of our common stock or otherwise be in
their best interests.
Restrictions on Ownership and Transfer
To
qualify as a REIT under the Internal Revenue Code for each taxable year
beginning after December 31, 2007, our shares of capital stock must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year.
Also, beginning after December 31, 2007, no more than 50% of the value of our
outstanding shares of capital stock may be owned, directly or constructively,
by five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities) during the second half of any calendar year.
Our
charter, subject to certain exceptions, contains restrictions on the number of
shares of our capital stock that a person may own. Our charter provides that
(subject to certain exceptions described below) no person may own, or be deemed
to own by the attribution provisions of the Internal Revenue Code, more than
9.8% in value or in number of shares, whichever is more restrictive, of any
class or series of our capital stock.
Our
charter also prohibits any person from (i) 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 (ii) transferring shares of our capital stock
if such transfer would result in our capital stock being owned by fewer than
100 persons. Any person who acquires or attempts or intends to acquire
beneficial or constructive ownership of shares of our capital stock that will
or may violate any of the foregoing restrictions on transferability and
ownership, or who is the intended transferee of shares of our stock which are
transferred to the trust (as described below), will be required to give notice
immediately to us and provide us with such other information as we may request
to determine the effect of such transfer on our status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if our board of
directors determines that it is no longer in our best interests to attempt to
qualify, or to continue to qualify, as a REIT.
Our
board of directors, in its sole discretion, may exempt a person from the
foregoing restrictions. The person seeking an exemption must provide to our
board of directors such representations, covenants and undertakings as our
board of directors may deem appropriate to conclude that granting the exemption
will not cause us to lose our status as a REIT. Our board of directors may also
require a ruling from the Internal Revenue Service or an opinion of counsel to
determine or ensure our status as a REIT.
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Any
attempted transfer of our securities which, if effective, would result in a
violation of the foregoing restrictions will cause the number of securities
causing the violation (rounded to the nearest whole share) to be automatically
transferred to a trust for the exclusive benefit of one or more charitable
beneficiaries, and the proposed transferee will not acquire any rights in such
securities. The automatic transfer will be deemed to be effective as of the
close of business on the business day (as defined in our charter) before the
date of the transfer. If, for any reason, the transfer to the trust is
ineffective, our charter provides that the purported transfer in violation of
the restrictions will be void ab initio. Shares of our stock held in the
trust will be issued and outstanding shares. The proposed transferee will not
benefit economically from ownership of any securities held in the trust, will
have no rights to dividends and no rights to vote or other rights attributable
to the shares of stock held in the trust. The trustee of the trust will have
all voting rights and rights to dividends or other distributions with respect
to shares held in the trust. These rights will be exercised for the exclusive
benefit of the charitable beneficiary. Any dividend or other distribution paid
before our discovery that shares of stock have been transferred to the trust
will be paid by the recipient to the trustee upon demand. Any dividend or other
distribution authorized but unpaid will be paid when due to the trustee. Any
dividend or distribution paid to the trustee will be held in trust for the
charitable beneficiary. Subject to Maryland law, the trustee will have the
authority (i) to rescind as void any vote cast by the proposed transferee
before our discovery that the shares have been transferred to the trust and
(ii) to recast the vote in accordance with the desires of the trustee acting
for the benefit of the charitable beneficiary. However, if we have already
taken irreversible corporate action, then the trustee will not have the authority
to rescind and recast the vote.
Within
20 days of receiving notice from us that the securities have been transferred
to the trust, the trustee will sell the securities to a person designated by
the trustee, whose ownership of the securities will not violate the above
ownership limitations. Upon such sale, the interest of the charitable
beneficiary in the securities sold will terminate and the trustee will
distribute the net proceeds of the sale to the proposed transferee and to the
charitable beneficiary as follows. The proposed transferee will receive the
lesser of (i) the price paid by the proposed transferee for the securities or,
if the proposed transferee did not give value for the securities in connection
with the event causing the securities to be held in the trust (e.g., a gift, devise or other similar
transaction), the market price (as defined in our charter) of the securities on
the day of the event causing the securities to be held in the trust and (ii)
the price received by the trustee from the sale or other disposition of the
securities. The trustee may reduce the amount payable to the proposed
transferee by the amount of dividends and distributions paid to the proposed
transferee and owed by the proposed transferee to the trustee. Any net sale
proceeds in excess of the amount payable to the proposed transferee will be
paid immediately to the charitable beneficiary. If, before our discovery that
the securities have been transferred to the trust, the securities are sold by
the proposed transferee, then (i) the securities shall be deemed to have been
sold on behalf of the trust and (ii) to the extent that the proposed transferee
received an amount for the securities that exceeds the amount the proposed
transferee was entitled to receive, the excess shall be paid to the trustee
upon demand.
In
addition, the securities held in the trust will be deemed to have been offered
for sale to us, or our designee, at a price per share equal to the lesser of
(i) the price per share in the transaction that resulted in the transfer to the
trust (or, in the case of a devise or gift, the market price at the time of the
devise or gift) and (ii) the market price on the date we, or our designee,
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accept the offer. We may
reduce the amount payable to the proposed transferee, however, by the amount of
any dividends or distributions paid to the proposed transferee on the
securities and owed by the proposed transferee to the trustee. We will have the
right to accept the offer until the trustee has sold the securities. Upon a
sale to us, the interest of the charitable beneficiary in the securities sold
will terminate and the trustee will distribute the net proceeds of the sale to
the proposed transferee.
All
certificates representing the securities will bear a legend referring to the
restrictions described above or will state that we will furnish a full
statement about certain transfer restrictions to a stockholder upon request and
without charge.
Every
owner of more than 5% (or such lower percentage as required by the Internal
Revenue Code or the regulations promulgated thereunder) in value of all classes
or series of our stock, including shares of common stock, within 30 days after
the end of each taxable year, will be required to give written notice to us
stating the name and address of such owner, the number of shares of each class
and series of shares of our stock which the owner beneficially owns and a
description of the manner in which the shares are held. Each owner shall
provide to us such additional information as we may request to determine the
effect, if any, of the beneficial ownership on our status as a REIT and to
ensure compliance with the ownership limitations. In addition, each such owner
shall upon demand be required to provide to us such information as we may
request, in good faith, to determine our status as a REIT and to comply with
the requirements of any taxing authority or governmental authority or to
determine such compliance.
These
ownership limitations could delay, defer or prevent a transaction or a change
in control that might involve a premium price for the common stock or might
otherwise be in your best interests.
Classification
of Board of Directors, Vacancies and Removal of Directors
Our
charter and by-laws, as amended, provide for a staggered Board of Directors
consisting of up to fifteen directors. Our charter provides that our directors
shall be divided into three classes, with terms of three years each. The number
of directors in each class and the expiration of each class term is as follows:
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Class I
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2 Directors
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Expires 2011
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Class II
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2 Directors
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Expires 2009
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Class III
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1 Directors
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Expires 2010
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At
each annual meeting of our stockholders, successors of the class of directors
whose term expires at that meeting will be elected for a three-year term and
the directors in the other two classes will continue in office. A classified
Board of Directors may delay, defer or prevent a change in control or other
transaction that might involve a premium over the then prevailing market price
for our common stock or other attributes that our stockholders may consider
desirable. In addition, a classified Board of Directors could prevent
stockholders who do not agree with the policies of our Board of Directors from
replacing a majority of the Board of Directors for two years, except in the
event of removal for cause.
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Our
by-laws, as amended, provide that any vacancy on our Board of Directors may be
filled by a majority of the remaining directors. Any individual so elected
director will hold office for the unexpired term of the director he or she is
replacing. Our by-laws, as amended, provide that a director may be removed at
any time only for cause upon the affirmative vote of at least two-thirds of the
votes entitled to be cast in the election of directors, but only by a vote
taken at a stockholder meeting. These provisions preclude stockholders from
removing incumbent directors, except for cause and upon a substantial
affirmative vote, and filling the vacancies created by such removal with their
own nominees.
Indemnification
Our
amended and restated charter obligates us to indemnify our directors and
officers and to pay or reimburse expenses for them before the final disposition
of a proceeding to the maximum extent permitted by Maryland law. The
Corporations and Associations Article of the Annotated Code of Maryland (or the
Maryland General Corporation Law) permits a corporation to indemnify its
present and former directors and officers against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities, unless it is established that (1) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith, or (b) was the result of
active and deliberate dishonesty, or (2) the director or officer actually
received an improper personal benefit in money, property or services, or (3) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful.
Limitation
of Liability
The
Maryland General Corporation Law permits the charter of a Maryland corporation
to include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, except to the extent
that (1) it is proved that the person actually received an improper benefit or
profit in money, property or services, or (2) a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a
finding that the persons action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated
in the proceeding. Our amended and restated charter provides for elimination of
the liability of our directors and officers to us or our stockholders for money
damages to the maximum extent permitted by Maryland law from time to time.
Maryland
Business Combination Act
The
Maryland General Corporation Law establishes special requirements for business
combinations between a Maryland corporation and interested stockholders
unless exemptions are applicable. An interested stockholder is any person who
beneficially owns 10% or more of the voting power of our then outstanding
voting stock. Among other things, the law prohibits for a period of five years
a merger and other similar transactions between us and an interested
stockholder unless the Board of Directors approved the transaction prior to the
party becoming an interested stockholder. The five-year period runs from the
most recent date on which the interested stockholder became an interested
stockholder. The law also requires a supermajority
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stockholder vote for such transactions after the end
of the five-year period. This means that the transaction must be approved by at
least:
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80% of the votes entitled to be cast by holders of
outstanding voting shares; and
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two-thirds of the votes entitled to be cast by
holders of outstanding voting shares other than shares held by the interested
stockholder or an affiliate of the interested stockholder with whom the
business combination is to be effected.
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As
permitted by the Maryland General Corporation Law, we have elected not to be
governed by the Maryland business combination statute. We made this election by
opting out of this statute in our charter, as amended. If, however, we amend
our charter to opt back in to the statute, the business combination statute
could have the effect of discouraging offers to acquire us and of increasing
the difficulty of consummating any such offers, even if our acquisition would
be in our stockholders best interests.
Maryland Control Share Acquisition Act
Maryland
law provides that control shares of a Maryland corporation acquired in a
control share acquisition have no voting rights except to the extent approved
by a vote of the other stockholders. Two-thirds of the shares eligible to vote
must vote in favor of granting the control shares voting rights. Control
shares are shares of stock that, taken together with all other shares of stock
the acquirer previously acquired, would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of voting power:
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one-tenth or more but less
than one-third of all voting power;
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one-third or more but less
than a majority of all voting power; or
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a majority or more of all
voting power.
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Control
shares do not include shares of stock the acquiring person is entitled to vote
as a result of having previously obtained stockholder approval. A control
share acquisition means the acquisition of control shares, subject to certain
exceptions.
If
a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may
compel our Board of Directors to call a special meeting of stockholders to
consider the voting rights of the shares. If such a person makes no request for
a meeting, we have the option to present the question at any stockholders
meeting.
If
voting rights are not approved at a meeting of stockholders then, subject to
certain conditions and limitations, we may redeem any or all of the control
shares (except those for which voting rights have previously been approved) for
fair value. We will determine the fair value of the shares, without regard to
the absence of voting rights, as of the date of either:
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the last control share
acquisition; or
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the meeting where
stockholders considered and did not approve voting rights of the control
shares.
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If
voting rights for control shares are approved at a stockholders meeting and
the acquirer becomes entitled to vote a majority of the shares of stock
entitled to vote, all other stockholders may obtain rights as objecting
stockholders and, thereunder, exercise appraisal rights. This means that you
would be able to force us to redeem your stock for fair value. Under Maryland
law, the fair value may not be less than the highest price per share paid in
the control share acquisition. Furthermore, certain limitations otherwise
applicable to the exercise of dissenters rights would not apply in the context
of a control share acquisition. The control share acquisition statute would not
apply to shares acquired in a merger, consolidation or share exchange if we
were a party to the transaction. The control share acquisition statute could
have the effect of discouraging offers to acquire us and of increasing the
difficulty of consummating any such offers, even if our acquisition would be in
our stockholders best interests.
Transfer Agent and Registrar
Mellon
Investor Services LLC, 480 Washington Blvd., Jersey City, New Jersey 07310, is
the transfer agent and registrar for our stock. Its telephone number is (800)
522-6645.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
This
section summarizes the material federal income tax considerations that you, as
an Owner (as defined in the immediately succeeding paragraph) of shares of
capital stock, may consider relevant. K&L Gates LLP has acted as our tax
counsel, has reviewed this section and is of the opinion that the discussion
contained herein fairly summarizes the federal income tax consequences that are
likely to be material to an Owner of our shares of capital stock. Because this
section is a summary, it does not address all aspects of taxation that may be
relevant to particular Owners of our capital stock in light of their personal
investment or tax circumstances, or to certain types of Owners that are subject
to special treatment under the federal income tax laws, such as insurance
companies, tax-exempt organizations (except to the extent discussed in
Taxation of Owners,Taxation of Tax-Exempt Owners below), regulated
investment companies, partnerships and other pass-through entities (including
entities classified as partnerships for federal income tax purposes), financial
institutions or broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in Taxation of Owners,Taxation
of Foreign Owners below) and other persons subject to special tax rules.
You
should be aware that in this section, when we use the term:
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Code, we mean the
Internal Revenue Code of 1986, as amended;
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Disqualified organization,
we mean any organization described in section 860E(e)(5) of the Code,
including:
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i.
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the United States;
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ii.
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any state or political
subdivision of the United States;
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iii.
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any foreign government;
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iv.
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any international
organization;
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v.
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any agency or
instrumentality of any of the foregoing;
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vi.
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any charitable remainder
trust or other tax-exempt organization, other than a farmers cooperative
described in section 521 of the Code, that is exempt both from income
taxation and from taxation under the unrelated business taxable income
provisions of the Code; and
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vii.
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any rural electrical or
telephone cooperative;
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Domestic Owner, we mean
an Owner that is a U.S. Person;
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Foreign Owner, we mean
an Owner that is not a U.S. Person;
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IRS, we mean the
Internal Revenue Service;
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Owner, we mean any
person having a beneficial ownership interest in shares of our capital stock;
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TMP, we mean a taxable
mortgage pool as that term is defined in section 7701(i)(2) of the Code;
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TRS, we mean a taxable
REIT subsidiary described under Requirements for QualificationTaxable REIT
Subsidiaries below;
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U.S. Person, we mean (i)
a citizen or resident of the United States; (ii) a corporation (or entity
treated as a corporation for federal income tax purposes) created or
organized in the United States or under the laws of the United States or of
any state thereof, including, for this purpose, the District of Columbia;
(iii) a partnership (or entity treated as a partnership for tax purposes)
organized in the United States or under the laws of the United States or of
any state thereof, including, for this purpose, the District of Columbia (unless
provided otherwise by future Treasury regulations); (iv) an estate whose
income is includible in gross income for federal income tax purposes
regardless of its source; or (v) a trust, if a court within the United States
is able to exercise primary supervision over the administration of the trust
and one or more U.S. Persons have authority to control all substantial
decisions of the trust. Notwithstanding the preceding clause, to the extent
provided in Treasury regulations, certain trusts that were in existence on
August 20, 1996, that were treated as U.S. Persons prior to such date, and
that elect to continue to be treated as U.S. Persons, also are U.S. Persons.
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The
statements in this section and the opinion of K&L Gates LLP are based on
the current federal income tax laws. We cannot assure you that new laws,
interpretations of law or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
No assurance can be given that the IRS would not assert, or that a court would
not sustain, a position contrary to any of the tax consequences described
below. We have not sought and will not seek an advance ruling from the IRS
regarding any matter in this prospectus.
This
summary provides general information only and is not tax advice. We urge you to
consult your tax advisor regarding the specific tax consequences to you of the
purchase,
15
ownership and
sale of our capital stock and of our election to be taxed as a REIT.
Specifically, you should consult your tax advisor regarding the federal, state,
local, foreign, and other tax consequences of such purchase, ownership, sale
and election, and regarding potential changes in applicable tax laws.
Taxation of Our Company
We
have elected to be taxed as a REIT under Sections 856 through 860 of the Code
commencing with our short taxable year ending on December 31, 2007. We believe
that we were organized and have operated and will continue to operate in such a
manner as to qualify for taxation as a REIT under the federal income tax laws,
but no assurances can be given that we will operate in a manner so as to
qualify or remain qualified as a REIT. This section discusses the laws
governing the federal income tax treatment of a REIT and the owners of REIT
stock. These laws are highly technical and complex.
In
the opinion of K&L Gates LLP, our counsel, we have qualified to be taxed as
a REIT beginning with our taxable year ended on December 31, 2007, and our
organization and current and proposed method of operation will enable us to
continue to meet the requirements for qualification and taxation as a REIT.
Investors should be aware that K&L Gates LLPs opinion is based upon
customary assumptions, is conditioned upon certain representations made by us
as to factual matters, including representations regarding the nature of our
assets and the conduct of our business, and is not binding upon the IRS or any
court.
In
addition, K&L Gates LLPs opinion is based on existing federal income tax
law governing qualification as a REIT, which is subject to change either
prospectively or retroactively. Moreover, our qualification and taxation as a
REIT depend upon our ability to meet on a continuing basis, through actual
annual operating results, certain qualification tests set forth in the federal
income tax laws. Those qualification tests involve the percentage of income
that we earn from specified sources, the percentage of our assets that falls
within specified categories, the diversity of our stock ownership, and the
percentage of our earnings that we distribute. K&L Gates LLP will not
review our compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that our actual results of operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of our failure to qualify as a REIT, see Failure to Qualify.
If
we qualify as a REIT, we generally will not be subject to federal income tax on
our taxable income that we currently distribute to our stockholders, but
taxable income generated by our domestic TRSs, if any, will be subject to
regular federal (and applicable state and local) corporate income tax. However,
we will be subject to federal tax in the following circumstances:
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We will pay
federal income tax on our taxable income, including net capital gain, that we
do not distribute to stockholders during, or within a specified time period
after, the calendar year in which the income is earned.
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We may be
subject to the alternative minimum tax.
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We will pay
federal income tax at the highest corporate rate on:
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net income
from the sale or other disposition of property acquired through foreclosure,
which we refer to as foreclosure property, that we hold primarily for sale to
customers in the ordinary course of business, and
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other
non-qualifying income from foreclosure property.
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We will pay
a 100% tax on net income earned from sales or other dispositions of property,
other than foreclosure property, that we hold primarily for sale to customers
in the ordinary course of business.
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If we fail to
satisfy the 75% gross income test or the 95% gross income test, as described
below under Gross Income Tests, but nonetheless continue to qualify as a
REIT because we meet other requirements, we will be subject to a 100% tax on:
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the greater
of the amount by which we fail the 75% gross income test or the 95% gross
income test, multiplied, in either case, by
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a fraction
intended to reflect our profitability.
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If we fail
to satisfy the asset tests by more than a de minimis amount, as described
below under Asset Tests, as long as the failure was due to reasonable
cause and not to willful neglect, we dispose of the assets or otherwise
comply with such asset tests within six months after the last day of the
quarter in which we identify such failure and we file a schedule with the IRS
describing the assets that caused such failure, we will pay a tax equal to
the greater of $50,000 or 35% of the net income from the non-qualifying
assets during the period in which we failed to satisfy such asset tests.
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If we fail
to satisfy one or more requirements for REIT qualification, other than the
gross income tests and the asset tests, and such failure was due to
reasonable cause and not due to willful neglect, we will be required to pay a
penalty of $50,000 for each such failure.
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We may be
required to pay monetary penalties to the IRS in certain circumstances,
including if we fail to meet recordkeeping requirements intended to monitor
our compliance with rules relating to the composition of a REITs
stockholders, as described below in Requirements for Qualification.
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If we fail
to distribute during a calendar year at least the sum of: (i) 85% of our REIT
ordinary income for the year, (ii) 95% of our REIT capital gain net income
for the year and (iii) any undistributed taxable income from earlier periods,
we will pay a 4% nondeductible excise tax on the excess of the required
distribution over the sum of the amount we actually distributed and any
retained amounts on which income tax has been paid at the corporate level.
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We may elect
to retain and pay federal income tax on our net long-term capital gain. In
that case, a Domestic Owner would be taxed on its proportionate share of our
undistributed long-term capital gain (to the extent that we make a timely
designation of such gain to the stockholder) and would receive a credit or
refund for its proportionate share of the tax we paid.
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We will be
subject to a 100% excise tax on transactions between us and any of our TRSs
that are not conducted on an arms-length basis.
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If (a) we
recognize excess inclusion income for a taxable year as a result of our
ownership of a 100% equity interest in a TMP or our ownership of a REMIC
residual interest and (b) one or more Disqualified Organizations is the
record owner of shares of our capital stock during that year, then we will be
subject to tax at the highest corporate federal income tax rate on the
portion of the excess inclusion income that is allocable to the Disqualified
Organizations. We do not anticipate owning REMIC residual interests; we may,
however, own 100% of the equity interests in one or more CDO offerings or one
or more trusts formed in connection with our securitization transactions, but
intend to structure each CDO offering and each securitization transaction so
that the issuing entity would not be classified as a TMP. See Taxable
Mortgage Pools.
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If we
acquire any asset from a C corporation, or a corporation that generally is
subject to full corporate-level tax, in a merger or other transaction in
which we acquire a basis in the asset that is determined by reference either
to the C corporations basis in the asset or to another asset, we will pay
tax at the highest corporate federal income tax rate if we recognize gain on
the sale or disposition of the asset during the 10-year period after we
acquire the asset. The amount of gain on which we will pay tax is the lesser
of:
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the amount
of gain that we recognize at the time of the sale or disposition, and
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the amount
of gain that we would have recognized if we had sold the asset at the time we
acquired it, assuming that the C corporation will not elect in lieu of this
treatment to an immediate tax when the asset is acquired.
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In
addition, notwithstanding our qualification as a REIT, we may also have to pay
certain state and local income taxes because not all states and localities
treat REITs in the same manner that they are treated for federal income tax
purposes. Moreover, as further described below, any domestic TRS in which we
own an interest will be subject to federal, state and local corporate income
tax on its taxable income. We could also be subject to tax in situations and on
transactions not presently contemplated.
Requirements
for Qualification
A
REIT is a corporation, trust, or association that meets each of the following
requirements:
1.
It is managed by one or more trustees or directors.
2.
Its beneficial ownership is evidenced by transferable shares or by transferable
certificates of beneficial interest.
3.
It would be taxable as a domestic corporation, but for the REIT provisions of
the federal income tax laws.
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4.
It is neither a financial institution nor an insurance company subject to
special provisions of the federal income tax laws.
5.
At least 100 persons are beneficial owners of its shares or ownership
certificates.
6.
Not more than 50% in value of its outstanding shares or ownership certificates
is owned, directly or indirectly, by five or fewer individuals, which the
federal income tax laws define to include certain entities, during the last
half of any taxable year. For purposes of this requirement, indirect ownership
will be determined by applying attribution rules set out in section 544 of the
Code, as modified by section 856(h) of the Code.
7.
It elects to be taxed as a REIT, or has made such election for a previous
taxable year, and satisfies all relevant filing and other administrative
requirements that must be met to elect and maintain REIT qualification.
8.
It meets certain other qualification tests, described below, regarding the
nature of its income and assets.
We
must meet requirements 1 through 4 during our entire taxable year and must meet
requirement 5 during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months.
Requirements 5 and 6 applied to us beginning with our 2008 taxable year. If we
comply with all the requirements for ascertaining the ownership of our
outstanding stock in a taxable year and have no reason to know that we violated
requirement 6, we will be deemed to have satisfied requirement 6 for that
taxable year. For purposes of determining share ownership under requirement 6,
an individual generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes. An individual generally
does not include a trust that is a qualified employee pension or profit sharing
trust under the federal income tax laws, however, and beneficiaries of such a
trust will be treated as owning our stock in proportion to their actuarial
interests in the trust for purposes of requirement 6.
We
believe that our shares are held with sufficient diversity of ownership to
satisfy requirements 5 and 6. In addition, our charter restricts the ownership
and transfer of our stock so that we should continue to satisfy these
requirements. The provisions of our charter restricting the ownership and
transfer of our capital stock are described in Description of Capital StockRestrictions
on Ownership and Transfer.
To
monitor compliance with the share ownership requirements, we generally are
required to maintain records regarding the actual ownership of our shares. To
do so, we must demand written statements each year from the record holders of
significant percentages of our stock pursuant to which the record holders must
disclose the actual owners of the shares (i.e., the persons required to include
our dividends in their gross income). We must maintain a list of those persons
failing or refusing to comply with this demand as part of our records. We could
be subject to monetary penalties if we fail to comply with these record keeping
requirements. If you fail or refuse to comply with the demands, you will be
required by Treasury Regulations to submit a statement with your tax return
disclosing your actual ownership of our shares and other
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information.
In addition, we must satisfy all relevant filing and other administrative
requirements that must be met to elect and maintain REIT qualification and use
a calendar year for federal income tax purposes. We intend to continue to
comply with these requirements.
Qualified
REIT Subsidiaries
A
corporation that is a qualified REIT subsidiary is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items
of income, deduction and credit of a qualified REIT subsidiary are treated as
assets, liabilities, and items of income, deduction and credit of the REIT. A
qualified REIT subsidiary is a corporation, other than a TRS, all of the
capital stock of which is owned, directly or indirectly, by the REIT. Thus, in
applying the requirements described herein, any qualified REIT subsidiary that
we own will be ignored, and all assets, liabilities, and items of income,
deduction and credit of such subsidiary will be treated as our assets,
liabilities, and items of income, deduction and credit. If we own 100% of the
equity interests in a CDO issuer or other securitization vehicle that is
treated as a corporation for tax purposes, that CDO issuer or other
securitization vehicle would be a qualified REIT subsidiary, unless we and the
CDO issuer or other securitization vehicle jointly elect to treat the CDO
issuer or other securitization vehicle as a TRS. It is anticipated that CDO
financings we enter into will be treated as qualified REIT subsidiaries.
Other
Disregarded Entities and Partnerships
An
unincorporated domestic entity, such as a partnership, limited liability
company, or trust that has a single owner generally is not treated as an entity
separate from its parent for federal income tax purposes. An unincorporated
domestic entity with two or more owners generally is treated as a partnership
for federal income tax purposes. In the case of a REIT that is a partner in a
partnership that has other partners, the REIT is treated as owning its
proportionate share of the assets of the partnership and as earning its
allocable share of the gross income of the partnership for purposes of the
applicable REIT qualification tests. For purposes of the 10% value test (see
Asset Tests), our proportionate share is based on our proportionate interest
in the equity interests and certain debt securities issued by the partnership.
For all of the other asset and income tests, our proportionate share is based
on our proportionate interest in the capital interests in the partnership. Our
proportionate share of the assets, liabilities, and items of income of any
partnership, joint venture or limited liability company that is treated as a
partnership for federal income tax purposes in which we acquire an interest,
directly or indirectly, will be treated as our assets and gross income for
purposes of applying the various REIT qualification requirements.
If
a disregarded subsidiary of ours ceases to be wholly-ownedfor example, if any
equity interest in the subsidiary is acquired by a person other than us or
another disregarded subsidiary of oursthe subsidiarys separate existence
would no longer be disregarded for federal income tax purposes. Instead, the
subsidiary would have multiple owners and would be treated as either a
partnership or a taxable corporation. Such an event could, depending on the
circumstances, adversely affect our ability to satisfy the various asset and
gross income requirements applicable to REITs, including the requirement that
REITs generally may not own, directly or indirectly, more than 10% of the
securities of another corporation. See Asset Tests and Gross Income
Tests.
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Taxable
REIT Subsidiaries
A
REIT is permitted to own up to 100% of the stock of one or more TRSs. A TRS is
a fully taxable corporation that may earn income that would not be qualifying
income if earned directly by the parent REIT. The subsidiary and the REIT must
jointly elect to treat the subsidiary as a TRS. A corporation with respect to
which a TRS directly or indirectly owns more than 35% of the voting power or
value of the stock will automatically be treated as a TRS. We generally may not
own more than 10%, as measured by voting power or value, of the securities of a
corporation that is not a qualified REIT subsidiary unless we and such
corporation elect to treat such corporation as a TRS. Overall, no more than 25%
of the value of a REITs assets may consist of stock or securities of one or
more TRSs.
The
separate existence of a TRS or other taxable corporation, unlike a qualified
REIT subsidiary or other disregarded subsidiary as discussed above, is not
ignored for U.S. federal income tax purposes. Accordingly, a domestic TRS would
generally be subject to federal (and applicable state and local income tax)
corporate income tax on its earnings, which may reduce the cash flow generated
by us and our subsidiaries in the aggregate and our ability to make
distributions to our stockholders.
A
REIT is not treated as holding the assets of a TRS or other taxable subsidiary
corporation or as receiving any income that the subsidiary earns. Rather, the
stock issued by the subsidiary is an asset in the hands of the REIT, and the
REIT generally recognizes as income the dividends, if any, that it receives
from the subsidiary. This treatment can affect the gross income and asset test
calculations that apply to the REIT, as described below. Because a parent REIT
does not include the assets and income of such subsidiary corporations in
determining the parents compliance with the REIT requirements, such entities
may be used by the parent REIT to undertake indirectly activities that the REIT
rules might otherwise preclude it from doing directly or through pass-through
subsidiaries or render commercially unfeasible (for example, activities that
give rise to certain categories of income such as non-qualifying hedging income
or inventory sales).
Certain
restrictions imposed on TRSs are intended to ensure that such entities will be
subject to appropriate levels of U.S. federal income taxation. If a TRS that
has for any taxable year both (i) a debt-to-equity ratio in excess of 1.5 to 1,
and (ii) accrued interest expense in excess of accrued interest income, then
the TRS may be denied an interest expense deduction for a portion of the
interest expense accrued on indebtedness owed to the parent REIT (although the
TRS can carry forward the amount disallowed to subsequent taxable years). In
addition, if amounts are paid to a REIT or deducted by a TRS due to
transactions between the REIT and a TRS that exceed the amount that would be
paid to or deducted by a party in an arms-length transaction, the REIT
generally will be subject to an excise tax equal to 100% of such excess. We
intend to scrutinize all of our transactions with any of our subsidiaries that
are treated as a TRS in an effort to ensure that we do not become subject to
this excise tax; however, we cannot assure you that we will be successful in
avoiding this excise tax.
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Gross Income Tests
We
must satisfy two gross income tests annually to maintain qualification as a
REIT. First, at least 75% of our gross income for each taxable year must
consist of defined types of income that we derive from investments relating to
real property or mortgages on real property, or from qualified temporary
investments. Qualifying income for purposes of the 75% gross income test
generally includes:
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rents from
real property;
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interest on
debt secured by a mortgage on real property or on interests in real property;
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dividends or
other distributions on, and gain from the sale of, shares in other REITs;
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gain from
the sale of real estate assets;
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any amount
includible in gross income with respect to a regular or residual interest in
a REMIC, unless less than 95% of the REMICs assets are real estate assets,
in which case only a proportionate amount of such income will qualify; and
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income
derived from certain temporary investments.
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Second,
in general, at least 95% of our gross income for each taxable year must consist
of income that is qualifying income for purposes of the 75% gross income test,
other types of interest and dividends, gain from the sale or disposition of
stock or securities (provided that such stock or securities are not inventory
property, i.e., property held
primarily for sale to customers in the ordinary course of business) or any
combination of these.
Gross
income from the sale of inventory property is excluded from both the numerator
and the denominator in both income tests. Income and gain from hedging
transactions that we enter into to hedge indebtedness incurred or to be
incurred to acquire or carry real estate assets will generally be excluded from
both the numerator and the denominator for purposes of the 95% gross income
test and the 75% gross income test. We intend to monitor the amount of our
non-qualifying income and manage our investment portfolio to comply at all
times with the gross income tests but we cannot assure you that we will be
successful in this effort.
Interest
The
term interest, as defined for purposes of both gross income tests, generally
excludes any amount that is based in whole or in part on the income or profits
of any person. However, interest generally includes the following: (i) an
amount that is based on a fixed percentage or percentages of gross receipts or
sales and (ii) an amount that is based on the income or profits of a borrower,
where the borrower derives substantially all of its income from the real
property securing the debt by leasing substantially all of its interest in the
property, but only to the extent that the amounts received by the borrower
would be qualifying rents from real property if received directly by a REIT.
If
a loan contains a provision that entitles a REIT to a percentage of the
borrowers gain upon the sale of the real property securing the loan or a
percentage of the appreciation in the
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propertys
value as of a specific date, income attributable to that loan provision will be
treated as gain from the sale of the property securing the loan, which
generally is qualifying income for purposes of both gross income tests.
Interest,
including original issue discount or market discount, that we accrue on our
real estate-related investments generally will be qualifying income for
purposes of both gross income tests. However, many of our investments will not
be secured by mortgages on real property or interests in real property. Our
interest income from those investments will be qualifying income for purposes
of the 95% gross income test but not the 75% gross income test. In addition, as
discussed below, if the fair market value of the real estate securing any of
our investments is less than the principal amount of the underlying loan, a
portion of the income from that investment will be qualifying income for
purposes of the 95% gross income test but not the 75% gross income test.
Where
a mortgage covers both real property and other property, an apportionment of
interest income must be made for purposes of the 75% gross income test. If a
mortgage covers both real property and other property and the fair market value
of the real property securing the mortgage loan at the time we commit to
originate or acquire the mortgage loan equals or exceeds the highest principal
amount of the loan during the year, then all of the interest we accrue on the
mortgage loan will qualify for purposes of the 75% gross income test. If,
however, the value of the real property were less than the highest principal
amount, then only a portion of the interest income we accrue on the mortgage
loan would qualify for purposes of the 75% gross income test; such portion
based on the percentage equivalent of a fraction, the numerator of which is the
fair market value of the real property and the denominator of which is the
principal amount of the mortgage loan.
Fee
Income
We
may receive various fees in connection with our operations. The fees will be
qualifying income for purposes of both the 75% gross income and 95% gross
income tests if they are received in consideration for entering into an
agreement to make a loan secured by a mortgage on real property or an interest
in real property and the fees are not determined by income or profits of any
person. Other fees are not qualifying income for purposes of either gross
income test. Any fees earned by our TRS will not be included for purposes of
the gross income tests.
Dividends
Our
share of any dividends received from any corporation (including any TRS that we
own, but excluding any REIT or any qualified REIT subsidiary) in which we own
an equity interest will qualify for purposes of the 95% gross income test but
not for purposes of the 75% gross income test. Our share of any dividends
received from any other REIT in which we own an equity interest will be
qualifying income for purposes of both gross income tests.
Rents
from Real Property
We
currently do not intend to acquire real property with the proceeds of offerings
of these securities.
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Hedging
Transactions
We
may, from time to time, enter into hedging transactions with respect to the
interest rate risk associated with our borrowings. To the extent that we enter
into a contract to hedge interest rate risk on indebtedness incurred to acquire
or carry real estate assets, any income and gain from such hedging transaction
will be excluded from gross income for purposes of the 95% gross income test
and the 75% gross income test. To the extent that we hedge for certain other
purposes, the resultant income or gain will be treated as income that does not
qualify under the 95% gross income test or the 75% gross income test. We intend
to structure any hedging transaction in a manner that does not jeopardize our
status as a REIT but we cannot assure you that we will be successful in this
regard. We may conduct some or all of our hedging activities through a TRS, the
income from which may be subject to federal income tax, rather than
participating in the arrangements directly or through a partnership, qualified
REIT subsidiary or other disregarded subsidiary. No assurance can be given,
however, that our hedging activities will not give rise to income that does not
qualify for purposes of either or both of the REIT gross income tests, and will
not adversely affect our ability to satisfy the REIT qualification
requirements.
Failure
to Satisfy Gross Income Tests
We
intend to monitor the amount of our non-qualifying income and manage our assets
to comply with the gross income tests for each taxable year for which we seek
to maintain our status as a REIT. We cannot assure you, however, that we will
be able to satisfy the gross income tests. If we fail to satisfy one or both of
the gross income tests for any taxable year, we may nevertheless qualify as a
REIT for such year if we qualify for relief under certain provisions of the
Code. These relief provisions will be generally available if (i) our failure to
meet such tests was due to reasonable cause and not due to willful neglect, and
(ii) we file with the IRS a schedule describing the sources of our gross income
in accordance with Treasury Regulations. We cannot predict, however, whether in
all circumstances, we would qualify for the benefit of these relief provisions.
In addition, as discussed above under Taxation of Our Company, even if the
relief provisions apply, a tax would be imposed upon the amount by which we
fail to satisfy the particular gross income test.
Asset Tests
To
qualify as a REIT, we also must satisfy the following asset tests at the end of
each quarter of each taxable year. First, at least 75% of the value of our
total assets must consist of some combination of real estate assets, cash,
cash items, government securities, and, under some circumstances, stock or debt
instruments purchased with new capital. For this purpose, the term real estate
assets includes interests in real property (including leaseholds and options
to acquire real property and leaseholds), stock of other corporations that
qualify as REITs and interests in mortgage loans secured by real property
(including certain types of mortgage-backed securities). Assets that do not
qualify for purposes of the 75% test are subject to the additional asset tests
described below.
Second,
the value of our interest in any one issuers securities (other than debt and
equity securities issued by any of our TRSs, qualified REIT subsidiaries, any
other entity that is
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disregarded as
an entity separate from us, and any equity interest we may hold in a
partnership) may not exceed 5% of the value of our total assets. Third, we may
not own more than 10% of the voting power or 10% of the value of any one
issuers outstanding securities (other than debt and equity securities issued
by any of our TRSs, qualified REIT subsidiaries, any other entity that is
disregarded as an entity separate from us, and any equity interest we may hold
in a partnership). Fourth, no more than 25% of the value of our total assets
may consist of the securities of one or more TRSs. For purposes of the 10%
value test, the term securities does not include certain straight debt
securities.
Notwithstanding
the general rule that, for purposes of the gross income and asset tests, a REIT
is treated as owning its proportionate share of the underlying assets of a
partnership in which it holds a partnership interest, if a REIT holds
indebtedness issued by a partnership, the indebtedness will be subject to, and
may cause a violation of the asset tests, unless it is a qualifying mortgage
asset or otherwise satisfies the rules for straight debt. Similarly, although
stock of another REIT qualifies as a real estate asset for purposes of the REIT
asset tests, non-mortgage debt issued by another REIT may not so qualify.
Any
regular or residual interest that we own in a REMIC will generally qualify as
real estate assets. However, if less than 95% of the assets of a REMIC consist
of assets that qualify as real estate assets, then we will be treated as
holding directly our proportionate share of the assets of such REMIC for
purposes of the asset tests.
We
believe that most of the assets that we hold and those we expect to hold will
be qualifying assets for purposes of the 75% asset test. However, our
investment in other asset-backed securities, bank loans and other instruments
that are not secured by mortgages on real property will not be qualifying
assets for purposes of the 75% asset test.
We
have monitored and will continue to monitor the status of our assets for
purposes of the various asset tests and will seek to manage our portfolio to
comply at all times with such tests. There can be no assurance, however, that
we will be successful in this effort. In this regard, to determine our
compliance with these requirements, we will need to estimate the value of our
assets to ensure compliance with the asset tests. We will not obtain
independent appraisals to support our conclusions concerning the values of our
assets, and we will generally rely on representations and warranties of sellers
from whom we acquire mortgage loans concerning the loan-to-value ratios for
such mortgage loans. Moreover, some of the assets that we may own may not be
susceptible to precise valuation. Although we will seek to be prudent in making
these estimates, there can be no assurance that the IRS will not disagree with
these determinations and assert that a different value is applicable, in which
case we might not satisfy the 75% asset test and the other asset tests and
would fail to qualify as a REIT.
Failure to Satisfy Asset Tests
If
we fail to satisfy the asset tests as the end of a quarter, we will not lose
our REIT qualification if:
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we satisfied
the asset tests at the end of the preceding calendar quarter; and
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the
discrepancy between the value of our assets and the asset test requirements
arose from changes in the market values of our assets and was not wholly or
partly caused by the acquisition of one or more non-qualifying assets.
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If
we did not satisfy the condition described in the second bullet above, we still
could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose.
If
we violate the 5% value test, 10% voting test or 10% value test described above
at the end of any calendar quarter, we will not lose our REIT qualification if
(i) the failure is de minimis (up
to the lesser of 1% of our total assets or $10 million) and (ii) we dispose of
these assets or otherwise comply with the asset tests within six months after
the last day of the quarter. In the event of a more than de minimis failure of any of the
asset tests, as long as the failure was due to reasonable cause and not to
willful neglect, we will not lose our REIT qualification if we (i) file with
the IRS a schedule describing the assets that caused the failure, (ii) dispose
of these assets or otherwise comply with the asset tests within six months
after the last day of the quarter and (iii) pay a tax equal to the greater of
$50,000 per failure or an amount equal to the product of the highest corporate
income tax rate (currently 35%) and the net income from the non-qualifying
assets during the period in which we failed to satisfy the asset tests.
Annual Distribution Requirements
To
qualify as a REIT, we are required to distribute dividends (other than capital
gain dividends) to our stockholders in an amount at least equal to:
(A)
the sum of
(i)
90% of our REIT taxable income (computed without regard to the dividends paid
deduction and our net capital gains), and
(ii)
90% of the net income (after tax), if any, from foreclosure property (as
described below), minus
(B)
the sum of certain items of non-cash income.
In
addition, if we were to recognize built-in-gain (as defined below) on
disposition of any assets acquired from a C corporation in a transaction in
which our basis in the assets was determined by reference to the C
corporations basis (for instance, if the assets were acquired in a tax-free
reorganization), we would be required to distribute at least 90% of the
built-in-gain recognized net of the tax we would pay on such gain.
Built-in-gain is the excess of (a) the fair market value of an asset
(measured at the time of acquisition) over (b) the basis of the asset (measured
at the time of acquisition).
Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if either (i) we declare the distribution before we file
a timely federal income tax return for the year and pay the distribution with
or before the first regular dividend payment after such declaration or (ii) we
declare the distribution in October, November or December of the taxable year,
payable to stockholders of record on a specified day in any such
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month, and we
actually pay the dividends before the end of January of the following year. The
distributions under clause (i) are taxable to the Owners of our capital stock
in the year in which paid, and the distributions in clause (ii) are treated as
paid on December 31 of the prior taxable year. In both instances, these
distributions relate to our prior taxable year for purposes of the 90%
distribution requirement.
We
will pay federal income tax at corporate tax rates on our taxable income, including
net capital gain, that we do not distribute to stockholders. Furthermore, if we
fail to distribute during each calendar year, or by the end of January
following the calendar year in the case of distributions with declaration and
record dates falling in the last three months of the calendar year, at least
the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our
REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, we will be subject to a 4% nondeductible excise tax
on the excess of such required distribution over the amounts actually
distributed. We generally intend to make timely distributions sufficient to
satisfy the annual distribution requirements and to avoid corporate federal income
tax and the 4% nondeductible excise tax.
We
may elect to retain, rather than distribute, our net capital gain and pay tax
on such gains. In this case, we could elect to have our stockholders include
their proportionate share of such undistributed capital gains in income and to
receive a corresponding credit or refund, as the case may be, for their share
of the tax paid by us. Stockholders would then increase the adjusted basis of
their stock by the difference between the designated amounts of capital gains
from us that they include in their taxable income, and the tax paid on their
behalf by us with respect to that income.
To
the extent that a REIT has available net operating losses carried forward from
prior tax years, such losses may reduce the amount of distributions that it
must make to comply with the REIT distribution requirements. Such losses,
however, will generally not affect the character, in the hands of stockholders,
of any distributions that are actually made by the REIT, which are generally
taxable to stockholders to the extent that the REIT has current or accumulated
earnings and profits. See Taxation of Stockholders, Taxation of Taxable
Domestic Stockholders.
We
may find it difficult or impossible to meet distribution requirements in
certain circumstances. Due to the nature of the assets in which we will invest,
we may be required to recognize taxable income from those assets in advance of
our receipt of cash flow on or proceeds from disposition of such assets. For
instance, we may be required to accrue interest and discount income on mortgage
loans, mortgage-backed securities, and other types of debt securities or
interests in debt securities before we receive any payments of interest or
principal on such assets. Moreover, in certain instances we may be required to
accrue taxable income that we may not actually recognize as economic income.
For example, if we own a residual equity position in a mortgage loan
securitization, we may recognize taxable income that we will never actually
receive due to losses sustained on the underlying mortgage loans. Although
those losses would be deductible for tax purposes, they would likely occur in a
year subsequent to the year in which we recognized the taxable income. Thus,
for any taxable year, we may be required to fund distributions in excess of
cash flow received from our investments. If such circumstances arise, then to
fund our distribution requirement and maintain our status as a REIT we may have
to sell
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assets at
unfavorable prices, borrow at unfavorable terms, make taxable stock dividends,
or pursue other strategies. We cannot be assured, however, any such strategy
would be successful if our cash flow were to become insufficient to make the
required distributions.
Under
certain circumstances, we may be able to rectify a failure to meet the
distribution requirement for a year by paying deficiency dividends to
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest and a penalty to the IRS based on the amount of any deduction
taken for deficiency dividends.
Failure to Qualify
If
we fail to satisfy one or more requirements for REIT qualification, other than
the gross income tests and the asset tests, we could avoid disqualification if
our failure is due to reasonable cause and not to willful neglect and we pay a
penalty of $50,000 for each such failure. In addition, there are relief
provisions for a failure of the gross income tests and asset tests, as
described in Gross Income Tests and Asset Tests.
If
we fail to qualify for taxation as a REIT in any taxable year, and the relief
provisions do not apply, we will be subject to tax (including any applicable
alternative minimum tax) on our taxable income at regular federal corporate
income tax rates. Distributions to stockholders in any year in which we fail to
qualify will not be deductible by us nor will they be required to be made. In
such event, to the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations of the Code, corporate stockholders may be eligible for
the dividends received deduction, and individual stockholders and other
non-corporate stockholders may be eligible to be taxed at the reduced 15% rate
currently applicable to qualified dividend income (through 2010). Unless
entitled to relief under specific statutory provisions, we will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. We cannot predict whether in all
circumstances we would be entitled to such statutory relief.
Prohibited Transactions
Net
income derived by a REIT from a prohibited transaction is subject to a 100%
excise tax. The term prohibited transaction generally includes a sale or
other disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or
business. Although we do not expect that our assets will be held primarily for
sale to customers or that a sale of any of our assets will be in the ordinary
course of our business, these terms are dependent upon the particular facts and
circumstances, and we cannot assure you that we will never be subject to this
excise tax. The 100% tax does not apply to gains from the sale of property that
is held through a TRS or other taxable corporation, although such income will
be subject to tax in the hands of the corporation at regular federal corporate
income tax rates.
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Foreclosure Property
A
REIT is subject to tax at the maximum corporate rate (currently 35%) on any
income from foreclosure property, including gain from the disposition of such
foreclosure property, other than income that otherwise would be qualifying
income for purposes of the 75% gross income test. Foreclosure property is real
property and any personal property incident to such real property (i) that is
acquired by a REIT as result of the REIT having bid on such property at
foreclosure, or having otherwise reduced the property to ownership or
possession by agreement or process of law, after there was a default (or
default was imminent) on a lease of such property or a mortgage loan held by
the REIT and secured by the property, (ii) for which the related loan or lease
was acquired by the REIT at a time when default was not imminent or anticipated
and (iii) for which such REIT makes a proper election to treat the property as
foreclosure property. Any gain from the sale of property for which a
foreclosure election has been made will not be subject to the 100% excise tax
on gains from prohibited transactions described above, even if the property
would otherwise constitute inventory or dealer property in the hands of the
selling REIT. We do not expect to receive income from foreclosure property that
is not qualifying income for purposes of the 75% gross income test. However, if
we do receive any such income, we intend to make an election to treat the
related property as foreclosure property.
Taxable Mortgage Pools
An
entity, or a portion of an entity, may be classified as a TMP under the Code if
(i) substantially all of its assets consist of debt obligations or interests in
debt obligations, (ii) more than 50% of those debt obligations are real estate
mortgage loans, interests in real estate mortgage loans or interests in certain
mortgage-backed securities as of specified testing dates, (iii) the entity has
issued debt obligations that have two or more maturities and (iv) the payments
required to be made by the entity on its debt obligations bear a relationship
to the payments to be received by the entity on the debt obligations that it
holds as assets. Under Treasury Regulations, if less than 80% of the assets of
an entity (or a portion of an entity) consist of debt obligations, these debt
obligations are considered not to comprise substantially all of its assets,
and therefore the entity would not be treated as a TMP.
We
do not intend to structure or enter into securitization or financing
transactions that will cause us to be viewed as owning interests in one or more
TMPs. Generally, if an entity or a portion of an entity is classified as a TMP,
then the entity or portion thereof is treated as a taxable corporation and it
cannot file a consolidated federal income tax return with any other
corporation. If, however, a REIT owns 100% of the equity interests in a TMP,
then the TMP is a qualified REIT subsidiary and, as such, ignored as an entity
separate from the REIT.
If,
notwithstanding our intent to avoid having the issuing entity in any of our
securitization or financing transactions classified as a TMP, one or more of
such transactions was so classified, then as long as we owned 100% of the
equity interests in the issuing entity, all or a portion of the income that we
recognize with respect to our investment in the issuing entity will be treated
as excess inclusion income. Section 860E(c) of the Code defines the term
excess inclusion with respect to a residual interest in a REMIC. The IRS,
however, has yet to issue guidance on the computation of excess inclusion
income on equity interests in a TMP held by a REIT. Generally, however, excess
inclusion income with respect to our investment in any TMP
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and any
taxable year will equal the excess of (i) the amount of income we accrue on our
investment in the TMP over (ii) the amount of income we would have accrued if
our investment were a debt instrument having an issue price equal to the fair
market value of our investment on the day we acquired it and a yield to maturity
equal to 120% of the long-term applicable federal rate in effect on the date we
acquired our interest. The term applicable federal rate refers to rates that
are based on weighted average yields for treasury securities and are published
monthly by the IRS for use in various tax calculations. If we undertake
securitization transactions that are TMPs, the amount of excess inclusion
income we recognize in any taxable year could represent a significant portion
of our total taxable for that year.
Although
we intend to structure our securitization and financing transactions so that we
will not recognize any excess inclusion income, we cannot assure you that we
will always be successful in this regard. If, notwithstanding our intent, we
recognized excess inclusion income, then under guidance issued by the IRS we
would be required to allocate the excess inclusion income proportionately among
the dividends we pay to our stockholders and we must notify our stockholders of
the portion of our dividends that represents excess inclusion income. The
portion of any dividend you receive that is treated as excess inclusion income
is subject to special rules. First, your taxable income can never be less than
the sum of your excess inclusion income for the year; excess inclusion income
cannot be offset with net operating losses or other allowable deductions.
Second, if you are a tax-exempt organization and your excess inclusion income
is subject to the unrelated business income tax, then the excess inclusion portion
of any dividend you receive will be treated as unrelated business taxable
income. Third, dividends paid to Foreign Owners who hold stock for investment
and not in connection with a trade or business conducted in the United Sates
will be subject to United States federal withholding tax without regard to any
reduction in rate otherwise allowed by any applicable income tax treaty.
If
we recognize excess inclusion income, and one or more Disqualified
Organizations are record holders of shares of capital stock, we will be taxable
at the highest federal corporate income tax rate on the portion of any excess
inclusion income equal to the percentage of our stock that is held by
Disqualified Organizations. In such circumstances, we may reduce the amount of
our distributions to a Disqualified Organization whose stock ownership gave
rise to the tax. To the extent that our capital stock owned by Disqualified
Organizations is held by a broker/dealer or other nominee, the broker/dealer or
other nominee would be liable for a tax at the highest corporate tax rate on
the portion of our excess inclusion income allocable to our capital stock held
by the broker/dealer or other nominee on behalf of the Disqualified
Organizations.
If
we own less than 100% of the equity interests in a TMP, the foregoing rules
would not apply. Rather, the entity would be treated as a corporation for
federal income tax purposes and would potentially be subject to federal
corporate income tax. This could adversely affect our compliance with the REIT
gross income and asset tests described above. We currently do not have, and
currently do not intend to enter into any securitization or financing
transaction that is a TMP in which we own some, but less than all, of the
equity interests, and we intend to monitor the structure of any TMPs in which
we have an interest to ensure that they will not adversely affect our status as
a REIT. We cannot assure you that we will be successful in this regard.
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Taxation of Owners
Taxation of Taxable
Domestic Owners
Distributions.
As long as we qualify as a REIT, distributions we make to our taxable Domestic
Owners out of current or accumulated earnings and profits (and not designated
as capital gain dividends) will be taken into account by them as ordinary
income. Dividends we pay to a corporation will not be eligible for the
dividends received deduction. In addition, distributions we make to individuals
and other Owners that are not corporations generally will not be eligible for
the 15% reduced rate of tax currently (through 2010) in effect for qualified
dividend income. However, provided certain holding period and other
requirements are met, an individual or other non-corporate Owner will be
eligible for the 15% reduced rate with respect to (i) distributions
attributable to dividends we receive from certain C corporations, such as our
TRSs, and (ii) distributions attributable to income upon which we have paid
corporate income tax.
Distributions
that we designate as capital gain dividends will be taxed as long-term capital
gains (to the extent that they do not exceed our actual net capital gain for
the taxable year) without regard to the period for which you have owned our
capital stock. However, corporate Owners may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Long-term capital gains are
generally taxable at maximum federal rates of 15% (through 2010) in the case of
individuals, trusts and estates, and 35% in the case of corporations.
Rather
than distribute our net capital gains, we may elect to retain and pay the
federal income tax on them, in which case you will (i) include your
proportionate share of the undistributed net capital gains in income, (ii)
receive a credit for your share of the federal income tax we pay and (iii)
increase the basis in your capital stock by the difference between your share
of the capital gain and your share of the credit.
Distributions
in excess of our current and accumulated earnings and profits will not be
taxable to you to the extent that they do not exceed your adjusted tax basis in
our capital stock you own, but rather, will reduce your adjusted tax basis in
your capital stock. Assuming that the capital stock you own is a capital asset,
to the extent that such distributions exceed your adjusted tax basis in the
capital stock you own, you must include them in income as long-term capital
gain (or short-term capital gain if the capital stock has been held for one
year or less).
If
we declare a dividend in October, November or December of any year that is
payable to stockholders of record on a specified date in any such month, but
actually distribute the amount declared in January of the following year, then
you must treat the January distribution as though you received it on December
31 of the year in which we declared the dividend. In addition, we may elect to
treat other distributions after the close of the taxable year as having been
paid during the taxable year, but you will be treated as having received these
distributions in the taxable year in which they are actually made.
To
the extent that we have available net operating losses and capital losses
carried forward from prior tax years, such losses may reduce the amount of
distributions that we must make to comply with the REIT distribution
requirements. See Annual Distribution
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Requirements.
Such losses, however, are not passed through to you and do not offset your
income from other sources, nor would they affect the character of any
distributions that you receive from us; you will be subject to tax on those
distributions to the extent that we have current or accumulated earnings and
profits.
Although
we do not expect to recognize any excess inclusion income, if we did recognize
excess inclusion income, we would identify a portion of the distributions that
we make to you as excess inclusion income. Your taxable income can never be
less than the sum of your excess inclusion income for the year; excess
inclusion income cannot be offset with net operating losses or other allowable
deductions. See Taxable Mortgage Pools.
Dispositions
of Our Stock. Any gain or loss you recognize upon the sale or other
disposition of our capital stock will generally be capital gain or loss for
federal income tax purposes, and will be long-term capital gain or loss if you
held the capital stock for more than one year. In addition, any loss you
recognize upon a sale or exchange of our capital stock that you have owned for
six months or less (after applying certain holding period rules) will generally
be treated as a long-term capital loss to the extent of distributions received
from us that you are required to treat as long-term capital gain.
If
you recognize a loss upon a disposition of our capital stock in an amount that
exceeds a prescribed threshold, it is possible that the provisions of recently
adopted Treasury Regulations involving reportable transactions could apply,
with a resulting requirement to separately disclose the loss-generating
transaction to the IRS. While these regulations are directed towards tax
shelters, they are written quite broadly, and apply to transactions that would
not typically be considered tax shelters. In addition, recently enacted
legislation imposes significant penalties for failure to comply with these
requirements. You should consult your tax advisor concerning any possible
disclosure obligation with respect to the receipt or disposition of our capital
stock, or transactions that might be undertaken directly or indirectly by us.
Moreover, you should be aware that we and other participants in the
transactions involving us (including our advisors) may be subject to disclosure
or other requirements pursuant to these regulations.
Amounts
that you are required to include in taxable income with respect to our capital
stock you own, including taxable distributions and the income you recognize
with respect to undistributed net capital gain, and any gain recognized upon
your disposition of our capital stock, will not be treated as passive activity
income. You may not offset any passive activity losses you may have, such as
losses from limited partnerships in which you have invested, with income you
recognize with respect to our shares of capital stock. Generally, income you
recognize with respect to our capital stock will be treated as investment
income for purposes of the investment interest limitations.
Information
Reporting and Backup Withholding. We will report to our stockholders
and to the IRS the amount of distributions we pay during each calendar year and
the amount of tax we withhold, if any. Under the backup withholding rules, you
may be subject to backup withholding at a current rate of 28% with respect to
distributions unless you:
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are a
corporation or come within certain other exempt categories and, when
required, demonstrate this fact; or
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provide a
taxpayer identification number, certify as to no loss of exemption from
backup withholding, and otherwise comply with the applicable requirements of
the backup withholding rules.
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Any
amount paid as backup withholding will be creditable against your federal
income tax liability. For a discussion of the backup withholding rules as
applied to foreign owners, see Taxation of Foreign Owners.
Taxation of Tax-Exempt Owners
Tax-exempt
entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts, are generally exempt from federal income
taxation. However, they are subject to taxation on their unrelated business
taxable income (UBTI). Provided that a tax-exempt Owner (i) has not held our
capital stock as debt financed property within the meaning of the Code and
(ii) has not used our capital stock in an unrelated trade or business, amounts
that we distribute to tax-exempt Owners generally should not constitute UBTI.
However, a tax-exempt Owners allocable share of any excess inclusion income
that we recognize will be subject to tax as UBTI. See Taxable Mortgage
Pools. We intend to structure our securitization and financing transactions so
that we will avoid recognizing any excess inclusion income.
Tax-exempt
Owners that are social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group legal services
plans, exempt from taxation under special provisions of the federal income tax
laws, are subject to different UBTI rules, which generally will require them to
characterize distributions that they receive from us as UBTI.
In
certain circumstances, a qualified employee pension trust or profit sharing
trust that owns more than 10% of our stock could be required to treat a
percentage of the dividends that it receives from us as UBTI if we are a
pension-held REIT. We will not be a pension-held REIT unless either (a) one
pension trust owns more than 25% of the value of our stock or (b) a group of
pension trusts individually holding more than 10% of our stock collectively
owns more than 50% of the value of our stock. However, the restrictions on
ownership and transfer of our stock, as described under Description of Capital
StockRestrictions on Ownership and Transfer are designed among other things
to prevent a tax-exempt entity from owning more than 10% of the value of our
stock, thus making it unlikely that we will become a pension-held REIT.
Taxation of Foreign Owners
The
following is a summary of certain U.S. federal income and estate tax consequences
of the ownership and disposition of our capital stock applicable to a Foreign
Owner.
If
a partnership, including for this purpose any entity that is treated as a
partnership for U.S. federal income tax purposes, holds our capital stock, the tax
treatment of a partner in the partnership will generally depend upon the status
of the partner and the activities of the partnership. An investor that is a
partnership having Foreign Owners as partners should consult its tax advisors
about the U.S. federal income tax consequences of the acquisition, ownership
and disposition of our capital stock.
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The
discussion is based on current law and is for general information only. The
discussion addresses only certain and not all aspects of U.S. federal income
and estate taxation.
Ordinary Dividend Distributions. The
portion of dividends received by a Foreign Owner payable out of our current and
accumulated earnings and profits that are not attributable to our capital gains
and that are not effectively connected with a U.S. trade or business of the
Foreign Owner will be subject to U.S. withholding tax at the rate of 30%
(unless reduced by an applicable income tax treaty). In general, a Foreign
Owner will not be considered engaged in a U.S. trade or business solely as a
result of its ownership of our capital stock. In cases where the dividend
income from a Foreign Owners investment in our capital stock is (or is treated
as) effectively connected with the Foreign Owners conduct of a U.S. trade or
business, the Foreign Owner generally will be subject to U.S. tax at graduated
rates, in the same manner as Domestic Owners are taxed with respect to such
dividends (and may also be subject to the 30% branch profits tax in the case of
a foreign owner that is a foreign corporation). If a Foreign Owner is the
record holder of shares of our capital stock, we plan to withhold U.S. income
tax at the rate of 30% on the gross amount of any distribution paid to a
Foreign Owner unless:
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a lower
income treaty rate applies and the Foreign Owner provides us with an IRS Form
W-8BEN evidencing eligibility for that reduced rate; or
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the Foreign
Owner provides us with an IRS Form W-8ECI certifying that the distribution is
effectively connected income.
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Under
some income tax treaties, lower withholding tax rates do not apply to ordinary
dividends from REITs. Furthermore, reduced treaty rates are not available to
the extent that distributions are treated as excess inclusion income. See
Taxable Mortgage Pools. We intend to structure our securitization and
financing transactions so that we will avoid recognizing any excess inclusion
income.
Non-Dividend
Distributions. Distributions we make to a Foreign Owner that are not
considered to be distributions out of our current and accumulated earnings and
profits will not be subject to U.S. federal income or withholding tax unless
the distribution exceeds the Foreign Owners adjusted tax basis in our capital
stock at the time of the distribution and, as described below, the Foreign
Owner would otherwise be taxable on any gain from a disposition of our capital
stock. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of our current and accumulated earnings
and profits, the entire distribution will be subject to withholding at the rate
applicable to dividends. A Foreign Owner may, however, seek a refund of such
amounts from the IRS if it is subsequently determined that the distribution was,
in fact, in excess of our current and accumulated earnings and profits,
provided the proper forms are timely filed with the IRS by the Foreign Owner.
Capital Gain
Dividends. Distributions that we make to Foreign Owners that are
attributable to our disposition of U.S. real property interests (USRPI, which
term does not include interests in mortgage loans and mortgage-backed
securities) are subject to U.S. federal income and withholding taxes pursuant
to the Foreign Investment in Real Property Act of 1980, or FIRPTA, and may also
be subject to branch profits tax if the Foreign Owner is a corporation that is
not entitled to treaty relief or exemption. Although we do not anticipate
recognizing any gain attributable to the disposition of USRPI, as defined by
FIRPTA, Treasury Regulations
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interpreting
the FIRPTA provisions of the Code could be read to impose a withholding tax at
a rate of 35% on all of our capital gain dividends (or amounts we could have
designated as capital gain dividends) paid to Foreign Owners, even if no
portion of the capital gains we recognize during the year are attributable to
our disposition of USRPI. However, in any event, the FIRPTA rules will not
apply to distributions to a Foreign Owner with respect to any class of our
capital stock so long as (i) such class of stock is regularly traded (as
defined by applicable Treasury Regulations) on an established securities
market, and (ii) the Foreign Owner owns (actually or constructively) no more
than 5% of such class of stock at any time during the one-year period ending
with the date of the distribution.
Dispositions
of Our Stock. Unless our capital stock constitutes a USRPI, a sale
of our capital stock by a Foreign Owner generally will not be subject to U.S.
federal income tax under FIRPTA. We do not expect that our capital stock will
constitute a USRPI. Our capital stock will not constitute a USRPI if less than
50% of our assets throughout a prescribed testing period consist of interests
in real property located within the United States, excluding, for this purpose,
interest in real property solely in the capacity as a creditor. Even if the
foregoing test is not met, our capital stock will not constitute a USRPI if we
are a domestically controlled REIT. A domestically controlled REIT is a REIT
in which, at all times during a specified testing period, less than 50% in
value of its shares is held directly or indirectly by foreign owners. We do not
intend to maintain records to determine whether we are a domestically
controlled REIT for this purpose.
Even
if we do not constitute a domestically controlled REIT, a Foreign Owners sale
of a class of our capital stock generally will still not be subject to tax
under FIRPTA as a sale of a USRPI provided that (i) such class of stock is
regularly traded (as defined by applicable Treasury Regulations) on an
established securities market and (ii) the selling Foreign Owner has owned
(actually or constructively) 5% or less of such class of stock at all times
during a specified testing period.
If
gain on the sale of our capital stock were subject to taxation under FIRPTA,
the Foreign Owner would generally be subject to the same treatment as a
Domestic Owner with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the capital stock could be required to
withhold 10% of the purchase price and remit such amount to the IRS.
Capital
gains not subject to FIRPTA will nonetheless be taxable in the United States to
a Foreign Owner in two cases. First, if the Foreign Owners investment in our
capital stock is effectively connected with a U.S. trade or business conducted
by such Foreign Owner, the Foreign Owner will generally be subject to the same
treatment as a Domestic Owner with respect to such gain. Second, if the Foreign
Owner is a nonresident alien individual who was present in the United States
for 183 days or more during the taxable year and has a tax home in the United
States, the nonresident alien individual will be subject to a 30% tax on the
individuals capital gain.
Estate Tax.
Our capital stock owned or treated as owned by an individual who is not a
citizen or resident of the United States (as specially defined for U.S. federal
estate tax purposes) at the time of death will be includible in the
individuals gross estate for U.S. federal estate tax
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purposes,
unless an applicable estate tax treaty provides otherwise. Such individuals
estate may be subject to U.S. federal estate tax on the property includible in
the estate for U.S. federal estate tax purposes.
Other Tax Consequences
Possible
Legislative or Other Actions Affecting Tax Consequences. Prospective
investors should recognize that the present federal income tax treatment of an
investment in our capital stock may be modified by legislative, judicial or
administrative action at any time, and that any such action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and Treasury Department, resulting in
revisions of regulations and revised interpretations of established concepts as
well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of an investment in our
capital stock.
State and
Local Taxes. We and our stockholders may be subject to state or
local taxation in various state or local jurisdictions, including those in
which we or they transact business or reside. The state and local tax treatment
may not conform to the federal income tax consequences discussed above.
Consequently, prospective investors should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in our
capital stock.
PLAN OF DISTRIBUTION
We
may sell the securities offered pursuant to this prospectus and any accompanying
prospectus supplements to or through one or more underwriters or dealers or we
may sell the securities to investors directly or through agents. Each
prospectus supplement, to the extent applicable, will describe the number and
terms of the securities to which such prospectus supplement relates, the name
or names of any underwriters or agents with whom we have entered into
arrangements with respect to the sale of such securities, the public offering
or purchase price of such securities and the net proceeds we will receive from
such sale. Any underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement. We may sell
securities directly to investors on our own behalf in those jurisdictions where
we are authorized to do so.
Underwriters
may offer and sell the securities at a fixed price or prices, which may be
changed, at market prices prevailing at the time of sale, at prices related to
the prevailing market prices or at negotiated prices. We also may, from time to
time, authorize dealers or agents to offer and sell these securities upon such
terms and conditions as may be set forth in the applicable prospectus
supplement. In connection with the sale of any of these securities, underwriters
may receive compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of the securities
for whom they may act as agent. Underwriters may sell the securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents.
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Shares
may also be sold in one or more of the following transactions: (a) block
transactions (which may involve crosses) in which a broker-dealer may sell all
or a portion of the shares as agent but may position and resell all or a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker-dealer as principal and resale by the broker-dealer for its own
account pursuant to a prospectus supplement; (c) a special offering, an
exchange distribution or a secondary distribution in accordance with applicable
New York Stock Exchange or other stock exchange rules; (d) ordinary brokerage
transactions and transactions in which a broker-dealer solicits purchasers; (e)
sales at the market to or through a market maker or into an existing trading
market, on an exchange or otherwise, for shares; and (f) sales in other ways
not involving market makers or established trading markets, including direct
sales to purchasers. Broker-dealers may also receive compensation from
purchasers of the shares which is not expected to exceed that customary in the
types of transactions involved.
Any
underwriting compensation paid by us to underwriters or agents in connection
with the offering of these securities, and any discounts or concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Dealers and agents participating in
the distribution of the securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the securities may be deemed to be underwriting discounts and
commissions. The maximum underwriting compensation to be received by any
Financial Industry Regulatory Authority member or independent broker-dealer
will not exceed 8% for any offering of these securities.
Underwriters,
dealers and agents may be entitled, under agreements entered into with us, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act of 1933. Unless otherwise set
forth in the accompanying prospectus supplement, the obligations of any
underwriters to purchase any of these securities will be subject to certain
conditions precedent.
In
connection with the offering of the securities hereby, certain underwriters,
and selling group members and their respective affiliates, may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the applicable securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated
by the SEC pursuant to which these persons may bid for or purchase securities
for the purpose of stabilizing their market price.
The
underwriters in an offering of securities may also create a short position
for their account by selling more securities in connection with the offering
than they are committed to purchase from us. In that case, the underwriters
could cover all or a portion of the short position by either purchasing securities
in the open market following completion of the offering of these securities or
by exercising any over-allotment option granted to them by us. In addition, the
managing underwriter may impose penalty bids under contractual arrangements
with other underwriters, which means that they can reclaim from an underwriter
(or any selling group member participating in the offering) for the account of
the other underwriters, the selling concession for the securities that are
distributed in the offering but subsequently purchased for the account of the
underwriters in the open market. Any of the transactions described in this
paragraph or comparable transactions that are described in any accompanying
prospectus
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supplement may
result in the maintenance of the price of the securities at a level above that
which might otherwise prevail in the open market. None of the transactions
described in this paragraph or in an accompanying prospectus supplement are
required to be taken by any underwriters and, if they are undertaken, may be
discontinued at any time.
Our
common stock is listed on the New York Stock Exchange under the symbol CIM.
Any series of our preferred stock will be new issues of securities with no
established trading market and may or may not be listed on a national
securities exchange. Any underwriters or agents to or through which securities
are sold by us may make a market in the securities, but these underwriters or
agents will not be obligated to do so and any of them may discontinue any
market making at any time without notice. No assurance can be given as to the
liquidity of or trading market for any securities sold by us.
Underwriters,
dealers and agents may engage in transactions with, or perform services for, us
and our affiliates in the ordinary course of business. Underwriters have from
time to time in the past provided, and may from time to time in the future
provide, investment banking services to us for which they have in the past
received, and may in the future receive, customary fees.
EXPERTS
The
consolidated financial statements incorporated in this prospectus by reference
from the Companys Annual Report on Form 10-K, and the effectiveness of Chimera
Investment Corporations internal control over financial reporting have been
audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report, which is incorporated herein by
reference. Such consolidated financial statements have been so incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
The
validity of the securities offered hereby is being passed upon for us by
K&L Gates LLP. The opinion of counsel described under the heading Material
Federal Income Tax Considerations is being rendered by K&L Gates LLP. This
opinion is subject to various assumptions and is based on current tax law.
WHERE YOU CAN FIND MORE
INFORMATION
We
file annual, quarterly, and current reports, proxy statements and other
information with the SEC. You may read and copy any reports or other
information that we file with the SEC at the SECs Public Reference Room
located at 100 F Street, N.E., Washington D.C. 20549. You may also receive
copies of these documents upon payment of a duplicating fee, by writing to the
SECs Public Reference Room. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room in Washington D.C. and other
locations. Our Securities and Exchange Commission filings, including our
registration statement, are also available to you, free of charge, on the
Securities and Exchange Commissions website at www.sec.gov. Finally, we
also maintain an Internet site where you can find additional information. The
address of our Internet site is http://www.chimerareit.com. All internet
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addresses
provided in this prospectus or in any accompanying prospectus supplement are
for informational purposes only and are not intended to be hyperlinks. In
addition, the information on our internet site is not a part of, and is not
incorporated or deemed to be incorporated by reference in, this prospectus or
any accompanying prospectus supplement or other offering materials.
Accordingly, no information in our or any of these other internet addresses is
included herein or incorporated or deemed to be incorporated by reference
herein.
We
have filed a registration statement, of which this prospectus is a part,
covering the securities offered hereby. As allowed by SEC rules, this
prospectus does not contain all of the information set forth in the
registration statement and the exhibits, financial statements and schedules
thereto. We refer you to the registration statement, the exhibits, financial
statements and schedules thereto for further information. This prospectus is
qualified in its entirety by such other information.
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE
The
SEC allows us to incorporate by reference information into this prospectus,
which means that we can disclose important information to you by referring you
to another document filed separately with the SEC. The information incorporated
by reference is deemed to be part of this prospectus, except for any
information superseded by information in this prospectus. We have filed the
documents listed below with the SEC (File No. 1-33796) under the Exchange Act,
and these documents are incorporated herein by reference:
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Our Annual
Report on Form 10-K for the year ended December 31, 2008 as filed on March 3,
2009;
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Our Current
Report on Form 8-K filed on April 17, 2009;
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Our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on
May 7, 2009; and
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Description
of our common stock included in our Registration Statement on Form 8-A, filed
on November 11, 2007.
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All
documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates (other than
information in such documents that is not deemed to be filed) shall be deemed
to be incorporated by reference into this prospectus and to be part hereof from
the date of filing of those documents. All documents we file pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the
initial registration statement that contains this prospectus and prior to the
effectiveness of the registration statement shall be deemed to be incorporated
by reference into this prospectus and to be part hereof from the date of filing
those documents.
Any
statement contained in this prospectus or in a document incorporated by
reference shall be deemed to be modified or superseded for all purposes to the
extent that a statement
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contained in
this prospectus or in any other document which is also incorporated by
reference modifies or supersedes that statement.
We
will provide to each person, including any beneficial owner, to whom a copy of
this prospectus is delivered, a copy of any or all of the information that has
been incorporated by reference in this prospectus but not delivered with this
prospectus (other than the exhibits to such documents which are not
specifically incorporated by reference herein); we will provide this
information at no cost to the requester upon written or oral request to
Investor Relations, Chimera Investment Corporation, 1211 Avenue of the
Americas, Suite 2902, New York, New York 10036, telephone number (866) 315-9930.
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