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    On December 7, 2012, the CFTC issued a No-Action Letter that provides mortgage REITs relief from such registration (“("No-Action Letter”Letter") if they meet certain conditions and submit a claim for such no-action relief by email to the CFTC. The Company believes it meets the conditions set forth in the No-Action Letter and it has filed its claim with the CFTC to perfectpermit the use of the no-action relief from registration. However, if in the future the Company does not meet the conditions set forth in the No-Action Letter or the relief provided by the No-Action Letter becomes unavailable for any other reason and the Company is unable to obtain another exemption from registration, the Company may be required to reduce or eliminate its use of interest rate swaps or vary the manner inwhich it deploys interest rate swaps in its business andin order to mitigate the cost of compliance with the commodity pool regulations. Further, the Company or its directors may be required to register with the CFTC as CPOs and the Advisor may be required to register as a “commodity"commodity trading advisor”advisor" with the CFTC whichin order to execute or maintain the Company's hedging strategy. This will require compliance with CFTC rules and subject the Company, its directors and the Advisor to regulation by the CFTC.CFTC and require compliance with the CFTC's swap rules. In the event registration for the Company, its directors or the Advisor is required but is not obtained, the Company, its directors or the Advisor may be subject to fines, penalties and other civil or governmental actions or proceedings, anyproceedings. The costs of whichcompliance with the CFTC regulations, or the changes to the Company's hedging strategy necessary to avoid their application, could have a material adverse effect on the Company’sCompany's business, financial condition and consolidated results of operations.

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If the Company attempts to qualify for hedge accounting treatment for its derivative instruments, but the Company fails to so qualify, it may suffer because losses on the derivatives that the Company enters into may not be offset by a change in the fair value of the related hedged transaction.

    If the Company attempts to qualify for hedge accounting treatment for the Company’sCompany's derivative instruments, but it fails to so qualify for a number of reasons, including if the Company uses instruments that do not meet the definition of a derivative (such as short sales), the Company fails to satisfy hedge documentation and hedge effectiveness assessment requirements or the Company’sCompany's instruments are not highly effective, the Company may suffer because losses on the derivatives the Company holds may not be offset by a change in the fair value of the related hedged transaction.

Declines in the fair market values of the Company’sCompany's assets may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to the Company’sCompany's stockholders.

    A portion of the Company’sCompany's assets may be classified for accounting purposes as “available-for-sale.”"available-for-sale." Other than in the instances of other-than-temporary impairment, changes in the fair market values of most of these assets will be directly charged or credited to stockholders’stockholders' equity. As a result, a decline in values may reduce the book value of the Company. Moreover, if the decline in value of an available-for-sale security is other than temporary or if the Company elects the fair value option in respect of such security, such decline will reduce earnings.

    A decline in the fair market value of the Company’sCompany's assets may adversely affect it, particularly in instances where the Company has borrowed money based on the fair market value of those assets. If the fair market value of those assets declines, the lender may require the Company to post additional collateral to support the loan. If the Company were unable to post the additional collateral, it would have to sell the assets at a time when it might not otherwise choose to do so. A reduction in credit available may reduce the Company’sCompany's earnings and, in turn, cash available for distribution to stockholders.

Risks Related to the Company’sCompany's Assets and the Company’sCompany's Target Assets

The Company may not realize gains or income from its assets, which could cause the value of its common stock to decline.

    The Company seeks to generate both current income and capital appreciation for its stockholders. However, the Company’sCompany's assets may not appreciate in value and, in fact, may decline in value, and the debt securitiesassets the Company owns, originates or acquires may default on interest and/or principal payments. Accordingly, the Company may not be able to realize gains or income from the Company’sCompany's assets. Any gains that the Company does realize may not be sufficient to offset any other losses the Company experiences. Any income that the Company realizes may not be sufficient to offset the Company’sCompany's expenses.

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The Company’sCompany's portfolio of assets may be concentrated and will be subject to risk of default.

    While the Company intends to diversify its portfolio of assets in the manner described in this annual report on Form 10-K, the Company is not required to observe specific diversification criteria, except as may be set forth in the guidelines adopted by the Company’sCompany's board of directors. Therefore, the Company’sCompany's portfolio of assets may at times be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. For example, as of December 31, 2012,2013, the five statesthat represented the largest portion of mortgage loans underlying the Company’s non-agency RMBS assets (measured by outstanding principal balance) were: California (43.2%(25.6%); Florida (7.9%(17.8%); Georgia (6.8%); New York (7.0%); VirginiaJersey (4.6%); and New Jersey (4.5%Virginia (4.0%). To the extent that the Company’sCompany's portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of its assets within a short time period, which may reduce the Company’sCompany's net income and the value of its common stock and accordingly reduce its ability to pay dividends to its stockholders.

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The spread between swap rates and residential mortgage loans and non-Agency RMBS may widen due to difficult market conditions, which may adversely affect lending terms for these assets and have a negative impact on the Company’sCompany's stated book value.

    Since the onset of the financial crisis that began in 2007, the spread between swap rates and residential mortgage loans and non-Agency RMBS has been volatile. Spreads on these assets initially moved wider due to the difficult credit conditions and have only recovered a portion of that widening. As the prices of securitized assets declined, a number of investors and a number of structured investment vehicles faced margin calls from dealers and were forced to sell assets in order to reduce leverage. The price volatility of these assets also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment. The spread between the yield on the Company’sCompany's assets and its funding costs is an important factor in the performance of this aspect of the Company’sCompany's business. Wider spreads imply greater income on new asset purchases but may have a negative impact on the Company’sCompany's stated book value. Wider spreads generally negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings, which may require the Company to reduce leverage by selling assets.

The Company holds and may originate or acquire additional residential mortgage loans and non-Agency RMBS collateralized by subprime mortgage loans, which are subject to increased risks.

    The Company holds and may originate or acquire additional residential mortgage loans and non-Agency RMBS backed by collateral pools of mortgage loans that have been originated using underwriting standards that are less restrictive than those used in underwriting “prime"prime mortgage loans”loans" and “alternative-A"alternative-A mortgage loans.”" These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including lower home prices, as well as aggressive lending practices, subprime mortgage loans have in recent years experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans, the performance of subprime mortgage loans and non-Agency RMBS backed by subprime mortgage loans that the Company holds and may originate or acquire could be correspondingly adversely affected, which could adversely impact the Company’sCompany's consolidated results of operations, financial condition and business.

Deficiencies in the underwriting of newly originated residential mortgage loans may result in an increase in the severity of losses on the Company's residential mortgage loans.

    The Company plans, over time, to evolve its whole loan strategy to include newly originated residential mortgage loans, which the Company expects to become a core component of its strategy. The underwriting of newly originated residential mortgage loans is different than the underwriting and investment process related to seasoned mortgage loans and RMBS, which focuses, in part, on performance history.

    Prior to originating or acquiring residential mortgage loans or other assets, the Company may undertake underwriting and due diligence efforts with respect to various aspects of the loan or asset. When underwriting or conducting due diligence, the Company relies on resources and data available to it, which may be limited, and on investigations by third parties. The Company may also only conduct due diligence on a sample of a pool of loans or assets it is acquiring and assume that the sample is representative of the entire pool. The Company's underwriting and due diligence efforts may not reveal matters which could lead to losses. If the Company's underwriting processis not robust enough or if it does not conduct adequate due diligence, or the scope of the Company's underwriting or due diligence is limited, the Company may incur losses.

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Table    During the mortgage loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective mortgage. The quality of Contentsthese appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure from the broker or lender to provide an appraisal in the amount necessary to enable the originator to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the residential mortgage loans.

    Although mortgage originators generally underwrite mortgage loans in accordance with their pre-determined loan underwriting guidelines, from time to time and in the ordinary course of business, originators, including the Company, may make exceptions to these guidelines. On a case by case basis, underwriters may determine that a prospective borrower that does not strictly qualify under the underwriting guidelines warrants an underwriting exception, based upon compensating factors. Compensating factors may include a lower loan-to-value ratio, a higher debt coverage ratio, experience as an owner or investor, higher borrower net worth or liquidity, stable employment, longer length of time in business and length of time owning the property. Loans originated with exceptions may result in a higher number of delinquencies and defaults.

Losses could occur due to a counterparty that sold the Company a loan refusing to or being unable to repurchase that loan or pay damages related to breaches of representations made by the seller and due to inaccurate representations made by the Company in connection with its sale of a loan.

    While the Company has not yet begun originating or purchasing newly originated loans, it has taken steps to build out its capabilities. Losses could occur due to a counterparty that sold the Company a loan or other asset refusing to or being unable to (e.g., due to its financial condition) repurchase that loan or asset or pay damages to the Company if the Company determines subsequent to purchase that one or more of the representations or warranties made to the Company in connection with the sale was inaccurate.

    Even if the Company obtains representations and warranties from the counterparties from whom it acquired the loans or other assets, they may not parallel the representations and warranties the Company makes to subsequent purchasers of the loans or may otherwise not protect the Company from losses, including, for example, due to the counterparty being insolvent or otherwise unable to make a payment to the Company at the time it claims damages for a breach of representation or warranty. Furthermore, to the extent the Company claims that counterparties from which the Company has acquired loans have breached their representations and warranties to the Company, it may adversely impact the Company's business relationship with those counterparties, including by reducing the volume of business the Company conducts with those counterparties, which could negatively impact the Company's ability to acquire loans and the Company's business. To the extent the Company has significant exposure to representations and warranties made to it by one or more counterparties from which the Company acquires loans, the Company may determine, as a matter of risk management, to reduce or discontinue loan acquisitions from those counterparties, which could reduce the volume of mortgage loans the Company acquires and negatively impact the Company's business and financial results.

    In addition, when selling loans (including sales into a securitization trust), the Company will typically be required to make representations and warranties to the purchaser regarding, among other things, certain characteristics of those assets, including characteristics the Company seeks to verify through the Company's underwriting and due diligence efforts. If the Company's representations and warranties are inaccurate with respect to any asset, it may be obligated to repurchase that asset or pay damages, which may result in a loss. The Company generally does not establish reserves for potential liabilities relating to representations and warranties it makes unless and until the Company believes that those liabilities are both probable and estimable, as determined in accordance with U.S. GAAP. As a result, the Company may not have reserves relating to these potential liabilities or any reserves it may establish could be inadequate.

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    The integrity of the servicing and foreclosure processes are critical to the value of the residential mortgage loan portfolios underlyingloans and the RMBS collateralized by residential mortgage loans in which the Company invests, and the Company’s Company'sfinancial results could be adversely affected by deficiencies in the conduct of those processes. For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and the Company’sCompany's losses on, the residential mortgage loans and non-Agency RMBS the Company owns or may originate or acquire. Foreclosure delays may also increase the administrative expenses of any securitization trusts that the Company may sponsor for non-Agency RMBS, thereby reducing the amount of funds available for distribution to the Company’sCompany's stockholders. In addition, the subordinate classes of securities issued by any such securitization trusts may continue to receive interest payments while the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of credit support available for the senior classes the Company may own, thus possibly adversely affecting these securities.

    In addition, in these circumstances, the Company may be obligated to fund any obligation of the servicer to make advances on behalf of a delinquent loan obligor. To the extent that there are significant amounts of advances that need to be funded in respect of loans where the Company owns the servicing right, it could have a material adverse effect on the Company's business and financial results.

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

The commercial mortgage loans underlying the CMBS the Company may hold and acquire may be subject to defaults, foreclosure timeline extension, fraud and commercial price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to the Company.

    CMBS are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Commercial mortgage loans are secured by multifamily or commercial property and may be subject to risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’sborrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things,

• tenant mix;
   
• success of tenant businesses;
   
• property management decisions;
   
• property location and condition;
   
• competition from comparable types of properties;
   
• changes in laws that increase operating expenses or limit rents that may be charged;
   
• any need to address environmental contamination at the property or the occurrence of any uninsured casualty at the property;
   
• changes in national, regional or local economic conditions and/or specific industry segments;
   
• declines in regional or local real estate values;
   
• declines in regional or local rental or occupancy rates;
  

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• increases in interest rates;
   
• real estate tax rates and other operating expenses;
   
• changes in governmental rules, regulations and fiscal policies, including environmental legislation; and
   
• acts of God, terrorist attacks, social unrest and civil disturbances.

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The Company’sCompany's investments may include subordinated tranches of RMBS or CMBS, which are subordinate in right of payment to more senior securities.

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

If the Advisor underestimates the loss-adjusted yields of the Company’sCompany's CMBS investments, the Company may experience losses.

    The Advisor expects to value any CMBS investments based on loss-adjusted yields, taking into account estimated future losses on the mortgage loans included in the securitization’ssecuritization's pool of loans, and the estimated impact of these losses on expected future cash flows. The Advisor’sAdvisor's loss estimates may not prove accurate, as actual results may vary from estimates. In the event that the Advisor underestimates the pool level losses relative to the price the Company pays for a particular CMBS investment, the Company may experience losses with respect to such investment.

The Company may not control the special servicing of the mortgage loans included in the CMBS in which it may invest and, in such cases, the special servicer may take actions that could adversely affect the Company’sCompany's interests.

    With respect to CMBS in which the Company may invest, overall control over the special servicing of the related underlying mortgage loans will be held by a “directing certificateholder”"directing certificateholder" or a “controlling"controlling class representative,”" which is appointed by the holders of the most subordinate class of CMBS in such series. The Company may not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect the Company’sCompany's interests.

The Company may purchase interests in mortgage servicing rights, which will expose it to significant risks.

    MSRs are among the Company’sCompany's target assets. Fannie Mae and Freddie Mac generally require mortgage servicers to be paid a minimum servicing fee that significantly exceeds the amount a servicer would charge in an arm’s-lengtharm's-length transaction. The minimum servicing fee required by the Agencies is therefore made up of the normal arm’s-lengtharm's-length servicing fee and the excess mortgage servicing amount.

    Any MSRs the Company acquires will be recorded at fair value on the Company’sCompany's balance sheet based upon significant estimates and assumptions, with changes in fair value included in the Company’sCompany's consolidated results of operations. Such estimates and assumptions would include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced mortgage loans.

    The ultimate realization of the value of MSRs, which are measured at fair value on a recurring basis, may be materially different than the fair values of such MSRs as may be reflected in the Company’sCompany's balance sheet as of any particular date. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on the Company’sCompany's consolidated financial position, results of operations and cash flows. Accordingly, there may be material uncertainty about the fair value of any MSRs the Company acquires.

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    Changes in interest rates are a key driver of the performance of MSRs. Historically, the value of MSRs has increased when interest rates rise and decreased when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. The Company may pursue various hedging strategies to seek to reduce its exposure to adverse changes in interest rates. The Company’sCompany's hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect the Company. To the extent the Company does not utilize derivatives to hedge against changes in the fair value of MSRs, the Company’sCompany's balance sheet, consolidated results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change.

    Prepayment speeds significantly affect excess mortgage servicing fees. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. The Company will base the price it pays for MSRs and the rate of amortization of those assets on factors such as the Company’sCompany's projection of the cash flows from the related pool of mortgage loans. The Company’sCompany's expectation of prepayment speeds will be a significant assumption underlying those cash flow projections. If prepayment speeds are significantly greater than expected, the carrying value of MSRs could exceed their estimated fair value. If the fair value of MSRs decreases, the Company would be required to record a non-cash charge, which would have a negative impact on its financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows the Company receives from MSRs, and the Company could ultimately receive substantially less than what it paid for such assets.

    Moreover, delinquency rates have a significant impact on the valuation of any excess mortgage servicing fees. An increase in delinquencies will generally result in lower revenue because typically the Company will only collect servicing fees from Agencies or mortgage owners for performing loans. If delinquencies are significantly greater than the Company expects, the estimated fair value of the MSRs could be diminished. When the estimated fair value of MSRs is reduced, the Company could suffer a loss, which could have a negative impact on the Company’sCompany's financial results.

    Furthermore, MSRs are subject to numerous U.S. federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on the Company’sCompany's business. The Company’sCompany's failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which the Company or the servicer are subject by virtue of ownership of MSRs, whether actual or alleged, could expose the Company to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on the Company’sCompany's business, financial condition, consolidated results of operations or cash flows.

The receivables underlying the ABS the Company may acquire are subject to credit risks, liquidity risks, interest rate risks, market risks, operations risks, structural risks and legal risks, which could result in losses to the Company.

    ABS are securities backed by various asset classes, including auto loans, student loans, credit card loans, equipment loans, floor plan loans and small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration. A portion of the Company’sCompany's target assets may be ABS. The structure of an ABS, and the terms of the investors’investors' interest in the underlying collateral, can vary widely depending on the type of collateral, the desires of investors and the use of credit enhancements. Individual transactions can differ markedly in both structure and execution. Important determinants of the risk associated with issuing or holding ABS include (i) the relative seniority or subordination of the class of ABS held by an investor, (ii) the relative allocation of principal and interest payments in the priorities by which such payments are made under the governing documents, (iii) the effect of credit losses on both the issuing vehicle and investors’investors' returns, (iv) whether the underlying collateral represents a fixed set of specific assets or accounts, (v) whether the underlying collateral assets are revolving or closed-end, (vi) the terms (including maturity of the ABS) under which any remaining balance in the accounts may revert to the issuing vehicle and (vii) the extent to which the entity that sold the underlying collateral to the issuing vehicle is obligated to provide support to the issuing vehicle or to investors. With respect to sometypes of ABS, the foregoing risks are more closely correlated with similar risks on corporate bonds of similar terms and maturities than with the performance of a pool of similar assets.

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    In addition, certain ABS (particularly subordinated ABS) provide that the non-payment of interest thereon in cash will not constitute an event of default in certain circumstances, and the holders of such ABS will not have available to them any associated default remedies. Interest not paid in cash will generally be capitalized and added to the outstanding principal balance of the related security. Deferral of interest through such capitalization will reduce the yield on such ABS.

    Holders of ABS bear various risks, including credit risks, liquidity risks, interest rate risks, market risks, operations risks, structural risks and legal risks. Credit risk arises from (i) losses due to defaults by obligors under the underlying collateral and (ii) the issuing vehicle’svehicle's or servicer’sservicer's failure to perform its respective obligations under the transaction documents governing the ABS. These two risks may be related, as, for example, in the case of a servicer that does not provide adequate credit-review scrutiny to the underlying collateral, leading to a higher incidence of defaults.

    Market risk arises from the cash flow characteristics of the ABS, which for most ABS tend to be predictable. The greatest variability in cash flows comes from credit performance, including the presence of wind-down or acceleration features designed to protect the investor in the event that credit losses in the portfolio rise well above expected levels.

    Interest rate risk arises for the issuer from (i) the pricing terms on the underlying collateral, (ii) the terms of the interest rate paid to holders of the ABS and (iii) the need to mark to market the excess servicing or spread account proceeds carried on the issuing vehicle’svehicle's balance sheet. For the holder of the security, interest rate risk depends on the expected life of the ABS, which may depend on prepayments on the underlying assets or the occurrence of wind-down or termination events. If the servicer becomes subject to financial difficulty or otherwise ceases to be able to carry out its functions, it may be difficult to find other acceptable substitute servicers and cash flow disruptions or losses may occur, particularly with underlying collateral comprised of non-standard receivables or receivables originated by private retailers who collect many of the payments at their stores.

    Structural and legal risks include the possibility that, in a bankruptcy or similar proceeding involving the originator or the servicer (often the same entity or affiliates), a court having jurisdiction over the proceeding could determine that, because of the degree to which cash flows on the assets of the issuing vehicle may have been commingled with cash flows on the originator’soriginator's other assets (or similar reasons), (i) the assets of the issuing vehicle could be treated as never having been truly sold by the originator to the issuing vehicle and could be substantively consolidated with those of the originator, or (ii) the transfer of such assets to the issuer could be voided as a fraudulent transfer. The time and expense related to a challenge of such a determination also could result in losses and/or delayed cash flows.

An increase in interest rates may cause a decrease in the volume of certain of the Company’sCompany's target assets, which could adversely affect its ability to originate or acquire target assets that satisfy its investment objectives and to generate income and make distributions.

    Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of the Company’sCompany's target assets available to it, which could adversely affect the Company’sCompany's ability to originate or acquire assets that satisfy its investment objectives. Rising interest rates may also cause the Company’sCompany's target assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause the Company to be unable to originate or acquire a sufficient volume of its target assets with a yield that is above the Company’sCompany's borrowing cost, the Company’sCompany's ability to satisfy its investment objectives and to generate income and make distributions may be materially and adversely affected.

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

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

    The Company seeks to invest in non-Agency RMBS, Agency RMBS, residential mortgage loans, non-Agency RMBS, MSRs, Agency RMBS and other real estate-related and financial assets, including MSRs, IOs, CMBS and ABS. In a normal yield curve environment, an investment in such assets will generally decline in value if long-term interest rates increase. Declines in fair market value may ultimately reduce earnings or result in losses to the Company, which may negatively affect cash available for distribution to the Company’sCompany's stockholders.

    A significant risk associated with the Company’sCompany's target assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the fair market value of these investments would decline, and the duration and weighted average life of the investments would increase. The Company could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the Company’sCompany's repurchase agreements.

    Fair market values of the Company’sCompany's investments may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those investments that are subject to prepayment risk or widening of credit spreads.

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

Interest rate mismatches between the Company’sCompany's ARMs and RMBS backed by ARMs or hybrid ARMs and the Company’sCompany's borrowings used to fund its purchases of these assets may cause it to suffer losses.

    The Company funds its residential mortgage loans and RMBS with borrowings that have interest rates that adjust more frequently than the interest rate indices and repricing terms of ARMs and RMBS backed by ARMs or hybrid ARMs. Accordingly, if short-term interest rates increase, the Company’sCompany's borrowing costs may increase faster than the interest rates on its ARMs and RMBS backed by ARMs or hybrid ARMs adjust. As a result, in a period of rising interest rates, the Company could experience a decrease in net income or a net loss.

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

    In addition, ARMs and RMBS backed by ARMs or hybrid ARMs are typically subject to lifetime interest rate caps that limit the amount an interest rate can increase through the maturity of the RMBS.ARMs. However, the Company’sCompany's borrowings under repurchase agreements typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on the Company’sCompany's borrowings could increase without limitation while caps could limit the interest rates on these types of RMBS.assets. This problem is magnified for ARMs and RMBS backed by ARMs or hybrid ARMs that are not fully indexed. Further, some ARMs and RMBSbacked by ARMs or hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, the Company may receive less cash income on these types of RMBSassets than the Company needs to pay interest on its related borrowings. These factors could reduce the Company’sCompany's net interest income and cause it to suffer a loss during periods of rising interest rates.

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Interest rate fluctuations may adversely affect the level of the Company’sCompany's net income and the value of the Company’sCompany's assets and common stock.

    Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’sCompany's control. Interest rate fluctuations present a variety of risks, including the risk of a narrowing of the difference between asset yields and borrowing rates, flattening or inversion of the yield curve and fluctuating prepayment rates, and may adversely affect the Company’sCompany's income and the value of its assets and common stock.

Because the Company holds and may originate or acquire additional fixed-rate securities,assets, an increase in interest rates on the Company’sCompany's borrowings may adversely affect its book value.

    Increases in interest rates may negatively affect the fair market value of the Company’sCompany's assets. Any fixed-rate securitiesassets the Company holds, originates or acquires generally will be more negatively affected by these increases than adjustable-rate securities.assets. In accordance with accounting rules, the Company will be required to reduce its earnings for any decrease in the fair market value of its assets that are accounted for under the fair value option. The Company will be required to evaluate its assets on a quarterly basis to determine their fair value by using third-party bid price indications provided by dealers who make markets in these securitiesassets or by third-party pricing services. If the fair value of a securityan asset is not available from a dealer or third-party pricing service, the Company will estimate the fair value of the securityasset using a variety of methods, including discounted cash flow analysis, matrix pricing, option-adjusted spread models and fundamental analysis. Aggregate characteristics taken into consideration include type of collateral, index, margin, periodic cap, lifetime cap, underwriting standards, age and delinquency experience. However, the fair value reflects estimates and may not be indicative of the amounts the Company would receive in a current market exchange. If the Company determines that an agencya security is other-than-temporarily impaired, the Company would be required to reduce the value of such agency security on its balance sheet by recording an impairment charge in its income statement and its stockholders’stockholders' equity would be correspondingly reduced. Reductions in stockholders’stockholders' equity decrease the amounts the Company may borrow to originate or purchase additional target assets, which could restrict the Company’sCompany's ability to increase its net income.

Because the assets the Company holds and expects to originate or acquire may experience periods of illiquidity, the Company may lose profits or be prevented from earning capital gains if the Company cannot sell mortgage-related assets at an opportune time.

    The Company bears the risk of being unable to dispose of its assets at advantageous times or in a timely manner because mortgage-related assets generally experience periods of illiquidity, including the recent period of delinquencies and defaults with respect to residential mortgage loans. The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. As a result, the Company’sCompany's ability to vary its portfolio in response to changes in economic and other conditions may be relatively limited, which may cause it to incur losses.

The Company may experience a decline in the fair market value of its assets.

    A decline in the fair market value of the Company’sCompany's assets and the assets which it intends to originate or acquire may require the Company to recognize an “other-than-temporary”"other-than-temporary" impairment against such assets under U.S. GAAP, if the Company were to determine that, with respect to any debt security in unrealized loss positions, the Company does not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, the Company would recognize unrealizedrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair market value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect the Company’sCompany's future losses or gains, as they are based on the difference between the sale price received and the adjusted amortized cost of such assets at the time of sale. In addition, the Companyhas elected the fair value option for its residential mortgage loans and RMBS and future mortgage related assets may also be carried at fair value. Accordingly, declines in the fair value of these assets will also be recognized as unrealized losses through earnings and will adversely impact the results of its operations for the period in which such change in value occurs.

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Many of the assets in the Company’sCompany's portfolio will be recorded at fair value and, as a result, there will be uncertainty as to the value of these assets.

    Many of the assets in the Company’sCompany's portfolio are and will likely be in the form of securitiesassets that are not publicly traded. The fair value of securitiesresidential mortgage loans, RMBS and other mortgage-related assets that are not publicly traded may not be readily determinable. The Company values these assets quarterly at fair value, as determined in accordance with applicable accounting standards, which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of the Company’sCompany's assets may fluctuate over short periods of time and the Company’sCompany's determinations of fair value may differ materially from the values that would have been used if a ready market for these securitiesassets existed. The value of the Company’sCompany's common stock could be adversely affected if its determinations regarding the fair value of these assets were materially higher than the values that the Company ultimately realizes upon their disposal.

Prepayment rates may adversely affect the value of the Company’sCompany's portfolio of assets.

    Pools of residential mortgage loans underlie the RMBS that the Company holds and will acquire. In the case of residential mortgage loans, thereThere are seldom any restrictions on borrowers’borrowers' abilities to prepay their residential mortgage loans. Declines in interest rates may cause an increase in prepayment rates of mortgage loans. In addition, both HARP and QE3 may also cause an increase in prepayment rates. The Company generally receives distributions from principal payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster than expected, this results in prepayments that are faster than expected on the RMBS. Faster than expected prepayments could adversely affect the Company’sCompany's profitability, including in the following ways:

• The Company may purchase residential mortgage loans and RMBS that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest rate, the Company may pay a premium over the par value to acquire the security.asset. In accordance with U.S. GAAP, the Company may amortize this premium over the estimated term of the residential mortgage loans or RMBS. If the RMBSasset is prepaid in whole or in part prior to its maturity date, however, the Company may be required to expense the premium that was prepaid at the time of the prepayment.

  
  

• The Company also may acquire residential mortgage loans and RMBS at a lower interest rate than the market interest rate at the time. This would adversely affect the Company’sCompany's profitability. Slower-than-expected prepayments may also adversely affect the fair market value of discounted residential mortgage loans and RMBS.

  
  

• The Company anticipates that a substantial portion of its ARMs and adjustable-rate RMBS may bear interest rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If an ARM or adjustable-rate RMBS is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, the Company will have held that ARM or RMBS while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.

  
  

• If the Company is unable to originate or acquire new residential mortgage loans or RMBS similar to the prepaid RMBS,assets, the Company’sCompany's financial condition, results of operation and cash flow would suffer. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general economic conditions, the relative interest rates on fixed-rate mortgages and ARMs, the credit rating of the borrower, the rate of home price appreciation or depreciation, and foreclosures and lender competition.

    While the Company will seek to minimize prepayment risk to the extent practical, in selecting assets it must balance prepayment risk against other risks and the potential returns of each asset. No strategy can completely insulate the Company from prepayment risk.

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Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for the Company to analyze its portfolio of assets. The Company is vulnerable to loss from prepayments if it purchases assets above par, especially in the event of additional mortgage loan modification and refinance programs or similar future legislative action.

    The Company’sCompany's success depends in part on its ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie its RMBS.loans. Changes in interest rates and prepayments affect the market price of the residential mortgage loans and RMBS that the Company intends to originate or purchase and any residential mortgage loans and RMBS that the Company holds at a given time. As part of the Company’sCompany's overall portfolio risk management, the Company will analyze interest rate changes and prepayment trends separately and collectively to assess their effects on the Company’sCompany's portfolio of assets. In conducting this analysis, the Company will depend on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. If dislocations in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, the Company’sCompany's ability to (i) assess the fair market value of its portfolio of assets, (ii) implement its hedging strategies and (iii) implement techniques to reduce its prepayment rate volatility would be significantly affected, which could materially adversely affect the Company’sCompany's financial position and consolidated results of operations. In particular, despite the historically low interest rates, recent dislocations, including home price depreciation resulting in many borrowers owing more on their mortgage than the values of their homes, have prevented many such borrowers from refinancing their mortgage loans, which has impacted prepayment rates and the value of residential mortgage loans and RMBS assets. However, mortgage loan modification and refinance programs or future legislative action may make refinancing mortgage loans more accessible or attractive to such borrowers, which could cause the rate of prepayments on residential mortgage loans and RMBS assets to accelerate. For residential mortgage loans and RMBS assets, including some of the Company’sCompany's RMBS assets, that were purchased or are trading at premium to their par value, higher prepayment rates would adversely affect the value of such assets or cause the holder to incur losses with respect to such assets.

Risks Related to Owning The Company’sCompany's Common Stock

Common stock and preferred stock eligible for future sale may have adverse effects on the Company’sCompany's share price.

    Subject to applicable law, the Company’sCompany's board of directors has the authority, without further stockholder approval, to authorize the Company to issue additional authorized shares of common stock and preferred stock on the terms and for the consideration it deems appropriate.appropriate, including shares of common stock issuable upon exchange of the Exchangeable Senior Notes. The Company cannot predict the effect, if any, of future sales of its common stock, or the availability of shares for future sales, on the market price of its common stock. As of March 10, 2014, the Company had 8,897,800 shares of common stock outstanding which are comprised of (i) 7,970,886 shares of common stock, and (ii) 926,914 Operating Partnership units ("OP units"), which are exchangeable, on a one-for-one basis, into cash or, at the Company's option, for shares of the Company's common stock. In addition, the Exchangeable Senior Notes are exchangeable for shares of the Company's common stock or, to the extent necessary to satisfy NYSE listing requirements, cash, at an exchange rate of 54.3103 shares of common stock for each $1,000 aggregate principal amount of the Exchangeable Senior Notes, subject to adjustment and other limitations under certain circumstances. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" of this annual report on Form 10-K, for a discussion of the terms of the Exchangeable Senior Notes. The market price of the Company’sCompany's common stock may also decline significantly when the restrictions on resale by certain of the Company’s stockholders lapse or a registration statement is filed pursuant to a registration rights agreement in respect of shares of the Company’sits common stock that were purchased in unregistered transactions.issuable upon exchange of the Exchangeable Senior Notes. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for the Company’sCompany's common stock. As of March 25, 2013, the Company had outstanding 7,970,886 shares of its common stock, and 926,914 Operating Partnership units (“OP units”), which are exchangeable on a one-for-one basis into shares of the Company’s common stock. The Company has agreed with stockholders and holders of OP units, which participated in the pre-IPO private placements (as described below), to file a registration statement in respect of these shares of common stock, including the shares of common stock issuable upon exchange of the OP units. As of March 25, 2013, holders of approximately 33.7% of the Company’s outstanding shares of common stock and OP units have agreed with ZAIS, as the managing member of the Advisor, not to, directly or indirectly, sell, transfer, assign, mortgage, hypothecate, pledge or otherwise dispose of or encumber or permit or suffer any encumbrance of all or any part of the shares of the Company’s common stock or OP units until November 5, 2013 (270 days following the Company's listing), without the prior written consent of ZAIS, subject to certain exceptions relating to private re-sales where the transferee continues to be bound by a lock-up agreement.

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For as long as the Company is an emerging growth company, the Company will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about the Company’sCompany's executive compensation, that apply to other public companies.

    Upon the completion of its IPO, the Company became subject to reporting and other obligations under the Exchange Act. In April 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”"JOBS Act") was enacted into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging"emerging growth companies,”" including certain requirements relating to accounting standards and compensation disclosure. The Company is an “emerging"emerging growth company”company" as defined in the JOBS Act and may remain an emerging growth company for up to five full fiscal years. Unlike other public companies that are not "emerging growth companies," for as long as the Company is an emerging growth company, the Company will not be required to (i) provide an auditor’sauditor's attestation report on management’s assessment of the effectiveness of the Company’s system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”"Sarbanes-Oxley Act"), (ii) comply with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”("PCAOB") requiring mandatory audit firm rotation or a supplement to the auditor’sauditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (iv) provide certain disclosure regarding executive compensation required of larger public companies or (v) hold shareholder advisory votes on executive compensation. The Company cannot predict if investors will find its shares of common stock less attractive if the Company chooses to rely on these exemptions.

Future offerings of debt or equity securities or notes exchangeable for shares of common stock, which may rank senior to the Company’sCompany's common stock, may adversely affect the market price of the Company’sCompany's common stock.

    If the Company decides to issueissues debt securities, inincluding issuances of notes by the futureOperating Partnership which wouldare exchangeable for shares of common stock of the Company, which rank senior to the Company’sCompany's common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting the Company’sCompany's operating flexibility. Additionally, any equity securities or convertible or exchangeable securities that the Company issues in the future may have rights, preferences and privileges more favorable than those of the Company’sCompany's common stock and may result in dilution to owners of the Company’sCompany's common stock. The Company and, indirectly, the Company’sCompany's stockholders, will bear the cost of issuing and servicing such securities. Because the Company’sCompany's decision to issue debt, exchangeable notes or equity securities in any future offering will depend on market conditions and other factors beyond the Company’sCompany's control, the Company cannot predict or estimate the amount, timing or nature of the Company’sCompany's future offerings. Thus, holders of the Company’sCompany's common stock will bear the risk of the Company’sCompany's future offerings, reducing the market price of the Company’sCompany's common stock and diluting the value of their stock holdings in the Company.

The Company has not established a minimum distribution payment level and the Company cannot assure stockholders of its ability to pay distributions in the future.

    To maintainThe Company's current policy is to pay distributions which will allow the Company’s qualificationCompany to satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax the Company intends to make regular quarterly distributions to holders of common stock out of legally available funds. The Company’s current policy is to pay quarterly distributions which, on an annual basis, will equal all or substantially all of the Company’s net taxableits undistributed income. The Company has not, however, established a minimum distribution payment level and the Company’sCompany's ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this annual report on Form 10-K. All distributions will be made at the discretion of the Company’sCompany's board of directors and will depend on the Company’sCompany's earnings, its financial condition, any debt covenants, maintenance of the Company’sCompany's REIT qualification, restrictions on making distributions under Maryland law and other factors as the Company’sCompany's board of directors may deem relevant from time to time. The Company may not be able to make distributions in the future and the Company’sCompany's board of directors may change the Company’sCompany's distribution policy in the future. The Company believes that a change in any one of the following factors, among others, could adversely affect its consolidated results of operations and impair the Company’sCompany's ability to pay distributions to its stockholders:

• the profitability of the assets the Company holds, originates or acquires;
   
• the Company’sCompany's ability to make profitable acquisitions;
   
• margin calls or other expenses that reduce the Company’sCompany's cash flow;
   
• defaults in the Company’sCompany's asset portfolio or decreases in the value of the Company’sCompany's portfolio; and
   
• the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

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    The Company cannot provide any assurance that it will achieve results that will allow it to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of the Company’sCompany's distributions may include a return of capital.

Risks Related to The Company’sCompany's Organization and Structure

Conflicts of interest could arise as a result of the Company’sCompany's UpREIT structure.

    Conflicts of interest could arise in the future as a result of the relationships between the Company and its affiliates, on the one hand, and the Operating Partnership or any partner thereof, on the other. The Company’sCompany's directors and officers have duties to the Company under applicable Maryland law in connection with their management of the Company. At the same time, the Company, through the Operating Partnership subsidiary, has fiduciary duties, as a general partner, to the Operating Partnership and to the limited partners under Delaware law in connection with the management of the Operating Partnership. The Company’sCompany's duties, through the Operating Partnership subsidiary, as a general partner to the Operating Partnership and its partners may come into conflict with the duties of the Company’sCompany's directors and officers.

Certain provisions of Maryland law could inhibit changes in control and prevent the Company’sCompany's stockholders from realizing a premium over the then-prevailing market price of the Company’sCompany's common stock.

    Certain provisions of the Maryland General Corporation Law (“MGCL”("MGCL") may have the effect of deterring a third party from making a proposal to acquire the Company or of impeding a change in control under circumstances that otherwise could provide the holders of shares of the Company’sCompany's common stock with the opportunity to realize a premium over the then-prevailing market price of such shares.

    The Company is subject to the “business combination”"business combination" provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including, generally, a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between the Company and an “interested stockholder”"interested stockholder" (defined generally as any person who beneficially owns 10% or more of the voting power of the Company’sCompany's outstanding voting stock or an affiliate or associate of the Company who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the Company’sCompany's outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five-year prohibition, any business combination between the Company and an interested stockholder generally must be recommended by the Company’sCompany's board of directors and approved by the affirmative vote of at least (i) eighty percent of the votes entitled to be cast by holders of outstanding shares of the Company’sCompany's voting stock; and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the Company’sCompany's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the stockholder would otherwise have become an interested stockholder. Pursuant to the statute, the Company’sCompany's board of directors will by resolution exempt business combinations (i) between the Company and ZAIS or its affiliates and (ii) between the Company and any person, provided that such business combination is first approved by the Company’sCompany's board of directors (including a majority of the Company’sCompany's directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between the Company and any of them. As a result, any person described above may be able to enter into business combinations with the Company that may not be in the best interest of the Company’sCompany's stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute.

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

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The Company’sCompany's ability to issue additional shares of common and preferred stock may prevent a change in the Company’sCompany's control.

    The Company’sCompany's charter authorizes it to issue additional authorized but unissued shares of common or preferred stock. In addition, the Company’sCompany's board of directors may, without stockholder approval, amend the Company’sCompany's charter to increase or decrease the aggregate number of shares of the Company’sCompany's stock or the number of shares of stock of any class or series that the Company has the authority to issue. As a result, the Company’sCompany's board may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares of the Company’sCompany's common stock or otherwise be in the best interest of the Company’sCompany's stockholders.

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

    As permitted by Maryland law, the Company’sCompany's charter limits the liability of its directors and officers to the Company and its stockholders for money damages, except for liability resulting from:

• actual receipt of an improper benefit or profit in money, property or services; or
  

• a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

    In addition, the Company’sCompany's charter authorizes it, to the maximum extent permitted by Maryland law, to obligate the Company to indemnify any present or former director or officer or any individual who, while a director or officer of the Company and at its request, serves or has served another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, trustee, member or manager from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any of the foregoing capacities and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The Company’sCompany's bylaws obligate it, to the maximum extent permitted by Maryland law, to indemnify any present or former director or officer or any individual who, while a director or officer of the Company and at its request, serves or has served another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, trustee, member or manager and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any of the foregoing capacities and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The Company’sCompany's charter and bylaws also permit it to indemnify and advance expenses to any individual who served a predecessor of the Company in any of the capacities described above and any employee or agent of the Company or a predecessor of the Company.

The Company's amended and restated bylaws designates the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for some litigation, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

    On March 11, 2014, the board of directors of the Company approved an amendment to its bylaws which, unless the Company consents in writing to the selection of an alternative forum, makes the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Company to the Company or to the stockholders of the Company, (iii) any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the MGCL or the Company's charter or bylaws, or (iv) any action asserting a claim against the Company or any director or officer or other employee of the Company that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of the Company's capital stock shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision may limit the ability of stockholders of the Company to obtain a judicial forum that they find favorable for disputes with the Company or its directors, officers, employees, if any, or other stockholders.

Maintenance of the Company’sCompany's 1940 Act exemption imposes limits on the Company’sCompany's operations.

    The Company conducts, and intends to continue to conduct, its operations so as not to become regulated as an investment company under the 1940 Act. Because the Company is a holding company and conducts its businesses primarily through wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company”"investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Company may own, may not have a combined value in excess of 40% of the value of the Company’sCompany's total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which the Company refers to as the 40% test. This requirement limits the types of businesses in which the Company may engage through its subsidiaries.

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