Investment Strategy
Our objective is to provide consistent returns to our investors through a combination of dividends and capital appreciation.
We invest in residential mortgage backed securities either issued or guaranteed as to principal and interest by a government agency or a government-sponsored entity, or Agency RMBS, collateralized by either adjustable-rate mortgage loans, or ARMs, with interest rates that reset monthly, hybrid ARMs that typically have a coupon rate that is fixed for an initial period (typically three, five seven or ten years) and thereafter resets at regular intervals, or fixed rate mortgage loans.
Our investment strategy is designed to:
- build an investment portfolio consisting of Agency RMBS that seeks to generate attractive risk-adjusted investment income;
- manage financing, interest and prepayment rate risks;
- capitalize on discrepancies in the relative valuations in the RMBS market;
- manage cash flow so as to provide for regular quarterly distributions to stockholders;
- limit credit risk;
- minimize the impact that changing interest rates have on our net investment income;
- cause us to maintain our qualification as a REIT; and
- cause us to remain exempt from the registration requirements of the Investment Company Act of 1940, or the Investment Company Act.
Our income is generated primarily from the net spread, or difference, between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities. We believe that the best approach to generating a positive net spread is to manage our liabilities to mirror, as often as possible, the interest rate risks of our investments. To seek to achieve this result, we employ short-term financing in combination with hedging techniques.
The key steps of our investment process are summarized below:
Investment Guidelines
Our Investment Guidelines provide that we will invest in Agency RMBS.
Specifically, our board of directors has adopted a set of investment guidelines that set out the investment focus and other criteria used to evaluate the merits of specific investments as well as the overall portfolio composition. Our Manager’s investment committee reviews our compliance with the investment guidelines periodically and our board of directors receives an investment report at each quarter-end in conjunction with its review of our quarterly results. Our board also reviews our investment portfolio and related compliance with our investment policies and procedures and investment guidelines at each regularly scheduled board of directors meeting.
Our board of directors and our Manager’s investment committee have adopted the following guidelines for our investments and borrowings:
- we will invest in Agency RMBS;
- no investment shall be made that would cause us to fail to qualify as a REIT for federal income tax purposes; and
- no investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act.
In addition, our board of directors has authorized us to dispose of our collateralized loan obligations, or CLOs, and structured notes at reasonable prices. We are not required to sell these securities. We continue to monitor the market for selling the remaining portion of our CLOs and structured notes; however, we may not be able to sell these assets for a reasonable price for some time given the recent depressed prices for these assets. These investment guidelines may be changed by a majority of our board of directors without the approval of our stockholders.
Our board of directors has also adopted a separate set of investment guidelines and procedures to govern our relationships with Cypress and Sharpridge. We have also adopted detailed compliance policies to govern our interaction with Cypress, including when Cypress is in receipt of material non-public information.