Apollo Residential Mortgage, Inc. - FORM 10-K

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Apollo Residential Mortgage, Inc.	exhibit121532210k.htm
EX-21.1 - EXHIBIT 21.1 - Apollo Residential Mortgage, Inc.	exhibit121521110k.htm
EX-31.2 - EXHIBIT 31.2 - Apollo Residential Mortgage, Inc.	exhibit121531210k.htm
EX-23.1 - EXHIBIT 23.1 - Apollo Residential Mortgage, Inc.	exhibit121523110k.htm
EX-31.1 - EXHIBIT 31.1 - Apollo Residential Mortgage, Inc.	exhibit121531110k.htm
EX-32.1 - EXHIBIT 32.1 - Apollo Residential Mortgage, Inc.	exhibit121532110k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35246

APOLLO RESIDENTIAL MORTGAGE, INC.

(Exact name of registrant as specified in its charter)



Maryland		45-0679215
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o Apollo Global Management, LLC 9 West 57th Street, 43rd Floor New York, New York (Address of principal executive offices)		10019 (Zip Code)

(212) 515–3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		New York Stock Exchange
8.00% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value $25.00 mandatory liquidation preference		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨		Accelerated filer	ý

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $462,689,697, based on the closing sales price of the registrant’s common stock on such date as reported on the New York Stock Exchange.

On February 29, 2016, the registrant had a total of 31,853,025 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the 2016 annual meeting of stockholders scheduled to be held on or about June 16, 2016 are incorporated by reference into Part III of this annual report on Form 10-K.

TABLE OF CONTENTS



		Page
PART I

ITEM 1.	Business	3
ITEM 1A.	Risk Factors	7
ITEM 1B.	Unresolved Staff Comments	35
ITEM 2.	Properties	35
ITEM 3.	Legal Proceedings	35
ITEM 4.	Mine Safety Disclosures	35

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
ITEM 6.	Selected Financial Data	40
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	73
ITEM 8.	Financial Statements and Supplementary Data	82
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	128
ITEM 9A.	Controls and Procedures	129
ITEM 9B.	Other Information	129

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	130
ITEM 11.	Executive Compensation	130
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	130
ITEM 13.	Certain Relationships and Related Transactions and Director Independence	130
ITEM 14.	Principal Accountant Fees and Services	130

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	131

SIGNATURES		133

FORWARD-LOOKING INFORMATION

Unless the context requires otherwise, references to “we,” “us,” “our,” “AMTG” or “Company” refer to Apollo Residential Mortgage, Inc., as consolidated with its subsidiaries including variable interest entities in which we are the primary beneficiary. The following defines certain of the commonly used terms in this annual report on Form 10-K: “Agency” refers to a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the United States (or, U.S.) Government, such as Ginnie Mae or the U.S. Small Business Administration or, in the aggregate “Agencies”; “Agency Inverse Floater” refers to securities that have a floating interest rate with coupons that reset periodically based on an index and which coupon varies inversely with changes in a referenced index, which index is typically the one month LIBOR; “Agency IO” and “Agency Inverse IO” refers to Agency interest-only and Agency inverse interest-only securities, respectively, which receive some or all of the interest payments, but no principal payments, made on a related series of Agency RMBS, based on a notional principal balance; “Agency-RMBS” refer to RMBS issued or guaranteed by an Agency; “Alt-A” refers to residential mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to Agency underwriting guidelines and generally allow homeowners to qualify for a mortgage loan with reduced or alternate forms of documentation; “ARMs” refer to adjustable rate mortgages; “ARM RMBS” refer to RMBS collateralized by ARMs; “BFT Contracts” refer to agreements in which a seller finances the sale of property, the buyer agrees to pay the purchase price of the property in monthly installments and legal title to the property is transferred when the terms of the contract are fulfilled; “CMOs” refer to collateralized mortgage obligation bonds; “December 2014 Pool” refers to the loan pool we purchased in December 2014; “Fannie Mae” refers to the Federal National Mortgage Association; “February 2013 Pool” refers to the loan pool we purchased in February 2013; “February 2013 Securitization” refers to the securitization that we transacted in February 2013 simultaneously with the purchase of the February 2013 Pool; “Freddie Mac” refers to the Federal Home Loan Mortgage Corporation; “Hybrids” refer to mortgage loans that have fixed interest rates for a period of time and, thereafter, generally adjust annually based on an increment over a specified interest rate index; “IO” refers to securities that have no principal balance and bear interest based on a notional balance; “LIBOR” refers to the London Interbank Offered Rate; “Long TBA Contracts” refer to TBA Contracts for which we would be required to buy certain Agency RMBS on a forward basis; “March 2015 Pool” refers to the loan pool we purchased in March 2015; “March 2015 Securitization” refers to the securitization that we transacted in March 2015, combining the December 2014 Pool with the March 2015 Pool, for which we retained the security issued in the securitization; “non-Agency RMBS” refer to RMBS that are not issued or guaranteed by an Agency; “Option ARMs” refer to mortgages that provide the mortgagee payment options, which may initially include a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment or a 30-year fully amortizing payment; “Risk Sharing Securities” refer to securities issued by Fannie Mae and/or Freddie Mac which are structured to be subject to the performance of referenced pools of residential mortgage loans and represent unsecured general obligations of the issuing Agency; “RMBS” refer to residential mortgage-backed securities; “SBA” refers to the U.S. Small Business Administration; “SBA-IO” refers to IO securities issued by the SBA; “SBC-MBS” refer to small balance commercial-mortgage-backed securities; “Seller Financing Program” refers to our initiative whereby we provide advances through a warehouse line to a third party to finance the acquisition and improvement of single family homes and, once the homes are improved, they are marketed for sale, with the seller providing financing to the buyer in the form of a mortgage loan or a BFT Contract; “Short TBA Contracts” refer to TBA Contracts for which we would be required to sell certain Agency RMBS on a forward basis; “Subprime” refers to mortgage loans that have been originated using underwriting standards that are less restrictive than those used to originate prime mortgage loans; “Swaps” refer to interest rate swap contracts where we agree to pay a fixed rate of interest and receive a variable rate of interest based on the notional amount of the interest rate swap contract; “Swaptions” refer to option contracts that allow the option holder to enter into a Swap with a specified fixed rate at the expiration of the option period; “Swaption Purchase Contracts” refer to Swaptions that we purchase which provide that at expiration of the option period, we may either (i) enter into a Swap under which we would pay a fixed interest rate and receive a variable rate of interest on the Swap notional amount, or (ii) we would receive a cash payment equal to the fair value, (if any) of the underlying Swap, which termination option is prescribed in the contract confirmation; “Swaption Sale Contracts” refer to Swaptions that we sell which provide that at expiration of the option period, the counterparty to such contract may either (i) enter into a Swap under which we would pay a fixed interest rate and receive a variable interest rate on the Swap notional amount or (ii) we would make a payment equal to the fair value (if any) of the underlying Swap, which termination option is prescribed in the contract confirmation; “TBA Contracts” refer to to-be-announced contracts to purchase or sell certain Agency RMBS on a forward basis and “VIE” refers to a variable interest entity.

We make forward-looking statements in this annual report on Form 10-K and will make forward-looking statements in future filings with the Securities and Exchange Commission (or, SEC), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (or, the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (or, the Exchange Act). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. 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,” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following

subjects, among others, may be forward-looking: market trends in our industry, interest rates, real estate values, the debt securities markets, the U.S. housing market or the general economy or the demand for residential mortgage loans; our business and investment strategy; our operating results and potential asset performance; availability of opportunities to acquire Agency RMBS, non-Agency RMBS, residential mortgage loans and other residential mortgage assets or other real estate related assets; changes in the prepayment rates on the mortgage loans securing our RMBS; management’s assumptions regarding default rates on the mortgage loans securing our non-Agency RMBS and our SBC-MBS; our ability to borrow to finance our assets and the terms, including the cost, maturity and other terms, of any such borrowing; our estimates regarding taxable income, the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by us to accrete the market discount on non-Agency RMBS, realized losses and changes in the composition of our Agency RMBS and non-Agency RMBS portfolios that may occur during the applicable tax period, including gain or loss on any RMBS disposals; expected leverage; general volatility of the securities markets in which we participate; our expected portfolio and scope of our target assets; our expected investment and underwriting process; interest rate mismatches between our target assets and any borrowings used to fund such assets; changes in interest rates and the market value of our target assets; rates of default or decreased recovery rates on our assets; the degree to which our hedging strategies may or may not protect us from interest rate volatility and the effects of hedging instruments on our assets; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters affecting our business; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of our board of directors and will depend on, among other things, our taxable income, our financial results and overall financial condition and liquidity; maintenance of our qualification as a real estate investment trust (or, REIT) for U.S. Federal income tax purposes and such other factors as our board of directors deems relevant; our ability to maintain our exclusion from registration as an investment company under the Investment Company Act of 1940, as amended (or, 1940 Act); availability of qualified personnel through ARM Manager, LLC (or, Manager); and our understanding of our competition.

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. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this annual report on Form 10-K. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those included in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible 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. See Item 1A of this annual report on Form 10-K.

PART I


ITEM 1.	Business

All currency figures are presented in thousands, except per share data or as otherwise noted.

GENERAL

We were incorporated in Maryland on March 15, 2011 and commenced operations on July 27, 2011. We are structured as a holding company and conduct our business primarily through ARM Operating, LLC and our other operating subsidiaries. We have elected and operate to qualify as a REIT for U.S. Federal income tax purposes commencing with our taxable year ended December 31, 2011. We also operate our business in a manner that we believe will allow us to remain excluded from registration as an investment company under the 1940 Act. We are externally managed and advised by our Manager, an indirect subsidiary of Apollo Global Management, LLC (or Apollo). Founded in 1990, Apollo is a leading global alternative investment manager with a contrarian and value-oriented investment approach, with reported total assets under management of approximately $170.1 billion as of December 31, 2015.

At December 31, 2015, our portfolio was comprised of Agency RMBS (comprised of pass-through, IO and Inverse IO securities), non-Agency RMBS, securitized mortgage loans, and other mortgage and mortgage related investment securities and other mortgage related investments. Over time, we expect that we may invest in a broader range of other residential mortgage and mortgage-related assets. (See “Target Assets,” below.)

We use leverage as part of our business strategy in order to increase potential returns to our stockholders and not for speculative purposes. The amount of leverage we choose to employ for particular assets will depend upon our Manager’s assessment of a variety of factors, which include the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks inherent in those assets and the creditworthiness of our financing counterparties.

We use derivatives to hedge a portion of our interest rate risk and not for speculative purposes. As of December 31, 2015, our derivatives included Swaps, Swaptions and a TBA Contract.

INVESTMENT STRATEGY

We primarily invest in residential mortgage assets throughout the United States. At December 31, 2015, our portfolio was comprised of Agency RMBS (comprised of pass-through, IO and Inverse IO securities), non-Agency RMBS, securitized mortgage loans, and other mortgage and mortgage related investments. We believe that the continued diversification of our portfolio of assets, our expertise within our target asset classes and the flexibility of our strategy enables us to achieve attractive risk-adjusted returns under a variety of market conditions and economic cycles over time. In the future, we may invest in assets other than our target assets listed below, in each case subject to maintaining our qualification as a REIT for U.S. Federal income tax purposes and our exclusion from registration as an investment company under the 1940 Act. Our board of directors may, without stockholder approval, amend our investment strategy at any time.

The following is a summary of our target assets at December 31, 2015:



Asset Classes		Principal Assets
Agency RMBS		Agency RMBS, primarily comprised of whole-pool pass-through securities, CMOs, Agency IO, Agency Inverse IO, Agency Inverse Floater and Agency principal-only (or, Agency PO) securities.

Non-Agency RMBS and Real Estate Related Asset-Backed Securities		Non-Agency RMBS, which may be comprised of non-investment grade, unrated or highly rated tranches backed by Alt-A mortgage loans, Option ARMs, Subprime mortgage loans and prime mortgage loans, and other real estate related asset-backed securities.

Residential Mortgage Loans		Prime mortgage loans, jumbo mortgage loans, Alt-A mortgage loans, Option ARMs, Subprime mortgage loans or other mortgage-like financing arrangements, including, but not limited to, BFT Contracts. These investments may be performing, sub-performing, re-performing or non-performing.

Other Residential Mortgage-Related Assets		Non-Agency RMBS comprised of interest-only securities (or, non-Agency IO), principal-only securities (or, non-Agency PO), floating rate inverse interest-only securities (or, non-Agency Inverse IO), and floating rate securities, and other Agency and non-Agency RMBS derivative securities, as well as other financial assets, including, but not limited to, common stock, preferred stock and debt of other real estate-related entities, mortgage servicing rights, excess servicing spreads, advances on a warehouse line and mortgage loans to investors in residential properties and residential real estate. In addition, we may own real estate incidental to our financing arrangements associated with such properties.

We rely on our Manager’s expertise in identifying assets within our target asset classes and to efficiently finance those assets. We expect that our Manager will make decisions based on a variety of factors, including expected risk-adjusted returns on our assets, credit fundamentals, liquidity, availability of adequate financing, borrowing costs and macroeconomic conditions, as well as maintaining our qualification as a REIT and our exclusion from registration as an investment company under the 1940 Act.

FINANCING STRATEGY

We use leverage primarily for the purpose of financing our investment portfolio and increasing potential returns to our stockholders and not for speculative purposes. The amount of leverage we choose to employ for particular assets will depend upon a variety of factors, which include the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks inherent in those assets and the creditworthiness of our financing counterparties. We had an aggregate debt-to-equity multiple of 4.2 times at December 31, 2015, which reflects the aggregate of our borrowings under repurchase agreements and securitized debt (based upon fair value) to our total stockholders’ equity.

We primarily use repurchase agreements to finance the acquisition of our investments and, to a lesser extent, we have and expect to continue to use securitizations as a means to finance whole loans. We use interest rate derivatives to serve as an economic hedge against the interest rate risk associated with a portion of our repurchase agreement borrowings and securitized debt.

Repurchase agreements, although legally structured as a sale and repurchase obligation, are financing contracts (i.e., borrowings) under which we pledge our assets, currently comprised of RMBS and other investment securities and cash as collateral. The amount borrowed under a repurchase agreement is limited to a specified percentage of the fair value of the assets pledged as collateral. The portion of the pledged collateral held by the lender in excess of the amount borrowed under the repurchase agreement is the margin requirement for that borrowing. Repurchase agreements involve the transfer of the pledged collateral to a lender at an agreed upon price in exchange for such lender’s simultaneous agreement to return the same security back to the borrower at a future date (i.e., the maturity of the borrowing) at a higher price. The difference between the original transfer price and return price is the cost, or interest expense, of borrowing under a repurchase agreement. For the substantial majority of our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the lender maintains custody of such collateral. At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, we are required to repay the loan, including any accrued interest, and concurrently reacquire custody of the pledged collateral or, with the consent of the lender, we may renew the repurchase financing at the then prevailing market interest rate and terms. Margin calls pursuant to which a lender may require that we pledge additional securities and/or cash as collateral to secure our borrowings under repurchase financing with such lender are routinely experienced by us when the fair value of our existing pledged collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions. In certain circumstances, we also may make margin calls on counterparties when collateral values increase. To date, we have satisfied all of our margin calls.

We continue to have available capacity under our master repurchase agreements. However, such agreements are generally uncommitted and are renewable at the discretion of our lenders. We finance our Agency RMBS with repurchase agreements generally targeting, in the aggregate, a debt-to-equity leverage ratio in the range between approximately 8 to 1 and 10 to 1 and finance our non-Agency RMBS with repurchase agreements generally targeting, in the aggregate, a debt-to-equity leverage ratio of approximately 3 to 1. Our target and actual leverage may vary from time to time based on availability of financing and our assessment of market conditions. The terms of our repurchase agreements are typically one to six months at inception, but in some cases may have initial terms that are shorter or longer, up to 24 months. At December 31, 2015, we had master repurchase agreements with 25 counterparties. As a matter of routine business, we may have discussions with additional financial institutions with respect to expanding our repurchase agreement borrowing capacity. As of December 31, 2015, we had $2,898,347 of borrowings outstanding under our repurchase agreements with 18 counterparties collateralized by $1,769,351 of Agency RMBS and $1,333,337 of non-Agency RMBS (which included $125,125 of non-Agency RMBS that were eliminated from our balance sheet in consolidation with VIEs) and $163,263 of other investment securities. (See Notes 8, 9 and 10 to the consolidated financial statements, included under Item 8 in this annual report on Form 10-K.)

We have engaged in and expect, subject to market conditions, to continue to engage in securitization transactions. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or financing the underlying securitized financial assets on more favorable terms than available on such assets on an unsecuritized basis.

In addition to repurchase borrowings and securitized debt, subject to market conditions, we may utilize other sources of leverage in the future, including, but not limited to, securitized debt associated with resecuritizations, warehouse facilities, bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances, in addition to transaction or asset-specific funding arrangements. Our future use of these alternative forms of financing is subject to market conditions.

HEDGING STRATEGY

Subject to maintaining our qualification as a REIT for U.S. Federal income tax purposes, we pursue various hedging strategies with the objective of reducing our exposure to increases in interest rates. The U.S. Federal income tax rules applicable to REITs may necessitate that we implement certain of these techniques through a taxable REIT subsidiary (or, TRS) that will generally be subject to U.S. Federal and state income taxation. Our hedging activity may vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions.

Our Swaps and Swaptions are intended to mitigate the effects of increases in our borrowing costs associated with increases in interest rates on a portion of our future repurchase borrowings; in addition, these derivative instruments may also mitigate the impact of increases in interest rates on the value of our Agency RMBS portfolio.

At December 31, 2015, our Swaps had an aggregate notional balance of $1,687,000 with a weighted average fixed-pay rate of 1.43% and a weighted average term to maturity of 3.4 years. Our Swaps have the economic effect of modifying the repricing characteristics on repurchase borrowings equal to the aggregate notional balance of our Swaps. Pursuant to our Swaps, we pay a fixed rate of interest and receive a variable rate of interest, generally based on three-month LIBOR, on the notional amount of the Swap. (See Note 11 Derivative Instruments to the consolidated financial statements included under Item 8 in this annual report on Form 10-K.)

In addition to Swap and Swaptions, we also enter into TBA Contracts from time to time. Short TBA Contracts may serve as an economic hedge against decreases in the value of Agency RMBS held in our portfolio, in an amount equivalent to the TBA Contract notional balance, with the same characteristics as those stipulated in the TBA Contract, or may serve as an economic hedge of indebtedness incurred or to be incurred to acquire real estate assets.

We expect that any gains recognized in connection with the settlement of our derivative transactions that we identify for tax purposes to hedge indebtedness incurred or to be incurred to acquire real estate assets would not constitute gross income for purposes of the REIT 75% and 95% gross income tests. To date, we have identified our Swap and Swaptions as tax hedges.

To date, we have not elected to apply hedge accounting pursuant to generally accepted accounting principles in the U.S. (or, GAAP) for our derivatives and, as a result, we record changes in the estimated fair value of such instruments, along with the associated net Swap interest in earnings, as a component of the net gain/(loss) on derivatives instruments in our consolidated statements of operations.

Certain Swap trades are required to be cleared through a clearinghouse, in accordance with the Commodities Futures Trading Commission (or, CFTC) Swap clearing rules. Swaps cleared under the CFTC Swap clearing rules generally require that higher initial margin collateral be posted relative to Swaps transacted with individual counterparties. The change in Swap margin collateral requirements generally increases the inherent cost of cleared Swaps, as higher amounts of cash are required to be pledged to meet the initial margin requirement on such transactions.

CORPORATE GOVERNANCE

Our board of directors is composed of a majority of independent directors. The Audit, Nominating and Corporate Governance and Compensation Committees of the board are composed exclusively of independent directors.

In order to foster the highest standards of ethics and conduct in all business relationships, we have adopted a Code of Business Conduct and Ethics and Corporate Governance Guidelines, which cover a wide range of business practices and procedures that apply to all of our directors and officers. In addition, we have implemented Whistleblowing Procedures for Accounting and Auditing Matters (or, Whistleblower Policy) that set forth procedures by which any “Covered Persons” (as defined in the Whistleblower Policy) may raise, on a confidential basis, concerns regarding, among other things, any questionable or unethical accounting, internal accounting controls or auditing matters with the Audit Committee. Third parties, such as vendors, clients, stockholders or competitors may also report a good faith complaint regarding such matters under the Whistleblower Policy.

We have a trading policy in place that governs the purchase or sale of any securities of the Company by any of our directors or employees, or by the partners, directors and officers of Apollo, as well as others, and that prohibits any such persons from buying or selling our securities on the basis of material non-public information.

COMPETITION

Our net income depends, in part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring and financing our target assets, we compete with other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. These competitors may be significantly larger than us, may have access to greater capital and other resources or may have other advantages. In addition, some competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Market conditions may attract additional market competitors, which may further increase our competition for investments and sources of financing. An increase in the competition for sources of funding could adversely affect the availability and cost of our financing, and thereby adversely affect the market price of our common stock and preferred stock (collectively our “capital stock”).

EMPLOYEES

We have no employees and are managed by our Manager pursuant to the management agreement between our Manager, us and ARM Operating LLC, dated as of July 21, 2011 (or, Management Agreement). Our officers, comprised of our Chief Executive Officer (or, CEO)/President and Chief Financial Officer (or, CFO)/Treasurer/Secretary are employees of our Manager or its affiliates.

AVAILABLE INFORMATION

We maintain a website at www.apolloresidentialmortgage.com and make available, free of charge, on our website (a) our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (including any amendments thereto), proxy statements and other information (or, Company Documents) filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are so filed or furnished, (b) Corporate Governance Guidelines, (c) Code of Business Conduct and Ethics and (d) written charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of our board of directors. Our documents filed with, or furnished to, the SEC are also available for review and copying by the public at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 and at the SEC’s website at www.sec.gov. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. We provide copies of our Corporate Governance Guidelines and Code of Business Conduct and Ethics, free of charge, to stockholders who request it. Requests should be directed to Investor Relations — Apollo Residential Mortgage, Inc., c/o Apollo Global Management, LLC, 9 West 57th Street, 43rd Floor, New York, New York 10019.


ITEM 1A.	Risk Factors

Our business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely affect our business, financial condition, results of operations and ability to pay dividends to our stockholders and could cause the value of our common stock and 8.00% Series A Cumulative Redeemable Perpetual Preferred Stock (or, Preferred Stock), to decline.

Readers should carefully consider each of the following risks and all of the other information set forth in this annual report on Form 10-K. Based on the information currently known to us, we believe the following information identifies the most significant risk factors affecting us. However, the risks and uncertainties we face are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also have a material effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Risks Related to Our Relationship with Our Manager

We depend on our Manager and certain key personnel of our Manager for success and upon their access to Apollo’s investment professionals and partners. We may not find a suitable replacement for our Manager if the Management Agreement is terminated or if key personnel leave the employment of our Manager or Apollo or otherwise become unavailable to us.

We do not have any employees or separate facilities and rely completely on our Manager to provide us with investment and advisory services. Our Manager has significant discretion as to the implementation of our operating policies and strategies. We depend on the diligence, skill and network of business contacts of our Manager. We benefit from the personnel, relationships and experience of our Manager’s executive team and other personnel and investors of Apollo. The executive officers and key personnel of our Manager evaluate, negotiate, purchase and monitor investments; therefore, our success depends on their continued service. We also depend, to a significant extent, on our Manager’s access to the investment professionals and partners of Apollo and the industry insight and deal flow generated by the Apollo investment professionals in the course of their investment and portfolio management activities.

The departure of any of the senior personnel of our Manager, or of a significant number of the investment professionals or partners of Apollo, could have a material adverse effect on our ability to achieve our investment objectives. In addition, we offer no assurance that our Manager will remain the investment manager or that it will continue to have access to its or Apollo’s executive officers and other investment professionals. At December 31, 2015, the term of the Management Agreement with our Manager was to expire on July 27, 2016. Absent certain action by the independent directors of our board of directors, the Management Agreement will continue to automatically renew on each anniversary for a one year term. Given that the independent members of our board of directors did not provide notice of termination in accordance with the terms of the Management Agreement to our Manager within 180 days of the July 27, 2016 renewal date, the Management Agreement was renewed through July 27, 2017. In the future, if the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to continue to execute our business strategy.

The ability of our Manager and its officers and other personnel to engage in other business activities may reduce the time our Manager spends managing our business and may result in certain conflicts of interest.

Certain of our officers and directors, and the officers and other personnel of our Manager, also serve or may serve as officers, directors or partners of other Apollo vehicles. Further, the officers and other personnel of our Manager may be called upon to provide managerial assistance to other Apollo vehicles. These demands on their time may distract them or slow the rate of our investment activity. Certain affiliates of Apollo, including certain separate accounts and funds managed by Apollo, source and/or manage RMBS and other mortgage related assets. It is possible that other Apollo vehicles, as well as existing or future portfolio companies or funds or separate accounts managed by Apollo, may from time to time, have the same target assets as ours as part of their larger business strategies. To the extent such other Apollo vehicle, or other vehicles that may be organized in the future, seek to acquire the same target assets as us, the scope of opportunities otherwise available to us may be adversely affected and/or reduced.

We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging in business activities of the types conducted by us for their own account.

We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging in business activities of the types conducted by us for their own account. However, our Code of Business Conduct and Ethics contains a conflicts of interest policy that prohibits our directors and executive officers, as well as personnel of our Manager, from engaging in any transaction that involves an actual conflict of interest, except under guidelines approved by our board of directors. Directors, executive officers and personnel of our Manager who are employees of Apollo are also subject to Apollo’s Code of Business Conduct and Ethics. In addition, the Management Agreement with our Manager does not prevent our

Manager and its affiliates from engaging in additional management or investment opportunities, some of which could compete with us.

The Management Agreement was negotiated between related parties and its terms, including fees payable to our Manager, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the Management Agreement because of the desire to maintain our ongoing relationship with our Manager.

The termination of the Management Agreement may be difficult and require payment of a substantial termination fee or other amounts, including in the case of termination for unsatisfactory performance, which may adversely affect our inclination to end the relationship with our Manager.

Termination of the Management Agreement with our Manager without cause is difficult and requires payment of a substantial termination fee or other amounts. The term “cause” is limited to specific circumstances laid out in the Management Agreement. Termination for unsatisfactory financial performance does not constitute “cause” under the Management Agreement. The Management Agreement provides that, in the absence of cause, it may only be terminated at the expiration of the initial term or any renewal period, upon the vote of at least two-thirds of our independent directors based upon: (i) unsatisfactory performance by our Manager that is materially detrimental to us or (ii) a determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent directors. We must provide our Manager with 180 days prior notice of any such termination. Additionally, upon non-renewal or a termination by us without cause (or upon a termination by our Manager due to our material breach), the Management Agreement provides that we will pay our Manager a termination payment equal to three times the average annual management fees earned by our Manager during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter. These provisions increase the effective cost to us of electing not to renew or to terminate (or defaulting in our obligations under) the Management Agreement, thereby adversely affecting our inclination to end our relationship with our Manager, even if we believe our Manager’s performance is not satisfactory.

Our Manager’s and Apollo’s liability is limited under the Management Agreement and we have agreed to indemnify them against certain liabilities. As a result, we could experience poor performance or losses for which our Manager would not be liable.

Pursuant to the Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Under the terms of the Management Agreement, our Manager, its officers, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing services to our Manager (including Apollo) will not be liable to us, any subsidiary of ours, our stockholders or partners or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the Management Agreement. In addition, we have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing services to our Manager (including Apollo) with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement.

Our Manager’s failure to make investments on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns from our assets would materially and adversely affect us.

Our ability to achieve our investment objectives depends on our ability to grow, which depends in turn on the management team of our Manager and its ability to identify and make investments on favorable terms that meet our investment criteria, as well as on our access to financing on acceptable terms. Our ability to grow is also dependent upon our Manager’s ability to successfully hire, train, supervise and manage new personnel. We may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

We do not own the Apollo name, but we may use the name pursuant to a license agreement with Apollo. Use of the name by other parties or the termination of our license agreement may harm our business.

We have entered into a license agreement with Apollo, pursuant to which it has granted us a non-exclusive, royalty-free license to use the name “Apollo.” Under this agreement, we have the right to use this name for so long as our Manager

continues to serve us pursuant to the Management Agreement. Apollo retains the right to continue using the “Apollo” name. We cannot preclude Apollo from licensing or transferring the ownership of the “Apollo” name to third parties, some of whom may compete with us. Consequently, we would be unable to prevent any damage to goodwill that may occur as a result of the activities of Apollo or others. Furthermore, in the event that the license agreement is terminated, we will be required to change our name and cease using the name. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise harm our business. The license agreement will terminate concurrently with the termination of the Management Agreement.

The manner of determining the management fee may not provide sufficient incentive to our Manager to maximize risk-adjusted returns from our assets in our investment portfolio since it is based on our stockholders’ equity (as defined in the Management Agreement) and not on other measures of performance.

Our Manager is entitled to receive a management fee that is based on the amount of our stockholders’ equity (as defined in the Management Agreement) at the end of each quarter, regardless of our performance. Our stockholders’ equity for the purposes of calculating the management fee is not the same as, and could be greater than, the amount of stockholders’ equity shown on our consolidated financial statements. The possibility exists that significant management fees could be payable to our Manager for a given quarter despite the fact that we experienced a net loss during that quarter. Our Manager’s entitlement to such compensation (regardless of performance) may not provide sufficient incentive to our Manager to devote its time and effort to source and maximize risk-adjusted returns from our assets on our investment portfolio, which could in turn adversely affect our ability to pay dividends to our stockholders and the market price of our capital stock. Furthermore, the compensation payable to our Manager will increase as a result of future equity offerings, even if the offering is dilutive to existing stockholders.

Our Manager manages our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment decision made by our Manager, which may result in us making riskier investments.

Our Manager is authorized to follow very broad investment guidelines. While our directors periodically review our investment guidelines and our investment portfolio, they do not review all of our proposed investments. In addition, in conducting periodic reviews, our directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may use complex strategies and transactions entered into by our Manager that may be difficult or impossible to unwind by the time they are reviewed by our directors. Our Manager has great latitude within the broad investment guidelines in determining the types of assets that are proper investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which could materially and adversely affect our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders. Decisions made and investments entered into by our Manager may not fully reflect our best interests.

There are various conflicts of interest in our relationship with Apollo, which could result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationship with Apollo, including our Manager. In the future, we may enter into additional transactions with Apollo. In particular, we may invest in, or acquire, certain of our investments through other Apollo vehicles, including joint ventures with affiliates of Apollo, or purchase assets from, sell assets to or arrange financing from or provide financing to new affiliated potential pooled investment vehicles or managed accounts not yet established, whether managed or sponsored by Apollo’s affiliates or our Manager. Any such transactions will require approval by a majority of our independent directors. In certain instances, we may invest alongside other Apollo vehicles in different parts of the capital structure of the same issuer. Depending on the size and nature of such investment, such transactions may require approval by a majority of our independent directors. There can be no assurance that any procedural protections will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s length transaction.

Our Manager and Apollo have agreed that, for so long as the Management Agreement is in effect and Apollo controls our Manager, neither they nor any entity controlled by Apollo will sponsor or manage any U.S. publicly traded REIT that invests primarily in our target assets. However, our Manager, Apollo and their respective affiliates has and may in the future sponsor or manage additional U.S. publicly traded REITs that invest generally in real estate assets but not primarily in our target assets. Certain affiliates of Apollo, including certain separate accounts and funds managed by Apollo, source and/or manage RMBS and other mortgage related assets. It is possible that other Apollo vehicles, as well as existing or future portfolio companies or funds or separate accounts managed by Apollo, may from time to time, have the same target assets as ours as a part of their larger business strategies. To the extent such other Apollo vehicles, or other vehicles that may be organized in the future, seek to acquire the same target assets as us, the scope of opportunities otherwise available to us may be adversely affected and/or reduced. Our Manager and Apollo have an investment allocation policy in place that is intended to ensure that every Apollo vehicle, including us, is treated in a manner that, over time, is fair and equitable.

According to this policy, investments may be allocated by taking into account factors, including but not limited to, available capital and net asset value of the investment vehicles, suitability of the investment, order size, investment objectives, permitted leverage and available financing, current income expectations, the size, liquidity and duration (i.e., the measure of sensitivity of the price of fixed income securities to changes in interest rates) of the available investment, seniority and other capital structure considerations and the tax implications of an investment. In certain circumstances, the allocation policy provides for the allocation of investments pursuant to a pre-defined arrangement that is other than pro-rata. The investment allocation policy may be amended by our Manager and Apollo at any time without our consent.

In addition to the fees payable to our Manager under the Management Agreement, our Manager and its affiliates may benefit from other fees paid to it in respect of our investments. In addition, an affiliate of Apollo may act as servicer for some of our mortgage loans or for any securitization vehicles we may establish. In any of these or other capacities, affiliates of Apollo and/or our Manager may receive market based fees for their roles, but only if approved by a majority of our independent directors.

Possession of material, non-public information could prevent us from undertaking advantageous transactions; Apollo could decide to establish information barriers.

Apollo generally follows an open architecture approach to information sharing within the larger Apollo organization and does not normally impose information barriers among Apollo and certain of its affiliates. If our Manager were to receive material non-public information about a particular real estate-related entity, or have an interest in investing in or disposing of a particular mortgage-related asset, Apollo or its affiliates may be prevented from investing in or disposing of such asset. Conversely, if Apollo or its affiliates were to receive material non-public information about a particular mortgage-related asset, or have an interest in investing in or disposing of a particular mortgage-related asset, we may be prevented from investing in or disposing of such asset. This risk affects us more than it does investment vehicles that are not related to Apollo, as Apollo generally does not use information barriers that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. Apollo’s approach to these barriers could prevent our Manager’s investment professionals from undertaking advantageous investments or dispositions that would be permissible for them otherwise. In addition, Apollo could in the future decide to establish information barriers, particularly as its business expands and diversifies. In such event, Apollo’s ability to operate as an integrated platform will be restricted and our Manager’s resources may be limited.

Our business may be adversely affected if our reputation, the reputation of our Manager or Apollo, or the reputation of counterparties with whom we associate is harmed.

We may be harmed by reputational issues and adverse publicity relating to us, our Manager or Apollo. Issues could include real or perceived legal or regulatory violations or could be the result of a failure in performance, risk-management, governance, technology or operations, or claims related to employee misconduct, conflict of interests, ethical issues or failure to protect private information, among others. Similarly, market rumors and actual or perceived association with counterparties whose own reputation is under question could harm our business. Such reputational issues may depress the market price of our capital stock or have a negative effect on our ability to attract counterparties for our transactions, or otherwise adversely affect us.

Risks Related to Our Company

We may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain dividend distributions to our stockholders.

Our ability to provide attractive risk-adjusted returns from our assets to our stockholders over the long term is dependent on our ability both to generate sufficient cash flow to pay an attractive dividend and to achieve capital appreciation, and we may not do either on an on-going basis. We may not be able to generate sufficient revenue from operations to pay our operating expenses and to continue to pay dividends to stockholders. The results of our operations and the execution of our business strategy depend on several factors, including the availability of opportunities for investment in our target assets, the level and volatility of interest rates, the availability of adequate equity capital as well as short and long-term financing, conditions in the financial markets and economic conditions.

Difficult and volatile conditions in the mortgage and residential real estate markets, as well as the broader financial markets, may cause us to experience losses related to our asset portfolio and there can be no assurance that we will be successful in executing our business strategies amidst such conditions.

Our results of operations may be materially affected by conditions in the market for mortgages and mortgage-related assets, including RMBS, as well as the residential real estate market, the financial markets and the economy in general. Continuing concerns about the mortgage market and the real estate market, as well as inflation and deflation concerns, falling energy prices, geopolitical issues, lower growth estimates for emerging markets, unemployment and the availability and cost of

credit, have contributed to volatility and uncertain expectations for the economy and markets going forward. In particular, the U.S. residential mortgage market has been severely affected by changes in the lending landscape in recent years and has experienced defaults, credit losses and significant liquidity concerns, and, although the market value of residential real estate has been stabilizing, there is no assurance that these conditions will remain stable or that conditions will not worsen. Further, there has been significant volatility in the price of residential mortgage assets in recent years. All of these factors have impacted investor perception of the risk associated with residential mortgage assets and have a further impact on the value of existing real property and mortgages and new demand for homes and mortgages, which has weighed, and may continue to weigh, heavily on real estate and mortgage prices and performance. Further deterioration of the mortgage and residential real estate markets may affect our ability to identify target assets that will provide us with attractive return opportunities and may cause us to experience losses related to our assets. Declines in the value of our portfolio, or perceived market uncertainty about the value of our assets, would likely make it difficult for us to obtain financing on favorable terms or at all. Our profitability may be materially adversely affected if we are unable to obtain cost-effective financing. An increase in the volatility and deterioration in the broader residential mortgage and RMBS markets as well as the broader financial markets may adversely affect the performance and market value of our assets, which may reduce earnings and, in turn, cash available for distribution to our stockholders. Also, to the extent we invest in mortgage servicing rights (or, MSRs) deterioration of the residential real estate markets could increase delinquencies and defaults on the mortgage loans underlying the MSRs we acquire and increase the cost of servicing mortgage loans. Such increases in servicing costs could adversely affect our results of operations as revenues derived from the MSRs that would otherwise produce income may be diverted to pay servicers additional servicing fees or reimburse servicers for additional expenses from servicing. In addition, as default rates are a component of pricing MSRs, the market value of our MSRs may decrease, thereby decreasing the value we could obtain if we sold the MSRs.

We operate in a competitive market for investment opportunities and future competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these securities.

A number of entities compete with us in acquiring assets and obtaining financing. In acquiring target assets, we compete with other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. In addition, other REITs with similar asset acquisition objectives, including others that may be organized in the future, compete with us in acquiring assets and obtaining financing. These competitors may be significantly larger than us, may have access to greater capital and other resources or may have other advantages. In addition, some competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Current market conditions may attract more competitors, which may increase the competition for sources of financing. An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect the market price of our capital stock. Many of our competitors are not subject to the operating constraints associated with REIT qualification or maintenance of our exclusion from registration as an investment company under the 1940 Act. Furthermore, competition for investments in our target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will continue to be able to identify and make investments that are consistent with our investment objectives.

We may change our operational policies (including our investment guidelines, strategies and policies and the targeted assets in which we invest) with the approval of our board of directors but without stockholder consent or notice at any time, which may adversely affect the market value of our capital stock and our ability to pay dividends to our stockholders.

Our board of directors determines our operational policies and may amend or revise our policies (including our policies with respect to the targeted assets in which we invest, dispositions, growth, operations, indebtedness, capitalization and dividends) or approve transactions that deviate from these policies at any time, without a vote of, or notice to, our stockholders. We may change our investment guidelines and our strategy at any time with the approval of our board of directors, but without the consent of, or notice to, our stockholders, which could result in us making investments that are different in type from, and possibly riskier than, the investments we currently invest in.

We use leverage as part of our business strategy in order to increase potential returns to stockholders but we do not have a formal policy limiting the amount of debt we may incur.

We use leverage as part of our business strategy in order to increase potential returns to stockholders but we do not have a formal policy limiting the amount of debt we may incur. The amount of leverage we deploy for particular investments in our target assets depends upon our Manager’s assessment of a variety of factors, which include the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks of those assets and the creditworthiness of our financing counterparties. Our charter and bylaws do not limit the amount of indebtedness we can incur.

Our ability to generate returns for our stockholders through our investment, finance and operating strategies is subject to then existing market conditions, and we may make significant changes to these strategies in response to changing market conditions.

In the future, to the extent that market conditions change and we have sufficient capital to do so, we may change our investment guidelines in response to opportunities available in different interest rate, economic and credit environments. As a result, we cannot predict the percentage of our equity that will be invested in any of our investment assets at any given time.

We depend on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our capital stock and our ability to pay dividends to our stockholders.

Our business depends on the communications and information systems of Apollo and other third-party service providers. Any failure or interruption of the systems of Apollo or any other counterparties that we rely on could cause delays or other problems in our securities trading activities and our operations, which could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to our investor relationships. As our reliance on technology has increased, so have the risks posed to both our information systems, both internal and those provided by Apollo and third-party service providers. Apollo has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or confidential information will not be negatively impacted by such an incident.

We cannot at the present time predict the unintended consequences and market distortions that may stem from far-ranging, governmental intervention in the economic and financial system or from regulatory reform of the oversight of the financial markets.

The U.S. Government, the U.S. Federal Reserve (or, the Federal Reserve), the U.S. Treasury (or, the Treasury), the SEC and other governmental and regulatory bodies have taken or are taking various actions in an effort to address the underlying causes of, and to contain the fallout from the global financial crisis of 2007 and 2008. For example, on July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (or, the Dodd-Frank Act) was signed into law. The Dodd-Frank Act places restrictions on residential mortgage loan originations and servicing and impacts the asset-backed securitization markets, including the RMBS market, most notably by imposing credit risk retention requirements (or, Risk Retention Rules) on securitizers, which were finalized by various rule making regulators in October 2014, with an effective date of December 24, 2015 for RMBS. The Dodd-Frank Act also imposes requirements on originators to make reasonable, good faith determinations regarding a consumer’s ability to repay a loan, subject to certain exceptions for qualified mortgages. The qualified mortgage rules issued and adopted by the Consumer Financial Protection Bureau (or, the CFPB) became effective in January 2014. The Dodd-Frank Act also imposes certain requirements on the servicing of residential mortgage loans, and the rules issued and adopted by the CFPB implementing these aspects of the Dodd-Frank Act became effective in January 2014. These and many other aspects of the Dodd-Frank Act are subject to rule making and will take effect over several years, making it difficult to anticipate the overall financial impact on us and, more generally, the financial services and mortgage industries.

The Dodd-Frank Act also created a new regulator, the CFPB, which now oversees many of the core laws that regulate the mortgage industry, including among others, the Real Estate Settlement Procedures Act and the Truth in Lending Act. In addition to the qualified mortgage rules and the servicing rules described above, we cannot predict what actions, if any, that the CFPB will take in the mortgage markets, nor what the impact of such actions will be on the mortgage markets or our results of operations, financial condition and business. In addition to the foregoing, the U.S. Government, Federal Reserve, Treasury and other governmental and regulatory bodies such as the Financial Stability Oversight Council, a panel comprising top U.S. financial regulators, may scrutinize or seek to implement changes to regulation which could in recent years negatively impact mortgage REITs, such as ourselves. For example, in recent years, a number of local governmental authorities have considered eminent domain as one of several potential alternatives to help resolve housing finance challenges. This type of legislation and action could have a severe negative impact on the mortgage markets and may introduce risks that are difficult, if not impossible, to quantify. There is no certainty as to whether any governmental bodies will take steps to acquire any mortgage loans under such programs, or ultimately pass other legislation that will affect the mortgage markets.

Such eminent domain programs would authorize governmental authorities to acquire certain mortgage loans by voluntary purchase or eminent domain and to modify those mortgage loans to allow homeowners to continue to own and occupy their homes, irrespective of whether the mortgage loans are actually in default or foreclosure. No such eminent domain programs have become operational, but there can be no assurance that jurisdictions will not take steps to acquire mortgage loans under an eminent domain program (or other programs or initiatives) in the future and what purchase price would be paid for any such mortgage loans.

We cannot predict future actions by the Federal Reserve or the impact such actions will have on our business.

The Federal Reserve is a major participant in, and its actions significantly impact, the residential mortgage market. For example, quantitative easing, a strategy implemented by the Federal Reserve to keep long-term interest rates low and stimulate the U.S. economy, has had the effect of reducing the difference between short-term and long-term interest rates. As a result of the reduction in long-term interest rates, prepayment speeds on certain RMBS increased. As of the end of October 2014, the Federal Reserve discontinued purchasing Agency and Treasury securities. We cannot predict or control the impact future actions by regulators or government bodies, such as the Federal Reserve, will have on our business. Accordingly, future actions by regulators or government bodies, including the Federal Reserve, could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Mortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, our other target assets.

The U.S. Government, through the Federal Reserve, the Federal Housing Administration (or, FHA), and the Federal Deposit Insurance Corporation, has implemented a number of federal programs designed to assist homeowners, including the Home Affordable Modification Program (which provides homeowners with assistance in avoiding residential mortgage loan foreclosures through loan modifications), the Hope for Homeowners Program (which allows certain distressed borrowers to refinance their mortgages into FHA-insured loans in order to avoid residential mortgage loan foreclosures) and the Home Affordable Refinance Program (or, HARP) (which allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments without new mortgage insurance, up to an unlimited loan-to-value ratio for fixed rate mortgages). A number of these homeowners assistance programs have been enhanced or expanded since their inception. In addition, current administration officials and certain members of the U.S. Congress from time to time have indicated support for additional legislative relief for homeowners, including an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings. Loan modifications are more likely to be used when borrowers are less able to refinance or sell their homes due to market conditions and when the potential recovery from a foreclosure is reduced due to lower property values. A significant number of loan modifications could result in a material reduction in cash flows to the holders of mortgages or mortgage securities on an ongoing basis. Amendments to the bankruptcy laws that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the assets that we intend to acquire and the assets we currently hold.

We may be unable to operate within the parameters that allow us to be excluded from regulation as a commodity pool operator, which would subject us to additional regulation and compliance requirements, and could materially adversely affect our business and financial condition.

The enforceability of agreements underlying certain derivative transactions may depend on compliance with applicable statutory and other regulatory requirements and, depending on the identity of the counterparty, applicable international statutory and regulatory requirements. Regulations have been promulgated by U.S. and foreign regulators attempting to strengthen oversight of derivative contracts. The Dodd-Frank Act established a comprehensive new regulatory framework for derivative contracts commonly referred to as “swaps” which requires that many swaps be executed on a regulated market and cleared through a central counterparty, which may result in increased margin requirements and costs. In addition, under the Dodd-Frank Act, any investment fund that trades in swaps may be considered a “commodity pool,” which would cause its operators to be regulated as a “commodity pool operator” (or, CPO). In December 2012, the Commodity Futures Trading Commission issued a no-action letter giving relief to operators of mortgage REITs from the requirements applicable to CPOs. In order to qualify, we must, among other non-operation requirements: (1) limit our initial margin and premiums for commodity interests (swaps and exchange-traded derivatives) to no more than 5% of the fair market value of our total assets; and (2) limit our net income from commodity interests that are not “qualifying hedging transactions” to less than 5% of our gross income. These parameters could limit the use of swaps by us below the level that our Manager would otherwise consider optimal or may lead to the registration of our Manager and/or directors as a CPO, which will subject us to additional regulatory oversight, compliance and costs.

The diminished level of Agency participation in, and other changes in the role of the Agencies in, the mortgage market may adversely affect our business.

If Agency participation in the mortgage market were reduced or eliminated, or their structures were to change, our ability to acquire Agency RMBS could be adversely affected. These developments could also materially and adversely impact our then existing Agency RMBS portfolio. We could be negatively affected in a number of ways depending on the manner in which related events unfold for the Agencies. If Fannie Mae or Freddie Mac were eliminated, or their structures were to change radically (e.g., limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, we could be unable to acquire additional Agency RMBS and our then existing Agency RMBS could be materially and adversely impacted. A reduction in the supply of Agency RMBS could also negatively affect the pricing of our existing Agency RMBS. We rely on our Agency RMBS (as well as other assets) as collateral for our financings under our repurchase agreement borrowings. Any decline in their value, or perceived market uncertainty about their value, may make it more difficult for us to obtain financing on our Agency RMBS on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions. Further, the current support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from Agency RMBS, thereby tightening the spread between the interest we earn on our Agency RMBS and the cost of financing those assets, and may increase the prices of Agency RMBS, thereby lowering the yields we would expect to receive on Agency RMBS that we purchase. In March 2013, the U.S. Federal Housing Finance Agency announced that it would establish a new institutional body, which later became known as the Federal Mortgage Insurance Corporation (or, FMIC), to replace Fannie Mae and Freddie Mac once they wind down operations. In 2013 and 2014, members of Congress proposed draft bills that would phase out Fannie Mae and Freddie Mac over a specified period of time, including one proposal where the FMIC would be modeled after the Federal Deposit Insurance Corporation (or, FDIC) and provide catastrophic reinsurance in the secondary market for mortgage-backed securities (or, MBS), and also take over multi-family guarantees. While prospects for passage are uncertain, these legislative measures underscore the potential change to the Agencies. Future legislation affecting the Agencies may create market uncertainty and have the effect of reducing the actual or perceived credit quality of the Agencies and the securities issued or guaranteed by them. As a result, such laws could increase the risk of loss on our investments in Agency RMBS. It also is possible that such laws could adversely impact the market for such securities and the spreads at which they trade relative to benchmark interest rates and other securities. All of the foregoing could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

The elimination or reduction of the mortgage-interest tax deduction could negatively affect the U.S. housing market.

Various tax reform proposals continue to circulate in Congress, some of which would change the manner in which home interest deductions are treated. It is unclear whether any of the pending tax reform proposals will be enacted, either piecemeal as revenue raisers or as part of a more comprehensive package of tax reforms. Elimination or further restrictions on the mortgage-interest tax deduction could negatively affect the U.S. housing market or the market value of mortgage loans.

Past and potential future credit rating downgrades of the United States and certain European countries and lower economic growth forecasts for emerging markets and China may materially adversely affect our business, liquidity, financial condition and results of operations.

Financial markets have been and continue to be affected by concerns over U.S. fiscal policy. Although the U.S. government passed legislation at the beginning of 2013 averting the so-called ‘‘fiscal cliff’’ (which, in the absence of such legislation, would have resulted in automatic tax increases and spending cuts at the end of 2012), uncertainty could reemerge relating to the stability of the U.S. fiscal and budgetary policy. This uncertainty, together with issues relating to sovereign debt conditions in Europe and lower economic growth forecasts in emerging markets, continue to contribute to the possibility of additional economic slowdowns and/or credit rating downgrades. The impact of U.S. fiscal uncertainty, or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, or the impact of the recent crisis in Europe with respect to the ability of certain countries to continue to service their sovereign debt obligations or the impact of reduced growth forecasts for emerging markets and China, is inherently unpredictable and could adversely affect U.S. and global financial markets and economic conditions. In addition, any further acceleration of these conditions may have an adverse impact on fixed income markets, which in turn could cause our net income to decline or have a material adverse effect on our financial condition.

If the European economic situation were to worsen, or expand to other countries within Europe, we may be subject to enhanced risk of counterparty failure as well as related problems arising from a lack of liquidity in our markets. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments and the government’s credit concerns in general could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, any decreased credit rating of U.S. Government securities would likely impact the credit risk associated with Agency RMBS in our portfolio and could create broader financial turmoil and uncertainty, which may exert downward pressure on the price of our capital stock. Continued adverse economic

conditions may negatively impact the value of the assets in our portfolio, our net income, liquidity and our ability to finance our assets on favorable terms.

Loss of our exclusion from registration under the 1940 Act would adversely affect us, the market price of shares of our capital stock and our ability to distribute dividends, and could result in the termination of the Management Agreement with our Manager.

Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis (or, the 40% Test). We are organized as a holding company and conduct our businesses primarily through ARM Operating, LLC. Both Apollo Residential Mortgage, Inc. and ARM Operating, LLC conduct operations so that they comply with the 40% Test. In addition, certain of our subsidiaries rely upon the exclusion from registration as an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally means that at least 55% of each such subsidiary’s total assets must be comprised of qualifying assets and at least another 25% of our total assets must be comprised of qualifying assets and real estate-related assets under the 1940 Act. We take the position that qualifying assets for this purpose include mortgage loans where 100% of the loan is secured by real estate when we acquire it and we have the unilateral right to foreclose on the loan and other assets, such as the entire ownership in whole-pool Agency and non-Agency RMBS, that the SEC staff in various no-action letters or other pronouncements has determined are the functional equivalent of whole mortgage loans for purposes of the 1940 Act. While the SEC staff has issued a no-action letter that permits the treatment of such interests in Agency whole-pool RMBS as qualifying assets, no such SEC staff guidance is available with respect to non-Agency whole-pool RMBS. Accordingly, we rely on our own judgment and analysis in treating non-Agency whole-pool RMBS as qualifying assets by analogy to Agency whole-pool RMBS. We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

In 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of the 1940 Act, including the nature of the assets that qualify for purposes of this exclusion. There can be no assurance that the laws and regulations governing the 1940 Act status of companies relying on Section 3(c)(5)(C) of the 1940 Act, including the SEC or its staff providing more specific or different guidance regarding this exclusion, will not change in a manner that adversely affects our operations. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such exclusion, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could further inhibit our ability to pursue our strategies. If the SEC or its staff takes a position contrary to our analysis with respect to the characterization of our target assets, we may be deemed an unregistered investment company. In which case, in order not to be required to register as an investment company, we may need to dispose of a significant portion of our assets or acquire significant other additional assets, which may have lower returns than our expected portfolio, or we may need to modify our business strategy to register as an investment company, which would result in significantly increased operating expenses and would likely entail significantly reducing our borrowings, which could also require us to sell a significant portion of our assets. We cannot assure investors that we would be able to complete these dispositions or acquisitions of assets, or deleveraging, on favorable terms, or at all. Consequently, any modification of our business strategy could have a material adverse effect on us. Further, if the SEC determined that we were an unregistered investment company, we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, we would potentially be unable to enforce contracts with third parties and third parties could seek to obtain rescission of transactions undertaken during the period for which it was established that we were an unregistered investment company. Any of these results would have a material adverse effect on us. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such exclusions, we may be required to adjust our business strategy accordingly.

Rapid changes in the values of our target assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion from registration under the 1940 Act.

If the market value or income potential of our target assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, we may need to increase our real estate assets and income or liquidate our non-qualifying assets to maintain our REIT qualification or our exclusion from registration as an investment company under the 1940 Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets we may own. We may have to make decisions that we otherwise would not make absent the REIT and 1940 Act considerations.

Risks Related to Our Financing

We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.

Our business strategy involves the use of borrowings. Pursuant to our leverage strategy, we borrow against a substantial portion of the market value of our assets and use the borrowed funds to finance the acquisition of additional investment assets. While certain of our lending and other transactional agreements may, in effect, limit the maximum amount of leverage that we may maintain, we are not required to maintain any particular minimum debt-to-equity ratio. Weakness in the financial markets, the residential mortgage markets and the economy in general could adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing or to increase the costs of our financing. The return on our assets and cash available for distribution to our stockholders may be reduced to the extent that market conditions prevent us from leveraging our assets or increase the cost of our financing relative to the income that can be derived from our investments. Our financing costs will reduce cash available to pay dividends to stockholders. We may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations.

We depend on repurchase agreements, and may in the future depend on the availability of securitizations (which we have previously accessed), resecuritizations, warehouse facilities and bank credit facilities (including term loans and revolving facilities) to finance our investments. Our inability to access such funding could have a material adverse effect on our results of operations, financial condition and business. We rely on short-term financing and thus are especially exposed to changes in the availability and cost of financing.

Our ability to fund our asset acquisitions may be impacted by our ability to secure financing on acceptable terms. We rely on short-term financing and thus are especially exposed to changes in the availability and cost of financing. For example, the term of a repurchase transaction under our repurchase agreements is typically one to six months at inception; although in some cases the term may be shorter or longer.

It is possible that the lenders that provide our financing could experience changes in their ability to advance funds to us, independent of our performance or the performance of our investment portfolio. Furthermore, if many of our potential lenders are unwilling or unable to provide us with financing, we could be forced to sell our assets at an inopportune time when prices are depressed. Further, if we default on our financial covenants with a lender or are otherwise unable to access funds under any of these facilities, we may have to curtail our asset acquisition activities and/or dispose of assets under adverse market conditions. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability.

Many lenders have continued to maintain tight lending standards, and have reduced their lending capacity in response to the difficulties and changed economic conditions that have adversely affected the mortgage market. In addition, certain lenders have been impacted by the European sovereign debt crisis. Further contraction among lenders, insolvency of lenders or other general market disruptions could adversely affect one or more of our existing or potential lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing on attractive terms or at all. This could increase our financing costs and reduce our access to liquidity, which could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

An increase in our borrowing costs relative to the interest we receive on our leveraged assets may adversely affect our profitability and our cash available for dividends to our stockholders.

Borrowing rates are currently at low levels that may not be sustained in the future. As our repurchase agreements and other short-term borrowings mature, we are required either to enter into new borrowings or to sell certain of our assets. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between the returns on our assets and the cost of our borrowings. This could adversely affect our earnings and, in turn, cash available for financing and investing purposes and to pay dividends to our stockholders.

Interest rate fluctuations could reduce the income on our investments and increase our financing costs.

Changes in interest rates will affect our operating results as such changes will affect the interest we receive on our floating rate interest-bearing investments, the financing cost of our borrowings and the amount of interest we pay/receive on our Swaps, which we utilize for hedging purposes. Changes in interest rates may also affect borrower default rates, which may result in losses for us. See “Risks Related to Our Assets” below.

Interest rate caps on certain of the mortgages collateralizing certain of our RMBS may adversely affect our profitability on such investments.

The coupon interest rate on ARM-RMBS adjusts over time as interest rates change (typically after an initial fixed-rate period for Hybrids). However, the level of adjustment to the interest rates earned on our RMBS collateralized by ARMs is typically limited by contract or, in certain cases, by state or federal law. Interim and lifetime interest rate caps on the mortgages collateralizing our ARMs limit the amount by which the interest rates on such mortgages can adjust. Interim interest rate caps limit the amount interest rates on a particular ARM can adjust upward during the next adjustment period. Lifetime interest rate caps limit the amount interest rates can adjust upward from inception through maturity of a particular ARM. Our repurchase transactions are not subject to similar restrictions, as the financial markets primarily determine the interest rates that we pay on borrowings under repurchase agreements used to finance our RMBS. Accordingly, in a sustained period of rising interest rates or a period in which interest rates rise rapidly, the interest income we earn on RMBS collateralized by ARMs could be less than the interest expense incurred to finance such assets.

If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term or if we default on our obligations under the repurchase agreement, we could incur losses.

When we engage in repurchase transactions, we generally transfer securities to lenders (i.e., repurchase agreement counterparties) and receive cash from such lenders. Because the cash/financing we receive from the lender is less than the value of the securities we pledge (this difference is referred to as the “haircut”), if the lender defaults on its obligation to transfer the same securities back to us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). See “Counterparty Risk,” included under Item 7A of this annual report on Form 10-K, for further discussion regarding risks related to exposure to financial institution counterparties by country. Our exposure to defaults by counterparties may be more pronounced during periods of significant volatility in the market conditions for mortgages and mortgage-related assets as well as the broader financial markets. In addition, generally, if we default on one of our obligations under a repurchase transaction with a particular lender, that lender can elect to terminate the transaction and cease entering into additional repurchase transactions with us. In addition, some of our repurchase agreements contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other repurchase agreements could also declare a default. Any losses we incur on our repurchase transactions could materially adversely affect our earnings and thus our cash available for dividends to our stockholders.

Our rights under our repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements, which may allow our lenders to repudiate our repurchase agreements.

In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the pledged collateral without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as that of an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.

The repurchase agreements that we use to finance our asset acquisitions may require us to provide additional collateral and may restrict us from leveraging our assets as fully as desired.

Our repurchase agreements are uncommitted and the counterparty may refuse to advance funds under such agreements to us. If the market value of the mortgage loans or securities pledged or sold by us to a funding source decline in value, the lending institution may have the right to initiate a margin call in its sole discretion, which would require us to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so. Posting additional collateral will reduce our liquidity and may reduce our ability to pay dividends to our stockholders and limit our ability to leverage our assets, which could adversely affect our business and could cause the value of our capital stock to decline.

We may be forced to sell assets at significantly depressed prices to meet margin calls to post additional collateral and/or to maintain adequate liquidity, which could cause us to incur losses. Moreover, to the extent we are forced to sell assets at such time, given market conditions, we may be selling at the same time as others facing similar pressures, which could exacerbate a difficult market environment and which could result in us incurring significantly greater losses on our sale of such assets. In an extreme case of market duress, a market may not even be present for certain of our assets at any price. In the event we do not have sufficient liquidity to meet margin calls and post additional collateral, lending institutions can accelerate repayment of our indebtedness, increase our borrowing rates, liquidate our collateral or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection under the U.S.

Bankruptcy Code. In the event of our bankruptcy, our borrowings may qualify for special treatment under the U.S. Bankruptcy Code. This special treatment would allow the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to liquidate the collateral under these agreements without delay. Further, financial institutions may require us to maintain a certain amount of cash that is not invested or to set aside non-leveraged assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. If we are unable to meet these collateral obligations, as described above, our financial condition could deteriorate rapidly.

Certain of our financing facilities and other counterparty agreements contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues.

Certain of our financing facilities and other counterparty agreements contain, or may contain in the future, restrictions, covenants, and representations and warranties that, among other things, may require us to satisfy specified financial, asset quality, loan eligibility and loan performance tests. If we fail to meet or satisfy any of these covenants or representations and warranties, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their respective interests against collateral pledged under such agreements and restrict our ability to make additional borrowings.

Certain of our financing agreements may also contain cross-default or other similar provisions. Under our financing agreements with such provisions, the lender could declare a default (or in certain cases, accelerate our debt obligations rather than declare a default) if a default (or other similar event) were to occur under our other financing or similar arrangements (whether with that lender, the affiliates of that lender or a third party lender) after the expiration of any cure periods under such other arrangements. The specific nature of these cross-defaults (or similar provisions) varies among our various financing agreements that contain such provisions.

The covenants and restrictions in our current and future financing facilities and other counterparty agreements may restrict our ability to, among other things:


•	incur or guarantee additional debt;


•	make certain investments or acquisitions;


•	pay dividends on, repurchase or redeem our capital stock;


•	engage in mergers or consolidations;


•	reduce liquidity below certain levels,


•	grant liens or incur operating losses for more than a specified period; and


•	enter into transactions with affiliates.

These restrictions may interfere with our ability to obtain financing, to pay dividends, including dividends needed to maintain our qualification as a REIT, or to engage in other business activities, which may significantly limit or harm our business, financial condition, liquidity and results of operations. A default and resulting repayment acceleration could significantly reduce our liquidity, which could require us to sell our assets to repay amounts due and outstanding. This could also significantly harm our business, financial condition, results of operations and our ability to pay dividends, which could cause the value of our capital stock to decline. A default will also significantly limit our financing alternatives such that we will be unable to continue to pursue our strategy, which could curtail the returns on our assets.

If we acquire and subsequently re-sell any mortgage loans, we may be required to repurchase such loans or indemnify investors if we breach representations and warranties.

If we acquire and subsequently re-sell any mortgage loans, we would generally be required to make customary representations and warranties about such loans to the loan purchaser. Residential mortgage loan sale agreements and the terms of any securitizations into which we may sell loans will generally require us to repurchase or substitute loans in the event we breach a representation or warranty we provide to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. The remedies available to a purchaser of mortgage loans are generally broader than those available to us against an originating broker or correspondent. Repurchased loans are typically worth only a fraction of the original price. Significant repurchase activity could materially adversely affect our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders. See “Market Conditions and Our Strategy,” included under Item 7 of this annual report on Form 10-K.

Securitizations expose us to additional risks.

We have acquired and, based on our Manager’s assessment of market conditions, may continue to acquire residential mortgage loans with the intention of securitizing them and retaining all or a part of the securitized assets in our portfolio. To the extent that we securitize residential mortgage loans, we may hold the most junior certificates associated with a

securitization and, with the adoption of the Risk Retention Rules, we now will be required to retain these certificates or other certificates in an amount and a manner that satisfies the Risk Retention Rules. As a holder of the most junior certificates, we are more exposed to losses on the portfolio investments because the interest we retain is subordinate to the more senior notes typically issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the more senior notes experience any losses. We cannot be assured that we will be able to access the securitization market in the future, or be able to do so at favorable rates. The inability to securitize our assets could hurt our performance and our ability to grow our business. See “Market Conditions and Our Strategy,” included under Item 7 of this annual report on Form 10-K.

Risks Related to Our Hedging

Our existing and future hedging transactions may expose us to contingent liabilities in the future and adversely impact our financial condition and results of operations.

Subject to maintaining our qualification as a REIT, part of our strategy involves entering into hedging transactions that could require us to fund cash payments in certain circumstances (e.g., the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due from us would be equal to the unrealized loss of the open Swap positions with the respective counterparty and could also include other fees and charges. Such losses would be reflected in our results of operations as realized losses. Our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could adversely impact our financial condition.

Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for dividends to our stockholders.

In addition, certain of our derivative instruments involve risk since they often are not traded on regulated exchanges or guaranteed by an exchange or its clearing house. Consequently, there may be no requirements with respect to segregation of customer funds and positions. In addition, the hedging transactions must comply with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in its default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although we generally seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure stockholders that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Our operating results may suffer because losses on our derivatives may not be offset by a change in the fair value of our investment assets.

In order to mitigate interest rate risk associated with increases in interest rates we enter into interest rate derivative contracts. To date, we chose not to pursue hedge accounting for these or any of our other derivative instruments for GAAP purposes, and therefore we record the change in estimated fair value of such instruments in earnings. As a result, changes in the fair value of our derivative instruments may result in us incurring realized and unrealized losses on such instruments.

To the extent that we invest in MSRs and excess MSRs in the future, the value of such MSRs and excess MSRs may be reduced substantially by changes in interest rates unless we are able to hedge against that uncertainty.

Changes in interest rates are a key driver of the performance of MSRs and excess MSRs since the values of such assets are highly sensitive to changes in interest rates. Excess MSRs are interests in MSRs, representing a portion of the fee paid to mortgage servicers. The fee that a mortgage servicer is entitled to receive for servicing a pool of mortgages generally exceeds the reasonable compensation that would be charged in an arm’s-length transaction. For example, 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-length transaction. The portion of the fee in excess of what would be charged in an arm’s-length transaction is commonly referred to as the excess mortgage servicing fee. Historically, the value of MSRs and excess MSRs has generally increased when interest rates rise and generally decreased when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. We may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our 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 us and/or could adversely affect us.

To the extent we do not utilize derivatives to hedge against changes in fair value of the MSRs or excess MSRs that we may acquire, our balance sheet, financial condition and results of operations would be susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs and excess MSRs as interest rates change.

Risks Related to Our Assets

We may not realize gains or earn income from our assets, which could cause the value of our capital stock to decline.

We seek to generate attractive risk-adjusted returns from our assets to our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. However, the assets we acquire may not appreciate in value and may in fact decline in value, as we experienced with our Agency RMBS during 2013, and the debt securities we acquire may default on interest and/or principal payments. Accordingly, we may not be able to realize gains or income from our assets. Any gains that we do realize may not be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses, which could cause the value of our capital stock to decline.

We acquire Alt-A and Subprime mortgage loans and Option ARMs and non-Agency RMBS collateralized by Alt-A, Subprime and Option ARM mortgage loans, which are subject to increased risks.

We have acquired, and expect to continue to acquire, Alt-A, Subprime mortgage loans and Option ARMs and invest in non-Agency RMBS backed by collateral pools that contain these types of mortgage loans, as well. Subprime mortgages may have been originated using underwriting standards that are less strict than those used in underwriting “prime mortgage loans” and as a result include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending practices, Alt-A, Subprime mortgage loans and Option ARMs have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that 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 Alt-A and Subprime mortgage loans, the performance of RMBS backed by Alt-A and Subprime mortgage loans that we may acquire could be correspondingly adversely affected, which could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Our portfolio of assets may be concentrated and may be subject to risk of default.

Our portfolio is primarily comprised of Agency RMBS and non-Agency RMBS and to a lesser extent, mortgage loans, mortgage related assets and other investments. Over time, we may continue to diversify our portfolio to cover a broader range of other residential mortgage and mortgage related assets, including, but not limited to, additional residential mortgage loans, which we may source through bulk acquisitions of pools of whole loans originated by third parties, bonds-for-title, MSRs and excess MSRs. However, we are not required to observe specific diversification criteria, except as may be set forth in the investment guidelines adopted by our board of directors. Therefore, our 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. To the extent that our portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of our assets within a short time period, which may reduce our net income and the value of our shares and accordingly reduce our ability to pay dividends to our stockholders. Difficult conditions in the markets for mortgages and mortgage-related assets as well as the broader financial markets have resulted in a significant contraction in liquidity for mortgages and mortgage-related assets, which may adversely affect the value of the assets in which we invest.

Our Manager’s use of models in connection with the evaluation of our assets subjects us to potential risks in the event that such models are incorrect, misleading or based on incomplete information.

As part of the risk management process, our Manager uses detailed proprietary models to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure frequency, cost and timing. Models and data are used to value assets or potential assets and also in connection with hedging our acquisitions. Many of the models are based on historical trends. These trends may not be indicative of future results. Furthermore, the assumptions underlying the models may prove to be inaccurate, causing the models to also be incorrect. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation models, our Manager may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, hedging transactions based on faulty models and data may prove to be unsuccessful in mitigating unfavorable interest rate exposure.

Our investments in non-Agency RMBS or other investment assets of lower credit quality involve credit risk, which could materially adversely affect our results of operations.

The holder of a mortgage or non-Agency RMBS assumes a risk that the borrowers may default on their obligations to make full and timely payments of principal and interest. Pursuant to our investment guidelines, we have the ability to acquire non-Agency RMBS and other investments that involve credit risk. In general, non-Agency RMBS carry greater investment risk than Agency RMBS because they are not guaranteed as to principal and/or interest by the U.S. Government, any federal agency or any federally chartered corporation. Unexpectedly high rates of default (e.g., in excess of the default rates forecasted) and/or higher than expected loss severities on the mortgages collateralizing our non-Agency RMBS may adversely affect the value of such assets. Accordingly, non-Agency RMBS and other investment assets of lower credit quality could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on these assets.

We may have significant credit risk, especially on non-Agency RMBS, in certain geographic areas and may be disproportionately affected by adverse events specific to those markets.

A significant number of the mortgages collateralizing our RMBS may be concentrated in certain geographic areas. For example, with respect to our non-Agency RMBS portfolio, we have significantly higher exposure in California, New York, Florida, New Jersey and Texas. Certain markets within these states (particularly California and Florida) experienced significant decreases in residential home value during the recent housing crisis and continue to experience challenging economic and real estate conditions. Any event that adversely affects the economy or real estate market in these states could have a disproportionately adverse effect on our non-Agency RMBS portfolio. In general, any material decline in the economy or significant difficulties in the real estate markets would be likely to cause a decline in the value of residential properties securing the mortgages in the relevant geographic area. For example, a prolonged period of low oil prices could have a negative impact on the U.S. economy and, in particular, the economies of energy-dominant states such as Texas, North Dakota and California. A significant portion of our non-Agency RMBS portfolio consists of loans originated in California and Texas and accordingly, a prolonged period of low oil prices could adversely impact the economy of such states and accordingly the ability of borrowers in such states to repay their mortgage loans. This, in turn, could increase the risk of delinquency, default and foreclosure on real estate collateralizing our non-Agency RMBS in affected areas. This may then materially adversely affect our credit loss experience on our non-Agency RMBS in such areas if unexpectedly high rates of default (e.g., in excess of the default rates forecasted) and/or higher than expected loss severities on the mortgages collateralizing such securities were to occur.

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

We focus primarily on investing in, financing and managing Agency RMBS, non-Agency RMBS, residential mortgage loans and other residential mortgage assets or other real estate related assets in the U.S. In a normal yield curve environment, some of these types of assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for dividends to our stockholders.

A significant risk associated with these assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these assets could decline, and the duration and weighted-average life of the assets could increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the repurchase agreements we may enter into to finance the purchase of these securities. Market values of our assets may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, increases or expected increases in voluntary prepayments for those assets that are subject to prepayment risk or widening of credit spreads or spreads to benchmark interest rates.

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

Interest rate fluctuations may adversely affect the value of our assets, net income and capital 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 our 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 our income and the value of our capital

stock. Additionally, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline in the market price of our capital stock.

Our investments are recorded at fair value and there may be uncertainty as to the value of these assets.

The assets in our investment portfolio are comprised of securities that trade in a market that may experience periods of illiquidity or market dislocation. We value our investments at fair value, as defined by GAAP, which valuations may from time to time, require us to use assumptions that may not be observable in the marketplace, particularly in periods of market dislocation or illiquidity for such investments. Our assumptions could cause our estimate of value for our investments to be subjective, with the fair value of such investments differing materially from the values in a liquid market. There can be no assurance that the values that we arrive at for our investments can be realized upon the sale of such investments in the marketplace, due both to the potential subjectivity of our valuations and the fact that market values of our investments can be become very volatile depending on market conditions and the performance of certain investments.

The failure of servicers to effectively service the mortgage loans underlying certain of the assets in our portfolio could materially and adversely affect our investments in non-Agency RMBS and mortgage loans.

Most residential mortgage loans and securitizations of residential mortgage loans require a servicer to manage collections on each of the underlying loans. Both default frequency and severity of loss experienced on mortgage loans may depend upon the quality of the servicer. If servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If servicers take longer to liquidate non-performing assets, loss severities may tend to be higher than originally anticipated. The failure of servicers to effectively service the mortgage loans underlying certain assets in our portfolio could negatively impact the value of our investments and our performance. Many servicers have gone out of business in recent years, requiring a transfer of servicing to another servicer. This transfer takes time and loans may become delinquent because of confusion or lack of attention. In the case of pools of securitized loans, servicers may be required to advance interest on delinquent loans to the extent the servicer deems those advances recoverable. In the event the servicer does not advance, interest may be interrupted even on more senior securities. Servicers may also advance more interest than is in fact recoverable once a defaulted loan is disposed, and the loss to us may, as a result, be greater than the outstanding principal balance of that loan (greater than 100% loss severity).

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

Some of our assets are rated by nationally recognized statistical rating organizations. Any credit ratings on our assets are subject to ongoing evaluation by rating agencies, and we cannot assure investors that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our assets in the future, the value of these assets could significantly decline, which would adversely affect the value of our portfolio and could result in losses to us.

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair our assets and harm our operations.

We believe the risks associated with our business will be more severe during periods of economic slowdown or recession, especially if these periods are accompanied by declining real estate values. Our non-Agency RMBS and residential mortgage loans will be particularly sensitive to these risks.

A decline in real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support refinancing or moving to a new home. Borrowers may also be less able or inclined to continue to honor their mortgage obligations if the value of real estate weakens, particularly in situations where balance of the mortgage loan exceeds the value of the mortgaged property. As a result, a decline in real estate values significantly increases the likelihood that we will incur losses on our non-Agency RMBS and mortgage loans in the event of default because the value of property securing such investments may be insufficient for us to recover our investment. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from non-Agency RMBS and residential mortgage loans in our portfolio, as well as our Manager’s ability to acquire, sell and securitize residential mortgage loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to pay dividends to our stockholders.

Prepayment rates may adversely affect the value of our portfolio of mortgage assets.

The value of our mortgage assets may be affected by prepayment rates on mortgage loans. If we purchase mortgage assets at a premium to par value, when borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will have to amortize the related premium faster than we anticipated when we invested in such assets. Conversely, if we purchase mortgage assets at a discount to par value, when borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates on mortgage loans may be affected by a number of factors including, but not limited to, market interest rates, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks. In periods of declining interest rates, prepayment rates on mortgage loans generally increase. In addition, prepayments received during periods of declining interest rates are likely to be reinvested by us in assets with yields that are lower than the investments that prepaid. In addition, the market value of the assets may, because of the risk of prepayment, benefit less than other fixed- income securities from declining interest rates.

We invest in Agency IO and Agency Inverse IO and may in the future invest in non-Agency IO and non-Agency Inverse IO, all of which are highly sensitive to prepayments and/or changes in interest rates. As the mortgages underlying an IO or Inverse IO are paid off, the future stream of interest on such securities is reduced. Faster prepayments than we anticipated on the underlying loans backing our IO and Inverse IO will have an adverse effect on our returns on these investments.

If we purchase MSRs, we will base the price we pay and the rate of amortization of those assets on, among other things, our projection of the cash flows from the pool of mortgage loans underlying the related MSRs. Our expectation of prepayment speeds and recapture rates is a significant assumption underlying our cash flow projections and if prepayment speeds are significantly greater than expected or recapture rates significantly lower than expected, the carrying value of any MSRs that we acquire could exceed their estimated fair value.

The mortgage loans that we acquire, and the mortgage and other loans underlying the RMBS that we acquire, are subject to delinquency, foreclosure and loss, which could result in losses to us.

Residential mortgage loans are secured by one-to-four family and other residential properties and are subject to risks of delinquency, foreclosure and loss. The ability of a borrower to repay a loan secured by a residential property typically is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, natural disasters, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay their loans. In addition, we invest in non-Agency RMBS, which are backed by residential real property but, in contrast to Agency RMBS, their principal and interest are not guaranteed by federally chartered entities such as Fannie Mae and Freddie Mac and, in the case of Ginnie Mae, the U.S. Government. The ability of a borrower to repay these loans or other financial assets is dependent upon the income or assets of these borrowers.

In the event of any default under a mortgage loans or similar residential mortgage assets held directly by us, we bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loans or other residential mortgage assets, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

Certain investments in whole mortgage loans may require us to purchase less desirable mortgage assets as part of an otherwise desirable pool of mortgage assets, which could subject us to additional risks relating to the less desirable mortgage assets.

If we acquire whole mortgage loans, we may be required to purchase other types of mortgage assets as part of an available pool of mortgage assets in order to acquire the desired whole loans. These other mortgage assets may include mortgage assets that subject us to additional risks. Acquisition of less desirable mortgage assets may impair our performance and reduce the return on our investments.

We may be subject to liability for potential violations of predatory lending laws, which could adversely impact our results of operations, financial condition and business.

Various U.S. federal, state and local laws have been enacted that are designed to discourage predatory lending practices. If any of our mortgage loans or similar residential mortgage assets are found to have been originated in violation of predatory or abusive lending laws, we could incur losses, which could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

We are subject to counterparty risk and may be unable to seek indemnity or require our counterparties to repurchase mortgage loans if they breach representations and warranties, which could cause us to suffer losses.

When selling mortgage loans, sellers typically make customary representations and warranties about such loans. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to repurchase or substitution, or that our counterparty will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase agreements. Our inability to obtain indemnity or require repurchase of a significant number of loans could have a material adverse effect our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Our mortgage assets are subject to risks particular to real property, which may reduce our return from an affected property or asset and reduce or eliminate our ability to pay dividends to stockholders.

We own mortgage assets secured either directly or indirectly by real estate. In addition, we own real estate directly acquired through our Seller Financing Program and may also acquire real estate as a result of a default of mortgage loans. Real estate investments are subject to various risks, including:


•	natural disasters, including earthquakes, floods and other natural disasters, which may result in uninsured losses;


•	acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;


•	adverse changes in national and local economic and market conditions;


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


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


•	the potential for uninsured or under-insured property losses.

If any of these or similar events occur, it may reduce our return from an affected property or asset and reduce or eliminate our ability to pay dividends to our stockholders. In particular, the occurrence of a natural disaster (such as an earthquake, tornado, hurricane or a flood) or a significant adverse climate change may cause a sudden decrease in the value of real estate and would likely reduce the value of the properties securing our mortgage loans and mortgages collateralizing our non-Agency RMBS. Since certain natural disasters may not typically be covered by the standard hazard insurance policies maintained by borrowers, the borrowers may have to pay for repairs due to the disasters. Borrowers may not repair their property or may stop paying their mortgages under those circumstances. This would likely cause defaults and credit loss severities to increase on our mortgage and mortgage related assets which, unlike our investments in Agency RMBS, are not guaranteed as to principal and/or interest by the U.S. Government, any federal agency or federally chartered corporation.

We have significant risk associated with our investments associated with our Seller Financing Program as such investments are concentrated in certain geographic areas and may be disproportionately affected by adverse events specific to those markets.

Assets we hold in connection with our Seller Financing Program are concentrated primarily in the southeastern U.S. Any event that adversely affects the economy or real estate values in these markets could have a disproportionately adverse effect on our ability to collect amounts due on our warehouse line receivable as well as our returns on investments associated with our Seller Financing Program. We currently do not have access to financing for assets held under our Seller Financing Program.

We have significant credit and counterparty risks associated with our warehouse line receivables and the creditworthiness of our warehouse borrower counterparty.

We extend credit to our Seller Financing Program counterparty through a warehouse line, which is used by it to fund home purchases and improvements. Subsequent to purchasing and rehabilitating a home, our Seller Financing Program counterparty markets the home for sale, offering seller financing through either a BFT Contract or mortgage loan. Once the Seller Financing Program counterparty completes the transaction cycle by entering into a BFT Contract or mortgage loan with a home buyer, we have the right of first refusal to purchase the contract/mortgage. We could experience losses associated with

our warehouse line receivables should our Seller Financing Program counterparty seek to cancel our agreement and/or default on the warehouse line, as we may have difficulty in taking possession of the properties and completing property improvements necessary to market the homes for sale. The warehouse line is collateralized by a pledge of the ownership interest in the equity of the warehouse counterparty which holds title to the real estate properties.

Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.

The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our debt investments becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us and our ability to pay dividends to our stockholders.

In the course of our business, we may take title to real estate, and if so, could be subject to environmental liabilities with respect to these properties. The presence of hazardous substances, if any, on our properties may adversely affect our ability to sell the affected properties and incur substantial remediation costs, thus harming our financial condition. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

To the extent that we invest in MSRs in the future, the value that we may realize from MSRs and excess MSRs may be significantly less than the fair values of such assets reflected on our balance sheet.

We may invest in MSRs, which arise from contractual agreements between us and the investors (or, their agents) in mortgage securities and mortgage loans. Subject to maintaining our qualification as a REIT and our exclusion from registration as an investment company under the 1940 Act, we may acquire MSRs from the sale of mortgage loans where we assume the obligation to service the loan in connection with the sale transaction or we may purchase MSRs and excess MSRs. Any MSRs and excess MSRs that we acquire will be recorded at fair value on our balance sheet. The determination of the fair value of MSRs and excess MSRs will require our Manager to make numerous estimates and assumptions. Such estimates and assumptions 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 and excess MSRs may be materially different than the fair values of such assets as reflected in our consolidated 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 our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders. Accordingly, there may be material uncertainty about the fair value of any MSRs or excess MSRs we acquire.

Furthermore, MSRs, excess MSRs and the related servicing activities 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 our business. Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which we or they are subjected by virtue of ownership of MSRs or excess MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

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

Allegations of deficiencies in foreclosure documentation and servicing and foreclosure practices by several large mortgage servicers have raised various concerns relating to foreclosure practices. As a result of these alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. In addition, on February 9, 2012, a group consisting of state attorneys general and state bank and mortgage regulators in 49 states reached a settlement with the largest mortgage servicers regarding foreclosure practices in the states’ various jurisdictions. On January 7, 2013, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System announced a settlement with a number of mortgage servicers in lieu of continuing a foreclosure review process, under which borrowers who believed they were financially harmed by the foreclosure process in 2009 and 2010 were able to request an independent review of the process. The settlement, which includes funds for both direct payments to eligible borrowers and for other assistance such as loan modifications and forgiveness of deficiency

judgments, ended the case-by-case reviews. Although servicers have generally ended their suspension of foreclosures, the processing of foreclosures continues to be slow in many states due to continuing issues in the servicer foreclosure process, including efforts by servicers to comply with regulatory consent orders and requirements, recent changes in the state foreclosure laws, court rules and proceedings and the pipeline of foreclosures resulting from these delays as well as the elevated level of foreclosures caused by the housing market downturn. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure or bankruptcy proceedings. We intend to continue to monitor and review the issues raised by the alleged improper foreclosure practices. We cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect our business and cannot assure you that these matters will not impair our performance and reduce the return on our investments.

The lack of liquidity of our assets may adversely affect our business, including our ability to value and sell our assets.

We may acquire assets or other instruments that are not liquid, including securities and other instruments that are not publicly traded. Moreover, turbulent market conditions, could significantly and negatively impact the liquidity of our assets. Illiquid assets typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. In addition, validating third-party pricing for illiquid assets may be more subjective than more liquid assets. The illiquidity of our assets may make it difficult to sell such assets if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded such assets. To the extent that we utilize leverage to finance our purchase of assets that are or become illiquid, the negative impact on us related to trying to sell assets quickly could be greatly exacerbated. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

We maintain cash balances in our bank accounts that exceed the Federal Deposit Insurance Corporation limitation.

We regularly maintain cash balances at a single bank domiciled in the U.S. in excess of the Federal Deposit Insurance Corporation insurance limit. The failure of such bank could result in the loss of a portion of such cash balances in excess of the federally insured limit, which could materially and adversely affect our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Homeowner association super priority liens may take priority over mortgage liens, which could impact the value of the properties that we may acquire of the properties underlying our investments.

In some jurisdictions it is possible that the first lien of a mortgage may be extinguished by super priority liens of homeowners associations (or, HOAs), potentially resulting in a loss of the outstanding principal balance of the mortgage loan. In a number of states, HOA or condominium association assessment liens can take priority over first lien mortgages in certain circumstances. The number of these so called superlien jurisdictions has increased in the past few decades and may increase further. Recent rulings by the highest courts in Nevada and the District of Columbia have held that the superlien statute provides the HOA or condominium association with a true lien priority rather than a payment priority from the proceeds of the sale, creating the ability to extinguish the existing senior mortgage and greatly increasing the risk of losses on mortgage loans secured by homes whose owners fail to pay HOA or condominium fees.

If an HOA, or a purchaser of an HOA superlien, completes a foreclosure in respect of an HOA superlien on a mortgaged property, the related mortgage loan may be extinguished. In those circumstances, a loan owner could suffer a loss of the entire principal balance of such mortgage loan. A servicer might be able to attempt to recover, on an unsecured basis, by suing the related mortgagor personally for the balance, but recovery in these circumstances will be problematic if the related mortgagor has no meaningful assets against which to recover.

If properties that we may acquire or the properties underlying our investments suffer such losses, it could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Special assessments and energy efficiency liens may take priority over mortgage liens, which could impact the value of the properties that we may acquire or the properties underlying our investments.

Mortgaged properties securing mortgage loans may be subject to the lien of special property taxes and/or special assessments. These liens may be superior to the liens securing the mortgage loans, irrespective of the date of the mortgage. In some instances, individual mortgagors may be able to elect to enter into contracts with governmental agencies for Property Assessed Clean Energy (or, PACE) or similar assessments that are intended to secure the payment of energy and water efficiency and distributed energy generation improvements that are permanently affixed to their properties, possibly without notice to or the consent of the mortgagee. These assessments may also have lien priority over the mortgages securing mortgage loans. No assurance can be given that a mortgaged property so assessed will increase in value to the extent of the assessment

lien. Additional indebtedness secured by the assessment lien would reduce the amount of the value of a mortgaged property available to satisfy the affected mortgage loan.

Such actions could have a dramatic impact on our business, results of operations and financial condition, and the cost of complying with any additional laws and regulations could have a material adverse effect on our business, financial condition, results of operations, the market price of our capital stock and our ability to pay dividends to our stockholders.

Risks Related to Our Capital Stock

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

Subject to applicable law, our board of directors has the power, without further stockholder approval, to authorize us to issue additional authorized shares of common stock and preferred stock on the terms and for the consideration it deems appropriate. We cannot predict the effect, if any, of future sales of our capital stock, or the availability of shares for future sales, on the market price of our common stock or preferred stock. The market price of our common stock may decline significantly when the restrictions on resale by certain of our stockholders lapse. Sales of substantial amounts of common stock, preferred stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.

If our portfolio of assets generates insufficient income and cash flow, we could be required to sell assets, borrow funds, make a portion of our dividend distributions in the form of a taxable stock distribution or distribution of debt securities to meet our distribution requirements.

We are generally required to distribute to our stockholders at least 90% of our ordinary taxable income each year for us to qualify as a REIT under the Internal Revenue Code of 1986, as amended (or, the Internal Revenue Code), which requirement we currently satisfy through quarterly cash dividends. Our ability to pay dividends may be adversely affected by a number of factors. Although we pay quarterly dividends to our stockholders, our board of directors has the sole discretion to determine the timing, form and amount of any distributions to our stockholders. If our portfolio of assets generates insufficient income and cash flow to fund our dividends, we could be required to sell assets, borrow funds or make a portion of our dividend distributions in the form of a taxable stock distribution or distribution of debt securities. To the extent that we are required to sell assets in adverse market conditions or borrow funds at unfavorable rates, our results of operations could be materially and adversely affected. Our board of directors will make determinations regarding dividend distributions based upon various factors, including our ordinary taxable income, our financial condition, our liquidity, our debt and preferred stock covenants, maintenance of our REIT qualification, applicable provisions of the Maryland General Corporation Law (or, MGCL) and other factors as our board of directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay dividends to our stockholders:


•	our ability to make profitable investments;


•	margin calls or other expenses that reduce our cash flow;


•	defaults in our asset portfolio or decreases in the value of our portfolio; and


•	a significant increase in our operating expenses.

As a result, no assurance can be given that we will be able to pay dividends to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve any expected market yield, increase or even be maintained over time, such that the value of our capital stock could be materially and adversely affected.

In addition, dividend distributions that we make to our stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated as long-term capital gains to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in shares of our common stock.

Future offerings of debt or equity securities, which may rank senior to our common stock, may adversely affect the market price of our common stock and result in dilution to owners of our common stock.

If we decide to issue debt securities in the future, which would rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. In September 2012, we issued 6,900,000 shares of Preferred Stock. No dividends may be paid on our common stock unless full cumulative dividends have been paid on our Preferred Stock. The issuance of additional shares of our common stock, including in connection with conversions of our outstanding Preferred Stock, or other future issuances of convertible securities, including outstanding options and warrants, or otherwise, will dilute the ownership interest of our common stockholders. Additionally, any equity securities or convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and,

indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

Risks Related to Our Organization and Structure

Certain provisions of the MGCL could inhibit changes in control.

Certain provisions of the MGCL may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. We are subject to the “business combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then outstanding voting stock or an affiliate or our associate who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting 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 us and an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of our voting stock and (ii) two-thirds of the votes entitled to be cast by holders of our voting stock 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 our common stockholders receive a minimum price, as defined under MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for our 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 interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted business combinations (i) between us and any other person, provided that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person), (ii) between us and Apollo and its affiliates and associates and (iii) persons acting in concert with any of the foregoing. As a result, any person described above may be able to enter into business combinations with us that may not be in the best interests of our stockholders, without compliance by us with the super majority vote requirements and other provisions of the statute. There can be no assurance that our board of directors will not amend or revoke this exemption in the future.

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

The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently have. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors as a result of which, vacancies on our board of directors may be filled only by the remaining directors, even if the remaining directors do not constitute a quorum. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a premium over the then current market price.

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

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

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit recourse available to holders of our capital stock in the event of actions not in their best interests.

Our charter limits the liability of our present and former directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under Maryland law, our present and former directors and officers do not have any liability to us and our stockholders for money damages other than liability resulting from:


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


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

Our charter authorizes us to indemnify our directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present and former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. We have entered into indemnification agreements with each of our directors and officers pursuant to which we may be obligated to pay or reimburse the defense costs incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification.

Our charter contains provisions that make removal of our directors difficult, which could make it difficult for stockholders to effect changes to our management.

Our charter provides that, subject to the rights of any series of preferred stock, a director may be removed with or without cause upon the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of us that is in the best interests of stockholders.

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

In order for us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year, and at least 100 persons must beneficially own our stock during at least 335 days of a taxable year of 12 months, or during a proportionate portion of a shorter taxable year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To preserve our REIT qualification, among other purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. The Articles Supplementary for our Preferred Stock prohibit any stockholder from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding Preferred Stock. These ownership limits could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. Our board of directors have established exemptions from the ownership limits which permit that: (i) Apollo and certain of its affiliates to collectively hold up to 25% of our common stock; (ii) certain private fund investors to collectively hold (a) up to the greater of 1,540,500 shares of our common stock or 15% of our common stock, and (b) up to 25% of our Preferred Stock, and; (iii) other private fund investors to collectively hold up to 20% of our Preferred Stock.

Risks Related to Our Taxation as a REIT

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code, and our failure to qualify as a REIT or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available to pay dividends to our stockholders.

We have elected to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2011. We have not requested and do not intend to request a ruling from the Internal Revenue Service (or, IRS) that we qualify as a REIT. The U.S. federal income tax laws governing REITs are complex, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding shares, and the amount of our dividend distributions. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our ability to satisfy the REIT asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our

income and assets on an ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes. Thus, while we currently operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will qualify as a REIT for any particular year.

If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income, and distributions to our stockholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow money or sell assets in order to pay our taxes. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our taxable income to stockholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT for the subsequent four taxable years following the year in which we failed to qualify.

Complying with REIT requirements may force us to liquidate or forego otherwise attractive investments.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities, shares in REITs and other qualifying real estate assets, including certain mortgage loans, certain kinds of MBS, and certain securities issued by other REITs. The remainder of our investments in securities (other than government securities and REIT qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and securities that are qualifying real estate assets) can consist of the securities of any one issuer, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total securities can be represented by securities of one or more TRSs, and the aggregate value of debt instruments issued by public REITs held by us that are not otherwise secured by real property may not exceed 25% of the value of our total assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

REIT distribution requirements may cause us to forego attractive investment opportunities and/or may require us to incur debt or sell assets to make such dividend distributions.

In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income including certain items of non-cash income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our dividend distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We expect to distribute our net income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the 4% nondeductible excise tax.

Our taxable income may substantially exceed our net income as determined based on GAAP because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, referred to as phantom income. Although some types of phantom income are excluded in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any phantom income items if we do not distribute those items on an annual basis. In addition, our taxable income may substantially exceed our net income as determined in accordance with GAAP or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, for tax purposes we may be required to accrue interest and discount income on mortgage loans, RMBS, and other types of debt securities or interests in debt securities before we receive any payments of interest or principal on such assets. We may also acquire distressed debt instruments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower, with gain recognized by us to the extent that the principal amount of the modified debt exceeds our cost of purchasing it prior to modification. We may be required under the terms of the indebtedness that we incur, whether to private lenders or pursuant to government programs, to use cash received from interest payments to

make principal payment on that indebtedness, with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.

As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of our shares as part of a distribution in which stockholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements and to avoid U.S. federal corporate income tax and the 4% nondeductible excise tax. Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

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

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. We also could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Internal Revenue Code to maintain our qualification as a REIT. In addition, our TRSs will be subject to U.S. federal, state and local corporate taxes. In order to meet the REIT qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale to customers in the ordinary course of business, we hold some of our assets through TRSs. Any taxes paid by us or our TRSs would decrease the cash available for distribution to our stockholders.

The failure of mortgage loans or RMBS subject to a repurchase agreement to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.

When we enter into repurchase agreements, we will nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that we are treated for U.S. federal income tax purposes as the owner of the assets that are the subject of any such agreements notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the repurchase agreement, in which case we could fail to qualify as a REIT.

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

We have acquired and intend to continue to acquire non-Agency RMBS and residential whole loans at prices that reflect significant market discounts on their unpaid principal balances. In particular, we have purchased junior tranches of certain non-Agency RMBS in which our right to cash distributions is subordinated to that of the holders of the senior tranches. The senior tranches participate in the cash flow from the underlying loan assets and distributions on the junior tranches are generally made only after all required payments are made to holders of the senior tranches. The amount of the discount at which we have acquired such non-Agency RMBS will generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made, unless we elect to include accrued market discount in income as it accrues. Principal payments on certain loans are made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions. In addition, even if junior tranches of non-Agency RMBS that we hold continue to generate taxable income with no corresponding receipt of cash, we must continue to meet the REIT distribution requirements, which are based on our taxable income.

Similarly, some of the RMBS that we acquire have been issued with original issue discount (or, OID). We are required to report such OID based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such RMBS will be made. If a portion of such RMBS turns out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectibility is provable. Finally, in the event that any debt instruments or RMBS acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectibility. Similarly, we may be required to accrue interest income with respect to subordinate RMBS at its stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest is determined to be uncollectible, the utility of that deduction could depend on us having taxable income in that later year or thereafter.

We may acquire excess MSRs, which reflects the portion of an MSR that exceeds the arm’s length fee for services performed by the mortgage service. Based on IRS guidance concerning the classification of excess MSRs to the extent we acquire excess MSRs, we intend to treat such excess MSRs as ownership interests in the interest payments made on the underlying mortgage loans, akin to an “interest-only” strip. Under this treatment, for purposes of determining the amount and timing of taxable income, each excess MSR is treated as a bond that was issued with OID on the date we acquired such excess MSR. In general, we will be required to accrue OID based on the constant yield to maturity of each excess MSR, and to treat such OID as taxable income in accordance with the applicable U.S. federal income tax rules. The constant yield of an excess MSR will be determined, and we will be taxed, based on a prepayment assumption regarding future payments due on the mortgage loans underlying the excess MSR. If the mortgage loans underlying an excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of OID will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, we may be required to accrue an amount of income with respect to an excess MSR that exceeds the amount of cash collected for such excess MSR. Furthermore, it is possible that, over the life of the investment in an excess MSR, the total amount we pay for, and accrue with respect to, the excess MSR may exceed the total amount we collect on such excess MSR. No assurance can be given that we will be entitled to a deduction for such excess, meaning that we may be required to recognize phantom income over the life of an excess MSR, which will impact our REIT distribution requirements.

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

The interest apportionment rules under Treasury Regulation Section 1.856-5(c) provide that, if a mortgage is secured by both real property and other property, a REIT is required to apportion its annual interest income to the real property security based on a fraction, the numerator of which is the value of the real property securing the loan, determined when the REIT commits to acquire the loan, and the denominator of which is the highest “principal amount” of the loan during the year. IRS Revenue Procedure 2014-51 interprets the “principal amount” of the loan to be the face amount of the loan, despite the Internal Revenue Code requiring taxpayers to treat any market discount, that is the difference between the purchase price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as interest rather than principal.

The interest apportionment regulations apply only if the mortgage loan in question is secured by both real property and other property. Beginning in 2016, if a loan is secured by both real property and personal property, and the fair market value of the personal property does not exceed 15% of the fair market value of all real and personal property securing the loan, the loan is treated as secured solely by real property for the purposes of these rules. We expect that all or most of the mortgage loans that we acquire will be secured only by real property and no other property value is taken into account in our underwriting process. Accordingly, it is not contemplated that we will invest in mortgage loans to which the interest apportionment rules described above would apply. Nevertheless, if the IRS were to assert successfully that (i) our mortgage loans were secured by other property in addition to real estate (and, beginning in 2016, such property securing a loan exceeds 15% of the total value of the real property and personal property securing such loan), (ii) the interest apportionment rules applied for purposes of our REIT testing, and (iii) that the position taken in IRS Revenue Procedure 2014-51 applied to certain mortgage loans in our portfolio for purposes of our REIT testing, then depending upon the value of the real property securing our mortgage loans and their face amount, and the sources of our gross income generally, we may fail to meet the 75% REIT gross income test. If we do not meet this test, we could potentially lose our REIT qualification or be required to pay a penalty to the IRS.

In addition, the Internal Revenue Code provides that a regular or a residual interest in a real estate mortgage investment conduit (or, REMIC) is generally treated as a real estate asset for the purpose of the REIT asset tests, and any amount includable in our gross income with respect to such an interest is generally treated as interest on an obligation secured by a mortgage on real property for the purpose of the REIT gross income tests. If, however, less than 95% of the assets of a REMIC in which we hold an interest consist of real estate assets (determined as if we held such assets), we will be treated as holding our proportionate share of the assets of the REMIC for the purpose of the REIT asset tests and receive directly our proportionate share of the income of the REMIC for the purpose of determining the amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property. In connection with the expanded HARP, the IRS issued guidance providing that, among other things, if a REIT holds a regular interest in an “eligible REMIC,” or a residual interest in an “eligible REMIC” that informs the REIT that at least 80% of the REMIC’s assets constitute real estate assets, then (i) the REIT may treat 80% of the value of the interest in the REMIC as a real estate asset for the purpose of the REIT asset tests and (ii) the REIT may treat 80% of the gross income received with respect to the interest in the REMIC as interest on an obligation secured by a mortgage on real property for the purpose of the 75% REIT gross income test. For this purpose, a REMIC is an “eligible REMIC” if (i) the REMIC has received a guarantee from Fannie Mae or Freddie Mac that will allow the REMIC to make any principal and interest payments on its regular and residual interests and (ii) all of the REMIC’s mortgages and pass-through certificates are secured by interests in single-family dwellings (which includes one-to-four family dwellings). If we were to acquire an interest in an eligible REMIC of which less than 95% of the assets constitute real estate assets, the IRS guidance described above may generally allow us to treat 80% of our interest in such a REMIC as a qualifying asset for the purpose of the REIT asset tests and 80% of the gross income derived from the interest as qualifying income for the purpose of

the 75% REIT gross income test. Although the portion of the income from such a REMIC interest that does not qualify for the 75% REIT gross income test would likely be qualifying income for the purpose of the 95% REIT gross income test, the remaining 20% of the REMIC interest generally would not qualify as a real estate asset, which could adversely affect our ability to satisfy the REIT asset tests. Accordingly, owning such a REMIC interest could adversely affect our ability to qualify as a REIT.

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

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

Although our use of TRSs may be able to partially mitigate the impact of meeting the requirements necessary to maintain our qualification as a REIT, our ownership of and relationship with our TRSs is limited and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax if our transaction with a TRS is not conducted on an arm’s length basis.

A REIT may own up to 100% of the stock of one or more entities that elect to be treated as a TRS for tax purposes. Subject to certain exceptions, a TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of 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. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s total assets may consist of stock or securities of one or more TRS. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. TRSs that we may form will pay U.S. federal, state and local income or franchise tax on their taxable income, and their after-tax net income will be available for distribution to us but will not be required to be distributed to us, unless necessary to maintain our REIT qualification. We will monitor the aggregate value of the securities of our TRSs and intend to conduct our affairs so that such securities will represent less than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets. In addition, we will scrutinize our transactions with our TRSs to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax. There can be no assurance however, that we will be able to comply with the TRS limitation or avoid the 100% excise tax in all situations.

Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our common stock.

The maximum U.S. federal income tax rate for certain qualified dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to the maximum U.S. federal income tax rate on ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors

who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our shares.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate exposure will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if (i) the instrument (a) hedges interest rate risk or foreign currency exposure on liabilities used to carry or acquire real estate assets, (b) hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests or (c) hedges an instrument described in clause (a) or (b) for a period following the extinguishment of the liability or the disposition of the asset that was previously hedged by the hedged instrument, and (ii) such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or the limits on our use of hedging techniques could expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit to us, although such losses may be carried forward to offset future taxable income of the TRS.

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

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

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of shares of our common stock.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Liquidation of our assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our assets to repay obligations to our lenders, we may be unable to comply with these requirements, thereby jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as inventory or property held primarily for sale to customers in the ordinary course of business.

Our qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, and also to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies under the 75% REIT gross income test. In addition, when purchasing the equity tranche of a securitization, we may rely on opinions or advice of counsel regarding the qualification of the securitization for exemption from U.S. corporate income tax and the qualification of interests in such securitization as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

Our ability to invest in TBA Contracts could be limited by our REIT qualification, and we could fail to qualify as a REIT as a result of these investments.

We may purchase forward-settling Agency RMBS transactions through TBA Contracts. Pursuant to these TBAs, we will agree to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. As with any forward purchase contract, the value of the underlying Agency RMBS may decrease between the contract date and the settlement date, which may result in the recognition of income or gains or loss. The law is unclear regarding whether TBAs are qualifying assets for the 75% REIT asset test.

Accordingly, our ability to purchase Agency RMBS through TBAs or to dispose of TBAs, through these transactions or otherwise, could be limited. We do not expect TBAs to comprise a significant portion of our assets and, therefore, do not expect TBAs to adversely affect our ability to meet the REIT assets tests. No assurance can be given that the IRS would treat TBAs as qualifying assets. In the event that such assets are determined to be non-qualifying, we could be subject to a penalty tax or we could fail to qualify as a REIT if the value of our TBAs, together with our non-qualifying assets for the 75% asset test, exceeded 25% of our total assets at the end of any calendar quarter or any income from the disposition of TBAs exceeded 25% of our gross income for any taxable year.

Risks Related to the Proposed Merger and Related Transactions

The proposed merger with Apollo Commercial Mortgage, Inc. (or, ARI) and related transactions are subject to conditions, including certain conditions that may not be satisfied or completed on a timely basis, if at all. Failure to complete the merger and related transactions could negatively impact our stock price and our future business and financial results.

The proposed merger with ARI and the related transactions are subject to customary closing conditions. Satisfaction of certain of the conditions is not within our control, and difficulties in otherwise satisfying such conditions may prevent, delay or otherwise materially adversely affect the consummation of the proposed transactions. If the merger and related transactions are not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the transactions, we would be subject to a number of risks, including negative reactions from the financial markets. In addition, we could be subject to litigation related to the proposed transactions. If these risks materialize it may adversely affect our businesses, financial condition, financial results and stock price.


ITEM 1B.	Unresolved Staff Comments

None.


ITEM 2.	Properties

Our principal executive office is located at 9 West 57th Street, New York, NY 10019, telephone (212) 515-3200.


ITEM 3.	Legal Proceedings

From time to time, we may be involved in various claims and legal actions in the ordinary course of business. As of December 31, 2015, we were not involved in any legal proceedings.


ITEM 4.	Mine Safety Disclosures

Not applicable.

PART II


ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

All currency amounts are presented in thousands, except per share amounts or as otherwise noted.

Market Information

Our common stock is listed on the New York Stock Exchange (or, NYSE), under the symbol “AMTG.” On March 3, 2016, the last sales price for our common stock on the NYSE was $13.05 per share. The following table presents the high and low sales prices per share of our common stock during each calendar quarter for the years ended December 31, 2015 and 2014:



Year	Quarter End Date	High		Low
2015	December 31, 2015	$	13.41	$	11.34
	September 30, 2015	$	15.26	$	12.21
	June 30, 2015	$	16.18	$	14.65
	March 31, 2015	$	16.50	$	15.46
2014	December 31, 2014	$	16.71	$	15.44
	September 30, 2014	$	17.00	$	15.41
	June 30, 2014	$	17.14	$	15.60
	March 31, 2014	$	17.50	$	14.66

Holders

As of February 29, 2016, we had 163 registered holders of our common stock. The 163 holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which holds shares on behalf of certain of the beneficial owners of our common stock. Such information was obtained through our registrar and transfer agent.

Dividends

We elected to be taxed as a REIT for U.S. Federal income tax purposes commencing with our taxable year ended December 31, 2011 and, as such, anticipate distributing annually at least 90% of our REIT taxable income. Although we may borrow funds to pay dividends, cash for such dividends is expected to be largely generated from our results of operations. Dividends are declared and paid at the discretion of our board of directors and depend on our taxable net income, cash available for distribution, financial condition, ability to maintain our qualification as a REIT and such other factors that our board of directors may deem relevant. From time to time, a portion of our dividends on our capital stock may be characterized as capital gains or return of capital. For 2015, all of our common stock dividends were characterized as ordinary income to stockholders. (See Item 1A and Item 7 of this annual report on Form 10-K for a discussion of factors which may adversely affect our ability to pay dividends and for information regarding the sources of funds used for dividends.)

As of December 31, 2015, we had 6,900,000 shares of Preferred Stock outstanding, which entitles holders to receive dividends at an annual rate of 8.00% (paid quarterly, in arrears) based on the liquidation preference of $25.00 per share, or $2.00 per share per annum. The dividends on the Preferred Stock are cumulative and payable quarterly in arrears. Except under certain limited circumstances, the Preferred Stock is generally not convertible into or exchangeable for any other property or any other of our securities at the election of the holders. No dividends may be paid on our common stock unless full cumulative dividends have been paid on the Preferred Stock, all of which have been paid to date. After September 20, 2017, we may, at our option, redeem the shares at $25.00 per share, plus any accrued unpaid distribution through the date of the redemption.

The following table presents information with respect to our common stock dividends declared during the years ended December 31, 2015 and December 31, 2014:



Year	Declaration Date	Record Date	Payment Date	Dividend per Share
2015	December 17, 2015	December 31, 2015	January 31, 2016	$	0.48
	September 17, 2015	September 30, 2015	October 30, 2015	$	0.48
	June 17, 2015	June 30, 2015	July 31, 2015	$	0.48
	March 19, 2015	March 31, 2015	April 30, 2015	$	0.48
2014	December 18, 2014	December 31, 2014	January 30, 2015	$	0.45
	September 17, 2014	September 30, 2014	October 31, 2014	$	0.44
	June 19, 2014	June 30, 2014	July 31, 2014	$	0.42
	March 13, 2014	March 31, 2014	April 30, 2014	$	0.40

Direct Stock Purchase and Dividend Reinvestment Plan (Dollar amounts presented with respect to our Direct Stock Purchase and Dividend Reinvestment Plan are in whole dollars.)

In November 2012, we initiated a Direct Stock Purchase and Dividend Reinvestment Plan (or, the Stock Purchase Plan) to provide new investors and existing stockholders of our common stock with a convenient and economical way to purchase shares of our common stock. By participating in the Stock Purchase Plan, individuals may purchase additional shares of our common stock by reinvesting some or all of the cash dividends that they receive on their shares of our common stock. In addition, the Stock Purchase Plan permits participants to make optional cash investments of up to $10,000 per month, and, with our prior approval, optional cash investments in excess of $10,000 per month, for the purchase of additional shares of our common stock. We may, in the future, offer a discount from the market price of our common stock ranging from 0% to 5%, including the payment by us of applicable brokerage fees, pursuant to the dividend reinvestment or optional cash investment features of the Stock Purchase Plan, at our sole discretion.

Wells Fargo Shareowner Services is the administrator of the Stock Purchase Plan (or, the Plan Administrator). Stockholders who own common stock that is registered in their own name and want to participate in the Stock Purchase Plan can join by enrolling online by accessing their shareowner account through the Plan Administrator’s website at www.shareowneronline.com or by completing an enrollment form and returning it to the Plan Administrator.

Individuals that are not existing stockholders and stockholders that hold shares of our common stock in “street name” in a brokerage, bank or other intermediary account, and do not wish to transfer their shares of common stock into their name, can enroll in the Stock Purchase Plan by: (1) enrolling online at www.shareowneronline.com and authorizing the Plan Administrator to make a one-time deduction from their bank account of at least $250; (2) completing and returning an enrollment form, together with an initial investment of at least $250; (3) enrolling online at www.shareowneronline.com and agreeing to make a one-time deduction from your bank account of at least $100 and authorizing future monthly or bi-monthly cash investments of at least $100; or; (4) completing and returning an enrollment form together with an initial investment of at least $100 authorizing future automatic monthly or bi-monthly cash investments of at least $100.

For additional information regarding the Stock Purchase Plan or additional assistance regarding the transfer of shares, individuals may telephone the Plan Administrator at 1-800-468-9716, or at 1-651-450-4064 if outside the U.S. Information may also be found on the Plan Administrator’s website at www.shareowneronline.com.

Stockholder Return Performance (Amounts presented with respect to Stockholder Return Performance are in whole dollars.)

The stock performance graph and table below shall not be deemed, under the Securities Act or the Exchange Act, to be (i) “soliciting material” or “filed” or (ii) incorporated by reference by any general statement into any filing made by us with the SEC, except to the extent that we specifically incorporate such stock performance graph and table by reference.

The following graph is a comparison of the cumulative total stockholder return on our common stock, the Russell 2000 Index (or, Russell 2000) and the SNL Finance REIT Index (or, SNL Finance REIT), a peer group index from July 22, 2011 (the day we commenced trading on the NYSE) to December 31, 2015. The graph assumes that $100 was invested on July 22, 2011 in our common stock, the Russell 2000 and the SNL Finance REIT and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our shares will continue to be in line with the same or similar trends depicted in the following graph.



	Period Ended
Index	7/22/2011		12/31/2011		12/31/2012		12/31/2013		12/31/2014		12/31/2015
Apollo Residential Mortgage, Inc.	$	100.00	$	83.43	$	130.43	$	108.35	$	128.39	$	111.55
Russell 2000	$	100.00	$	88.65	$	103.14	$	143.18	$	150.19	$	143.56
SNL Finance REIT⁽¹⁾	$	100.00	$	93.66	$	112.48	$	108.63	$	124.40	$	114.08

⁽¹⁾

As of December 31, 2015, the SNL Finance REIT Index was comprised of the following companies: AG Mortgage Investment Trust, Inc.; American Capital Agency Corp.; American Capital Mortgage Investment Corp.; American Church Mortgage Company; Annaly Capital Management, Inc.; Anworth Mortgage Asset Corporation; Apollo Commercial Real Estate Finance, Inc.; Apollo Residential Mortgage, Inc.; Arbor Realty Trust, Inc.; Ares Commercial Real Estate Corporation; ARMOUR Residential REIT, Inc.; Bimini Capital Management, Inc.; Blackstone Mortgage Trust; Capstead Mortgage Corporation; Cherry Hill Mortgage; Chimera Investment Corporation; Colony Financial, Inc.; CV Holdings, Inc.; CYS Investments, Inc.; Dynex Capital, Inc.; Ellington Residential Mortgage; Five Oaks Investment Corp.; Great Ajax Corp.; Hannon Armstrong Sustainable; Hatteras Financial Corp.; Invesco Mortgage Capital Inc.; JAVELIN Mortgage Investment Corp.; JER Investors Trust Inc.; Jernigan Capital Inc.; Ladder Capital Inc.; MFA Financial, Inc.; New Residential Investment Corp.; New York Mortgage Trust, Inc.; Newcastle Investment Corp.; Orchid Island Capital Inc.; Origen Financial, Inc.; Owens Realty Mortgage Inc.; PennyMac Mortgage Investment Trust; RAIT Financial Trust; Redwood Trust, Inc.; Resource Capital Corp.; Starwood Property Trust, Inc.; Two Harbors Investment Corp.; United Development Fund IV; Western Asset Mortgage Capital Corporation; and Zais Financial Corp.

Securities Authorized For Issuance Under Equity Compensation Plans

During 2011, we adopted the Apollo Residential Mortgage, Inc. 2011 Equity Incentive Plan (or, LTIP). The LTIP provides for grants of restricted common stock, restricted stock units (or, RSUs) and other equity-based awards up to an aggregate of 5% of the issued and outstanding shares of our common stock. (For further discussion of the LTIP, see Note 15 - Equity Award Plan to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)

The following table presents certain information about the 2011 Plan as of December 31, 2015:



Award⁽¹⁾	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table)
Restricted Stock Units	148,549	N/A⁽²⁾		1,273,795
Total	148,549	$	—	1,273,795


⁽¹⁾	All equity based compensation granted to date has been granted pursuant to the LTIP.


⁽²⁾	A weighted average exercise price is not applicable for our RSUs, as such equity awards result in the issuance of shares of our common stock provided that such awards vest and, as such, do not have an exercise price. At December 31, 2015, 57,955 RSUs had vested and 90,594 RSUs remained subject to time based vesting.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

Stock Repurchase Program

On November 6, 2013, our Board of Directors authorized a stock repurchase program (or, Repurchase Program), to repurchase up to $50,000 of our outstanding common stock. Such authorization does not have an expiration date. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program may be made at times and in amounts as we deem appropriate, using available cash resources. Shares of common stock repurchased by us under the Repurchase Program, if any, will be canceled and, until reissued by us, will be deemed to be authorized but unissued shares of our common stock. The Repurchase Program may be suspended or discontinued by us at any time and without prior notice. Through December 31, 2015, we repurchased 360,800 shares of common stock under the Repurchase Program at an aggregate cost of $5,000.

Repurchases of Equity Securities



Month Purchased ⁽¹⁾	Total Number of Shares Repurchased	Weighted Average Price Paid per Share⁽²⁾		Total Cost of Shares Repurchased
August 2015	202,655	$	13.86	$	2,808
September 2015	158,145	13.86		2,192
Total	360,800	$	13.86	$	5,000


⁽¹⁾	Month is based on trade date.


⁽²⁾	Amount includes brokerage commissions.


ITEM 6.	Selected Financial Data

All currency figures are presented in thousands, except per share amounts or as otherwise noted.

The selected financial data presented below has been derived from our audited consolidated financial statements. This information should be read in conjunction with Item 1, Item 7 and the audited consolidated financial statements and notes thereto included under Item 8 of this annual report on Form 10-K.



	For the Year Ended December 31,
Operating Data:	2015			2014			2013			2012			For the Period From July 27, 2011 Through December 31, 2011
Interest income	$	160,100		$	154,177		$	154,713		$	94,369		$	10,733
Interest expense	(32,358		)	(30,386		)	(27,602		)	(14,631		)	(1,138		)
Net interest income	127,742			123,791			127,111			79,738			9,595
Realized gain/(loss) on sale of RMBS, net	16,998			(8,821		)	(66,850		)	39,817			885
Realized gain/loss on sale of other investments securities	102			—			—			—			—
Other than temporary impairment recognized	(12,089		)	(14,891		)	(13,412		)	(5,475		)	(2,120		)
Unrealized gain/(loss) on RMBS, net	(64,027		)	102,942			(133,963		)	105,877			4,602
Realized gain/(loss) on derivatives, net	(41,396		)	(49,148		)	9,203			(12,514		)	(630		)
Unrealized gain/(loss) on derivatives, net	(5,015		)	(39,379		)	50,373			(20,151		)	(3,246		)
Unrealized gain/(loss) on securitized mortgage loans, net	(1,958		)	4,813			3,950			—			—
Unrealized (loss) on mortgage loans, net	—			(9		)	—			—			—
Unrealized gain/(loss) on securitized debt, net	1,031			(124		)	(954		)	—			—
Unrealized gain/(loss) on other investment securities	(6,376		)	(96		)	335			—			—
Other, net	(123		)	82			76			48			2
Operating expenses	(26,484		)	(23,105		)	(23,080		)	(14,584		)	(4,616		)
Net income/(loss)	$	(11,595	)	$	96,055		$	(47,211	)	$	172,756		$	4,472
Preferred Stock dividends declared	(13,800		)	(13,800		)	(13,800		)	(5,022		)	—
Net income/(loss) allocable to common stock and participating securities	$	(25,395	)	$	82,255		$	(61,011	)	$	167,734		$	4,472
Earnings/(loss) per common share - basic and diluted	$	(0.81	)	$	2.55		$	(2.02	)	$	8.36		$	0.43
Dividends declared per share of common stock	$	1.92		$	1.71		$	2.20		$	3.40		$	0.30



	December 31,
Balance Sheet Data (at period end):	2015		2014		2013		2012		2011
Agency pass-through RMBS	$	1,800,250	$	2,243,946	$	2,219,334	$	3,572,168	$	1,112,459
Agency Inverse Floater securities	$	—	$	5,094	$	—	$	—	$	—
Agency IO securities	$	57,354	$	11,941	$	44,425	$	5,880	$	7,884
Agency Inverse IO securities	$	6,752	$	26,542	$	26,778	$	48,046	$	7,783
Non-Agency RMBS	$	1,197,226	$	1,468,109	$	1,212,789	$	605,197	$	112,346
Securitized mortgage loans	$	167,624	$	104,438	$	110,984	$	—	$	—
Other investment securities	$	166,190	$	34,228	$	11,515	$	—	$	—
Mortgage loans held at fair value	$	—	$	14,120	$	—	$	—	$	—
Other investments	$	45,233	$	40,561	$	—	$	—	$	—
Derivative instruments - assets	$	4,347	$	11,642	$	53,315	$	750	$	—
Cash and cash equivalents	$	120,144	$	114,443	$	127,959	$	149,576	$	44,407
Total Assets	$	3,663,025	$	4,348,053	$	3,911,576	$	4,487,921	$	1,416,927
Borrowings under repurchase agreements	$	2,898,347	$	3,402,327	$	3,034,058	$	3,654,436	$	1,079,995
Non-recourse securitized debt	$	18,951	$	34,176	$	43,354	$	—	$	—
Derivative instruments - liabilities	$	13,813	$	8,949	$	4,610	$	23,184	$	3,481
Total Liabilities	$	2,968,162	$	3,562,101	$	3,153,975	$	3,771,138	$	1,212,341
Preferred Stock, liquidation preference	$	172,500	$	172,500	$	172,500	$	172,500	$	—
Total Stockholders’ Equity	$	694,863	$	785,952	$	757,601	$	716,783	$	204,586


ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and accompanying notes included under Item 8 of this annual report on Form 10-K.

All currency amounts are presented in thousands, except per share amounts or as otherwise noted.

General

We were organized in Maryland on March 15, 2011 and commenced operations on July 27, 2011. We are structured as a holding company and conduct our business primarily through ARM Operating, LLC and our other operating subsidiaries. We have elected and operate to qualify as a REIT for U.S. Federal income tax purposes commencing with our taxable year ended December 31, 2011. We also operate our business in a manner that we believe will allow us to remain excluded from registration as an investment company under the 1940 Act. We are externally managed and advised by our Manager, an indirect subsidiary of Apollo Global Management, LLC.

At December 31, 2015, our portfolio was comprised of $1,864,356 of Agency RMBS (comprised of pass-through, IO and Inverse IO securities), $1,197,226 of non-Agency RMBS, $167,624 of securitized mortgage loans, and $211,423 of other investment securities and other mortgage related assets. Over time, we expect that we may invest in a broader range of other residential mortgage and mortgage-related assets. (For information about our target assets, see “Investment Strategy” included under Item 1 of this annual report on Form 10-K.)

We use derivatives to hedge a portion of our interest rate risk and not for speculative purposes. As of December 31, 2015, our derivatives included Swaps, Swaptions and a TBA Contract.

Factors Impacting Our Operating Results

Our results of operations are driven by, among other things, our net interest income, changes in the market value of our investments and derivative instruments and, from time to time, realized gains and losses on the sale of our investments and termination of our derivative instruments. The supply and demand for RMBS and other mortgage assets in the market place, the terms and availability of financing for such assets, general economic and real estate conditions, the impact of U.S Government actions that impact the real estate and mortgage sector, and the credit performance of our credit sensitive investments impact our overall performance. Our net interest income varies primarily as a result of changes in market interest rates and the slope of the yield curve (i.e., the differential between long-term and short-term interest rates) and constant prepayment rates (or, CPR) on our RMBS. The CPR measures the amount of unscheduled principal prepayments on RMBS as a percentage of the principal balance, and includes the conditional repayment rate (or, CRR), which measures voluntary prepayments of mortgages collateralizing a particular RMBS and conditional default rates (or, CDR), which measures involuntary prepayments resulting from defaults of the underlying mortgage loans. CPRs vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. In addition, our borrowing costs and available credit are further affected by the collateral pledged and general conditions in the credit market.

With respect to our results of operations and financial condition, increases in interest rates are generally expected to cause: (i) the interest expense associated with our borrowings to increase; (ii) the value of our fixed-rate Agency pass-through RMBS, Inverse IO and Inverse Floater securities and Long TBA Contracts, if any, to decrease; (iii) coupons on our variable rate investment assets to reset to higher interest rates; (iv) prepayments on our RMBS, mortgages and securitized mortgage loans to decline, thereby slowing the amortization of our Agency RMBS purchase premiums and the accretion of purchase discounts on our non-Agency RMBS and mortgage and securitized mortgage loans; (v) the value of our Agency IO securities to increase; and (vi) the value of our Short TBA Contracts, if any, Swaps, and Swaption Contracts to increase. Conversely, decreases in interest rates are generally expected to have the opposite impact as those stated above. The timing and extent to which interest rates change, the specific terms of the mortgage loans underlying our RMBS, such as periodic and life-time caps and floors on ARMs, as well as other conditions in the market place will further impact our results of operations and financial condition.

Premiums arise when we purchase a security at a price in excess of the security’s par value and discounts arise when we purchase a security at a price below the security’s par value. Premiums on our RMBS are amortized against interest income

over the life of the security, while discounts (excluding credit discounts, as discussed below) are accreted to income over the life of the security. The speeds at which premiums are amortized and discounts are accreted are significantly impacted by the CPR for each security. CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. CPRs on Agency RMBS and non-Agency RMBS may differ significantly.

We are exposed to credit risk with respect to our non-Agency RMBS, other investment securities, securitized mortgage loans, mortgage loans and other investments. Such credit risk is associated with delinquency, default and foreclosure and any resulting losses on disposing of the real estate underlying such investments. The credit risk on our non-Agency RMBS is generally mitigated by the credit support built into non-Agency RMBS structures and the purchase discounts on such securities, which provides a level of credit protection in the event that we receive less than 100% of the par value of these securities. The credit risk associated with our warehouse line receivable is mitigated by a pledge of substantially all the equity of the third-party borrower/guarantor, which borrower has legal title to the homes, BFT Contracts and mortgage loans that we finance on a warehouse line. To date we purchased substantially all of our non-Agency RMBS at a discount to par value; a portion of such discount may be viewed as a credit discount which is not expected to be amortized into interest income. The amount designated as credit discount on a security may change over time based on the security’s performance and its anticipated future performance. (See “Credit Risk”, included under Item 7A of this annual report on Form 10-K.)

Our non-Agency RMBS investment process involves analysis focused primarily on quantifying and pricing credit risk. Interest income on our non-Agency RMBS is recorded at an effective yield, which reflects an estimate of expected cash flows for each security. In forecasting cash flows on our non-Agency RMBS, our Manager makes certain assumptions about the underlying mortgage loans which assumptions include, but are not limited to, future interest rates, voluntary prepayment rates, default rates, modifications and loss severities. As part of our non-Agency RMBS surveillance, we review, on at least a quarterly basis, each security’s performance. To the extent that actual performance and our current assessment of future performance differs from our prior assessment, such changes are reflected in the yield/income recognized on such securities prospectively. Credit losses greater than those anticipated, or in excess of purchase discount on a given security, could materially adversely impact our operating results.

We receive interest payments only with respect to the notional amount of Agency IO and Agency Inverse IO. Therefore, the performance of such instruments is extremely sensitive to prepayments on the underlying pool of mortgages. Unlike Agency pass-through RMBS, the market prices of Agency IO generally have a positive correlation to increases in interest rates. Generally, as market interest rates increase, prepayments on the mortgages underlying an Agency IO are expected to decrease, which in turn is expected to extend/increase the cash flow and the value of such securities; we expect the inverse to occur with respect to decreases in market interest rates. In addition to viewing Agency IO as investments, we also note that such instruments serve as a partial economic hedge against the impact that an increase in market interest rates would have on the value of our Agency RMBS in the marketplace. While Agency IO and Agency Inverse IO comprised a relatively small portion of our investments at December 31, 2015, the value of and return on such instruments are highly sensitive to changes in interest rates and prepayments.

Market Conditions and Our Strategy

General:

The yield on the ten year U.S. Treasury Note increased marginally during 2015 ending at 2.27%, ten basis points higher than the prior year end, while the yield on the two year U.S. Treasury Note increased by 38 basis points, closing 2015 at 1.05%. These disparate moves in long and short term interest rates caused the yield curve to flatten during 2015. The catalyst for the larger yield increase in shorter maturity bonds was a shift in monetary policy by the Federal Reserve, which acted in mid-December 2015 and raised the target federal funds rate by 25 basis points, marking the first rate increase since mid-2006.

The table below presents quarterly information about rates for two and ten-year U.S. Treasury Notes, ten-year Swap rates and the spread between the two and ten year U.S. Treasury Note rate for each calendar quarter during the year ended December 31, 2015:



Table 1
	Max		Min		Average		Quarter End		High		Low		Average		Quarter End
Quarter Ended	Ten-Year Treasury Rate								Ten-Year Swap Rate
December 31, 2015	2.34	%	1.97	%	2.18	%	2.27	%	2.24	%	1.95	%	2.10	%	2.19	%
September 30, 2015	2.45	%	2.00	%	2.22	%	2.04	%	2.52	%	2.00	%	2.28	%	2.00	%
June 30, 2015	2.48	%	1.84	%	2.16	%	2.35	%	2.56	%	1.95	%	2.24	%	2.43	%
March 31, 2015	2.24	%	1.64	%	1.96	%	1.92	%	2.36	%	1.80	%	2.08	%	2.84	%
	Two-Year Treasury Rate								Spread Between Two and Ten Year Treasury Rate
December 31, 2015	1.09	%	0.55	%	0.82	%	1.05	%	1.25	%	1.42	%	1.36	%	1.22	%
September 30, 2015	0.81	%	0.54	%	0.68	%	0.63	%	1.64	%	1.46	%	1.54	%	1.41	%
June 30, 2015	0.73	%	0.48	%	0.60	%	0.64	%	1.75	%	1.36	%	1.56	%	1.71	%
March 31, 2015	0.72	%	0.41	%	0.59	%	0.56	%	1.52	%	1.23	%	1.37	%	1.36	%

Investment Strategy:

During 2015, we continued to increase our allocation to credit sensitive investment securities and mortgage related investments and reduce our investment in Agency RMBS. We believe that this migration has reduced our overall exposure to changes in interest rates, while increasing our sensitivity to credit risk.

The following table presents the composition of the carrying value of our investment portfolio as a percentage of total investments as of December 31, 2015 and December 31, 2014:



Table 2	December 31, 2015		December 31, 2014
Rate Investments:
Agency pass-through RMBS	52.3	%	56.8	%
Agency Inverse Floater	—		0.1
Agency IO and Agency Inverse IO	1.9		1.0
	54.2		57.9

Credit Investments:
Non-Agency RMBS	34.8		37.2
Securitized mortgage loans	4.9		2.6
Mortgage loans	—		0.4
Other investments	1.3		1.0
Other investment securities ⁽¹⁾	4.8		0.9
	45.8		42.1
Total	100.0	%	100.0	%


⁽¹⁾	See Note 6 - Other Investment Securities and Other Investments to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.

Agency RMBS Portfolio/Interest Rate Hedges:

For 2015, our Agency RMBS portfolio experienced a fair value weighted CPR of 7.7%, comprised of 7.1% CPR on Agency pass-through securities and 13.9% on Agency IO and Agency Inverse IO securities. During 2015, the maximum average monthly CPR of our Agency RMBS was experienced in June 2015, with an overall Agency CPR of 11.1% comprised of 11.0% on Agency pass-through securities and 15.7% on Agency IO and Agency Inverse IO securities in the aggregate.

In the third quarter, we began to see spread widening across Agency RMBS as credit spreads, or spreads between the yield on credit sensitive securities and U.S. Treasury Notes, widened in the high yield and other markets, affecting Agency RMBS valuations. As a result, while prices of our hedges increased in connection with interest rate increases, such economic hedges did not fully offset the decrease in prices of our Agency RMBS in the fourth quarter of 2015.

The following table presents the composition and estimated fair value and net unrealized gain/(loss) position with respect to our Agency RMBS portfolio at December 31, 2015 and December 31, 2014:



Table 3	December 31, 2015					December 31, 2014
Collateral	Estimated Fair Value		Unrealized Gain/(Loss), Net			Estimated Fair Value		Unrealized Gain/(Loss), Net
30-Year Fixed Rate:
3.5% Coupon	$	527,657	$	(7,822	)	$	515,628	$	169
4.0% Coupon	983,536		(3,916		)	1,256,724		399
4.5% & 5.0% Coupons	—		—			366,472		4,256
	1,511,193		(11,738		)	2,138,824		4,824
ARMs	289,057		(2,723		)	105,122		(153		)
Agency Inverse Floater	—		—			5,094		145
Agency IO	57,354		(424		)	11,941		(7		)
Agency Inverse IO	6,752		(112		)	26,542		53
Total Agency RMBS	$	1,864,356	$	(14,997	)	$	2,287,523	$	4,862

The following table presents information with respect to our Swaps and Swaptions at December 31, 2015 and December 31, 2014:



Table 4	December 31, 2015			December 31, 2014
Swaps:
Notional amount	$	1,687,000		$	1,687,000
Estimated fair value	$	(7,134	)	$	594
Weighted average fixed pay rate	1.43		%	1.43		%
Weighted average months to maturity	41			52

Swaption Purchase Contracts:
Notional amount	$	875,000		$	1,250,000
Estimated fair value	$	1,244		$	1,555
Weighted average term to expiration (months)	5			5
Weighted average underlying Swap term (months)	108			112
Weighted average underlying Swap fixed pay rate	2.92		%	3.53		%

Swaption Sale Contracts:
Notional amount	$	300,000		$	—
Estimated fair value	$	(3,381	)	$	—
Weighted average term to expiration (months)	8			—
Weighted average underlying Swap term (months)	105			—
Weighted average underlying Swap fixed pay rate	1.97		%	—		%

(For more information about derivative instruments we held at December 31, 2015 and December 31, 2014, see Note 11 - Derivative Instruments to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)

Credit Investments:

Market valuations for non-Agency RMBS, which started 2015 with a positive tone, generally weakened over the course of 2015, reflecting increased market volatility amid concerns around sovereign debt and signs of global economic weakness. In the third quarter of 2015, credit spreads, or spreads between the yield on credit sensitive securities and U.S. Treasury Notes, on non-Agency RMBS widened, negatively impacting valuations of our non-Agency RMBS and other investment securities.

Notwithstanding the impact of spread widening in the fixed income market, as previously discussed, we believe non-Agency valuations continue to be supported by market technicals, such as the continued lack of supply of newly issued non-Agency securities, as well as fundamentals, such as the recovering housing market, which factors support positive future

performance with respect to borrower defaults and loss severities on liquidated properties. Our non-Agency RMBS performed well during 2015, as voluntary prepayments increased and defaults continued to decrease.

Our credit investments were comprised of the following at December 31, 2015 and December 31, 2014:



Table 5	December 31, 2015		December 31, 2014
Non-Agency RMBS (at fair value)	$	1,197,226	$	1,468,109
Securitized mortgage loans (at fair value)	167,624		104,438
Other investments	45,233		40,561
Other investment securities:
Risk Sharing Securities - Freddie Mac (at fair value)	47,232		10,395
Risk Sharing Securities - Fannie Mae (at fair value)	51,424		—
SBC-MBS (at fair value)	64,607		23,833
SBA-IO (at fair value)	2,927		—
Total	$	1,576,273	$	1,647,336

As of December 31, 2015 we had: (a) $10,239 of advances outstanding under a warehouse line; (b) $26,525 of legal title to real estate associated with BFT Contracts; and (c) $8,469 of mortgage loans, all of which were related to our Seller Financing Program. We provide warehouse advances to our Seller Financing Program counterparty to fund the acquisition of single-family homes primarily located in the southeastern U.S. We expect that we will substantially complete our purchases of BFT Contracts and/or mortgage loans originated in connection with the Seller Financing Program during the first half of 2016.

Leverage and Borrowing Facilities:

Our average debt-to-equity multiple during 2015 was 4.13 times compared to 3.84 times for 2014. The increase in our leverage reflects our use of higher leverage on our Agency RMBS, on average, compared to leverage on such securities during 2014.

Borrowings:

Borrowings under repurchase agreements remained readily available from counterparties for repurchase agreements collateralized by Agency RMBS, non-Agency RMBS and residential whole loans. Over time, as market conditions change, in addition to repurchase borrowings we may use other forms of leverage, including, but not limited to, warehouse facilities, additional securitizations, resecuritizations, bank credit facilities (including term loans and revolving facilities), and public and private equity and debt issuances, in addition to transaction or asset-specific funding arrangements.

Regulatory Updates:

Under the direction and guidance of the Federal Housing Finance Agency (or, FHFA), Freddie Mac and Fannie Mae or, in the aggregate, Government Sponsored Entities (or, GSEs) are developing a common securitization platform (or, CSP) for their single-family mortgage securitization activities, including the issuance by both GSEs of a single MBS. The CSP is expected to be a common information technology platform that will use industry-standard software, systems and data requirements and will be adaptable for use by other market participants in the future. The CSP is being developed by a joint venture owned by the GSEs and will leverage the GSEs’ existing security structures and would encompass many of the pooling features of the current Fannie Mae MBS and more of the disclosure framework of the current Freddie Mac participation certificate. The FHFA is expected to make an announcement in 2016 as to the date that Freddie Mac is expected to begin using the CSP as part of its first phase, with Fannie Mae to begin using the CSP at a later time.

In September 2014, the SEC adopted rules substantially revising Regulation AB requirements regarding the offering process, disclosure and reporting for publicly-issued asset-backed securities (or, Enhanced Disclosure Rules), which are not yet applicable as of the date hereof. Among other things, publicly-issued asset-backed securities transactions issued after the effective date of the Enhanced Disclosure Rules will have enhanced asset-level disclosure on an ongoing basis and requirements for a review of underlying assets by an independent asset representations reviewer if certain trigger events occur. In addition, the SEC has not yet acted on certain rules initially proposed in April 2010 and re-proposed in July 2011 that would make the Enhanced Disclosure Rules applicable to private offerings issued in reliance on Rule 144A or Rule 506 of Regulation D at the request of the investor.

In October 2014, the FHFA announced a plan that could ease credit requirements, enabling more people to qualify for mortgages by further relaxing agreements that determine when Fannie Mae and Freddie Mac can require lenders to buy back bad loans and permitting borrowers to qualify for certain mortgage loans with smaller down payments than are now required. In October 2015, Fannie Mae and Freddie Mac further modified their buy back policies (which took effect on January 1, 2016)

to provide potential alternatives to repurchase in respect of certain categories of loan defects. These plans and policy changes are designed to provide lenders with more clarity and transparency and to offer reassurances to lenders that fear they could suffer unpredictable losses on the loans that they securitize through the GSEs. Recent reports and surveys suggest that the foregoing efforts of the FHFA and the GSEs have succeeded to some degree in easing credit.

In October 2014, the FDIC, the FHFA, the Office of the Comptroller of the Currency, the SEC, the Federal Reserve System and the Department of Housing and Urban Development adopted a final rule implementing the credit risk retention requirements of Section 941 of the Dodd-Frank Act for asset-backed securities (or, Risk Retention Rules). As required by the Dodd-Frank Act, the Risk Retention Rules generally require “securitizers” (in general, the “sponsor” of the securitization transaction) to retain a financial exposure of not less than 5% of the fair value of the securitized assets (or, horizontal risk retention) or 5% of each class of the securities issued (or, vertical risk retention), or a combination of the two (or, Required Risk) for a certain period of time (not to exceed seven years). The Risk Retention Rules prohibit hedging Required Risk if payments on the hedge instrument are materially related to the Required Risk and the hedge position would limit the financial exposure of the securitizer to the Required Risk. A securitizer may not pledge its interest in any Required Risk as collateral for any financing unless such financing is full recourse to the securitizer. The Risk Retention Rules applicable to RMBS became effective on December 24, 2015.

It remains unclear what the impact of such developments, plans and policy changes discussed above will be. For a discussion of additional risks relating to our business, see Part I, Item 1A, “Risk Factors” in this annual report on Form 10-K.

On December 18, 2015, President Obama signed into law the Consolidated Appropriations Act of 2016, an omnibus spending bill, with a division referred to as the Protecting Americans From Tax Hikes Act of 2015 (or, the PATH Act). The PATH Act changes certain of the rules affecting REIT qualification and taxation of REITs and REIT shareholders, which are briefly summarized below.

For taxable years beginning after 2017, the percentage of a REIT's total assets that may be represented by securities of one or more TRSs is reduced from 25% to 20%.


◦	“Publicly offered REITs” (which generally include any REIT required to file annual and periodic reports with the SEC, including us) are no longer subject to the preferential dividend rules for taxable years beginning after 2014.

◦

For taxable years beginning after 2015, debt instruments issued by publicly offered REITs are qualifying assets for purposes of the 75% REIT asset test. However, no more than 25% of the value of a REIT's assets may consist of debt instruments that are issued by publicly offered REITs that are not otherwise treated as real estate assets, and interest on debt of a publicly offered REIT will not be qualifying income under the 75% REIT gross income test unless the debt is secured by real property.

◦

For taxable years beginning after 2015, to the extent rent attributable to personal property is treated as rents from real property (because rent attributable to the personal property for the taxable year does not exceed 15% of the total rent for the taxable year for such real and personal property), the personal property will be treated as a real estate asset for purposes of the 75% REIT asset test. Similarly, debt obligation secured by a mortgage on both real and personal property will be treated as a real estate asset for purposes of the 75% asset test, and interest thereon will be treated as interest on an obligation secured by real property, if the fair market value of the personal property does not exceed 15% of the fair market value of all property securing the debt.


◦	For taxable years beginning after 2014, the period during which dispositions of properties with net built-in gains from C corporations in carry-over basis transactions will trigger the built-in gains tax is reduced from ten years to five years.


◦	For taxable years beginning after 2015, a 100% excise tax will apply to "redetermined services income," i.e., non-arm’s-length income of a REIT’s TRS attributable to services provided to, or on behalf of, the REIT (other than services provided to REIT tenants, which are potentially taxed as redetermined rents).


◦	The rate of withholding tax applicable under the Foreign Investment in Real Property Tax Act of 1980 (or, FIRPTA) to certain sales and other dispositions of U.S. real property interests (or, USRPIs) by non-U.S. persons, and certain distributions from corporations whose stock may constitute a USRPI, is increased from 10% to 15% for dispositions and distributions occurring after February 16, 2016.


◦	For dispositions and distributions on or after December 18, 2015, the stock ownership thresholds for exemption from FIRPTA taxation on sale of stock of a publicly traded REIT and for recharacterizing capital gain dividends received from a publicly traded REIT as ordinary dividends is increased from not more than 5% to not more than 10%.

Results of Operations

Year Ended December 31, 2015 compared to the Year Ended December 31, 2014

General

For the year ended December 31, 2015, we had a net loss allocable to common stock and participating securities of $(25,395) or $(0.81) per basic and diluted common share, compared net income allocable to common and participating securities of $82,255 and $2.55 per basic and diluted common share for the year ended December 31, 2014. Our results of operations for the year ended December 31, 2015 were significantly impacted by unrealized losses on our RMBS and derivative instruments, as discussed below.

Net Interest Income

Our net interest income is significantly impacted by the amount of leverage we use (which will impact the balance of our interest earning assets and interest bearing liabilities), our interest rate spread and our net interest margin. Interest rate spread measures the difference between the yield on interest-earnings assets and the cost of interest-bearing liabilities, while the net interest margin reflects net interest income divided by the average interest-earning assets. For the year ended December 31, 2015 and December 31, 2014, we earned interest income of $160,100 and $154,177, respectively. The increase in our interest income was driven by the increase in our average investment balances (based on amortized cost) and an increase in the yield on our investments. (See Table 6, below.) We incurred interest expense, which was primarily related to our borrowings under repurchase agreements, of approximately $32,358 and $30,386, respectively. Our higher borrowing expense reflects: (1) an increase in our average borrowings, (2) an increase in borrowings associated with our non-Agency RMBS, other credit investments and securitized mortgage loans, which borrowings have higher interest rates than repurchase agreements on Agency RMBS and (3) an increase in interest rates on our Agency RMBS repurchase borrowings. (See Table 6, below.)

The yield on our Agency RMBS decreased to 2.96% for 2015 from 3.04% for 2014, as we migrated to lower coupon and ARM Agency RMBS during 2015. Actual prepayments may cause future premium amortization on our Agency RMBS to vary significantly over time. Investments in non-Agency RMBS and other investment securities made during 2015 were generally lower yielding compared to yields on our existing non-Agency RMBS and other investment securities portfolio, reflecting the relative appreciation of non-Agency RMBS in the market over time relative to investments held by us that were purchased in earlier years. Changes in the performance, or performance expectations, of our non-Agency RMBS may significantly impact the amount of income recognized in future periods on such investments.

We had an interest rate spread and net interest margin of 3.35% and 3.49% for the year ended December 31, 2015, respectively, compared to 3.29% to 3.39%, respectively, for the year ended December 31, 2014. The increase in our interest income reflects the increase in average interest earning assets, reflecting the use of higher average leverage for 2015 compared to 2014.

The net interest rate spread and net interest margin do not reflect the total return on equity allocated to investment types, which is significantly impacted by the amount of leverage we use to finance our investments. We are generally able to utilize greater leverage on Agency RMBS than on non-Agency RMBS and other credit investments, as Agency RMBS are not viewed as having credit risk and are generally more liquid than non-Agency RMBS and other credit investments. Therefore, when making investment decisions we consider, among other things, the relative return on equity for each investment opportunity. Returns on investments will vary over time based on market conditions at the time of purchase and changes in such conditions thereafter. The impact of our Swaps is not reflected in our net interest rate spread and net interest margin, as we have not elected hedge accounting for our derivative instruments. However, when making investment decisions, we consider our “effective cost of borrowings,” which non-GAAP measure includes the net interest component of our Swaps. (See Tables 6, 7, 10, 21, 23, 24 and 25, below.)

The following table presents certain information regarding our interest-earning assets, interest-bearing liabilities and the components of our net interest income for the years ended December 31, 2015 and December 31, 2014:



Table 6	For the Year Ended December 31, 2015
	Agency RMBS			Non-Agency RMBS and Other Credit Investments ⁽¹⁾			Securitized Mortgage Loans			Total
Average balance ⁽²⁾	$	2,070,643		$	1,431,362		$	156,012		$	3,658,017
Total interest income	$	61,230		$	85,427		$	13,443		$	160,100
Weighted average CPR	7.70		%	5.23		%	5.28		%	6.63		%
Yield on average assets	2.96		%	5.97		%	8.74		%	4.38		%
Average balance of associated repurchase agreements	$	1,889,011		$	1,123,419		$	92,128		$	3,104,558
Average balance of securitized debt ⁽³⁾	$	—		$	—		$	26,286		$	26,286
Total interest expense	$	7,750		$	21,074		$	3,534		$	32,358
Average cost of funds ⁽⁴⁾⁽⁵⁾	0.41		%	1.88		%	2.98		%	1.03		%
Net interest income	$	53,480		$	64,353		$	9,909		$	127,742
Net interest rate spread	2.55		%	4.09		%	5.76		%	3.35		%
Total interest expense including net interest cost of Swaps ⁽⁶⁾	$	26,626		$	21,075		$	4,061		$	51,762
Effective cost of funds ⁽⁶⁾	1.41		%	1.88		%	3.43		%	1.65		%
Net interest income including net interest cost of Swaps	$	34,604		$	64,352		$	9,382		$	108,338
Effective net interest rate spread ⁽⁶⁾	1.55		%	4.09		%	5.31		%	2.73		%



	For the Year Ended December 31, 2014
	Agency RMBS			Non-Agency RMBS and Other Credit Investments ⁽¹⁾			Securitized Mortgage Loans			Total
Average balance ⁽²⁾	$	2,203,434		$	1,297,019		$	101,354		$	3,601,807
Total interest income	$	67,030		$	79,247		$	7,900		$	154,177
Yield on average assets	3.04		%	6.11		%	7.79		%	4.28		%
Average balance of associated repurchase agreements	$	1,932,424		$	1,029,761		$	29,736		$	2,991,921
Average balance of securitized debt ⁽³⁾	$	—		$	—		$	37,886		$	37,886
Total interest expense	$	6,977		$	21,162		$	2,247		$	30,386
Average cost of funds ⁽⁴⁾⁽⁵⁾	0.36		%	2.03		%	3.28		%	0.99		%
Net interest income	$	60,053		$	58,085		$	5,653		$	123,791
Net interest rate spread	2.68		%	4.08		%	4.51		%	3.29		%
Total interest expense including net interest cost of Swaps ⁽⁶⁾	$	26,536		$	21,162		$	2,800		$	50,498
Effective cost of funds ⁽⁶⁾	1.35		%	2.03		%	4.08		%	1.64		%
Net interest income including net interest cost of Swaps	$	40,494		$	58,085		$	5,100		$	103,679
Effective net interest rate spread ⁽⁶⁾	1.69		%	4.08		%	3.71		%	2.64		%


⁽¹⁾	Other credit investments includes other investment securities, other investments, and mortgage loans.


⁽²⁾	Amount reflects amortized cost, which does not include unrealized gains/(losses).


⁽³⁾	Reflects the average unpaid balance.


⁽⁴⁾	Cost of funds by investment type is based on the underlying investment type of the assets pledged as collateral.


⁽⁵⁾	Cost of funds does not include accrual and settlement of interest associated with our Swaps. Since we did not elect hedge accounting for our Swaps, costs associated with our Swaps are included in gain/(loss) on derivative instruments in our consolidated statement of operations.

⁽⁶⁾

The effective cost of funds for the securitized mortgage loans reflects the cost of our securitized debt. In addition, we incur interest expense for repurchase agreement borrowings collateralized by the securities that we retained in our securitization transactions. The bonds issued in connection with our securitizations do not appear on our financial statements, as they have been eliminated in consolidation. (See “Non-GAAP Financial Measures,” below.)

As of December 31, 2015, our repurchase agreement borrowings collateralized by Agency RMBS had initial terms of up to four months with haircut requirements ranging from 3.0% to 5.0% and financing rates from 0.42% to 0.55%; our repurchase agreement borrowings collateralized by non-Agency RMBS had initial terms of up to 24 months with haircut requirements ranging from 10.0% to 40.0% and financing rates from 1.25% to 2.92%.

The following table presents information with respect to our repurchase agreement borrowings by type of collateral pledged as of December 31, 2015, and December 31, 2014 and the respective effective cost of funds for the periods presented:



Table 7	For the Year Ended December 31,
	2015				2014
Collateral Pledged:	Cost of Funds		Effective Cost of Funds ⁽¹⁾		Cost of Funds		Effective Cost of Funds ⁽¹⁾
Agency RMBS	0.41	%	1.41	%	0.36	%	1.35	%
Non-Agency RMBS and other credit investments ⁽²⁾	1.88		1.88		2.03		2.03
Securitized mortgage loans ⁽³⁾	2.98		3.43		3.28		4.08
Total	1.03	%	1.65	%	0.99	%	1.64	%

⁽¹⁾

The effective cost of funds for the periods presented include interest expense for the periods and the net interest component for Swaps during the periods of $19,404 and $20,112, respectively. While we have not elected to apply hedge accounting for our Swaps, we view such instruments as an economic hedge against the impact of increases in interest rates on our borrowing costs. (See “Non-GAAP Financial Measures,” below.)


⁽²⁾	For the periods presented other credit investments were comprised of other investments securities and other investments.


⁽³⁾	The non-Agency RMBS associated with our securitization transactions are eliminated in consolidation with VIEs and the mortgage loans in VIEs are consolidated by us. The interest expense on repurchase agreement borrowings associated with non-Agency RMBS relating to our securitization transactions are included with the cost of funds for our securitized mortgage loans.

Gains/(Losses) on Derivative Instruments

The following table presents components of our gain/(loss) on derivative instruments for the years ended December 31, 2015 and December 31, 2014:



Table 8	For the Year Ended December 31,
Components of Gain/(Loss) on Derivative Instruments	2015			2014
Net interest (payments/accruals) on Swaps ⁽¹⁾	$	(19,404	)	$	(20,112	)
Gain/(loss) on termination and expiration of Swaptions, net ⁽¹⁾	(15,636		)	(22,502		)
Gain/(loss) on settlement of TBA Contracts, net ⁽¹⁾	(6,356		)	(6,534		)
Change in fair value of Swaps, net ⁽²⁾	(7,727		)	(34,931		)
Change in fair value of Swaptions, net⁽²⁾	3,451			(4,242		)
Change in fair value of TBA Contracts, net ⁽²⁾	(739		)	(206		)
Total	$	(46,411	)	$	(88,527	)


⁽¹⁾	Amounts are realized.


⁽²⁾	Amounts are unrealized.

At December 31, 2015, we had Swaps with an aggregate notional amount of $1,687,000, a weighted average fixed pay rate of 1.43% and weighted average term to maturity of 3.4 years. At December 31, 2015, our Swaptions had an aggregate notional amount of $1,175,000 and a weighted average term of five months until expiration; Swaps underlying our Swaption Purchase Contracts had a weighted average fixed pay rate of 2.92% and a weighted average term of 9.0 years; Swaps underlying our Swaption Sale Contracts had a weighted average fixed pay rate of 1.97% and a weighted average term of 8.8 years.

In general, we expect that changes in the fair value of our derivative instruments will move inversely to changes in the fair value of our Agency pass-through RMBS, however we do not expect that the changes in valuations of such derivatives relative to our Agency pass-through RMBS will off-set entirely. We note that the terms and benchmark interest rates associated with our derivatives are not matched with our investments and the notional amount of our derivatives is not equal to our investments. Further, the value of our Swaps and Swaptions do not mitigate the impact of spread widening, which occurred during 2015, as market spreads widened between the yield on RMBS relative to certain benchmark interest rates. The timing and amount of realized and unrealized gains/(losses) associated with our derivative instruments cannot be predicted, as the value of such instruments generally moves inversely with changes in interest rates which cannot be predicted with any

certainty. (For more information about derivative instruments we held at December 31, 2015 and December 31, 2014, see Note 11 - Derivative Instruments to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)

Swaps and Swaptions

While our view is that our net Swaps and Swaption positions will serve as an economic hedge against increases in future market interest rates associated with our repurchase agreement borrowings, we have not elected hedge accounting under GAAP. Alternatively, we present the “effective cost of funds” to reflect our interest expense adjusted to include the interest component for our Swaps that would be reported had we elected and qualified for hedge accounting for such instruments. We believe that the presentation of our effective cost of funds, which is a non-GAAP financial measure, is useful for investors as it presents our borrowing costs as viewed by us. (See “Non-GAAP Financial Measures,” below.)

The following table presents the notional amount and estimated fair value for each of our derivative instrument types at December 31, 2015 and December 31, 2014:



Table 9	December 31, 2015					December 31, 2014
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Swaps - assets	$	693,000	$	3,103		$	957,000	$	9,543
Swaptions - assets	875,000		1,244			1,250,000		1,555
Swaps - (liabilities)	994,000		(10,237		)	730,000		(8,949		)
Swaptions - (liabilities)	300,000		(3,381		)	—		—
Long TBA Contracts - assets	100,000		(195		)	100,000		544
Total derivative instruments, net	$	2,962,000	$	(9,466	)	$	3,037,000	$	2,693

The following table presents our effective interest expense, effective cost of funds, effective net interest income and effective net interest rate spread, which amounts are non-GAAP financial measures as they include the net interest component of our Swaps, for the annual and quarterly periods presented: (See “Non-GAAP Financial Measures,” below.)



Table 10	Repurchase Borrowings on Agency RMBS			Repurchase Borrowings on Non-Agency RMBS and Other Credit Investments ⁽¹⁾			Repurchase Borrowings and Securitized Debt Associated with Securitized Mortgage Loans ⁽²⁾			Total
Year Ended December 31, 2015
Effective interest expense	$	26,626		$	21,075		$	4,061		$	51,762
Effective cost of funds	1.41		%	1.88		%	3.43		%	1.65		%
Effective net interest income	$	34,604		$	64,352		$	9,382		$	108,338
Effective net interest rate spread	1.55		%	4.09		%	5.31		%	2.73		%
Year Ended December 31, 2014
Effective interest expense	$	26,536		$	21,162		$	2,800		$	50,498
Effective cost of funds	1.35		%	2.03		%	4.08		%	1.64		%
Effective net interest income	$	40,494		$	58,085		$	5,100		$	103,679
Effective net interest rate spread	1.69		%	4.08		%	3.71		%	2.64		%


⁽¹⁾	Other credit investments may include investments in Risk Sharing Securities, SBC-MBS, mortgage loans and other investments.


⁽²⁾	Our securitized debt and repurchase borrowings associated with non-Agency RMBS issued through our securitizations are legally collateralized by the securities pledged. However, such securities are eliminated from our consolidated balance sheet and the securitized mortgage loans are presented.

Realized and Unrealized Gains/(Losses) on Investments and Securitized Debt

During the years ended December 31, 2015 and 2014, we sold Agency RMBS of $1,733,187 and $1,555,100, respectively, realizing net gains of $2,786 and losses of $(19,282), respectively, and sold non-Agency RMBS of $375,564 and $112,841, respectively, realizing net gains of $14,212 and $10,461, respectively. During 2015, as we identified attractive investment opportunities in other credit related investment securities, we sold Agency RMBS and non-Agency RMBS to provide the equity needed to make such investments. From time to time we sell certain securities to balance our portfolio in response to current and anticipated market conditions. In addition, as we find attractive investment opportunities in non-Agency RMBS, whole loans and mortgage related assets, we may sell Agency and/or non-Agency RMBS to provide funds to

make such purchases. With respect to non-Agency RMBS, we continue to emphasize investments in seasoned securities, backed by Subprime, Alt-A and Option ARM mortgage loans.

We have elected the fair value option for all of our RMBS, securitized mortgage loans, pools of mortgage loans we purchased, other investment securities and securitized debt and, as a result, record changes in the estimated fair value of such instruments in earnings. The following table presents amounts related to realized gains and losses as well as changes in estimated fair value of our assets and liabilities carried at fair value for the years ended December 31, 2015 and December 31, 2014:



Table 11	For the Year Ended December 31,
	2015			2014
Realized gain/(loss) on sale of RMBS, net	$	16,998		$	(8,821	)
Realized gain/(loss) on sale of other investment securities, net	102			—
OTTI recognized	(12,089		)	(14,891		)
Unrealized gain/(loss) on RMBS, net	(64,027		)	102,942
Unrealized (loss) on other investment securities	(6,376		)	(96		)
Unrealized gain/(loss) on securitized mortgage loans	(1,958		)	4,813
Unrealized gain/(loss) on securitized debt	1,031			(124		)
Unrealized (loss) on mortgage loans carried at fair value	—			(9		)
Total	$	(66,319	)	$	83,814

Expenses

General and Administrative Expenses: We are responsible for our operating expenses, which include the cost of data and analytical systems, outsourced accounting, due diligence, prime brokerage and banking fees, professional services, including auditing and legal fees, board of director fees and expenses, compliance related costs, corporate insurance and miscellaneous other operating costs. We reimburse our Manager, or its affiliates, for our allocable share of the compensation of our CFO/Treasurer/Secretary based on the percentage of her time spent on our affairs and for other corporate finance, tax, accounting, legal, risk management, operations, compliance and other non-investment professional personnel of our Manager or its affiliates who spend all or a portion of their time managing our affairs. Costs we incur for our third-party accounting services and clearing costs for security and repurchase transactions vary, based on the size of our portfolio and transaction activity. We incurred general and administrative expenses of $15,415 and $11,905 for the years ended December 31, 2015 and December 31, 2014, respectively. The increase in our general and administrative expenses was significantly impacted by costs incurred in connection with the pool of mortgage loans we purchased in March 2015. While these costs are expensed when incurred under GAAP, we consider such costs in assessing the total return on our investment. The remaining increases in our expenses primarily reflect our expanded use of analytical tools associated with our credit investments and incremental expenses associated with our Seller Financing Program, servicing costs associated with our securitized mortgage loan portfolios, costs incurred to explore new business initiatives and accounting support functions. To the extent that we continue to expand our portfolio to include a broader spectrum of investments, we expect that costs associated with legal work, due diligence, and credit analysis may remain near their current level.

Management Fee Expense: Under the terms of the Management Agreement, our Manager is entitled to a management fee calculated and payable quarterly in arrears in an amount equal to 1.5% of adjusted stockholders’ equity as defined in the Management Agreement, per annum. Our Manager uses the proceeds from the management fee, in part, to pay compensation to certain of its officers and personnel, who, notwithstanding that certain of them also are our officers, will receive no cash compensation directly from us. Pursuant to our Management Agreement, we incurred management fees of $11,069 and $11,200 for the years ended December 31, 2015 and December 31, 2014, respectively.

Management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 13 - Commitments and Contingencies to the consolidated financial statements included under Item 8 of this annual report Form 10-K.

Subsequent Events

Merger Agreement: As previously disclosed in a Form 8-K filed with the SEC on February 26, 2016, we recently announced the signing of a definitive merger agreement, (or, the Agreement) under which we will merge with Apollo Commercial Real Estate Finance, Inc. (or, ARI) for a price per share of our common stock equal to 89.25% of our book value per share as of the date that is three business days prior to the date on which the definitive proxy statement relating to the merger transaction is mailed to our stockholders, subject to adjustment under certain circumstances. Using our book value of common stock as of December 31, 2015 (or, December 31, 2015 Book Value) and based on the closing price of ARI’s shares of

common stock on February 25, 2016, the value to be paid in the transaction for each share of our common stock would equal approximately $14.59 per share, a 44% premium to the closing price of our shares of common stock on February 25, 2016.

Under the terms of the Agreement, our stockholders will receive a combination of cash and ARI common stock in exchange for their shares of our common stock. The aggregate number of ARI shares issuable in the transaction is limited to 13,400,000 and the remainder of the consideration will be paid in cash. Our book value, and thus the actual purchase price, will be determined as of a date prior to the mailing of the definitive proxy statement/prospectus to our stockholders to approve the transaction. Using our December 31, 2015 Book Value and based on the closing price of ARI’s shares of common stock on February 25, 2016, the transaction values us at approximately $641 million, including the assumption of $172.5 million (liquidation preference) of our Preferred Stock. In addition, each share of the Preferred Stock will be converted into one share of preferred stock, par value $0.01 per share, of a newly-designated series of ARI’s preferred stock, which we expect will be designated as 8.00% Series C Cumulative Redeemable Perpetual Preferred Stock.

The transaction has been approved by all members of the board of directors of each company (with the exception of Mark Biderman, who recused himself from the vote of each board of directors) upon the unanimous recommendation of a special committee of independent directors of each board of directors. The transaction will be subject to approval by the holders of at least a majority of (i) our outstanding shares of common stock and (ii) our shares of common stock that are beneficially owned by persons unaffiliated with Apollo. ARI stockholder approval will not be required in connection with the transaction. Consummation of the merger transaction is subject to the satisfaction of customary closing conditions, including the registration and listing of the shares of ARI stock that will be issued in the merger transaction and the approval and adoption of the Agreement by the holders of a majority of the shares of our common stock entitled to vote on the transaction, including a majority of the votes entitled to be cast by persons unaffiliated with Apollo.

Letter Agreement with Manager: Concurrently with the execution of the Agreement, we entered into the Letter Agreement with our Manager, pursuant to which the Manager has agreed to perform such services and activities as may be necessary to enable us to consummate the merger and other transactions contemplated by the Agreement.

For additional details regarding the terms and conditions of the Agreement and related matters, refer to the Form 8-K filed on February 26, 2016 relating to the transaction and to the Agreement and other documentation filed as exhibits thereto. Additional information regarding the proposed transaction, including risks associated with the proposed transaction, will be contained in a definitive proxy statement/prospectus to be filed by us and ARI with the SEC.

Results of Operations

Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

General

For the year ended December 31, 2014, we had net income allocable to common stock and participating securities of $82,255 or $2.55 per basic and diluted common share, compared to a net loss allocable to common and participating securities of $(61,011) and $(2.02) per basic and diluted common share for the year ended December 31, 2013. Our results of operations for the year ended December 31, 2013 were significantly impacted by steep declines in the value of our Agency RMBS portfolio, some of which were realized through sales, which were partially offset by increases in the realized and unrealized gains on our derivative instruments and non-Agency RMBS.

Net Interest Income

For the year ended December 31, 2014 and December 31, 2013, we earned interest income of $154,177 and $154,713, respectively, and incurred interest expense, which was primarily related to our borrowings under repurchase agreements, of approximately $30,386 and $27,602, respectively. This increase in our interest expense reflects the increase in our cost of funds to 0.99% for 2014, from 0.79% for 2013. This increase in our weighted average borrowing rate reflects higher borrowing rates associated with our portfolio shift toward credit sensitive investments, which borrowings bear higher interest rates compared to borrowing rates on Agency RMBS.

The yield on our Agency RMBS increased to 3.04% for 2014 from 2.92% for 2013, primarily reflecting our migration to Agency RMBS with lower purchase premiums during 2014. Actual prepayments and changes in expectations about prepayment rates, which reflect market fundamentals at the time of assessment, may cause future premium amortization on our Agency RMBS to vary significantly over time. Investments in non-Agency RMBS made during 2014 generally generated lower yields than the yields on non-Agency RMBS previously purchased, reflecting the general appreciation of non-Agency RMBS in the market during 2014.

We had an interest rate spread and net interest margin of 3.29% and 3.39% for the year ended December 31, 2014, respectively, compared to 3.02% to 3.13%, respectively, for the year ended December 31, 2013. (Interest rate spread measures the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities, while net interest margin reflects net interest income divided by average interest-earning assets.) Over the course of 2014, our interest rate spread and net interest margin increased, generally reflecting our shift in investment allocation from Agency RMBS to non-Agency RMBS. The net interest rate spread and net interest margin do not reflect the total return on equity allocated to investment types, which is significantly impacted by the amount of leverage we use to finance our investments. We are generally able to utilize greater leverage on Agency RMBS than on non-Agency RMBS and other mortgage assets, as Agency RMBS are not viewed as having credit risk and are generally more liquid than non-Agency RMBS and other mortgage assets. Therefore, when making investment decisions we consider, among other things, the relative return on equity for each investment opportunity. Returns on investments will vary over time based on market conditions at the time of purchase and changes in such conditions thereafter. The impact of our Swaps is not reflected in our net interest rate spread and net interest margin, as we have not elected hedge accounting for our derivative instruments. However, when making investment decisions, we consider our “effective cost of borrowings,” which non-GAAP measure includes the net interest component of our Swaps. (See Tables 12, 14, 17, 23, 24 and 25, below.)



Table 12	For the Year Ended December 31, 2014
	Agency RMBS			Non-Agency RMBS and Other Credit Investments ⁽¹⁾			Securitized Mortgage Loans			Total
Average balance ⁽²⁾	$	2,203,434		$	1,297,019		$	101,354		$	3,601,807
Total interest income	$	67,030		$	79,247		$	7,900		$	154,177
Yield on average assets	3.04		%	6.11		%	7.79		%	4.28		%
Average balance of associated repurchase agreements	$	1,932,424		$	1,029,761		$	29,736		$	2,991,921
Average balance of securitized debt ⁽³⁾	$	—		$	—		$	37,886		$	37,886
Total interest expense	$	6,977		$	21,162		$	2,247		$	30,386
Average cost of funds ⁽⁴⁾⁽⁵⁾	0.36		%	2.03		%	3.28		%	0.99		%
Net interest income	$	60,053		$	58,085		$	5,653		$	123,791
Net interest rate spread	2.68		%	4.08		%	4.51		%	3.29		%
Total interest expense including net interest cost of Swaps ⁽⁶⁾	$	26,536		$	21,162		$	2,800		$	50,498
Effective cost of funds ⁽⁶⁾	1.35		%	2.03		%	4.08		%	1.64		%
Net interest income including net interest cost of Swaps	$	40,494		$	58,085		$	5,100		$	103,679
Effective net interest rate spread⁽⁶⁾	1.69		%	4.08		%	3.71		%	2.64		%



	For the Year Ended December 31, 2013
	Agency RMBS			Non-Agency RMBS and Other Credit Investments ⁽¹⁾			Securitized Mortgage Loans			Total
Average balance ⁽²⁾	$	3,176,294		$	783,195		$	99,020		$	4,058,509
Total interest income	$	92,729		$	53,717		$	8,267		$	154,713
Yield on average assets	2.92		%	6.86		%	8.35		%	3.81		%
Average balance of associated repurchase agreements	$	2,803,094		$	631,983		$	24,237		$	3,459,314
Average balance of securitized debt ⁽³⁾	$	—		$	—		$	41,998		$	41,998
Total interest expense	$	12,189		$	13,110		$	2,303		$	27,602
Average cost of funds ⁽⁴⁾⁽⁵⁾	0.43		%	2.07		%	3.48		%	0.79		%
Net interest income	$	80,540		$	40,607		$	5,964		$	127,111
Net interest rate spread	2.49		%	4.79		%	4.87		%	3.02		%
Total interest expense including net interest cost of Swaps ⁽⁶⁾	$	33,767		$	13,110		$	2,759		$	49,636
Effective cost of funds ⁽⁶⁾	1.20		%	2.07		%	4.17		%	1.42		%
Net interest income including net interest cost of Swaps	$	58,962		$	40,607		$	5,508		$	105,077
Effective net interest rate spread ⁽⁶⁾	1.71		%	4.79		%	4.18		%	2.39		%


⁽¹⁾	Other credit investments includes other investment securities, other investments, and mortgage loans.


⁽²⁾	Amount reflects amortized cost, which does not include unrealized gains/(losses).


⁽³⁾	Reflects the average unpaid balance.


⁽⁴⁾	Cost of funds by investment type is based on the underlying investment type of the assets pledged as collateral.


⁽⁵⁾	Cost of funds does not include accrual and settlement of interest associated with derivative instruments. In accordance with GAAP, those costs are included in gain/(loss) on derivative instruments in our consolidated statement of operations.

⁽⁶⁾

The effective cost of funds for the securitized mortgage loans reflects the cost of our securitized debt and repurchase agreement borrowings collateralized by one of the subordinate securities that we retained in the securitization transaction. These subordinate bonds do not appear on our financial statements, as they were eliminated in consolidation. (See “Non-GAAP Financial Measures,” below.)

As of December 31, 2014, our repurchase agreement borrowings collateralized by Agency RMBS had initial terms of up to four months with haircut requirements ranging from 3.0% to 5.3% and financing rates from 0.32% to 0.39%; our repurchase agreement borrowings collateralized by non-Agency RMBS had initial terms of up to 24 months with haircut requirements ranging from 10.0% to 45.0% and financing rates from 1.16% to 2.59%; and our repurchase borrowings collateralized by

residential whole loans had initials terms up to four months and haircut requirements ranging from 35.0% to 40.0% and financing rates from 2.67% to 2.92%.

The following table presents certain information regarding our investment portfolio and borrowings for the quarterly periods presented:



Table 13
Quarterly Period Ended:	Average Balances⁽¹⁾		Total Interest Income		Weighted Average CPR		Yield on Average Assets		Average Balance of Borrowings⁽²⁾		Total Interest Expense		Average Cost of Funds⁽³⁾⁽⁴⁾		Net Interest Income		Net Interest Rate Spread
December 31, 2014
Agency RMBS	$	2,239,978	$	16,951	6.80	%	3.03	%	$	2,026,498	$	1,775	0.34	%	$	15,176	2.69	%
Non-Agency RMBS and other credit investments⁽⁵⁾	1,415,349		20,506		4.45	%	5.80	%	1,118,972		5,572		1.95	%	14,934		3.85	%
Securitized mortgage loans	98,191		1,857		1.73	%	7.56	%	67,286		553		3.22	%	1,304		4.34	%
Total	$	3,753,518	$	39,314	5.78	%	4.19	%	$	3,212,756	$	7,900	0.96	%	$	31,414	3.23	%
September 30, 2014
Agency RMBS	$	2,146,535	$	16,563	8.00	%	3.09	%	$	1,890,885	$	1,629	0.34	%	$	14,934	2.75	%
Non-Agency RMBS and other credit investments⁽⁵⁾	1,366,642		20,108		4.71	%	5.89	%	1,078,454		5,541		2.01	%	14,567		3.88	%
Securitized mortgage loans	98,978		1,871		2.79	%	7.56	%	65,631		538		3.21	%	1,333		4.35	%
Total	$	3,612,155	$	38,542	6.61	%	4.27	%	$	3,034,970	$	7,708	0.99	%	$	30,834	3.28	%
June 30, 2014
Agency RMBS	$	2,150,645	$	16,356	6.70	%	3.04	%	$	1,866,797	$	1,688	0.36	%	$	14,668	2.68	%
Non-Agency RMBS and other credit investments⁽⁵⁾	1,273,563		19,858		4.22	%	6.24	%	1,004,942		5,254		2.07	%	14,604		4.17	%
Securitized mortgage loans	102,062		1,927		4.83	%	7.55	%	67,676		568		3.32	%	1,359		4.23	%
Total	$	3,526,270	$	38,141	5.75	%	4.33	%	$	2,939,415	$	7,510	1.01	%	$	30,631	3.32	%
March 31, 2014
Agency RMBS	$	2,277,618	$	17,159	4.90	%	3.01	%	$	1,945,140	$	1,886	0.39	%	$	15,273	2.62	%
Non-Agency RMBS and other credit investments⁽⁵⁾	1,128,447		18,775		3.49	%	6.66	%	913,808		4,795		2.10	%	13,980		4.56	%
Securitized mortgage loans	106,300		2,246		2.33	%	8.45	%	69,947		587		3.36	%	1,659		5.09	%
Total	$	3,512,365	$	38,180	4.37	%	4.35	%	$	2,928,895	$	7,268	0.99	%	$	30,912	3.36	%

December 31, 2013
Agency RMBS	$	2,401,550	$	20,546	4.90	%	3.42	%	$	2,039,398	$	2,224	0.43	%	$	18,322	2.99	%
Non-Agency RMBS and other credit investments⁽⁵⁾	1,090,158		17,861		4.00	%	6.55	%	884,853		4,499		1.99	%	13,362		4.56	%
Securitized mortgage loans	108,772		2,313		5.70	%	8.51	%	71,282		635		3.49	%	1,678		5.02	%
Total	$	3,600,480	$	40,720	4.65	%	4.52	%	$	2,995,533	$	7,358	0.96	%	$	33,362	3.56	%
September 30, 2013
Agency RMBS	$	2,546,622	$	16,943	6.70	%	2.60	%	$	2,203,256	$	2,358	0.42	%	$	14,585	2.18	%
Non-Agency RMBS and other credit investments⁽⁵⁾	911,056		15,149		4.97	%	6.51	%	736,941		3,798		2.04	%	11,351		4.47	%
Securitized mortgage loans	110,049		2,324		1.53	%	8.26	%	73,175		633		3.43	%	1,691		4.83	%
Total	$	3,567,727	$	34,416	6.10	%	3.77	%	$	3,013,372	$	6,789	0.89	%	$	27,627	2.88	%

(Table 13 and notes continued on next page.)

(Table 13 continued.)



Quarterly Period Ended:	Average Balances⁽¹⁾		Total Interest Income		Weighted Average CPR		Yield on Average Assets		Average Balance of Borrowings⁽²⁾		Total Interest Expense		Average Cost of Funds⁽³⁾⁽⁴⁾		Net Interest Income		Net Interest Rate Spread
June 30, 2013
Agency RMBS	$	4,167,139	$	28,388	7.10	%	2.69	%	$	3,762,949	$	4,048	0.43	%	$	24,340	2.26	%
Non-Agency RMBS	589,969		10,644		4.28	%	7.14	%	470,514		2,541		2.17	%	8,103		4.97	%
Securitized mortgage loans	111,257		2,297		1.41	%	8.16	%	75,407		648		3.45	%	1,649		4.71	%
Total	$	4,868,365	$	41,329	6.63	%	3.36	%	$	4,308,870	$	7,237	0.67	%	$	34,092	2.69	%
March 31, 2013
Agency RMBS	$	3,621,734	$	26,853	7.00	%	2.97	%	$	3,226,408	$	3,558	0.45	%	$	23,295	2.52	%
Non-Agency RMBS	534,083		10,061		2.83	%	7.54	%	427,504		2,271		2.15	%	7,790		5.39	%
Securitized mortgage loans	65,099		1,333		2.54	%	8.19	%	44,459		388		3.54	%	945		4.65	%
Total	$	4,220,916	$	38,247	6.40	%	3.62	%	$	3,698,371	$	6,217	0.68	%	$	32,030	2.94	%


⁽¹⁾	Amount reflects amortized cost, which does not include unrealized gains/(losses).


⁽²⁾	Reflects average unpaid balance of borrowings under repurchase agreements and securitized debt.


⁽³⁾	Cost of funds by investment type is based on the underlying investment type of the assets pledged as collateral.


⁽⁴⁾	Cost of funds does not include accrual and settlement of interest associated with our Swaps and Swaptions, as we have not elected to apply hedge accounting. In accordance with GAAP, such costs are included in gain/(loss) on derivative instruments in the consolidated statement of operations.


⁽⁵⁾	Other credit investments includes other investment securities, other investments, and mortgage loans.

The following table presents information with respect to our repurchase agreement borrowings by type of collateral pledged as of December 31, 2014, and December 31, 2013 and the respective effective cost of funds for the periods presented:



Table 14	For the Year Ended December 31,
	2014				2013
Collateral Pledged:	Cost of Funds		Effective Cost of Funds⁽¹⁾		Cost of Funds		Effective Cost of Funds⁽¹⁾
Agency RMBS	0.36	%	1.35	%	0.43	%	1.20	%
Non-Agency RMBS and other credit investments ⁽²⁾	2.03		2.03		2.07		2.07
Securitized mortgage loans ⁽³⁾	3.28		4.08		3.48		4.17
Total	0.99	%	1.64	%	0.79	%	1.42	%

⁽¹⁾

The effective cost of funds for the periods presented include interest expense for the periods and the net interest component for Swaps during the periods of $20,112 and $22,034, respectively. While we have not elected to apply hedge accounting for our Swaps, we view such instruments as an economic hedge against the impact of increases in interest rates on our borrowing costs. (See “Non-GAAP Financial Measures,” below.)


⁽²⁾	At December 31, 2014, other credit investments were comprised of investments in Risk Transfer Securities, SBC-MBS, mortgage loans and other investments. At December 31, 2013, other credit investments were comprised of investments in Risk Transfer Securities.

⁽³⁾

Securitized mortgage loans, in effect, collateralize our securitized debt and repurchase agreement borrowings that are collateralized by the non-Agency RMBS that were retained in our February 2013 securitization transaction. The non-Agency RMBS that we retained in the securitization were eliminated in consolidation, such that we consider that the securitized mortgage loans as indirectly collateralizing such repurchase agreements.

The repurchase borrowings associated with non-Agency RMBS that were legally retained in connection with our securitization are included with the cost of funds for our securitized mortgage loans.

Gains/(Losses) on Derivative Instruments

The following table presents components of our gain/(loss) on derivative instruments for the years ended December 31, 2014 and December 31, 2013:



Table 15	For the Year Ended December 31,
Components of Gain/(Loss) on Derivative Instruments	2014			2013
Net interest (payments/accruals) on Swaps ⁽¹⁾	$	(20,112	)	$	(22,034	)
Gain on the termination of Swaps, net ⁽¹⁾	—			24,119
Gain/(loss) on the termination and expiration of Swaptions, net ⁽¹⁾	(22,502		)	6,837
Gain/(loss) on settlement of TBA Contracts, net ⁽¹⁾	(6,534		)	281
Change in fair value of Swaps ⁽²⁾	(34,931		)	58,708
Change in fair value of Swaptions ⁽²⁾	(4,242		)	(9,085		)
Change in fair value of TBA Contracts ⁽²⁾	(206		)	750
Total	$	(88,527	)	$	59,576


⁽¹⁾	Amounts are realized.


⁽²⁾	Amounts are unrealized.

At December 31, 2014, we had Swaps with an aggregate notional amount of $1,687,000, a weighted average fixed pay rate of 1.43% and weighted average term to maturity of 4.4 years. At December 31, 2014, our Swaptions had an aggregate notional amount of $1,250,000 and a weighted average term of five months until expiration; Swaps underlying our Swaptions had a weighted average fixed pay rate of 3.53% and a weighted average term of 9.4 years.

We expect that changes in the fair value of our derivative instruments will move inversely to changes in the fair value of our Agency pass-through RMBS, however we do not expect that the changes in valuations of such derivatives relative to our Agency pass-through RMBS will off-set entirely. We note that the terms and benchmark interest rates associated with our derivatives are not matched with our investments, that the notional amount of our derivatives is not equal to our investments and the value of our Swaps and Swaptions do not mitigate the impact of spread widening, which occurs when market spreads widen between the yield on RMBS relative to certain benchmark interest rates. The timing and amount of realized and unrealized gains/(losses) associated with our derivative instruments cannot be predicted, as the value of such instruments generally moves inversely with changes in interest rates which cannot be predicted with any certainty. (For more information about derivative instruments we held at December 31, 2014 and December 31, 2013, see Note 11 - Derivative Instruments to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)

The following table presents the notional amount and estimated fair value for each of our derivative instrument types at December 31, 2014 and December 31, 2013:



Table 16	December 31, 2014					December 31, 2013
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Swaps - assets	$	957,000	$	9,543		$	1,007,000	$	40,135
Swaptions - assets	1,250,000		1,555			1,375,000		12,430
Swaps - (liabilities)	730,000		(8,949		)	580,000		(4,610		)
Long TBA Contracts - assets	100,000		544			—		—
Short TBA Contracts - assets	—		—			400,000		750
Total derivative instruments, net	$	3,037,000	$	2,693		$	3,362,000	$	48,705



Table 17	Repurchase Borrowings on Agency RMBS			Repurchase Borrowings on Non-Agency RMBS and Other Credit Investments ⁽¹⁾			Securitized Debt Collateralized by Securitized Mortgage Loans			Total
Year Ended December 31, 2014
Effective interest expense	$	26,536		$	21,162		$	2,800		$	50,498
Effective cost of funds	1.35		%	2.03		%	4.08		%	1.64		%
Effective net interest income	$	40,494		$	58,085		$	5,100		$	103,679
Effective net interest rate spread	1.69		%	4.08		%	3.71		%	2.64		%
Year Ended December 31, 2013
Effective interest expense	$	33,767		$	13,110		$	2,759		$	49,636
Effective cost of funds	1.20		%	2.07		%	4.17		%	1.42		%
Effective net interest income	$	58,962		$	40,607		$	5,508		$	105,077
Effective net interest rate spread	1.71		%	4.79		%	4.18		%	2.39		%
Quarterly Period Ended December 31, 2014
Effective interest expense	$	6,749		$	5,572		$	692		$	13,013
Effective cost of funds	1.30		%	1.95		%	4.02		%	1.58		%
Effective net interest income	$	10,202		$	14,934		$	1,165		$	26,301
Effective net interest rate spread	1.72		%	3.85		%	3.54		%	2.60		%
Quarterly Period Ended September 30, 2014
Effective interest expense	$	6,617		$	5,541		$	678		$	12,836
Effective cost of funds	1.37		%	2.01		%	4.04		%	1.65		%
Effective net interest income	$	9,946		$	14,567		$	1,193		$	25,706
Effective net interest rate spread	1.72		%	3.88		%	3.52		%	2.62		%
Quarterly Period Ended June 30, 2014
Effective interest expense	$	6,631		$	5,254		$	706		$	12,591
Effective cost of funds	1.41		%	2.07		%	4.13		%	1.69		%
Effective net interest income	$	9,725		$	14,604		$	1,221		$	25,550
Effective net interest rate spread	1.63		%	4.17		%	3.42		%	2.64		%
Quarterly Period Ended March 31, 2014
Effective interest expense	$	6,539		$	4,795		$	723		$	12,057
Effective cost of funds	1.34		%	2.10		%	4.13		%	1.65		%
Effective net interest income	$	10,620		$	13,980		$	1,523		$	26,123
Effective net interest rate spread	1.67		%	4.56		%	4.32		%	2.70		%
Quarterly Period Ended December 31, 2013
Effective interest expense	$	6,651		$	4,499		$	772		$	11,922
Effective cost of funds	1.28		%	1.99		%	4.24		%	1.56		%
Effective net interest income	$	13,895		$	13,362		$	1,541		$	28,798
Effective net interest rate spread	2.15		%	4.56		%	4.27		%	2.97		%
Quarterly Period Ended September 30, 2013
Effective interest expense	$	9,118		$	3,799		$	766		$	13,683
Effective cost of funds	1.64		%	2.04		%	4.15		%	1.80		%
Effective net interest income	$	7,825		$	11,350		$	1,558		$	20,733
Effective net interest rate spread	0.96		%	4.45		%	4.12		%	1.97		%

(Table 17 and notes continued on next page.)



(Table 17 - continued.)	Repurchase Borrowings on Agency RMBS			Repurchase Borrowings on Non-Agency and Other Credit Investments ⁽¹⁾			Securitized Debt Collateralized by Securitized Mortgage Loans			Total
Quarterly Period Ended June 30, 2013
Effective interest expense	$	10,352		$	2,541		$	781		$	13,674
Effective cost of funds	1.10		%	2.17		%	4.15		%	1.27		%
Effective net interest income	$	18,036		$	8,103		$	1,516		$	27,655
Effective net interest rate spread	1.59		%	4.97		%	4.01		%	2.09		%
Quarterly Period Ended March 31, 2013
Effective interest expense	$	7,646		$	2,271		$	439		$	10,356
Effective cost of funds	0.96		%	2.15		%	4.00		%	1.14		%
Effective net interest income	$	19,207		$	7,790		$	894		$	27,891
Effective net interest rate spread	2.00		%	5.38		%	4.19		%	2.48		%


⁽¹⁾	Other credit investments presented were comprised of investments in Risk Transfer Securities, SBC-MBS, mortgage loans and other investments at December 31, 2014. At December 31, 2013, other credit investments were comprised of investments in Risk Transfer Securities. We had no other credit investments prior to the quarterly period ended December 31, 2013.

Realized and Unrealized Gains/(Losses) on Investments and Securitized Debt

During the years ended December 31, 2014 and 2013, we sold Agency RMBS of $1,555,100 and $3,529,336, respectively, realizing net losses of $(19,282) and $(81,504), respectively, and sold non-Agency RMBS of $112,841 and $94,307, respectively, realizing net gains of $10,461 and $14,654, respectively. During 2014, as we identified attractive investment opportunities in non-Agency RMBS, we sold Agency RMBS and reinvested such capital in non-Agency RMBS. The substantial majority of our RMBS sales during the year ended December 31, 2013 were made during the second quarter and were comprised primarily of sales of Agency RMBS, as we repositioned our portfolio in connection with the significant volatility in the fixed income market. As we find attractive investment opportunities in non-Agency RMBS, whole loans and mortgage related assets, we may sell Agency and/or non-Agency RMBS to provide funds to make such purchases. With respect to non-Agency RMBS, we continue to emphasize investments in seasoned securities, backed by Subprime, Alt-A and Option ARM mortgage loans.



Table 18	For the Year Ended December 31,
	2014			2013
Realized (loss) on sale of RMBS, net	$	(8,821	)	$	(66,850	)
Unrealized gain/(loss) on RMBS, net	91,290			(147,375		)
Unrealized gain/(loss) on other investment securities	(205		)	335
Unrealized gain on securitized mortgage loans	1,683			3,950
Unrealized (loss) on securitized debt	(124		)	(954		)
Unrealized (loss) on mortgage loans carried at fair value	(9		)	—
Total	$	83,814		$	(210,894	)

Expenses

General and Administrative Expenses: We reimburse our Manager for our allocable share of the compensation of our CFO/Treasurer/Secretary based on the percentage of her time spent on our affairs and for other corporate finance, tax, accounting, legal, risk management, operations, compliance and other non-investment professional personnel of our Manager or its affiliates who spend all or a portion of their time managing our affairs. We are responsible for our operating expenses, which include the cost of data and analytical systems, legal, accounting, due diligence, prime brokerage and banking fees, professional services, including auditing and legal fees, board of director fees and expenses, compliance related costs, corporate insurance, and miscellaneous other operating costs. We incurred general and administrative expenses of $11,905 and $11,501

for the years ended December 31, 2014 and December 31, 2013, respectively. Costs for our third-party investment accounting services and clearing costs we incur for security and repurchase transactions vary based on the size of our portfolio and transaction activity. During 2014, we incurred higher legal expenses in connection with our new business initiatives.

Management Fee Expense: Under the terms of the Management Agreement, our Manager is entitled to a management fee calculated and payable quarterly in arrears in an amount equal to 1.5% of adjusted stockholders’ equity as defined in the Management Agreement, per annum. Our Manager uses the proceeds from the management fee, in part, to pay compensation to certain of its officers and personnel, who, notwithstanding that certain of them also are our officers, will receive no cash compensation directly from us. Pursuant to our Management Agreement, we incurred management fees of $11,200 and $11,579 for the years ended December 31, 2014 and December 31, 2013, respectively.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 13 - Commitments and Contingencies to the consolidated financial statements included under Item 8 of this annual report Form 10-K.

Critical Accounting Policies and Use of Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires our Manager to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. In preparing these consolidated financial statements, our Manager has made estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from our estimates. Our accounting policies are described in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included under Item 8 of this annual report on Form 10-K. The more significant of our accounting policies are as follows:

Basis of Presentation

The audited consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. We currently operate as one business segment.

The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Classification of RMBS and valuations of financial instruments

Fair value election

To date, we have elected the fair value option of accounting for all of our investment securities at the time of purchase and our securitized debt when initially incurred. As a result of the fair value election on such assets/liabilities, we record the change in the estimated fair value of such assets and liabilities in earnings as unrealized gains/(losses). We believe that our election of the fair value option for our investments and securitized debt improves financial reporting, as it is consistent with presenting changes in the fair value of derivative instruments through earnings.

We generally intend to hold our investment securities to generate interest income; however, we have and may continue to sell certain of our investment securities as part of the overall management of our assets and liabilities and operating our business. Realized gains/(losses) on the sale of investment securities are recorded in earnings using the specific identification method.

Fair Value of Financial Instruments

We disclose the estimated fair value of our financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). We are required to provide enhanced disclosures regarding instruments in the Level III category, including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities. GAAP provides a framework for measuring estimated fair value and for providing financial statement disclosure requirements for fair value measurements. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level I - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level II - Fair values are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

Level III - Fair values are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.

The level in the fair value hierarchy, within which a fair measurement falls in its entirety, is based on the lowest level input that is significant to the fair value measurement. When available, we use quoted market prices to determine the estimated fair value of an asset or liability.

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

We have controls over our valuation processes that are intended to ensure that the valuations for our financial instruments are fairly presented in accordance with GAAP on a consistent basis. Our Manager and our chief executive officer oversee our valuation process, which is carried out by our Manager and Apollo’s pricing group. Our audit committee has final oversight for the valuation process for all of our financial instruments and, on a quarterly basis, reviews and provides final approval for such process.

Any changes to the valuation methodology will be reviewed by our Manager and audit committee to ensure the changes are appropriate. We may refine our valuation methodologies as market and products develop. The methods used by us may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and are believed to result in valuations consistent with other market participants, the use of different methodologies, or assumptions, to determine the estimated fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

The following describes the valuation methodologies used for our financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Agency RMBS, non-Agency RMBS, TBA Contracts, Securitized Mortgage Loans, Non-Recourse Securitized Debt and Other Investment Securities

To determine the fair value of our Agency RMBS, non-Agency RMBS, TBA Contracts, other investment securities, securitized mortgage loans and non-recourse securitized debt, we obtain third party broker quotes which, while non-binding, are indicative of fair value. To validate the reasonableness of the broker quotes, we obtain and compare the broker quotes to valuations received from a third party pricing service and review the range of quotes received for outliers, compare quotes to recent market activity observed for similar securities and review significant changes in quarterly price levels. We generally do not adjust the prices we obtain from brokers; however, adjustments to valuations may be made as deemed appropriate to capture observable market information at the valuation date. Further, broker quotes are used provided that there is not an ongoing material event that affects the issuer of the securities being valued or the market thereof. If there is such an ongoing event, we will determine the estimated fair value of the securities using valuation models that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and prepayment rates and, with respect to non-Agency RMBS, default rates and loss severities. Valuation techniques for securities may be based on models that consider the estimated cash flows of each debt tranche of the issuer, establish a benchmark yield, and develop an estimated tranche-specific spread to the benchmark yield based on the unique attributes of the tranche including, but not limited to, assumptions related to prepayment speed, the frequency and severity of defaults and attributes of the collateral underlying such securities. To the extent the inputs are observable and timely, the values would be categorized in Level II of the fair value hierarchy; otherwise they would be categorized as Level III. There were no events that resulted in us using internal models to value our Agency RMBS, non-Agency RMBS, TBA Contracts, Securitized Mortgage Loans, Non-Recourse Securitized Debt and Other Investment Securities in our consolidated financial statements for the periods presented. Given the high level of liquidity and price transparency for our Agency RMBS, Risk Sharing Securities (which are included in our “other investment securities”) and TBA Contracts, prices obtained from brokers and pricing services are readily verifiable to observable market transactions; as such, we categorize Agency RMBS, TBA Contracts and Risk Sharing Securities as Level II valuations. While market liquidity exists for non-Agency RMBS, securities underlying our securitized mortgage loans, securitized debt, SBC-MBS and

SBA-IO, periods of less liquidity or even illiquidity may also occur periodically for certain of these assets. As a result of this market dynamic and that observable market transactions may or may not exist from time to time, the valuations for such instruments are categorized as Level III.

In providing valuations for our Agency RMBS, we understand that our third party pricing service utilizes observable inputs such as: pool specific characteristics such as loan age, loan size, and credit quality of borrowers; yields for Treasury securities of various maturities; a range of spread and discount margin assumptions; floating rate indices such as LIBOR; prices for TBA securities; and recent trading and bidding activity for bonds with similar collateral characteristics. In providing valuations for our non-Agency RMBS, other investment securities and securitized debt, we understand that our third party pricing service utilizes both observable and unobservable inputs such as: pool specific characteristics such as loan age, loan size, credit quality of borrowers, servicer quality, structural and waterfall features of each bond; floating rate indices such as LIBOR; prepayment and default assumptions developed using the pricing service’s proprietary models. As a final step, we understand that the pricing service checks prices against recent trading and Bid Wanted in Competition (commonly known as “BWIC”) indications on each bond, bonds from the same securitization, bonds with similar underlying collateral or structural characteristics and bonds from the same manager and may make adjustments it considers appropriate based on such trading indications.

Swaps and Swaptions

We determine the estimated fair value of our Swaps and Swaptions based on market valuations obtained from a third party with expertise in valuing such instruments. With respect to Swap valuations, the expected future cash flows are determined for the fixed and floating leg of the Swap. To arrive at the expected cash flows for the fixed leg of a Swap, the rate stated in the Swap agreement is used and, to arrive at the cash flows for the floating leg, forward rates derived from raw yield curve data to are used. Finally, both the fixed and floating legs’ cash flows are discounted using the calculated discount factors and the fixed and floating leg valuations are netted to arrive at a single valuation for the Swap at the valuation date. Swaptions require the same market inputs as Swaps with the addition of implied Swaption volatilities quoted by the market. The valuation inputs for Swaps and Swaptions are observable and, as such, their valuations are categorized as Level II in the fair value hierarchy.

Interest income recognition

Investment Securities

Interest income on investment securities is accrued based on the outstanding principal balance and the current coupon interest rate on each security. In addition, premiums and discounts associated with Agency RMBS, non-Agency RMBS and other investment securities rated AA and higher by a nationally recognized statistical rating organization at the time of purchase are amortized into interest income over the life of such securities using the effective yield method. In order to determine the effective yield, we estimate prepayments for each security. For those securities, if prepayment levels differ, or are expected to differ in the future from our previous assessment, we adjust the amount of premium amortization recognized in the period that such change is made, applying the retrospective method, resulting in a cumulative catch-up reflecting such change. To the extent that prepayment activity varies significantly from our previous prepayment estimates, we may experience volatility in our interest income. For Agency pass-through RMBS that we acquired subsequent to June 30, 2013, we do not estimate prepayments to determine premium amortization or discount accretion on such securities. Instead, the amount of premium amortization/discount accretion on Agency pass-through RMBS acquired subsequent to June 30, 2013 is based upon actual prepayment experience, which may vary significantly over time. Substantially all the Agency RMBS we held at December 31, 2015 were acquired subsequent to June 30, 2013.

For Agency IO, Agency Inverse IO and Agency Inverse Floater securities, income is accrued based on the amortized cost and the effective yield. Cash received on Agency IO and Agency Inverse IO securities is first applied to accrued interest and then to reduce the amortized cost. At each reporting date, the effective yield is adjusted prospectively based on the current cash flow projections, which reflect prepayment estimates and the contractual terms of the security.

the projected cash flows for our non-Agency RMBS, we generally expect that a portion of the purchase discount on such securities will not be recognized as interest income and is instead viewed as a credit discount. Credit discount, if any, mitigates our risk of loss on our non-Agency RMBS and other investment securities. The amount of discount considered to be credit discount may change over time, based on the actual performance of the underlying mortgage collateral, actual and projected cash flows from such collateral, economic conditions and other factors. If the performance of a security with a credit discount is more favorable than forecasted, we may accrete more discount into interest income than expected at the time of purchase or when performance was last assessed. Conversely, if the performance of a security with a credit discount is less favorable than forecasted, the amount of discount accreted into income may be less than expected at the time of purchase or when performance was last assessed and/or impairment and write-downs of such securities to a new lower cost basis could result, as discussed below.

Impairments - Investment Securities

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired. We assess our investment securities for impairment on at least a quarterly basis and designate such impairments as either “temporary” or “other than temporary.” If we intend to sell an impaired security, or it is more likely than not that we will be required to sell an impaired security before its anticipated recovery, then we recognize an other than temporary impairment (or, OTTI) through earnings. If we do not expect to sell an other than temporarily impaired security, only the portion of the OTTI that is related to credit losses will be recognized as an OTTI, with the remainder recognized through earnings as a component of unrealized gains/(losses) on our statement of operations. When an OTTI is recognized, a new cost basis is established for the security, which new cost basis may not be adjusted for subsequent recoveries in fair value through earnings. However, if the performance of a security on which an OTTI was previously recognized improves, future yields may increase on such securities, resulting in a reversal of the prior impairment over time. The determination as to whether an OTTI exists and, if so, the amount of such impairment recognized is subjective, as such determinations are based on information available at the time of assessment, as well as our Manager’s estimates of the future performance and cash flow projections for the individual security. As a result, the timing and amount of OTTI constitutes material estimates that are susceptible to significant change.

Securitized Mortgage Loans and Mortgage Loans

Application of the interest method of accounting for our pools of securitized mortgage loans and mortgage loans requires the use of estimates to calculate a projected yield. We calculate the yield based on the projected cash flows for each pool of mortgage loans. To the extent the actual performance of a loan is better than last expected, the yield is adjusted upward prospectively to reflect the revised estimate of cash flows over the remaining life of the such mortgage pool. However, if the revised cash flow estimates on a loan pool provides a lower yield than the original or the last calculated yield, we recognize an OTTI through earnings which results in a corresponding reduction to the amortized cost of the loan pool. Decreasing yields arising solely from a change in the contractual interest rate on variable rate loans are not treated as an OTTI. If future cash collections are materially different in amount or timing than projected cash collections, earnings could be affected, either positively or negatively.

On at least a quarterly basis, our Manager reviews and, if appropriate, makes adjustments to cash flow projections based on input and analysis received from external sources, internal models and our Manager’s judgment about interest rates, prepayment speeds, home prices, the timing and amount of credit losses and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such loans and/or the recognition of an OTTI.

Warehouse Line Receivable

We accrue interest income on our warehouse line receivable, which income is included as a component of our “Interest income-other” on our consolidated statements of operations. The warehouse line receivable is included in “Other investments,” on our consolidated balance sheets. We accrue interest income on the warehouse line based on the contractual terms governing the warehouse line receivable agreement. We assess the collectability of the warehouse receivable and associated income on at least a quarterly basis.

Derivative Instruments

Subject to maintaining our qualification as a REIT for U.S. Federal income tax purposes, we utilize derivative financial instruments, currently comprised of Swaps, Swaptions and, from time to time, TBA Contracts as part of our interest rate risk management. We view our derivative instruments as economic hedges, which we believe mitigate interest rate risk associated with our borrowings under repurchase agreements and/or the fair value of our RMBS portfolio. We do not enter into derivative instruments for speculative purposes.

earnings. The fair value adjustments, along with the related interest income or interest expense, are recognized in our consolidated statement of operations in the line item “Gain/(loss) on derivative instruments, net”. If our hedging activities do not achieve the desired results, our earnings may be adversely affected.

To-Be-Announced Securities

TBA Contracts are forward contracts for the purchase or sale of Agency RMBS by a specified issuer and for a specified face amount, coupon and stated term, at a predetermined price on the date stated in the contract. The particular Agency RMBS as identified by a Committee on Uniform Securities Identification Procedures number (known as a CUSIP) delivered into the contract upon the settlement date are not known at the time of the transaction. We recognize in earnings unrealized gains and losses associated with TBA Contracts that are not subject to the regular-way exception, which applies: (i) when there is no other way to purchase or sell that security; (ii) if delivery of that security and settlement will occur within the shortest period possible for that type of security and (iii) if it is probable at inception and throughout the term of the individual contract that physical delivery of the security will occur. Changes in the value of our TBA Contracts and realized gains or losses on settlement are recognized in our consolidated statements of operations in the line item “Gain/(loss) on derivative instruments, net.”

Although permitted under certain circumstances, we do not offset cash collateral receivables or payables against our net derivative positions.

Repurchase Agreements

Investment securities financed under repurchase agreements are treated as collateralized borrowings, unless they meet sale treatment or are deemed to be linked transactions. Investment securities financed through a repurchase agreement remain on our consolidated balance sheet as an asset and cash received from the lender is recorded on our consolidated balance sheet as a liability. Interest paid and accrued in accordance with our repurchase agreements is recorded as interest expense.

Income taxes

Our financial results generally do not reflect provisions for current or deferred income taxes. We believe that we operate in, and intend to continue to operate in, a manner that allows and will continue to allow us to qualify as a REIT for tax purposes. Provided that we distribute all of our REIT taxable income annually and meet each of the requirements to maintain our status as a REIT, we do not generally expect to pay corporate level taxes and/or excise taxes. Many of the REIT requirements, are highly technical and complex and, if we were to fail to meet certain of the REIT requirements, we would be subject to U.S. federal, state and local income taxes.

We have a wholly owned TRS and may, in the future, elect to treat newly formed subsidiaries as a TRS. A TRS may participate in activities that would otherwise not be allowed to be carried on in a REIT. A TRS is subject to U.S. Federal, state and local income tax at regular corporate tax rates.

As of December 31, 2015, our TRS and its subsidiaries, which are not consolidated with the Company for income tax purposes, had an estimated net operating loss carryforward of approximately $1.5 million. Given the limited operating history of our TRS and its subsidiaries, there can be no assurance that such entities will generate taxable income in the future. As a result, the deferred tax asset of approximately $0.6 million associated with our net operating loss carryforward has been offset by a valuation allowance, such that we had no net deferred tax asset or liability at December 31, 2015 or 2014 and have not recorded any tax benefits through December 31, 2015.

Our major tax jurisdictions are U.S. Federal, New York State and New York City. The statute of limitations is open for all jurisdictions for tax years beginning 2012. We do not have any unrecognized tax benefits and do not expect a change in our position for unrecognized tax benefits in the next twelve months.

Variances between GAAP Income and Taxable Income

Our net income for financial reporting purposes differs from our taxable income. Certain of the differences between our GAAP net income and our taxable income arise from variations among the methods prescribed under GAAP and the Internal Revenue Code for recognizing certain items of income and/or expense. Certain of these variations give rise to “timing differences” between GAAP net income and taxable income while other variations cause “permanent differences” between GAAP net income and taxable net income.

Timing differences between our GAAP and taxable net income arise as a result of temporary differences between when certain revenue or expense items are recognized in earnings. The differences are expected to reverse over time and may cause significant short-term variances between GAAP and taxable net income. For 2015, the primary differences between our GAAP and taxable income arose from the following: (1) unrealized gain/(losses) that are recognized for GAAP purposes are not recognized for tax purposes; (2) discount accretion on non-Agency RMBS was less for tax purposes than for GAAP; (3) gains

and losses on the termination of Swaps and Swaptions were recognized in the period that the Swap or Swaption was terminated for GAAP purposes, while such gains/(losses) are recognized over the remaining term of the Swap or the term of the Swap underlying the Swaption for tax purposes; and (4) purchase premium amortization on Agency RMBS was higher for tax purposes than for GAAP. In addition, we hold certain securities that were issued with OID. We generally recognize OID in our current gross interest income over the term of the applicable securities as the OID accrues. The rate at which OID is recognized into taxable income is calculated using a constant rate of yield to maturity, without a loss assumption provision. As a result, for tax purposes, REIT taxable income with respect to securities with OID may be recognized in excess of GAAP income or in advance of the corresponding cash flow from these assets. The differences discussed above with respect to our Agency and non-Agency RMBS may also impact the difference between net gains we recognized under GAAP compared to tax. In addition, certain permanent differences between our GAAP income and our taxable income arise when items are recognized for GAAP purposes which will never affect the calculation of taxable income.

As of December 31, 2015, for tax purposes we had estimated non-deductible net capital losses of approximately $67.7 million which may be carried forward and applied against future net capital gains, of which approximately $20.4 million may be carried forward four years and approximately $47.3 million may be carried forward three years. This capital loss carryforward will reduce the amount of future capital gains, if any, that we would otherwise expect to distribute, as capital gains.

Depending on the structure of securitization/resecuritization transactions, for tax purposes such transactions may be treated either as a sale or a financing of the underlying assets. Income recognized from securitization and resecuritization transactions will generally differ for tax and GAAP purposes. Our February 2013 Securitization was treated as a sale for tax purposes but treated as a financing for GAAP purposes, whereby we consolidate the securitization trust under GAAP. As a result of these differences, for tax purposes no interest income is recognized on our securitized mortgage loans and no interest expense is recognized for our securitized debt; instead, interest income is recognized on the subordinated bonds we received from the associated trust. Our March 2015 Securitization was treated as a financing transaction for both GAAP and tax accounting purposes and, as such we are viewed as owing mortgage loans for both GAAP and tax purposes. However, with respect to income recognition on the securitized mortgage loans, for purposes of recognizing taxable income we are not permitted to estimate future losses on the securitized mortgage loans, while for GAAP purposes we are required to estimate future losses on the mortgage loans. These difference in GAAP versus tax accounting methods result in timing differences between GAAP and tax interest income recognized on mortgage loans associated with our March 2015 Securitization.

Liquidity and Capital Resources

General

To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our net taxable income, excluding net capital gains. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations.

Our principal sources of cash generally consist of borrowings under repurchase agreements, payments of principal and interest received on the RMBS portfolios, cash generated from operating results and, depending on market conditions, proceeds from capital market transactions, which to date have reflected issuances of common and preferred stock. As part of managing our investment portfolio, we may also generate cash through sales of RMBS. Cash is needed to fund our ongoing obligations, make payments of principal and interest on repurchase agreement borrowings, purchase target assets, meet margin calls, make dividend distributions to stockholders and for other general business and operating purposes.

Our primary sources of cash for the year ended December 31, 2015 consisted of proceeds from repurchase facility borrowings, proceeds from sales of Agency and non-Agency RMBS and payments of principal and interest we received on our investment portfolio. We expect that in the future, subject to market conditions, that we may issue additional shares of our common stock, other types of debt and/or equity securities and engage in additional securitization/resecuritization transactions.

Under our repurchase agreements, lenders retain the right to mark the collateral pledged to estimated fair value. A reduction in the value of the collateral pledged will require us to provide additional securities or cash as collateral. As part of our risk management process, our Manager closely monitors our liquidity position and subjects our balance sheet to scenario testing designed to assess our liquidity in the face of different economic and market developments.

We believe we have adequate financial resources to meet our obligations, including margin calls, as they come due, to actively hold and acquire our target assets, to fund dividends we declare on our capital stock and to pay our operating expenses. However, should the value of our pledged assets suddenly decrease, significant margin calls on repurchase agreement borrowings could result and our liquidity position could be materially and adversely affected. Further, should market liquidity tighten, our repurchase agreement counterparties could increase the percentage by which the collateral value is required to exceed the loan amount on new financings, reducing our ability to use leverage. Access to financing may also be negatively

impacted by the ongoing volatility in the global financial markets, potentially adversely impacting our current or potential lenders’ ability to provide us with financing.

Public Offerings of Capital Stock

The following table presents information with respect to shares of our capital stock we issued through public offerings from January 1, 2013 through December 31, 2015:



Table 19
Date of Issuance	Type of Capital Stock Issued	Number of Shares Issues	Offering Price Per Share		Net Proceeds
March 25, 2013	Common	1,020,000	$	22.00	$	22,430
March 13, 2013	Common	6,800,000	$	22.00	$	149,212

We primarily used the cash from these public offerings to invest on a levered basis in our target assets.

Stock Repurchase Program

On November 6, 2013, our Board of Directors authorized the Repurchase Program to repurchase up to $50,000 of our outstanding common stock. Such authorization does not have an expiration date. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program may be made at times and in amounts as we deem appropriate, using available cash resources. Shares of common stock repurchased by us under the Repurchase Program are canceled and, until reissued by us, are deemed to be authorized but unissued shares of our common stock. The Repurchase Program may be suspended or discontinued by us at any time and without prior notice. Through December 31, 2015, we repurchased 360,800 shares of common stock, all of which were repurchased during August and September of 2015, at an average cost per share of $13.86. At December 31, 2015, $45,000 of common stock remained authorized for future share repurchases under the Repurchase Program.

Investing Activity

During the year ended December 31, 2015, we: (i) invested $1,503,520 in Agency pass-through RMBS at a weighted average purchase price of 106.3% of par value, $78,591 in Agency IOs, $15,789 in Agency Inverse IO, $312,638 in non-Agency RMBS with a weighted average purchase price of 92.0% of par value, $169,606 in other investment securities, $28,642 in other investments and $81,094 in mortgage loans; (ii) received prepayments and scheduled amortization of $197,376 for Agency RMBS, $169,038 for non-Agency RMBS, and $17,143 on our securitized mortgage loans; and (iii) sold Agency RMBS of $1,733,187 realizing a net gain of $2,786 and sold $375,564 of non-Agency RMBS realizing a net gain of $14,212. As of December 31, 2015, we had investment related receivables of $2,692.

We receive interest-only payments with respect to the notional amount of Agency IO, Agency Inverse IO and SBA-IO. Therefore, the performance of such instruments is extremely sensitive to prepayments on the underlying pool of assets. Unlike Agency RMBS, the market prices of an IO generally have a positive correlation to changes in interest rates. Generally, as market interest rates increase, prepayments on the mortgages underlying an IO will decrease, which in turn is expected to increase the cash flow and the value of such securities; inverse results are expected with respect to decreases in market interest rates. In addition to viewing Agency IO as attractive investments, we also view such instruments as an economic hedge, in part, against the impact that an increase in market interest rates would have on our Agency RMBS. However, given that we had Agency IO of $57,354 with an aggregate notional balance of $564,931, the overall impact of Agency IO in off-setting the impact of increases in interest rates on the value of our Agency RMBS portfolio is limited. During the year ended December 31, 2015, we sold $60,973 of Agency IO and Agency Inverse IO securities with aggregate notional balances of $226,200, realizing an aggregate net gain of $307.

As of December 31, 2015, our non-Agency RMBS consisted primarily of RMBS backed by seasoned Subprime mortgages and, to a lesser extent, Alt-A and Option ARMs. The average cost basis of our non-Agency RMBS portfolio was 83.6% and 82.8% of par as of December 31, 2015 and December 31, 2014, respectively. (For additional information about our RMBS portfolio as of December 31, 2015, see Tables 27, 30 and 31 included under Item 7A and Note 4 - Residential Mortgage-Backed Securities to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)

Financing Activity

We use repurchase agreements to finance a substantial majority of our Agency RMBS, non-Agency RMBS and other investment securities with such securities pledged as collateral to secure such borrowings. At December 31, 2015, we had outstanding repurchase agreement borrowings with 18 counterparties totaling $2,898,347. We continue to have available

capacity under our repurchase agreements; however, our repurchase agreements are generally uncommitted and renewable at the discretion of our lenders. As of December 31, 2015, we had master repurchase agreements with 25 counterparties, and as a matter of routine business we may have discussions with other financial institutions in order to potentially provide us with additional repurchase agreement capacity.

The following table presents certain information about our borrowings for the periods presented:



Table 20	Repurchase Agreements						Securitized Debt ⁽¹⁾
Quarter Ended	Quarterly Average Balance		End of Period Balance		Maximum Balance at Month-End During the Period		Quarterly Average Balance		End of Period Balance		Maximum Balance at Month-End During the Period
December 31, 2015	$	2,898,737	$	2,898,347	$	2,913,423	$	20,566	$	18,904	$	20,840
September 30, 2015	$	3,047,811	$	3,011,025	$	3,071,188	$	24,708	$	21,351	$	24,730
June 30, 2015	$	3,215,482	$	3,177,679	$	3,240,446	$	28,582	$	25,828	$	28,883
March 31, 2015	$	3,217,137	$	3,303,385	$	3,303,385	$	31,321	$	29,240	$	31,026

December 31, 2014	$	3,178,580	$	3,402,327	$	3,402,327	$	34,176	$	33,098	$	34,519
September 30, 2014	$	2,998,470	$	3,076,808	$	3,076,808	$	36,500	$	34,947	$	36,692
June 30, 2014	$	2,900,282	$	2,991,989	$	2,991,989	$	39,133	$	37,348	$	39,066
March 31, 2014	$	2,887,060	$	2,859,344	$	2,956,389	$	41,835	$	40,281	$	41,292


⁽¹⁾	The balances presented for securitized debt reflect the balance of such debt, which does not reflect the impact of changes in the fair value of such liability.

The following table presents information about our borrowings by type of collateral pledged and the fair value of collateral pledged as of the dates presented and the weighted average interest rate, the cost of funds and effective cost of funds for the quarterly periods then ended:



Table 21	Principal Balance of Borrowing		Fair Value of Collateral Pledged ⁽¹⁾		Weighted Average Cost of Funds		Effective Cost of Funds ⁽²⁾
December 31, 2015:
Agency RMBS repurchase borrowings	$	1,719,479	$	1,800,420	0.48	%	1.52	%
Non-Agency RMBS and Other Investment repurchase borrowings	1,088,587		1,402,178		1.91	%	1.91	%
Securitized Mortgage Loans repurchase borrowings ⁽³⁾	90,281		125,125		2.82	%	3.19	%
Total repurchase borrowings	2,898,347		3,327,723		1.08	%	1.72	%
Securitized debt	18,904		91,599		4.64	%	4.64	%
Total	$	2,917,251	$	3,419,322	1.11	%	1.74	%
September 30, 2015:
Agency RMBS repurchase borrowings	$	1,809,868	$	1,900,594	0.42	%	1.47	%
Non-Agency RMBS and Other Investment repurchase borrowings	1,109,399		1,434,741		1.86	%	1.86	%
Securitized Mortgage Loans repurchase borrowings	91,758		125,948		2.61	%	3.18	%
Total repurchase borrowings	3,011,025		3,461,283		1.04	%	1.68	%
Securitized debt	21,351		93,751		4.97	%	4.97	%
Total	$	3,032,376	$	3,555,034	1.07	%	1.70	%
June 30, 2015:
Agency RMBS repurchase borrowings	$	1,868,994	$	1,955,767	0.38	%	1.35	%
Non-Agency RMBS repurchase borrowings	1,215,083		1,577,653		1.82	%	1.82	%
Securitized Mortgage Loans repurchase borrowings	93,602		128,933		2.76	%	3.33	%
Total repurchase borrowings	3,177,679		3,662,353		0.97	%	1.57	%
Securitized debt	25,828		98,223		4.60	%	4.60	%
Total	$	3,203,507	$	3,760,576	1.00	%	1.60	%

(Table 21 and notes continued on next page.)



(Table 21 - continued.)	Principal Balance of Borrowing		Fair Value of Collateral Pledged ⁽¹⁾		Weighted Average Cost of Funds		Effective Cost of Funds ⁽²⁾
March 31, 2015:
Agency RMBS repurchase borrowings	$	2,074,306	$	2,192,291	0.37	%	1.30	%
Non-Agency RMBS repurchase borrowings	1,134,211		1,492,830		1.88	%	1.88	%
Securitized Mortgage Loans repurchase borrowings	94,868		130,672		2.15	%	3.08	%
Total repurchase borrowings	3,303,385		3,815,793		0.93	%	1.52	%
Securitized debt	29,240		101,261		4.69	%	4.69	%
Total	$	3,332,625	$	3,917,054	0.96	%	1.58	%
December 31, 2014:
Agency RMBS repurchase borrowings	$	2,205,082	$	2,313,124	0.34	%	1.30	%
Non-Agency RMBS repurchase borrowings	1,164,092		1,538,096		1.95	%	1.95	%
Securitized Mortgage Loans repurchase borrowings	33,153		47,786		2.20	%	3.84	%
Total repurchase borrowings	3,402,327		3,899,006		0.93	%	1.56	%
Securitized debt	33,098		104,438		4.20	%	4.20	%
Total	$	3,435,425	$	4,003,444	0.96	%	1.58	%
September 30, 2014:
Agency RMBS repurchase borrowings	$	1,934,669	$	2,022,839	0.34	%	1.37	%
Non-Agency RMBS repurchase borrowings	1,112,962		1,486,250		2.01	%	2.01	%
Securitized Mortgage Loans repurchase borrowings	29,177		48,036		1.88	%	3.76	%
Total repurchase borrowings	3,076,808		3,557,125		0.95	%	1.62	%
Securitized debt	34,947		106,947		4.27	%	4.27	%
Total	$	3,111,755	$	3,664,072	0.99	%	1.65	%
June 30, 2014:
Agency RMBS repurchase borrowings	$	1,905,783	$	2,029,915	0.36	%	1.41	%
Non-Agency RMBS repurchase borrowings	1,057,637		1,390,446		2.07	%	2.07	%
Securitized Mortgage Loans repurchase borrowings	28,569		48,638		1.88	%	3.80	%
Total repurchase borrowings	2,991,989		3,468,999		0.97	%	1.66	%
Securitized debt	37,348		109,712		4.36	%	4.36	%
Total	$	3,029,337	$	3,578,711	1.01	%	1.69	%
March 31, 2014:
Agency RMBS repurchase borrowings	$	1,861,066	$	1,962,536	0.39	%	1.34	%
Non-Agency RMBS repurchase borrowings	970,044		1,303,098		2.10	%	2.10	%
Securitized Mortgage Loans repurchase borrowings	28,234		47,614		2.06	%	4.00	%
Total repurchase borrowings	2,859,344		3,313,248		0.95	%	1.61	%
Securitized debt	40,281		110,307		4.23	%	4.23	%
Total	$	2,899,625	$	3,423,555	0.99	%	1.65	%


⁽¹⁾	Includes cash collateral pledged for Agency RMBS and non-Agency RMBS. (See Note 9 - Collateral Positions to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)


⁽²⁾	The effective cost of funds for the quarterly periods are calculated on an annualized basis and adjusts interest expense to include the net interest component for Swaps. (See “Non-GAAP Financial Measures,” below.)

⁽³⁾

Repurchase agreements collateralized by securitized mortgage loans represent borrowings associated with non-Agency RMBS acquired in connection with our February 2013 securitization transaction. Such non-Agency RMBS were eliminated in consolidation with the VIE associated with the securitization and as a result are not included in our consolidated balance sheet. (See Notes 5 - Securitized Mortgage Loans and 14 - Use of Special Purpose Entities to the consolidated financial statements included under Item 8 of this annual report on Form 10-K.)

With respect to our repurchase agreement borrowings, the “haircut” represents the percentage by which the collateral value is contractually required to exceed the loan amount. At December 31, 2015, haircuts ranged from 3.0% to 5.0% for our repurchase borrowings secured by Agency RMBS and 10.0% to 40.0% for repurchase borrowings secured by non-Agency RMBS. Under our repurchase agreements, each respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets generally results in the lender initiating a margin call. Margin calls are

satisfied when we pledge additional collateral in the form of securities and/or cash to the lender. We have met all margin calls to date.

Certain repurchase agreements and other transactional agreements subject us to financial covenants. An event of default or termination event would give certain of our counterparties the option to terminate all existing repurchase transactions with us and require amounts due to the counterparties by us to be payable immediately. We were in compliance with all of our financial covenants at December 31, 2015. At December 31, 2015, RMBS pledged as collateral to lenders as security for repurchase agreements totaled $3,102,688 and RMBS held as a component of clearing margin totaled $3,522. Cash collateral held by counterparties is reported on our balance sheet as “Restricted cash” and, at December 31, 2015, was comprised of $61,772 pledged in connection with repurchase borrowings and $21,921 pledged in connection with derivative contracts.

Cash Flows and Liquidity for the Year Ended December 31, 2015

Our cash and cash equivalents increased by $5,701 during the year ended December 31, 2015, reflecting $48,231 provided by operating activities, $563,201 provided by investing activities and $605,731 used by financing activities. We held cash of $120,144 at December 31, 2015. (See “Consolidated Statements of Cash Flows,” included under Item 8 of this annual report on Form 10-K.)

Contractual Obligations and Commitments

The following table summarizes the effect on our liquidity and cash flows of our contractual obligations for principal and interest as of the periods presented:



Table 22
December 31, 2015	Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years		Total
Borrowings under repurchase agreements	$	2,898,347	$	—	$	—	$	—	$	2,898,347
Interest on repurchase agreements borrowings⁽¹⁾	13,651		—		—		—		13,651
Total	$	2,911,998	$	—	$	—	$	—	$	2,911,998


⁽¹⁾	Interest expense is calculated based on the interest rate in effect at December 31, 2015 and includes all interest expense incurred and expected to be incurred in the future through the contractual maturity of the associated repurchase agreement.

The table above does not include amounts due under the Management Agreement as such obligations, discussed below, do not have fixed and determinable payments, or our anticipated dividend on our Preferred Stock. (See Notes 13 - Commitments and Contingencies and 16 - Stockholders’ Equity to the consolidated financial statements included under Item 8 of this annual report on Form 10-K for a discussion with respect to our Management Agreement and Preferred Stock.) At December 31, 2015, we had securitized debt with a balance of $18,904 (and a fair value of $18,951) with a contractual interest rate of 4.00%. Our securitized debt is not included in the table above, as such debt is non-recourse to us and is only paid to the extent that the mortgage loans (in the securitization trust) collateralizing the debt pay.

Management Agreement

Pursuant to the Management Agreement, our Manager is entitled to a management fee calculated and payable quarterly in arrears in an amount equal to 1.5% of our stockholders’ equity (as defined in the Management Agreement) per annum. Our management fee is used, in part, to pay compensation to officers and personnel of the Manager who may also be our officers, but receive no cash compensation directly from us. We reimburse our Manager and/or its affiliates for the allocable share of the compensation of (1) our CFO/Treasurer/Secretary based on the percentage of her time spent on our affairs and (2) other corporate finance, tax, accounting, legal, risk management, operations, compliance and other non-investment professional personnel of our Manager or its affiliates who spend all or a portion of their time managing our affairs based on the percentage of time devoted by such personnel to our affairs. We are responsible for our operating expenses, which include the cost of data and analytical systems, legal, accounting, due diligence, prime brokerage and banking fees, professional services, including auditing and legal fees, board of director fees and expenses, compliance related costs, corporate insurance and miscellaneous other operating costs. To the extent that our Manager or its affiliates pay for services provided on our behalf, we are required to reimburse our Manager and/or its affiliates for such items. Expense reimbursements to our Manager and/or its affiliates are made in cash generally on a monthly basis in arrears. Our reimbursement obligation is not subject to any dollar limitation.

The Management Agreement may be terminated upon the affirmative vote of at least two-thirds of our independent directors based upon (1) unsatisfactory performance by our Manager that is materially detrimental to us or (2) a determination that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. Our Manager must be provided with written notice of any such termination at least 180 days prior to the

expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

As of December 31, 2015, our Management Agreement ran through July 27, 2016, with automatic one year renewals thereafter provided that the independent directors of our board do not provide notice of termination in accordance with the terms of the Management Agreement. Given that the independent members of our board of directors did not provide notice of termination of the Management Agreement to our Manager within 180 days of the July 27, 2016 renewal date, the Management Agreement was renewed through July 27, 2017.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment to provide additional funding to any such entities.

Dividends on Our Capital Stock

We have outstanding 6,900,000 shares of Preferred Stock, which entitles holders to receive dividends at an annual rate of 8.0% of the liquidation preference of $25.00 per share, or $2.00 per share per annum. The dividends on Preferred Stock are cumulative and payable quarterly in arrears. Except under certain limited circumstances, the Preferred Stock is generally not convertible into or exchangeable for any other property or any other of our securities at the election of the holders. After September 20, 2017, we may, at our option, redeem the shares at a redemption price of $25.00, plus any accrued unpaid distribution through the date of the redemption. No dividends may be paid on our common stock unless full cumulative dividends have been paid on the Preferred Stock, all of which have been paid to date.

We intend to continue to make regular quarterly dividend distributions to holders of our capital stock. U.S. Federal income tax law generally requires that a REIT distribute annually at least 90% of its net taxable income, excluding net capital gains and without regard to the deduction for dividends paid, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to continue to pay regular quarterly dividends to our stockholders in an amount at least equal to our net taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. Federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debts payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. (See “Variances between GAAP Income and Taxable Income,” above.)

Non-GAAP Financial Measures

We have included in this Form 10-K disclosures about our “operating earnings,” “operating earnings per common share” and “effective cost of funds” which disclosures constitute non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. We believe that the non-GAAP financial measures presented, when considered together with GAAP financial measures, provide information that is useful to investors in understanding our operating results. An analysis of any non-GAAP financial measures should be made in conjunction with results presented in accordance with GAAP.

Operating earnings and operating earnings per common share presented exclude, as applicable: (i) certain realized and unrealized gains and losses recognized through earnings; (ii) non-cash equity compensation; (iii) one-time events pursuant to changes in GAAP; and (iv) certain other non-cash charges. Operating Earnings is a non-GAAP financial measure that is used by us to assess our business results.

While we have not elected hedge accounting under GAAP for our Swaps, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates. To present for investors how we view our Swaps, we provide the “effective cost of funds” which is comprised of GAAP interest expense plus the interest expense component for our Swaps. The interest expense component of our Swaps reflects the net interest payments made or accrued on our Swaps. We believe that the presentation of the effective cost of funds is useful for investors, as it presents borrowing costs as viewed by us.

We believe that the non-GAAP measures we present provide investors and other readers of our annual report on Form 10-K with useful measures to assess the performance of our ongoing business and useful supplemental information to both management and investors in evaluating our financial results. The primary limitation associated with operating earnings as a measure of our financial performance over any period is that it excludes, except for the net interest component of Swaps, the effects of net realized and unrealized gains/(losses) from investments and derivative instruments. Our presentation of operating earnings may not be comparable to similarly-titled measures of other companies, who may use different definitions or

calculations for such term. As a result, operating earnings should not be considered as a substitute for our GAAP net income as a measure of our financial performance or any measure of our liquidity under GAAP.

A reconciliation of the GAAP items discussed above to their non-GAAP measures presented in this annual report on Form 10-K are as follows:



Table 23	For the Year Ended December 31,
	2015				2014				2013
	Reconciliation		Cost of Funds/Effective Cost of Funds		Reconciliation		Cost of Funds/ Effective Cost of Funds		Reconciliation		Cost of Funds/Effective Cost of Funds
Interest expense	$	32,358	1.03	%	$	30,386	0.99	%	$	27,602	0.79	%
Adjustment:
Net interest component of Swaps	19,404		0.62	%	20,112		0.65	%	22,034		0.63	%
Effective cost of funds	$	51,762	1.65	%	$	50,498	1.64	%	$	49,636	1.42	%
Weighted average balance of borrowings	$	3,092,543			$	3,029,807			$	3,501,312



Table 24	For the Year Ended December 31,
	2015				2014				2013
	Reconciliation		Cost of Funds/Effective Cost of Funds/Spread		Reconciliation		Cost of Funds/Effective Cost of Funds/Spread		Reconciliation		Cost of Funds/Effective Cost of Funds/Spread
Interest income	$	160,100	4.38	%	$	154,177	4.28	%	$	154,713	3.81	%
Less: effective interest expense/effective cost of funds ⁽¹⁾	51,762		1.65	%	50,498		1.64	%	49,636		1.42	%
Effective net interest income	$	108,338	2.73	%	$	103,679	2.64	%	$	105,077	2.39	%
Weighted average balance of interest earning assets	$	3,658,017			$	3,601,806			$	4,058,509


⁽¹⁾	As reconciled above in Table 23.



Table 25	Reconciliation of Interest Expense to Effective Cost of Funds for the Quarterly Periods Presented
			GAAP				Adjustment		Non-GAAP
	Weighted Average Balance of Borrowings		Interest Expense		Cost of Funds		Net Interest Component of Swaps		Effective Cost of Borrowings		Effective Cost of Funds
2014 - Quarterly Period Ended:
December 31	$	3,212,756	$	7,900	0.96	%	$	5,113	$	13,013	1.58	%
September 30	$	3,034,970	$	7,708	0.99	%	$	5,128	$	12,836	1.65	%
June 30	$	2,939,415	$	7,510	1.01	%	$	5,081	$	12,591	1.69	%
March 31	$	2,928,895	$	7,268	0.99	%	$	4,789	$	12,057	1.65	%
2013 - Quarterly Period Ended:
December 31	$	2,995,533	$	7,358	0.96	%	$	4,564	$	11,922	1.56	%
September 30	$	3,013,372	$	6,789	0.89	%	$	6,894	$	13,683	1.80	%
June 30	$	4,308,870	$	7,237	0.67	%	$	6,437	$	13,674	1.27	%
March 31	$	3,698,371	$	6,217	0.68	%	$	4,139	$	10,356	1.14	%

The following table provides a reconciliation of our operating earnings to our net income/(loss) reported in accordance with GAAP for the periods presented:



Table 26	For the Year Ended December 31,
	2015			2014			2013
Net income/(loss) allocable to common stockholders	$	(26,008	)	$	81,690		$	(61,416	)
Adjustments to arrive at operating earnings:
Realized (gain)/loss on sale of RMBS, net	(16,998		)	8,821			66,850
Unrealized (gain)/loss on RMBS, net	64,027			(102,942		)	134,002
Unrealized (gain)/loss on derivative instruments, net	5,015			39,379			(50,373		)
OTTI recognized	12,089			14,891			13,373
Realized (gain)/loss on Swap and Swaption terminations, net	15,636			22,502			(30,956		)
Realized (gain)/loss on TBA Contracts	6,356			6,534			(281		)
Tax amortization of (loss) on Swaption terminations and expirations, net	(2,549		)	(702		)	—
Unrealized (gain)/loss on securitized mortgage loans	1,958			(4,813		)	(3,950		)
Unrealized loss on mortgage loans	—			9			—
Unrealized (gain)/loss on securitized debt	(1,031		)	124			954
Unrealized (gain)/loss on other investment securities	6,376			96			(335		)
Realized (gain) on sale of other investment securities, net	(102		)	—			—
Non-cash stock-based compensation expense	1,189			1,265			1,047
Total adjustments to arrive at operating earnings	91,966			(14,836		)	130,331
Operating earnings	$	65,958		$	66,854		$	68,915
Basic and diluted operating earnings per share of common stock	$	2.06		$	2.09		$	2.26
Basic and diluted weighted average common shares outstanding	31,954			32,028			30,444


ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk

(Dollar amounts in thousands – except per share data.)

We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns from our assets through ownership of our capital stock. While we do not seek to avoid risk completely, we believe that risk can be quantified from historical experience and seek to actively manage risk, to earn sufficient returns to justify taking such risks and to maintain capital levels consistent with the risks we undertake.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency RMBS, we do expect to encounter credit risk related to our non-Agency RMBS, other investment securities, securitized mortgage loans, mortgage loans and other investments. The credit support built into non-Agency RMBS and SBC-MBS transaction structures is designed to mitigate credit losses. In addition, to date, we have purchased the substantial majority of our non-Agency RMBS at a discount to par value, which is expected to further mitigate our risk of loss in the event that less than 100% of the par value of such securities is received. However, credit losses greater than those anticipated or in excess of the recorded purchase discount could occur, which could materially adversely impact our operating results. The credit risk associated with our warehouse line receivable is mitigated by a pledge of substantially all the equity of the third-party borrower/guarantor, which borrower has legal title to the homes, BFT Contracts and mortgage loans that we finance on a warehouse line. With respect to our securitized mortgage loans, we retain the risk of potential credit losses. Our Manager seeks to reduce downside risk related to unanticipated credit events through the use of active asset surveillance to evaluate collateral pool performance and overseeing the servicer. Investment decisions are made following a bottom-up credit analysis of specific risk assumptions. As part of the risk management process our Manager uses detailed proprietary models to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure frequency, cost and timing.

The following table presents information about our non-Agency RMBS and the mortgages underlying such securities at December 31, 2015. Information presented with respect to weighted average original loan-to-value, weighted average credit score reported by Fair Isaac Corporation (or, FICO) and other information is aggregated based on information reported at the time of mortgage origination and, as such, do not reflect the impact of the general decline in home prices or changes in a mortgagee’s credit score.



Table 27	Year of Securitization⁽¹⁾
	2015			2014			2007			2006			2005			2004			2003 & Prior			Total
Portfolio Characteristics:
Number of Securities	9			9			10			35			61			61			35			220
Carrying Value/Estimated Fair Value	$	76,660		$	111,264		$	58,774		$	218,712		$	367,221		$	260,483		$	104,112		$	1,197,226
Amortized Cost	$	77,348		$	112,407		$	49,310		$	205,675		$	364,183		$	256,238		$	101,637		$	1,166,798
Current Par Value	$	77,809		$	113,011		$	85,548		$	275,656		$	443,575		286,674			$	113,600		$	1,395,873
Carrying Value to Current Par	98.52		%	98.45		%	68.70		%	79.34		%	82.79		%	90.86		%	91.65		%	85.77		%
Amortized Cost to Current Par	99.41		%	99.47		%	57.64		%	74.61		%	82.10		%	89.38		%	89.47		%	83.59		%
Net Weighted Average Coupon	3.14		%	3.38		%	1.79		%	1.02		%	1.22		%	1.71		%	2.28		%	1.68		%
Collateral Attributes:
Weighted Average Loan Age (in months)	97			103			109			116			128			139			159			126
Weighted Average Original Loan-to-Value	90.19		%	78.84		%	78.90		%	78.85		%	79.87		%	79.71		%	81.70		%	80.32		%
Weighted Average Original FICO score	634			574			688			667			660			642			603			644
Current Performance:
60+ Day Delinquencies	29.41		%	62.13		%	24.40		%	25.21		%	26.18		%	22.44		%	24.94		%	28.54		%
Average Credit Enhancement⁽²⁾	37.67		%	43.37		%	1.56		%	21.21		%	30.24		%	28.29		%	24.34		%	27.94		%
3 Month CPR⁽³⁾	2.75		%	2.34		%	3.80		%	4.49		%	6.37		%	6.35		%	6.02		%	5.27		%


⁽¹⁾	Certain of our non-Agency RMBS have been resecuritized; however, the vintage and information presented is based on the initial year of securitization and the data available at that time.


⁽²⁾	Credit enhancement is expressed as a percentage of all outstanding mortgage loan collateral. Our RMBS may incur losses if credit enhancement is reduced to zero.


⁽³⁾	Amounts presented reflect the weighted average monthly performance for the year ended December 31, 2015.

The following table presents certain characteristics about our securitized mortgage loans, all of which are first liens, at December 31, 2015. Information presented with respect to weighted average original loan-to-value, weighted average FICO score, and other information is aggregated based on information reported at the time of mortgage origination and, as such, do not reflect the impact of the general decline in home prices or changes in a mortgagee’s credit score.



Table 28	Year of Origination
	2009			2008			2007			2006			2005			2004 & Prior			Total
Portfolio Characteristics:
Number of loans	3			64			673			156			99			291			1,286
Current unpaid principal balance	$	468		$	13,654		$	131,903		$	27,620		$	14,647		$	22,706		$	210,998
Loan Attributes:
Weighted average loan age (in months)	77			93			102			110			124			157			110
Weighted average original loan-to-value	72.79		%	73.33		%	80.21		%	81.14		%	76.61		%	83.78		%	80.01		%
Weighted average original FICO score	519			620			631			620			649			619			627
Net weighted average coupon rate	7.29		%	6.43		%	5.82		%	5.93		%	5.24		%	6.53		%	5.91		%
Current Performance:
Current	—		%	67.43		%	73.27		%	77.98		%	85.88		%	72.92		%	74.19		%
30 day delinquent	40.66		%	12.65		%	7.62		%	11.80		%	8.82		%	13.14		%	9.24		%
60 days delinquent	—		%	4.59		%	5.06		%	1.12		%	1.32		%	6.48		%	4.40		%
90+ days delinquent	35.62		%	12.40		%	7.51		%	5.61		%	2.10		%	3.23		%	6.80		%
Bankruptcy/foreclosure	23.72		%	2.93		%	6.54		%	3.49		%	1.88		%	4.23		%	5.37		%

At December 31, 2015, we had investments with a fair value of $64,607 in SBC-MBS which had an aggregate amortized cost of $67,465 and par value of $76,276. These SBC-MBS had a weighted average credit enhancement of 24.41%, based on the percentage of all outstanding referenced loans. At December 31, 2015, our SBC-MBS had a weighted average coupon rate of 0.95%, based on the current par value. The performance of our SBC-MBS is impacted by the performance of the underlying loans collateralizing the SBC-MBS securitization. At December 31, 2015, the loans underlying the SBC-MBS securitization had a weighted average loan age of 110 months, a weighted average original loan-to-value of 59.35%, and a weighted average FICO score of 672. At December 31, 2015, 19.10% of the loans underlying the SBC-MBS were 60 or more days delinquent.

At December 31, 2015, we had investments of $98,656 in Risk Sharing Securities with an amortized cost of $101,942 and par, or reference, value of $103,813. These Risk Sharing Securities had a weighted average credit enhancement of 0.72%, based on the percentage of all outstanding referenced mortgages and at December 31, 2015, had a weighted average coupon rate of 3.97%, based on the par value. The performance of Risk Sharing Securities is based upon the performance of the referenced mortgages associated with the respective securitization. At December 31, 2015, the loans underlying our investments had, a weighted average loan age of 29 months, a weighted average original loan-to-value of 71.29%, and a weighted average FICO score of 759. At December 31, 2015, 0.13% of the loans underlying our investments in Risk Sharing Securities were 60 or more days delinquent.

The following table presents the fair value of our non-Agency RMBS at December 31, 2015, by original purchase price as a percentage of our par value by year of acquisition:



Table 29	Year of Acquisition
Acquisition Price⁽¹⁾	2015		2014		2013		2012		2011		Total		Percent of Total
>100%	$	4,931	$	1,911	$	1,560	$	—	$	—	$	8,402	0.7	%
100% to 95%	100,557		112,529		16,624		—		—		229,710		19.1
<95% to 85%	96,070		60,086		135,593		23,221		3,170		318,140		26.6
<85% to 75%	18,369		83,220		123,765		55,163		9,116		289,633		24.2
<75% to 65%	3,660		13,762		59,224		111,870		16,970		205,486		17.2
<65%	6,458		7,668		3,302		106,679		21,748		145,855		12.2
Total	$	230,045	$	279,176	$	340,068	$	296,933	$	51,004	$	1,197,226	100.0	%


⁽¹⁾	Prices are expressed as a percentage of par value.

The mortgages underlying our non-Agency RMBS are located in various states across the U.S. The following table presents the five largest concentrations by state for the mortgages collateralizing our non-Agency RMBS at December 31, 2015 based on fair value:



Table 30
Property Location	Percent⁽¹⁾
California	28.2	%
New York	11.0
Florida	8.1
New Jersey	5.0
Texas	4.8
Other⁽²⁾	42.9
Total	100.0	%


⁽¹⁾	Percentages are weighted to reflect our proportional share for each of the securities we own.


⁽²⁾	Includes mortgages on properties located in each of the remaining 45 states and the District of Columbia, with no state concentration exceeding 3.1% of the total.

The following table presents certain information about the mortgage loans underlying our non-Agency RMBS at December 31, 2015:



Table 31
Underlying Mortgage Loan Collateral Type	Market Value		Percent of Total
Subprime	$	838,129	70.0	%
Alt-A	147,708		12.3
Option ARM	211,389		17.7
Total	$	1,197,226	100.0	%

To the extent we invest in residential mortgage loans, we retain the risk of potential credit losses on the mortgage loans that we hold in our portfolio. With respect to any residential mortgage loans in which we may invest, we expect to seek to obtain representations and warranties from each seller stating that each loan was underwritten to our requirements or, in the event underwriting exceptions were made, that we are informed of the exceptions so that we may evaluate whether to accept or reject the loans. A seller who breaches these representations and warranties in making a loan that we purchase may be obligated to repurchase the loan from us. In the event we invest in residential mortgage loans, our Manager will seek to reduce downside risk related to unanticipated credit events through the use of active asset surveillance to evaluate collateral pool performance and will proactively manage positions.

Interest Rate Risk

Interest rates are sensitive to many factors, including fiscal and monetary policies, domestic and international economic and political considerations, as well as other factors, all of which are beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we expect to finance the acquisition of our assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, resecuritizations, bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances, in addition to transaction or asset specific funding arrangements.

Subject to maintaining our qualification as a REIT for U.S. Federal income tax purposes, we utilize derivative financial instruments to mitigate the impact of increases in interest rates. Increases in interest rates may impact the cost of our repurchase borrowings and reduce the value of our Agency RMBS. Our hedges are not designed to protect against market value fluctuations in our assets caused by changes in the spread between our investments and other benchmark rates such as Swaps and Treasury bonds. Therefore, the risk of adverse spread changes is inherent to our business. Our asset composition and general market conditions may cause the amount of interest rate protection provided by our derivatives to vary considerably over time. We also may utilize 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.

decline, thereby slowing the amortization of our Agency RMBS purchase premiums and the accretion of purchase discounts on our non-Agency RMBS and mortgage and securitized mortgage loans; (v) the value of our Agency IO securities to increase; and (vi) the value of our Short TBA Contracts, if any, Swaps and Swaption Contracts to increase. Conversely, decreases in interest rates are generally expected to have the opposite impact as those stated above. The timing and extent to which interest rates change, the specific terms of the mortgage loans underlying our RMBS, such as periodic and life-time caps and floors on ARMs, as well as other conditions in the market place will further impact our results of operations and financial condition.

Interest Rate Cap Risk

Certain of our RMBS are collateralized by ARMs, which are generally subject to interest rate caps, which could cause such RMBS to acquire characteristics similar to fixed-rate securities if interest rates were to rise above the cap levels. Interim interest rate caps limit the amount interest rates on a particular ARM can adjust during the next adjustment period. Lifetime interest rate caps limit the amount interest rates can adjust upward from inception through maturity of a particular ARM. These caps could result in us receiving less income on such assets than we would incur for interest expense on borrowings to finance such investments. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”

Interest Rate Effects on Estimated Fair Value

Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease differently from our derivative instruments.

The impact of changing interest rates on estimated fair value can change significantly when interest rates change materially. Accordingly, changes in actual interest rates may have a material adverse effect on us. Therefore, the volatility in the estimated fair value of our assets could increase significantly in the event that interest rates change materially. In addition, other factors impact the estimated fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.

Our RMBS are carried at their estimated fair value with unrealized gains and losses included in earnings. The estimated fair value of these securities fluctuates primarily due to changes in interest rates, and with respect to our non-Agency RMBS credit changes, and other factors. Generally, in a rising interest rate environment, the estimated fair value of our RMBS portfolio, on a net basis, would generally be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would generally be expected to increase.

Our securitized mortgage loans are carried at their estimated fair value with unrealized gains and losses included in earnings. Such assets, which are credit sensitive, are comprised of both ARM and fixed rate mortgage loans. As a result, changes in the fair value of our securitized mortgage loans are expected to be impacted by delinquencies, changes in housing prices, jobless rates, changes in interest rates and other factors.

Nearly all of our Agency pass-through RMBS, which comprise the substantial majority of our Agency portfolio, are fixed-rate securities. In general, as market interest rates increase the market prices for fixed-rate securities generally decrease; conversely, as market interest rates decrease the market prices for fixed-rate securities generally increase. We monitor the duration of our Agency RMBS and derivatives using empirical data as well as third party models and may adjust our portfolio to maintain duration at a level that we believe is prudent in the current or anticipated interest rate environment. In a rising interest rate environment, the weighted average life of our Agency RMBS could extend significantly beyond the terms of our Swaps or other hedging instruments. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed beyond the term of the hedging instrument while the income earned on the remaining Agency RMBS would remain fixed for a period of time. This situation may also cause the market value of our Agency RMBS to decline with insufficient or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses. Variations in models and methodologies in measuring duration may produce differing results for the same securities or portfolio.

The value of our non-Agency RMBS and securitized mortgage loans, which may be backed by Hybrid, ARM and fixed rate mortgage loans, are more significantly impacted by the performance of the underlying collateral (i.e., credit) than by changes in interest rates.

Under our repurchase agreements, each respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets generally results in the lender initiating a margin call, which we satisfy by pledging additional collateral in the form of securities and/or cash to the lender. In general, decreases in the fair value of our RMBS and MBS will reduce the amount we are able to borrow.

The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments, including derivative instruments and net interest income at December 31, 2015, assuming a static portfolio of assets. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience. For example, given the low level of interest rates at December 31, 2015, we have assumed a floor on repurchase agreement borrowing rates of 25 basis points and we have assumed a floor of six basis points with respect to the variable rate that we receive on our Swaps.



Table 32
Basis Point Change in Interest Rates	Percentage Change in Projected Portfolio Value	Percentage Change in Projected Net Interest Income and Periodic Interest Settlements for Swaps
+100	0.88%	6.62%
+50	1.00%	4.39%
(50)	(1.07)%	(11.31)%
(100)	(2.59)%	(23.44)%

Certain assumptions have been made in connection with the calculation of the information set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at December 31, 2015. The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.

Market Spread Risk

When the market spread between the yield on our investment securities (comprised of Agency RMBS, non-Agency RMBS and other investment securities) and benchmark interest rates widens, our net stockholders’ equity (or, net book value) could decline if the value of our investment securities falls by more than the offsetting fair value increases on our hedging instruments, creating what we refer to as “spread risk”. The spread risk associated with our investment securities and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Federal Reserve, changes at or actions taken by GSEs, market liquidity, or changes in required rates of return on different assets. Consequently, while we use Swaps, Swaptions, TBA contracts, and may from time to time use other derivative instruments as economic hedges to attempt to protect against moves in interest rates, such instruments typically will not protect our portfolio value against spread risk.

The table below quantifies the estimated changes in the fair value of our investment securities portfolio (including derivatives and other securities used as economic hedges) and in our net asset value should spreads between our mortgage assets and benchmark interest rates go up or down by 5, 15 and 25 basis points. The estimated impact of spread changes are in addition to our sensitivity to interest rate shocks included in the above interest rate sensitivity table. The table below assumes interest rates and prices on our investment securities as of December 31, 2015. However, our portfolio's sensitivity to spread changes will vary with changes in interest rates and in the size and composition of our investment portfolio. Therefore, actual results could differ materially from our estimates.



Table 33
Basis Point Change in Spread Shock	Estimated Change in Portfolio Market Value⁽¹⁾	Estimated Change as a Percentage of Equity
(25)	1.61%	7.85%
(15)	0.98%	4.77%
(5)	0.32%	1.57%
+5	(0.32)%	(1.57)%
+15	(0.96)%	(4.69)%
+25	(1.59)%	(7.77)%


⁽¹⁾	Scenarios reflect the net impact of spread shock on RMBS, Other Investment Securities, Securitized Mortgage Loans, and TBA Contracts.

Prepayment Risk

The value of our assets may be affected by prepayment rates on residential mortgage loans. If we acquire residential mortgage loans and mortgage related securities, we anticipate that the residential mortgage loans or the underlying residential mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, the decrease in corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally anticipated.

Counterparty Risk

We finance the acquisition of a significant portion of our investments with repurchase agreements. The aggregate of our repurchase agreement financings are reflected as a liability in our consolidated balance sheet. In connection with these financing arrangements, we pledge our securities as collateral to secure the borrowing. The amount of collateral pledged will typically exceed the amount of the borrowing, as lenders apply a haircut to the collateral value, whereby the haircut reflects the percentage by which the collateral value is discounted to determine the loan amount. As a result, we are exposed to the counterparty if, during the term of the repurchase agreement financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral. (For additional information about our assets pledged as collateral as of December 31, 2015, see Note 9 - Collateral Positions to the consolidated financial statements, included under Item 8 of this annual report on Form 10-K.)

We enter into Swaps, Swaptions, and TBA Contracts to manage our interest rate risk and are required to pledge cash or securities as collateral as part of a margin arrangement in connection with such contracts. The amount of margin that we are required to post will vary by counterparty and generally reflects collateral posted with respect to Swaps and TBA Contracts that are in an unrealized loss position to us and a percentage of the aggregate notional amount of Swaps and Swaptions per counterparty. In the event that a counterparty to one of these contracts were to default on its obligation, we would be exposed to a loss when the amount of cash or securities pledged by us exceeds the unrealized loss on such contracts and to the extent that we are not able to recover our excess collateral. In addition, if a counterparty to a Swap cannot perform under the terms of the Swap, we may not receive payments due under that agreement, and thus, may lose any unrealized gain associated with the Swap or, be unable to collect the cash value, if any, at expiration. Therefore, upon a default by a Swap counterparty, the Swap would no longer mitigate the impact of changes in interest rates as intended. If a counterparty to a Swaption is unable to perform under the terms of a Swaption, we would lose our ability to exercise our option to enter into a Swap and, as a result, a Swaption that has value, based on its terms, may become worthless.

During the past several years, certain repurchase agreement and derivative counterparties in the U.S. and Europe have experienced financial difficulty and have been either rescued by government assistance or otherwise benefited from accommodative monetary policy of their respective central banks. Certain Swap trades entered into since June 10, 2013 are required to be cleared through a clearinghouse, in accordance with the CFTC Swap clearing rules. Swaps cleared under the CFTC Swap clearing rules generally require that higher initial margin collateral be posted relative to Swaps transacted with individual counterparties.

The following table summarizes our exposure to our repurchase agreements and derivative counterparties at December 31, 2015:



Table 34	Number of Counter-parties⁽¹⁾	Repurchase Agreement Borrowings		Derivatives at Fair Value			Exposure⁽²⁾		Exposure as Percent of Total Assets
North America:
United States⁽¹⁾	8	$	1,307,770	$	(8,466	)	$	217,015	5.9	%
Canada⁽³⁾	2	373,900		—			73,125		2.0	%
	10	1,681,670		(8,466		)	290,140		7.9	%
Europe:⁽³⁾
Switzerland	3	212,584		—			74,229		2.0	%
United Kingdom	2	30,828		(926		)	11,348		0.3	%
Netherlands	1	235,393		—			12,680		0.3	%
France	1	203,318		—			21,024		0.6	%
	7	682,123		(926		)	119,281		3.2	%
Asia:⁽³⁾
Japan	3	534,554		(74		)	30,012		0.8	%
Total	20	$	2,898,347	$	(9,466	)	$	439,433	11.9	%


⁽¹⁾	Includes $1,881 of exposure associated with a Swap that is cleared through a U.S. based clearing house.


⁽²⁾	Represents the amount of cash and/or securities pledged as collateral to counterparties and associated accrued interest receivable less the aggregate of repurchase agreement borrowings, associated accrued interest payable and unrealized loss on Swaps for each counterparty net of collateral pledged to us, and the fair value of our Swaptions.


⁽³⁾	Includes foreign based counterparties as well as U.S. domiciled subsidiaries of such counterparties, as such transactions are generally entered into with a U.S. domiciled subsidiary of such counterparties.

We extend credit to our Seller Financing Program counterparty through a warehouse line, which is used by the counterparty to fund home purchases and improvements. Subsequent to purchasing and rehabilitating a home, our Seller Financing Program counterparty markets the home for sale, offering seller financing through either a BFT Contract or mortgage loan. Once the Seller Financing Program counterparty completes the transaction cycle, by entering into a BFT Contract or mortgage loan with a home buyer, we have the right of first refusal to purchase the corresponding BFT Contract or mortgage loan. The warehouse line is collateralized by a pledge of the ownership interest in the equity of our Seller Financing Program counterparty which holds title to the real estate properties funded with the warehouse line. At December 31, 2015, we had $10,239 extended under a warehouse line. If the warehouse counterparty becomes distressed, we may have difficulty in taking possession of the properties and completing improvements necessary to market the homes for sale.

We had outstanding balances under repurchase agreements with 18 counterparties at December 31, 2015. The following table presents information with respect to any counterparty for repurchase agreements for which we had greater than 5% of stockholders’ equity at risk in the aggregate at December 31, 2015:



Table 35
Counterparty	Counterparty Rating⁽¹⁾	Amount of Risk⁽²⁾		Weighted Average Months to Maturity for Repurchase Agreements	Percent of Stockholders’ Equity
UBS⁽³⁾	A/A2/*	$	36,170	5	5.21	%
Credit Suisse Securities (USA) LLC	A//	$	38,059	2	5.48	%
Royal Bank of Canada⁽⁴⁾	AA-/Aa3/AA	$	67,295	1	9.68	%
Wells Fargo⁽⁵⁾	AA-/Aa1/AA	$	106,097	8	15.27	%


⁽¹⁾	The counterparty rating presented is the long-term issuer credit rating as rated at December 31, 2015 by Standard & Poor’s Ratings Services, Moody’s Investor Services, Inc. and Fitch, Inc., respectively. An “*” indicates that no rating was given by the respective rating agency.


⁽²⁾	The amount at risk reflects the difference between (a) the amount loaned to us through repurchase agreements, including interest payable, and (b) the cash and the fair value of the securities pledged by us as collateral, including accrued interest receivable on such securities.


⁽³⁾	Includes amounts at risk with UBS AG, London Branch and UBS Securities, LLC. Counterparty rating is the rating for UBS AG, London Branch, which represents $29,928 of total exposure. The remaining exposure is to UBS Securities, LLC which was rated A by Standard & Poor’s Ratings Services as of December 31, 2015.


⁽⁴⁾	Includes amounts at risk with Royal Bank of Canada and RBC (Barbados) Trading Bank Corporation. Counterparty rating is the rating for Royal Bank of Canada which represents $23,627 of the total exposure. The remaining exposure is to RBC (Barbados) Trading Bank Corporation which was rated A2 by Moody’s Investor Services at December 31, 2015.


⁽⁵⁾	Includes amounts at risk with Wells Fargo Bank, N.A. and Wells Fargo Securities, LLC. Counterparty rating is the rating for Wells Fargo Bank, N.A. which represents $85,639 of the total exposure. The remaining exposure is to Wells Fargo Securities, LLC which was rated AA- by Standard & Poor’s Ratings Services as of December 31, 2015.

We maintain cash deposits with what we believe to be high credit quality financial institutions and invest in money market funds. Money market funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other U.S. Government agency. At December 31, 2015, we had cash and cash equivalents of $120,144 which was primarily comprised of deposits with our prime broker domiciled in the U.S., substantially all of which was in excess of applicable insurance limits, and $40,012 invested in a money market fund.

Funding Risk

We have financed a substantial majority of our securities and mortgage loans with repurchase agreement borrowings. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Weakness in the financial markets, the residential mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

Liquidity Risk

The assets that comprise our asset portfolio are not traded on an exchange. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than exchange-traded securities. Certain of our assets may from time to time become illiquid, making it difficult for us to sell such assets if the need or desire arises, or sell such assets at prices that are detrimental to us, including in response to changes in economic and other conditions.

Inflation

Substantially all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation. Our financial statements are prepared in accordance with GAAP and dividends are based upon net ordinary income as calculated for tax purposes; in each case, our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.


ITEM 8.	Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Schedule



Report of Independent Registered Public Accounting Firm	83

Consolidated Balance Sheets as of December 31, 2015 and 2014	84

Consolidated Statements of Operations for the years ended December 31, 2015, December 31, 2014, and December 31, 2013	85

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, December 31, 2014, and December 31, 2013	86

Consolidated Statements of Cash Flows for the years ended December 31, 2015, December 31, 2014, and December 31, 2013	87

Notes to Consolidated Financial Statements	89

All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Apollo Residential Mortgage, Inc.

New York, New York

We have audited the accompanying consolidated balance sheets of Apollo Residential Mortgage, Inc. and subsidiaries (or, the Company) as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. We also have audited the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Apollo Residential Mortgage, Inc. and subsidiaries as of December 31, 2015 and 2014 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ DELOITTE & TOUCHE LLP

New York, New York

March 4, 2016

Apollo Residential Mortgage, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands - except share and per share data)



	December 31, 2015			December 31, 2014
Assets:
Cash and cash equivalents	$	120,144		$	114,443
Restricted cash	83,693			69,006
Residential mortgage-backed securities, at fair value ($2,981,085 and $3,583,853 pledged as collateral, respectively)	3,061,582			3,755,632
Securitized mortgage loans (transferred to a consolidated variable interest entity), at fair value	167,624			104,438
Other investment securities, at fair value ($163,263 and $34,228 pledged as collateral, respectively)	166,190			34,228
Other investments	45,233			40,561
Mortgage loans, at fair value ($0 and $13,602 pledged as collateral, respectively)	—			14,120
Investment related receivable ($0 and $168,705 pledged as collateral, respectively)	2,692			191,455
Interest receivable	9,849			10,455
Derivative instruments, at fair value	4,347			11,642
Other assets	1,671			2,073
Total Assets	$	3,663,025		$	4,348,053

Liabilities:
Borrowings under repurchase agreements	$	2,898,347		$	3,402,327
Non-recourse securitized debt, at fair value	18,951			34,176
Investment related payable	—			76,105
Obligation to return cash held as collateral	280			2,546
Accrued interest payable	9,138			13,026
Derivative instruments, at fair value	13,813			8,949
Payable to related party	6,373			4,968
Dividends and dividend equivalents payable	19,170			18,305
Accounts payable, accrued expenses and other liabilities	2,090			1,699
Total Liabilities	2,968,162			3,562,101

Commitments and Contingencies (Note 13)

Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 6,900,000 and 6,900,000 shares issued and outstanding, respectively ($172,500 aggregate liquidation preference)	$	69		$	69
Common stock, $0.01 par value, 450,000,000 shares authorized, 31,853,025 and 32,088,045 shares issued and outstanding, respectively	319			321
Additional paid-in capital	789,465			793,274
Accumulated deficit	(94,990		)	(7,712		)
Total Stockholders’ Equity	694,863			785,952
Total Liabilities and Stockholders’ Equity	$	3,663,025		$	4,348,053

See notes to consolidated financial statements.

Apollo Residential Mortgage, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands - except per share data)



	For the Year Ended December 31,
	2015			2014			2013
Interest Income:
Residential mortgage-backed securities	$	137,238		$	144,529		$	146,263
Securitized mortgage loans and mortgage loans	13,444			7,900			8,267
Other	9,418			1,748			183
Total interest income	160,100			154,177			154,713

Interest Expense:
Repurchase agreements	(30,984		)	(28,746		)	(25,808		)
Securitized debt	(1,374		)	(1,640		)	(1,794		)
Total interest expense	(32,358		)	(30,386		)	(27,602		)

Net Interest Income	127,742			123,791			127,111

Other Income/(Loss), net
Realized gain/(loss) on sale of residential mortgage-backed securities, net	16,998			(8,821		)	(66,850		)
Realized gain on sale of other investment securities, net	102			—			—
Other than temporary impairments recognized	(12,089		)	(14,891		)	(13,412		)
Unrealized gain/(loss) on residential mortgage-backed securities, net	(64,027		)	102,942			(133,963		)
Unrealized gain/(loss) on securitized debt	1,031			(124		)	(954		)
Unrealized gain/(loss) on securitized mortgage loans	(1,958		)	4,813			3,950
Unrealized (loss) on mortgage loans	—			(9		)	—
Unrealized gain/(loss) on other investment securities	(6,376		)	(96		)	335
Gain/(loss) on derivative instruments, net (includes ($5,015), ($39,379) and $50,373 of unrealized gains/(losses), respectively)	(46,411		)	(88,527		)	59,576
Other, net	(123		)	82			76
Other Income/(Loss), net	(112,853		)	(4,631		)	(151,242		)

Operating Expenses:
General and administrative (includes ($1,189), ($1,265), and ($1,047) of non-cash stock based compensation, respectively)	(15,415		)	(11,905		)	(11,501		)
Management fee - related party	(11,069		)	(11,200		)	(11,579		)
Total Operating Expenses	(26,484		)	(23,105		)	(23,080		)

Net Income/(Loss)	(11,595		)	96,055			(47,211		)

Preferred Stock Dividends Declared	(13,800		)	(13,800		)	(13,800		)

Net Income/(Loss) Allocable to Common Stock and Participating Securities	$	(25,395	)	$	82,255		$	(61,011	)

Earnings/(Loss) per Common Share - Basic and Diluted	$	(0.81	)	$	2.55		$	(2.02	)

See notes to consolidated financial statements.

Apollo Residential Mortgage, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands - except share and per share amounts)



	Preferred Stock			Common Stock					Additional Paid-In Capital			Retained Earnings/(Accumulated Deficit)			Total Stockholders’ Equity
	Shares	Par		Shares		Par			Additional Paid-In Capital			Retained Earnings/(Accumulated Deficit)			Total Stockholders’ Equity
Balance at December 31, 2012	6,900,000	$	69	24,205,972		$	242		$	619,399		$	97,073		$	716,783
Issuance of common stock, net of expenses	—	—		7,820,000		78			171,564			—			171,642
Restricted stock grants	—	—		6,748		—			—			—			—
Capital increase related to equity compensation, net	—	—		6,250		—			1,047			—			1,047
Net income/(loss)	—	—		—		—			—			(47,211		)	(47,211		)
Dividends declared on common stock	—	—		—		—			—			(70,860		)	(70,860		)
Dividends declared on preferred stock	—	—		—		—			—			(13,800		)	(13,800		)
Balance at December 31, 2013	6,900,000	$	69	32,038,970		$	320		$	792,010		$	(34,798	)	$	757,601
Restricted stock grants	—	$	—	34,112		$	—		—			$	—		$	—
Capital increase related to equity compensation, net	—	—		14,963		1			1,264			—			1,265
Net income	—	—		—		—			—			96,055			96,055
Dividends declared on common stock	—	—		—		—			—			(55,169		)	(55,169		)
Dividends declared on preferred stock	—	—		—		—			—			(13,800		)	(13,800		)
Balance at December 31, 2014	6,900,000	$	69	32,088,045		$	321		$	793,274		$	(7,712	)	$	785,952
Restricted stock grants	—	$	—	9,332		$	—		—			$	—		$	—
Repurchase of common stock	—	—		(360,800	)	(4		)	(4,996		)	—			(5,000		)
Capital increase related to equity compensation, net	—	—		116,448		2			1,187			—			1,189
Net income/(loss)	—	—		—		—			—			(11,595		)	(11,595		)
Dividends declared on common stock, restricted stock and restricted stock units	—	—		—		—			—			(61,883		)	(61,883		)
Dividends declared on preferred stock	—	—		—		—			—			(13,800		)	(13,800		)
Balance at December 31, 2015	6,900,000	$	69	31,853,025		$	319		$	789,465		$	(94,990	)	$	694,863

See notes to consolidated financial statements.

Apollo Residential Mortgage, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)



	For the Year Ended December 31,
	2015			2014			2013
Cash Flows from Operating Activities:
Net income/(loss)	$	(11,595	)	$	96,055		$	(47,211	)
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization/(discount accretion), net	(35,008		)	(24,434		)	392
Amortization of deferred financing costs	612			427			379
Equity based compensation expense	1,481			1,229			1,047
Unrealized (gain)/loss on mortgage-backed securities, net	64,027			(102,942		)	133,963
Unrealized (gain)/loss on securitized mortgage loans	1,958			(4,813		)	(3,950		)
Unrealized (gain)/loss on derivative instruments, net	5,015			39,379			(50,373		)
Unrealized (gain)/loss on securitized debt	(1,031		)	124			954
Unrealized (gain)/loss on other investment securities	6,376			96			(335		)
Other than temporary impairments recognized	12,089			14,891			13,412
Realized (gain) on sales of mortgage-backed securities	(29,982		)	(22,581		)	(42,344		)
Realized loss on sales of mortgage-backed securities	12,984			31,402			109,194
Realized (gain)/loss on derivative instruments	21,992			29,037			(31,236		)
Realized loss on real estate owned, net	208			22			—
Realized (gain) on sale of other investment securities, net	(102		)	—			—
Depreciation on real estate subject to bond for title contracts	500			—			—
Changes in operating assets and liabilities:
(Increase)/decrease in accrued interest receivable, less purchased interest	617			(147		)	926
(Increase)/decrease in other assets	237			(390		)	125
Increase/(decrease) in accrued interest payable	(3,888		)	4,318			1,934
Increase in accounts payable and accrued expenses	190			443			888
Increase/(decrease) in payable to related party	1,350			(1,382		)	1,229
Increase in other liabilities	201			28			—
Net cash provided by operating activities	$	48,231		$	60,762		$	88,994
Cash Flows from Investing Activities:
Purchases of mortgage-backed securities	$	(1,986,577	)	$	(2,058,722	)	$	(3,534,147	)
Proceeds from sales of mortgage-backed securities	2,358,144			1,501,505			3,601,684
Purchases of mortgage loans	(67,357		)	(14,120		)	(113,038		)
Purchase of other investment securities	(169,606		)	(25,792		)	(12,000		)
Proceeds from sales of other investment securities	17,679			—			—
Purchases of other investments	(28,642		)	(52,419		)	—
Proceeds from sale of other investments	23,395			11,859			—
Proceeds from sales of real estate owned	1,341			178			—
(Increase)/decrease in restricted cash related to investing activities	(7,746		)	(11,625		)	30,844
Increase/(decrease) in collateral held related to investing activities	(2,266		)	(36,108		)	38,654
Principal payments received on mortgage-backed securities	408,027			321,907			370,844
Principal payments received on securitized mortgage loans and mortgage loans, net	16,378			6,949			6,038
Principal payments received on other investment securities	15,279			3,151			820
Proceeds from sale of derivative instruments	(6,356		)	(5,803		)	34,153
Purchase of interest rate swaption contracts	(11,785		)	(16,601		)	(23,682		)
Sale of interest rate swaption	3,293			—			—
Other, net	—			1			33
Net cash provided/(used) in investing activities	$	563,201		$	(375,640	)	$	400,203

(Continued on next page.)

See notes to consolidated financial statements.

Apollo Residential Mortgage, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Continued.)



	For the Year Ended December 31,
	2015			2014			2013
Cash Flows from Financing Activities:
Proceeds from repurchase agreement borrowings	$	17,654,884		$	11,424,498		$	18,734,904
Repayments of repurchase agreement borrowings	(18,158,864		)	(11,056,228		)	(19,355,283		)
(Increase)/decrease in restricted cash related to financing activities	(6,941		)	10,077			(4,661		)
Proceeds from issuance of securitized debt	—			—			50,375
Principal payments on securitized debt	(14,194		)	(9,302		)	(7,975		)
Payments made for securitization/deferred financing costs	—			—			(826		)
Dividends paid on preferred stock	(13,800		)	(13,800		)	(15,372		)
Dividends paid on common stock	(61,018		)	(53,676		)	(83,151		)
Proceeds from issuance of common stock	—			—			172,040
Payments on repurchase of common stock	(5,000		)	—			—
Implied repurchase of common stock for net share settlement of equity awards	(292		)	36			—
Payment of costs to issue preferred and common stock	—			—			(825		)
Deferred financing costs/offering costs expensed/(incurred) net	(506		)	(243		)	(40		)
Net cash provided/(used) by financing activities	$	(605,731	)	$	301,362		$	(510,814	)
Net increase/(decrease) in cash	$	5,701		$	(13,516	)	$	(21,617	)
Cash and cash equivalents at beginning of period	114,443			127,959			149,576
Cash and cash equivalents at end of period	$	120,144		$	114,443		$	127,959



Supplemental Disclosure of Operating Cash Flow Information:
Interest paid	$	36,039	$	26,501	$	25,769
Supplemental disclosure of non-cash financing/investing activities:
Residential mortgage-backed securities (purchased)/sold not settled, net	$	—	$	112,422	$	22,003
Due from broker	$	2,692	$	2,928	$	2,909
Dividends and dividend equivalent rights declared, not yet paid	$	19,170	$	18,305	$	16,812

See notes to consolidated financial statements.

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Unless the context requires otherwise, references to “we,” “us,” “our,” “AMTG” or “Company” refer to Apollo Residential Mortgage, Inc., as consolidated with its subsidiaries and variable interest entities in which we are the primary beneficiary. The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: “Agency” refers to a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the United States (or, U.S.) Government, such as Ginnie Mae or the U.S. Small Business Administration; “Agency Inverse IO” refers to Agency interest-only and Agency inverse interest-only securities, respectively, which receive some or all of the interest payments, but no principal payments, made on a related series of Agency RMBS, based on a notional principal balance; “Agency Inverse Floater” refers to securities that have a floating interest rate with coupons that reset periodically based on an index and which coupon varies inversely with changes in index, which index is typically the one month LIBOR; ” Agency IO” and ” Agency Inverse IO” refers to Agency interest-only and Agency inverse interest-only securities, respectively, which receive some or all of the interest payments, but no principal payments, made on a related series of Agency RMBS, based on a notional principal balance; “Agency RMBS” refer to RMBS issued or guaranteed by an Agency; “Alt-A” refers to residential mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to Agency underwriting guidelines and generally allow homeowners to qualify for a mortgage loan with reduced or alternate forms of documentation; “ARMs” refer to adjustable rate mortgages; “ARM-RMBS” refer to RMBS collateralized by ARMs; “BFT Contracts” are agreements in which a seller finances the sale of property, the buyer agrees to pay the purchase price of the property in monthly installments and legal title to the property is transferred when the terms of the contract are fulfilled; “CMOs” refer to collateralized mortgage obligation bonds; “December 2014 Pool” refers to the loan pool we purchased in December 2014; “Fannie Mae” refers to the Federal National Mortgage Association; “February 2013 Pool” refers to the loan pool we purchased in February 2013; “February 2013 Securitization” refers to the securitization that we transacted in February 2013 simultaneously with the purchase of the February 2013 Pool; “Freddie Mac” refers to the Federal Home Loan Mortgage Corporation; “Hybrids” refer to mortgage loans that have fixed interest rates for a period of time and, thereafter, generally adjust annually based on an increment over a specified interest rate index; “IO” refers to securities that have no principal balance and bear interest based on a notional balance; “LIBOR” refers to the London Interbank Offered Rate; “Long TBA Contracts” refer to TBA Contracts for which we would be required to buy certain Agency RMBS on a forward basis; “March 2015 Pool” refers to the loan pool we purchased in March 2015; “March 2015 Securitization” refers to the securitization that we transacted in March 2015, combining the December 2014 Pool with the March 2015 Pool, for which we retained the security issued in the securitization; “non-Agency RMBS” refer to RMBS that are not issued or guaranteed by an Agency; “Option ARMs” refer to mortgages that provide the mortgagee payment options, which may initially include a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment or a 30-year fully amortizing payment; “REO” refers to real estate owned as a result of foreclosure on mortgage loans; “Risk Sharing Securities” refer to securities issued by Fannie Mae and/or Freddie Mac which are structured to be subject to the performance of referenced pools of residential mortgage loans and represent unsecured general obligations of the issuing Agency; “RMBS” refer to residential mortgage-backed securities; “SBA” refers to the U.S. Small Business Administration; “SBA-IO” refers to IO securities issued by the SBA; “SBC-MBS” refer to small balance commercial-mortgage-backed securities; “Seller Financing Program” refers to our initiative whereby we provide advances through a warehouse line to a third party to finance the acquisition and improvement of single family homes, and once the homes are improved, they are marketed for sale, with the seller providing financing to the buyer in the form of a mortgage loan or a BFT Contract; “Short TBA Contracts” refer to TBA Contracts for which we would be required to sell certain Agency RMBS on a forward basis; “Subprime” refers to mortgage loans that have been originated using underwriting standards that are less restrictive than those used to originate prime mortgage loans; “Swaps” refer to interest swap contracts where we agree to pay a fixed rate of interest and receive a variable rate of interest based on the notional amount of the interest rate swap contract; “Swaptions” refer to option contracts that allow the option holder to enter into a Swap with a specified fixed rate at the expiration of the option period; “Swaption Purchase Contracts” refer to Swaptions that we purchase which provide that at expiration of the option period, we may either (i) enter into a Swap under which we would pay a fixed interest rate and receive a variable rate of interest on the Swap notional amount, or (ii) we would receive a cash payment equal to the fair value, (if any) of the underlying Swap, which termination option is prescribed in the contract confirmation; “Swaption Sale Contracts” refer to Swaptions that we sell which provide that at expiration of the option period, the counterparty to such contract may either (i) enter into a Swap under which we would pay a fixed interest rate and receive a variable interest rate on the Swap notional amount or (ii) we would make a payment equal to the fair value (if any) of the underlying Swap, which termination option is prescribed in the contract confirmation; “TBA Contracts” refer to to-be-announced contracts to purchase or sell certain Agency RMBS on a forward basis and “VIE” refers to a variable interest entity.

Note 1 – Organization

We were incorporated as a Maryland corporation on March 15, 2011 and commenced operations on July 27, 2011. We are externally managed and advised by ARM Manager, LLC (or, Manager), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries “Apollo”).

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

We operate and have elected to qualify as a real estate investment trust (or, REIT) under the Internal Revenue Code of 1986, as amended (or, Internal Revenue Code), commencing with the taxable year ended December 31, 2011. We also operate our business in a manner that allows us not to register as an investment company as defined under the Investment Company Act of 1940 (or, 1940 Act).

We invest on a levered basis in residential mortgage and mortgage-related assets in the U.S. Through December 31, 2015, our portfolio was comprised of: (i) Agency RMBS, (which include pass-through securities whose underlying collateral primarily includes 30 year fixed-rate mortgages), Agency IO, Agency Inverse IO and Agency Inverse Floater securities; (ii) non-Agency RMBS; (iii) securitized mortgage loans; (iv) other mortgage-related securities; (v) mortgage loans; and (vi) other real estate related investments associated with our Seller Financing Program. Over time, we may invest in a broader range of other residential mortgage and mortgage-related assets.

Note 2 – Summary of Significant Accounting Policies


(a)	Basis of Presentation and Consolidation

The consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. We currently operate as one business segment.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (or, GAAP) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.


(b)	Cash and Cash Equivalents

We consider all highly liquid short term investments with original maturities of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. We deposit our cash with what we believe to be high credit quality institutions. From time to time, our cash may include amounts pledged to us by our counterparties as collateral for our derivative instruments. At December 31, 2015 and 2014, our cash and cash equivalents were primarily comprised of cash on deposit with our prime broker (which is domiciled in the U.S.) substantially all of which was in excess of applicable insurance limits and, we had $40,012 and $40,000 invested in a money market fund at December 31, 2015 and December 31, 2014, respectively. Included in cash and cash equivalents was cash pledged by our counterparties to us of $280 and $2,546 at December 31, 2015 and December 31, 2014, respectively.


(c)	Obligation to Return Cash Held as Collateral

From time to time, we may hold cash pledged as collateral to us by certain of our derivative counterparties as a result of margin calls made by us. Cash pledged to us is unrestricted in use and, accordingly, is included as a component of cash on our consolidated balance sheets. In addition, a corresponding liability is reported as an obligation to return cash held as collateral.


(d)	Restricted Cash

Restricted cash represents cash held by our counterparties as collateral against our repurchase agreement borrowings, Swaps or other derivative instruments. Restricted cash is not available for general corporate purposes, but may be applied against amounts due to counterparties under our repurchase agreement borrowings and Swaps, or returned to us when our collateral requirements are exceeded or at the maturity or termination of the derivative instrument or repurchase agreement.


(e)	Investment Securities and Securitized Mortgage Loans

Our investment securities, which are comprised of RMBS and other investment securities, are designated as available for sale. Our RMBS portfolio is comprised of mortgage pass-through certificates, CMOs, including Agency IO and Agency Inverse IO representing interests in or obligations backed by pools of mortgage loans. Our securitized mortgage loans, which are designated as held for investment, are presented on our balance sheet as “Securitized mortgage loans transferred to consolidated variable interest entities, at fair value.” These mortgage loans are comprised of pools of performing, re-performing and non-performing mortgage loans that we purchased at a discount to principal balance.

At December 31, 2015, our other investment securities were comprised of investments in Risk Sharing Securities issued by Freddie Mac and Fannie Mae, SBA-IO and SBC-MBS. Our SBC-MBS generally include mortgage loans collateralized by a mix of residential multi-family (i.e., properties with five or more units), mixed use residential/commercial, small retail, office

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

building, warehouse and other types of property. In some instances, certain of the mortgage loans underlying the SBC-MBS that we own may also be additionally secured by a personal guarantee from the primary principals of the related business and/or borrowing entity. Our other investment securities are carried at fair value on our consolidated balance sheet. Interest income on our other investment securities is included in “Interest Income - Other” and changes in the estimated fair value of such securities is included in “Unrealized gain/(loss) on other investment securities” on our consolidated statements of operations.

Balance Sheet Presentation

Purchases and sales of our investment securities are recorded on the trade date. Our RMBS and other investment securities pledged as collateral against borrowings under repurchase agreements are included in “Residential mortgage-backed securities, at fair value” and “Other investment securities, at fair value” on our consolidated balance sheet, respectively, with the fair value of securities pledged disclosed parenthetically. Amounts receivable/payable associated with sales/purchases of securities at the balance sheet date are reflected on our consolidated balance sheet as “Investment related receivable” and “Investment related payable,” respectively.

For purposes of determining the applicable accounting policy with respect to our investment securities, we review credit ratings available from each of the three major credit rating agencies (i.e. Moody’s Investors Services, Inc., Standard & Poor’s Ratings Services and Fitch, Inc.) for each investment security at the time of purchase and apply the lowest rating.

The aggregate fair value of the mortgage loans associated with our securitization transactions are presented on our consolidated balance sheet as “Securitized mortgage loans transferred to consolidated variable interest entities, at fair value.” (See Notes 5 and 14.)

Impairments

Investment Securities: We have elected the fair value option of accounting for our investment securities and, as such, all changes in the market value of our investment securities are recorded through earnings. When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired. We assess our investment securities for impairment on at least a quarterly basis and designate such impairments as either “temporary” or “other than temporary.” If we intend to sell an impaired security, or it is more likely than not that we will be required to sell an impaired security before its anticipated recovery, then we recognize an OTTI through earnings. If we do not expect to sell an other than temporarily impaired security, only the portion of the OTTI that is related to credit losses will be recognized as an OTTI, with the remainder recognized through earnings as a component of unrealized gains/(losses) on our statement of operations. When an OTTI is recognized, a new cost basis is established for the security, which new cost basis may not be adjusted for subsequent recoveries in fair value through earnings. However, if the performance of a security on which an OTTI was previously recognized improves, future yields may increase on such securities, resulting in a reversal of all or a portion of previously recognized OTTI over time. The determination as to whether an OTTI exists and, if so, the amount of such impairment recognized is subjective, as such determinations are based on information available at the time of assessment, as well as our Manager’s estimates of the future performance and cash flow projections for the individual security. (See Notes 4 and 6.)

Securitized Mortgage Loans: We have elected the fair value option of accounting for our securitized mortgage loans and, as such, all changes in the estimated fair value of our securitized mortgage loans are recorded through earnings, including a provision for loan losses, if any. Our securitized mortgage loans had evidence of deterioration of credit quality at the time of acquisition. We analyze our securitized mortgage loan pool at least quarterly to assess the actual performance compared to the expected performance. If the revised cash flow estimates on our securitized mortgage loans provide a lower yield than the previous yield, we recognize a provision to loan losses (i.e., a reduction in the amortized cost of the securitized mortgage loans that is recorded in earnings) in an amount such that the yield will remain unchanged. If cash flow estimates on our securitized mortgage loans increase subsequent to recording a provision to loan losses, we will reverse previously recognized provision for loan losses before any increase to the yield is made. (See Note 5.)


(f)	Designation and Fair Value Option Election

To date, we have elected the fair value option of accounting for all of our investment securities, at the time of purchase, and our securitized debt when initially incurred. As a result of the fair value election on such assets /liabilities, we record the change in the estimated fair value of such assets and liabilities in earnings as unrealized gains/(losses). We generally intend to hold our investment securities to generate interest income; however, we have and may continue to sell certain of our investment securities as part of the overall management of our assets and liabilities and operating our business. Realized gains/(losses) on the sale of investment securities are recorded in earnings using the specific identification method.

Our securitized mortgage loans are considered held for investment purposes. Consistent with our investments in RMBS, we have elected the fair value option for our securitized mortgage loans and, as a result, we record changes in the estimated fair value of such assets in earnings as unrealized gains/(losses).

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

We believe that our election of the fair value option for our investment securities, securitized mortgage loans and securitized debt improves financial reporting, as such treatment is consistent with how we present the changes in the fair value of our Swaps, Swaptions and TBA Contracts, all of which are derivative instruments, through earnings.


(g)	Interest Income Recognition

Investment Securities

For Agency IO, Agency Inverse IO and Agency Inverse Floaters, income is accrued based on the amortized cost and the effective yield. Cash received on Agency IO and Agency Inverse IO is first applied to accrued interest and then to reduce the amortized cost. At each reporting date, the effective yield is adjusted prospectively based on the current cash flow projections, which reflect prepayment estimates and the contractual terms of the security.

Interest income on non-Agency RMBS and other investment securities rated below AA or not rated by a nationally recognized statistical rating organization is recognized based on the effective yield method of accounting. The effective yield on these securities is based on the projected cash flows from each security, which are estimated based on our observation of current information and events and include assumptions related to the future path of interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections based on input and analysis received from external sources, internal models and our judgment about interest rates, prepayment speeds, the timing and amount of credit losses and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and the payment priority structure of the security; therefore, actual maturities are generally shorter than the stated contractual maturities of the underlying mortgages. Based on the projected cash flows for our non-Agency RMBS, we generally expect that a portion of the purchase discount on such securities will not be recognized as interest income and is instead viewed as a credit discount. The credit discount mitigates our risk of loss on our non-Agency securities. The amount considered to be credit discount may change over time, based on the actual performance of the underlying mortgage collateral, actual and projected cash flows from such collateral, economic conditions and other factors. If the performance of a non-Agency RMBS with a credit discount is more favorable than forecasted, we may accrete more discount into interest income than expected at the time of purchase or when performance was last assessed. Conversely, if the performance of a non-Agency RMBS with a credit discount is less favorable than forecasted, the amount of discount accreted into income may be less than expected at the time of purchase or when performance was last assessed and/or impairment and write-downs of such securities to a new lower cost basis could result.

Securitized Mortgage Loans and Mortgage Loans

Application of the interest method of accounting for our pools of securitized mortgage loans and mortgage loans requires the use of estimates to calculate a projected yield. We calculate the yield based on the projected cash flows for each pool of mortgage loans. To the extent the actual performance of a loan pool is better than last expected, the yield is adjusted upward prospectively to reflect the revised estimate of cash flows over the remaining life of such mortgage pool. However, if the revised cash flow estimates on a loan pool provides a lower yield than the original or the last calculated yield, we recognize an OTTI (i.e., a reduction in the amortized cost of the loan pool that is recorded in earnings) such that the yield will remain unchanged. Decreasing yields arising solely from a change in the contractual interest rate on variable rate loans are not treated as an OTTI. If future cash collections are materially different in amount or timing than projected cash collections, earnings could be affected, either positively or negatively.

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

prepayment speeds, home prices, the timing and amount of credit losses and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such loans and/or the recognition of an OTTI.

Warehouse Line Receivable

We accrue interest income on our warehouse line receivable, which is included as a component of our “Interest income- other” and “Other investments,” on our consolidated financial statements, based on the contractual terms governing the warehouse line receivable agreement. We assess the collectability of the warehouse receivable and associated income on at least a quarterly basis.


(h)	Investment Consolidation and Transfers of Financial Assets

We evaluate the underlying entity that issues securities we acquire or to which we make a loan to determine the appropriate accounting methods.

In VIEs, an entity is subject to consolidation if the equity investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. VIEs that meet certain scope characteristics are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This determination can sometimes involve complex and subjective analysis. We are required on an ongoing basis to assess whether we are the primary beneficiary of a VIE.

In determining the accounting treatment to be applied to securitization transactions, we evaluate whether the entity used to facilitate the transactions was a VIE and, if so, whether it should be consolidated. Based on our evaluations, we have concluded since inception of our securitizations that each of our securitizations is a VIE and should be consolidated. If we determine in the future that consolidation is not required for a securitization, we would have to assess whether the transfer of the underlying assets qualify as a sale or should be accounted for as secured financings under GAAP.

We may periodically enter into transactions in which we sell assets. Upon a transfer of financial assets, we may sometimes retain or acquire senior or subordinated interests in the related assets. In connection with such transactions, a determination must be made as to whether we, as the transferor, have surrendered control over transferred financial assets. That determination must consider our continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. The financial components approach under applicable GAAP limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. It defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale.

From time to time, we may securitize mortgage loans we hold if such securitization allows us access to better financing terms. Depending upon the structure of the securitization transaction these transactions will be accounted for as either a “sale” and the loans will be removed from the consolidated balance sheet or, as a “financing” with the loans remaining on our consolidated balance sheet. Significant judgment may be exercised by us in determining whether a transaction should be recorded as a “sale” or a “financing.”


(i)	Deferred Financing Costs

Costs incurred in connection with securing our financings are capitalized and amortized using the effective interest rate method over the respective financing term with such amortization reflected on our consolidated statements of operations as a component of interest expense. Our deferred financing costs may include legal, accounting and other related fees. These deferred charges are included on our consolidated balance sheet as a component of “Other assets.” The amortization of deferred charges associated with our securitized debt is adjusted to reflect actual repayments of the securitized debt. (See Note 14.)

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)


(j)	Earnings Per Share

Earnings per share (or, EPS) is computed using the two-class method of accounting, which includes the weighted-average number of shares of common stock outstanding during the period and other securities that participate in dividends, such as our unvested restricted stock and restricted stock units (or, RSUs), to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and securities that participate in dividends based on their respective weighted-average shares outstanding for the period. During periods of net loss, losses are allocated only to the extent that the participating securities are required to absorb such losses. (See Note 17.)


(k)	Derivative Instruments

All derivatives are reported as either assets or liabilities on the balance sheet at estimated fair value. We have not elected hedge accounting for our derivative instruments and, as a result, changes in the fair value for our derivatives are recorded in earnings. The fair value adjustments, along with the related interest income or interest expense, are recognized in the consolidated statements of operations in the line item “Gain/(loss) on derivative instruments, net.”

To-Be-Announced Securities


(l)	Repurchase Agreements

Investment securities financed under repurchase agreements are treated as collateralized borrowings, unless they meet sale treatment or are deemed to be linked transactions. Through December 31, 2015, none of our repurchase agreements had been accounted for as a linked transaction. As of December 31, 2015 all securities financed through a repurchase agreement remained on our consolidated balance sheet as an asset (with the fair value of the securities pledged as collateral disclosed parenthetically) and cash received from the lender is recorded on our consolidated balance sheet as a liability. However, securities associated with our securitizations are eliminated in consolidation with VIEs. Interest paid and accrued in connection with our repurchase agreements is recorded as interest expense.


(m)	Stock-based Payments

We account for stock-based awards granted to our independent directors, to our Manager and to employees of our Manager and its affiliates using the fair value based methodology prescribed by GAAP. Expense related to restricted common stock issued to our independent directors is based on the fair value of our common stock on the grant date, and amortized into expense over the award vesting period on a straight-line basis. Expense related to RSUs issued to our Manager and to employees of our Manager and its affiliates are based on the estimated fair value of such award at the grant date and are remeasured quarterly for unvested awards. We measure the fair value of our RSUs using the price of our common stock and other measurement assumptions including implied volatility and discount rates. We use the graded vesting attribution method to amortize expense related to RSUs granted to our Manager and its affiliates.


(n)	Income Taxes (Dollar amounts in this Note 2(n) are not presented in thousands.)

We elected to be taxed as a REIT for U.S. Federal income tax purposes, commencing with our taxable year ended December 31, 2011. Pursuant to the Internal Revenue Code, a REIT that distributes at least 90% of its net taxable income, excluding net capital gains, as a dividend to its stockholders each year and which meets certain other conditions, will not be taxed on the portion of its taxable income that is distributed to its stockholders. We expect to meet the conditions required to

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

enable us to continue to operate as a REIT and to distribute all of our taxable income, including net capital gains for the periods presented and therefore we have not recorded any provisions for income taxes on our consolidated statements of operations.

As of December 31, 2015, we had estimated net capital loss carryforward amounts of $67.7 million which may be carried forward and applied against future net capital gains. Our capital loss carryforward amounts will reduce the amount of future capital gains, if any, that we would otherwise expect to distribute as capital gains, since capital gains would first be reduced by the capital loss carryforward. At December 31, 2015, we had estimated capital loss carryforward amounts of $47.3 million and $20.4 million which will expire in 2018 and 2019, respectively.

We have elected to treat a wholly owned subsidiary as a taxable REIT subsidiary (or, TRS). A TRS may participate in activities that would otherwise not be allowed to be carried on in a REIT. A TRS is subject to U.S. Federal, state and local income tax at regular corporate tax rates.

As of December 31, 2015 our TRS and its subsidiaries, which are not consolidated with the Company for income tax purposes, had an estimated net operating loss carryforward of $1.5 million. Given the limited operating history of our TRS and its subsidiaries, there can be no assurance that such entities will generate taxable income in the future. As a result, the deferred tax asset of approximately $0.6 million associated with our net operating loss carryforward has been offset by a valuation allowance, such that we had no net deferred tax asset or liability at December 31, 2015 or 2014 and, had not recorded any tax benefits through December 31, 2015.

Under GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Based upon review of our federal, state and local income tax returns and tax filing positions, we determined that no unrecognized tax benefits for uncertain tax positions were required to be recorded. In addition, we do not believe that we have any tax positions for which it is reasonably possible that we will be required to record significant amounts of unrecognized tax benefits within the next twelve months.

Our major tax jurisdictions are U.S. Federal, New York State and New York City. The statute of limitations is open for all jurisdictions for tax years beginning 2012.

(o) Variable Interest Entities

We consolidate a VIE when we have both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. We are required to reconsider our evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE. (See Note 2(h).)

Prior to the completion of our initial securitization transaction in February 2013, we had not transferred assets to any VIE or special purpose entity (or, SPE) and, other than acquiring RMBS issued by such entities, had no other involvement with any VIE or SPE. (See Note 14.)

(p) Recent Accounting Pronouncements

Accounting Standards Adopted

In January 2014, the FASB issued guidance in order to help determine when a creditor should derecognize a loan receivable and recognize the real estate property by clarifying when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. The guidance is effective for public business entities for fiscal years beginning after December 15, 2014. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued guidance to improve the definition of discontinued operations and to enhance convergence between the FASB’s and International Accounting Standard Board’s reporting requirements for discontinued operations. The new definition of discontinued operations limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The new guidance affects entities that have either of the following: (1) a component of an entity that either is disposed of or meets the criteria under current guidance to be classified as held-for-sale or (2) a business or nonprofit activity that, on acquisition, meets the criteria under current guidance to be classified as held-for-sale. The guidance is effective for all disposals (or classifications as held-for-sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held-for-sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held-for-sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this guidance did not impact on our consolidated financial statements.

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

In June 2014, the FASB issued guidance that requires repurchase-to-maturity transactions to be accounted for as secured borrowings rather than as sales with a forward repurchase commitment. The new guidance eliminated existing guidance on repurchase financings and requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. If derecognition criteria are met, the initial transfer will generally be accounted for as a sale and the repurchase agreement will generally be accounted for as a secured borrowing. Under prior guidance, there was a rebuttable presumption that the two parts of the repurchase financing are linked, meaning that the transactions should be combined and accounted for as a forward agreement to sell (purchase) a financial asset. The new guidance requires new disclosures for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings. These disclosures include information about the types of assets pledged and the relationship between those assets and the related obligation to return the proceeds. The new standard also requires new disclosures for transfers of financial assets that are accounted for as sales that involve an agreement with the transferee entered into in contemplation of the initial transfer that result in the transferor retaining substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The disclosures include information about the nature of the transactions, the transferor’s continuing exposure to the financial assets it derecognized and the components of the transactions presented in the financial statements. The guidance is effective for the first interim or annual period beginning after December 15, 2014, except for the disclosures related to transactions accounted for as secured borrowings, which are effective for periods beginning on or after March 15, 2015; earlier application of this guidance was not permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements, but resulted in additional disclosures with respect to our repurchase borrowings, as presented in Note 8.

In August 2014, the FASB issued guidance to eliminate diversity in practice in the accounting for measurement differences in both the initial consolidation and subsequent measurement of the financial assets and the financial liabilities of a collateralized financing entity. A reporting entity that consolidates a collateralized financing entity within the scope of the new guidance may elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in the new guidance or the existing guidance on fair value measurement. When the measurement alternative is not elected for a consolidated collateralized financing entity within the scope of the new guidance, the new guidance clarifies that (1) the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured using the requirements of the existing guidance on fair value measurement and (2) any differences in the fair value of the financial assets and the fair value of the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income (loss). When a reporting entity elects the measurement alternative included in the new guidance for a collateralized financing entity, the reporting entity should measure both the financial assets and the financial liabilities of that collateralized financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The guidance applies to a reporting entity that is required to consolidate a collateralized financing entity under the existing variable interest entity guidance when (1) the reporting entity measures all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other guidance and (2) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption of this guidance is permitted as of the beginning of an annual period. Our early adoption of this guidance during the period ended March 31, 2015 did not have a material impact on our consolidated financial statements (See Note 3(b).)

In February 2015, the FASB issued guidance affecting reporting entities that are required to evaluate whether they should consolidate certain legal entities, particularly those that have fee arrangements and related party relationships. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 31, 2015. Early adoption is permitted as of the beginning of an annual period. The amendments found in this accounting update do not affect the criteria within the Company's VIE analysis related to its securitization trusts, which are currently consolidated. As such, our adoption of this guidance during the period ended March 31, 2015 did not have an impact on our consolidated financial statements.

Accounting Standards Issued but Not Yet Adopted

In May 2014, the FASB issued guidance to establish a comprehensive and converged standard on revenue recognition to enable financial statement users to better understand and consistently analyze an entity’s revenue across industries, transactions, and geographies. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. The new guidance requires improved disclosures to help users of financial statements better

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

understand the nature, amount, timing, and uncertainty of revenue that is recognized. Qualitative and quantitative information is required to be disclosed about: (1) contracts with customers, (2) significant judgments and changes in judgments, and (3) assets recognized from costs to obtain or fulfill a contract. The new guidance will apply to all entities. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017; early application is not permitted. We are currently assessing the impact that this accounting guidance will have on our consolidated financial statements when adopted.

In August 2014, the FASB issued guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related financial statement note disclosures. The new guidance requires that management evaluate each annual and interim reporting period whether conditions exist that give rise to substantial doubt about the entity’s ability to continue as a going concern within one year from the financial statement issuance date, and if so, provide related disclosures. Disclosures are only required if conditions give rise to substantial doubt, whether or not the substantial doubt is alleviated by management’s plans. No disclosures are required specific to going concern uncertainties if an assessment of the conditions does not give rise to substantial doubt. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. If substantial doubt is alleviated as a result of the consideration of management’s plans, a company should disclose information that enables users of financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the financial statement notes): (1) principal conditions that initially give rise to substantial doubt, (2) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (3) management’s plans that alleviated substantial doubt. If substantial doubt is not alleviated after considering management’s plans, disclosures should enable investors to understand the underlying conditions, and include the following: (1) a statement indicating that there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date, (2) the principal conditions that give rise to substantial doubt, (3) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (4) management’s plans that are intended to mitigate the adverse conditions. The new guidance applies to all companies. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016, with early adoption permitted. Based on our current financial condition, we do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2014, the FASB issued guidance to clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the new guidance clarifies that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Further, the new guidance clarifies that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The new guidance applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015, with early adoption permitted. We do not expect the adoption of this accounting guidance will have a material impact on our consolidated financial statements.

In April 2015, the FASB issued guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and requires retrospective application. We expect to adopt this guidance when effective, and do not expect this guidance to have a significant impact on our financial statements, although it will change the financial statement classification of our deferred financing costs. As of December 31, 2015, we had $546 of net deferred financing costs which are included as a component of “Other assets” on our consolidated balance sheet. Under the new guidance, these net deferred financing costs will reduce the carrying value of the associated borrowings/debt. In August 2015, the FASB expanded its April 2015 guidance associated with the presentation of debt issue costs, to address costs related to line-of-credit arrangements. In this update, the FASB noted that the Securities and Exchange Commission (or, SEC) staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowing on the line-of-credit arrangement. We do not expect this clarification will have a material impact on our consolidated financial statements.

In June 2015, the FASB issued guidance providing for technical corrections and improvements to existing accounting standards. The amendments in this update represent changes to clarify, correct unintended application of guidance, or make minor improvements to existing accounting standards that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this guidance. The amendments that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

period. All other amendments will be effective upon the issuance of this accounting guidance. We are currently assessing the impact that this accounting guidance will have on our consolidated financial statements when adopted.

(q) Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation.

Note 3 – Fair Value of Financial Instruments

(a) General

Level I - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Any changes to our valuation methodology will be reviewed by our Manager and audit committee to ensure the changes are appropriate. We may refine our valuation methodologies as markets and products develop. The methods used by us may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and are believed to result in valuations consistent with other market participants, the use of different methodologies, or assumptions, to determine the estimated fair value of certain financial instruments could result in a different estimate of estimated fair value at the reporting date. We use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

(b) Agency RMBS, non-Agency RMBS, TBA Contracts, Securitized Mortgage Loans, Non-Recourse Securitized Debt and Other Investment Securities

To determine the fair value of our Agency RMBS, non-Agency RMBS, TBA Contracts, securitized mortgage loans, non-recourse securitized debt and other investment securities, we obtain third party broker quotes which, while non-binding, are indicative of fair value. To validate the reasonableness of the broker quotes, we obtain and compare the broker quotes to

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

valuations received from a third party pricing service and review the range of quotes received for outliers, compare quotes to recent market activity observed for similar securities and review significant changes in quarterly price levels. We generally do not adjust the prices we obtain from brokers; however, adjustments to valuations may be made as deemed appropriate to capture observable market information at the valuation date. Further, broker quotes are used provided that there is not an ongoing material event that affects the issuer of the securities being valued or the market thereof. If there is such an ongoing event, we will determine the estimated fair value of the securities using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and prepayment rates and, with respect to non-Agency RMBS, default rates and loss severities. Valuation techniques for RMBS may be based on models that consider the estimated cash flows of each debt tranche of the issuer, establish a benchmark yield, and develop an estimated tranche-specific spread to the benchmark yield based on the unique attributes of the tranche including, but not limited to, assumptions related to prepayment speed, the frequency and severity of defaults and attributes of the collateral underlying such securities. To the extent the inputs are observable and timely, the values would be categorized in Level II of the fair value hierarchy; otherwise they would be categorized as Level III. There were no events that resulted in us using internal models to value our Agency and non-Agency RMBS or other investment securities in our consolidated financial statements for the periods presented. Given the high level of liquidity and price transparency for our Agency RMBS, Risk Sharing Securities and TBA Contracts, prices obtained from brokers and pricing services are readily verifiable to observable market transactions; as such, we categorize Agency RMBS, TBA Contracts and Risk Sharing Securities as Level II valuations. While market liquidity exists for non-Agency RMBS, securities underlying our securitized mortgage loans, securitized debt and SBC-MBS, periods of less liquidity or even illiquidity may also occur periodically for certain of these assets. As a result of this market dynamic and that observable market transactions may or may not exist from time to time, such instruments are categorized as Level III.

We determine the estimated fair value of our Swaps and Swaptions based on market valuations obtained from a third party with expertise in valuing such instruments. With respect to Swap valuations, the expected future cash flows are determined for the fixed and floating rate leg of the Swap. To arrive at the expected cash flows for the fixed leg of a Swap, the coupon rate stated in the Swap agreement is used and to arrive at the expected cash flows for the floating leg, the forward rates derived from raw yield curve data are used. Finally, both the fixed and floating legs’ cash flows are discounted using the calculated discount factors and the fixed and floating leg valuations are netted to arrive at a single valuation for the Swap at the valuation date. Swaptions require the same market inputs as Swaps with the addition of implied Swaption volatilities quoted by the market. The valuation inputs for Swaps and Swaptions are observable and, as such, their valuations are categorized as Level II in the fair value hierarchy.

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(d) Fair Value Hierarchy

The following tables present our financial instruments carried at estimated fair value as of December 31, 2015 and December 31, 2014, based upon our consolidated balance sheet by the valuation hierarchy:



	December 31, 2015
	Level I		Level II		Level III		Total
Assets:
RMBS	$	—	$	1,864,356	$	1,197,226	$	3,061,582
Securitized mortgage loans (transferred to consolidated variable interest entities)	—		—		167,624		167,624
Other investment securities	—		98,656		67,534		166,190
Swaps/Swaptions	—		4,347		—		4,347
Total	$	—	$	1,967,359	$	1,432,384	$	3,399,743
Liabilities:
Swaps	$	—	$	13,618	$	—	$	13,618
Non-recourse securitized debt	—		—		18,951		18,951
Long TBA Contracts	—		195		—		195
Total	$	—	$	13,813	$	18,951	$	32,764

	December 31, 2014
	Level I		Level II		Level III		Total
Assets:
RMBS	$	—	$	2,287,523	$	1,468,109	$	3,755,632
Securitized mortgage loans (transferred to consolidated variable interest entity)	—		—		104,438		104,438
Other investment securities	—		10,395		23,833		34,228
Mortgage Loans	—		—		14,120		14,120
Long TBA Contracts	—		544		—		544
Swaps/Swaptions	—		11,098		—		11,098
Total	$	—	$	2,309,560	$	1,610,500	$	3,920,060
Liabilities:
Swaps	$	—	$	8,949	$	—	$	8,949
Non-recourse securitized debt	—		—		34,176		$	34,176
Total	$	—	$	8,949	$	34,176	$	43,125

100

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(e) Level III Fair Value Measurement Disclosures

Our non-Agency RMBS, other investment securities, securitized mortgage loans and securitized debt are measured at fair value and are considered to be Level III measurements of fair value.

The following table presents a summary of changes in the fair value of our non-Agency RMBS for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
Beginning balance	$	1,468,109		$	1,212,789		$	605,197
Purchases	312,668			464,419			748,032
Sales	(375,564		)	(112,841		)	(94,307		)
Principal repayments	(222,587		)	(151,640		)	(117,411		)
Total net gains/(losses) included in net income:
Realized gains/losses, net	14,213			10,461			14,654
Unrealized gains/(losses), net	(44,167		)	(3,014		)	21,805
OTTI recognized	(9,001		)	(10,005		)	(5,892		)
Discount accretion	53,555			57,940			40,711
Ending balance	$	1,197,226		$	1,468,109		$	1,212,789

The following table presents a summary of the changes in the fair value of our securitized mortgage loans associated with our securitizations for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
Beginning balance	$	104,438		$	110,984		$	—
Mortgage loans securitized	81,094			—			113,038
Principal repayments	(16,167		)	(6,949		)	(6,038		)
Discount accretion and other adjustments	1,446			(745		)	3,950
Unrealized gain/(loss) during the period, net	(1,752		)	4,813			34
OTTI recognized	—			(3,130		)	—
Loans transferred to REO	(1,435		)	(535		)	—
Ending balance	$	167,624		$	104,438		$	110,984

The following table presents a summary of the changes in fair value of our Level III other investment securities for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
Beginning balance	$	23,833		$	11,515		$	—
Transferred out of Level III fair values ⁽¹⁾	—			(11,515		)	—
Purchases	55,480			24,838			12,000
Principal repayments	(10,971		)	(1,137		)	(820		)
Discount accretion	2,035			276			—
Unrealized gain/(loss)	(2,814		)	(35		)	335
OTTI Recognized	(29		)	$	(109	)
Ending balance	$	67,534		$	23,833		$	11,515

⁽¹⁾During the three months ended March 31, 2014, we transferred certain of our other investment securities from Level III to Level II of the fair value hierarchy. These transferred securities, comprised of investments in Risk Transfer Securities, were transferred to Level II measurements of fair value based on the availability of significant observable market inputs which are used to estimate the fair value of these securities. Transfers between levels are deemed to take place on the first day of the reporting period in which the transfer occurred.

101

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

The following table presents a summary of the changes in fair value of our securitized debt for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
Beginning balance	$	34,176		$	43,354		$	—
Debt issued during the period	—			—			50,375
Principal paid	(14,194		)	(9,302		)	(7,975		)
Unrealized gain\(loss)	(1,031		)	124			954
Ending balance	$	18,951		$	34,176		$	43,354

(f) Financial Instruments Not Carried at Fair Value

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on our consolidated balance sheet at the dates presented:



	December 31, 2015				December 31, 2014
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Investment related receivable ⁽¹⁾	$	2,692	$	2,692	$	191,455	$	191,455
Warehouse line receivable ⁽²⁾⁽³⁾	$	10,239	$	10,239	$	28,639	$	28,639
Mortgage loans and real estate subject to BFT Contracts under Seller Financing Program ⁽³⁾	$	34,994	$	34,994	$	11,922	$	11,922
Financial liabilities:
Repurchase agreements	$	2,898,347	$	2,898,347	$	3,402,327	$	3,402,237
Investment related payable ⁽¹⁾	$	—	$	—	$	76,105	$	76,105


⁽¹⁾	Carrying value approximates fair value due to the short-term nature of the item.


⁽²⁾	Carrying value approximates fair value as such investment has a variable interest rate and there has been no material change in the credit-worthiness of the borrower.


⁽³⁾	Carrying value approximates fair value based on the assessment that there has been no material change in value or impairment of the associated real estate.

To determine the estimated fair value of our borrowings under repurchase agreements, contractual cash flows from such borrowings are discounted at estimated market interest rates, which rates may be based upon actual transactions executed by us or indicative rates quoted by brokers. The estimated fair values are not necessarily indicative of the amount we would realize on disposition of the financial instruments. Our borrowings under repurchase agreements had a weighted average remaining term to maturity of 51 days and 65 days at December 31, 2015 and December 31, 2014, respectively. Adjustments to valuations may be made as deemed appropriate to capture market information at the valuation date. Inputs used to arrive at the fair value of our repurchase agreement borrowings are generally observable and therefore the fair value of our repurchase agreement borrowings are classified as Level II valuations in the fair value hierarchy.

102

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Note 4 – Residential Mortgage-Backed Securities

(a) RMBS

The following tables present certain information about our RMBS portfolio at the dates presented:



	December 31, 2015
	Principal Balance		Unamortized Premium/ (Discount), Net ⁽¹⁾			Amortized Cost		Estimated Fair Value		Gross Unrealized Gain		Gross Unrealized Losses			Weighted Average Coupon
Agency pass-through RMBS, 30-Year Mortgages:
ARMs	$	272,533	$	19,247		$	291,780	$	289,057	$	—	$	(2,723	)	2.51	%
3.5% coupon	511,184		24,295			535,479		527,657		—		(7,822		)	3.50
4.0% coupon	925,929		61,523			987,452		983,536		1,307		(5,223		)	4.00
	1,709,646		105,065			1,814,711		1,800,250		1,307		(15,768		)	3.61	%
Agency IO⁽²⁾	—		—			57,778		57,354		1,175		(1,599		)	2.33	%
Agency Inverse IO⁽²⁾	—		—			6,864		6,752		—		(112		)	6.62	%
Total Agency securities	1,709,646		105,065			1,879,353		1,864,356		2,482		(17,479		)	4.53	%
Non-Agency RMBS	1,395,873		(229,075		)	1,166,798		1,197,226		47,857		(17,429		)	1.67	%
Total RMBS	$	3,105,519	$	(124,010	)	$	3,046,151	$	3,061,582	$	50,339	$	(34,908	)	3.24	%

	December 31, 2014
	Principal Balance		Unamortized Premium/ (Discount), Net ⁽¹⁾			Amortized Cost		Estimated Fair Value		Gross Unrealized Gain		Gross Unrealized Losses			Weighted Average Coupon
Agency pass-through RMBS, 30-Year Mortgages:
ARMs	$	98,079	$	7,196		$	105,275	$	105,122	$	6	$	(159	)	2.36	%
3.5% coupon	495,214		20,245			515,459		515,628		1,536		(1,367		)	3.50
4.0% coupon	1,173,972		82,353			1,256,325		1,256,724		8,357		(7,958		)	4.00
4.5% coupon	336,353		25,863			362,216		366,472		4,256		—			4.50
	2,103,618		135,657			2,239,275		2,243,946		14,155		(9,484		)	3.89	%
Agency Inverse Floater	1,359		3,590			4,949		5,094		145		—			81.76	%
Agency IO ⁽²⁾	—		—			11,948		11,941		62		(69		)	2.24	%
Agency Inverse IO ⁽²⁾	—		—			26,489		26,542		306		(253		)	6.30	%
Total Agency securities	2,104,977		139,247			2,282,661		2,287,523		14,668		(9,806		)	3.93	%
Non-Agency RMBS	1,682,858		(289,345		)	1,393,513		1,468,109		78,434		(3,838		)	1.46	%
Total RMBS	$	3,787,835	$	(150,098	)	$	3,676,174	$	3,755,632	$	93,102	$	(13,644	)	2.91	%

Note: We apply trade-date accounting. We had no unsettled trades at December 31, 2015. Included in the above table at December 31, 2014 were unsettled purchases with an aggregate cost of $76,009 and an estimated fair value and $75,990.


⁽¹⁾	A portion of the purchase discount on non-Agency RMBS is not expected to be recognized as interest income and, is instead viewed as a credit discount. See Notes 4(f) and 4(h).

⁽²⁾

Agency IO and Agency Inverse IO have no principal balance and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on such securities. At December 31, 2015 and December 31, 2014, our Agency IO had a notional balance of $564,931 and $133,924, respectively, and our Agency Inverse IO had a notional balance of $38,529 and $138,293, respectively.

103

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(b) Agency Pass-through RMBS

The following tables present certain information about our Agency pass-through RMBS by issuer at the dates presented:



	December 31, 2015
	Principal Balance		Unamortized Premium/ (Discount), Net		Amortized Cost		Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
Fannie Mae:
ARMs	$	256,983	$	18,188	$	275,171	$	272,631	$	—	$	(2,540	)
3.5% Coupon	90,310		4,123		94,433		93,429		—		(1,004		)
4.0% Coupon	343,887		22,519		366,406		365,238		373		(1,541		)
	691,180		44,830		736,010		731,298		373		(5,085		)
Freddie Mac:
ARMs	15,550		1,059		16,609		16,426		—		(183		)
3.5% Coupon	420,874		20,172		441,046		434,228		—		(6,818		)
4.0% Coupon	582,042		39,004		621,046		618,298		934		(3,682		)
	1,018,466		60,235		1,078,701		1,068,952		934		(10,683		)
Total Agency pass-through RMBS	$	1,709,646	$	105,065	$	1,814,711	$	1,800,250	$	1,307	$	(15,768	)



	December 31, 2014
	Principal Balance		Unamortized Premium/ (Discount), Net		Amortized Cost		Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
Fannie Mae:
ARMs	$	78,731	$	5,878	$	84,609	$	84,537	$	6	$	(78	)
3.5% Coupon	149,436		6,200		155,636		155,895		417		(158		)
4.0% Coupon	271,031		19,397		290,428		289,903		1,531		(2,056		)
4.5% Coupon	294,177		22,712		316,889		320,653		3,764		—
	793,375		54,187		847,562		850,988		5,718		(2,292		)
Freddie Mac:
ARMs	19,348		1,318		20,666		20,585		—		(81		)
3.5% Coupon	345,778		14,045		359,823		359,733		1,119		(1,209		)
4.0% Coupon	902,941		62,956		965,897		966,821		6,826		(5,902		)
4.5% Coupon	42,176		3,151		45,327		45,819		492		—
	1,310,243		81,470		1,391,713		1,392,958		8,437		(7,192		)
Total Agency pass-through RMBS	$	2,103,618	$	135,657	$	2,239,275	$	2,243,946	$	14,155	$	(9,484	)

104

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

The following tables present certain information about our non-Agency RMBS by type of underlying mortgage loan collateral type at the dates presented:



	December 31, 2015
Underlying Loan Characteristics	Principal Balance		Unamortized Premium/ (Discount) and OTTI, Net			Amortized Cost		Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
Subprime	$	939,161	$	(124,776	)	$	814,385	$	838,128	$	33,503	$	(9,760	)
Alt-A	184,932		(45,194		)	139,738		147,709		10,330		(2,359		)
Option ARMs	271,780		(59,105		)	212,675		211,389		4,024		(5,310		)
Total Non-Agency RMBS	$	1,395,873	$	(229,075	)	$	1,166,798	$	1,197,226	$	47,857	$	(17,429	)



	December 31, 2014
Underlying Loan Characteristics	Principal Balance		Unamortized Premium/ (Discount), Net			Amortized Cost		Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
Subprime	$	1,257,231	$	(184,851	)	$	1,072,380	$	1,129,045	$	59,350	$	(2,685	)
Alt-A	220,220		(53,283		)	166,937		179,767		13,329		(499		)
Option ARMs	205,407		(51,211		)	154,196		159,297		5,755		(654		)
Total Non-Agency RMBS	$	1,682,858	$	(289,345	)	$	1,393,513	$	1,468,109	$	78,434	$	(3,838	)

(d) Unrealized Loss Positions on RMBS

The following table presents information about our RMBS that were in an unrealized loss position at December 31, 2015:



	Unrealized Loss Position for Less than 12 Months						Unrealized Loss Position for 12 Months or More
	Fair Value		Unrealized Losses			Number of Securities	Fair Value		Unrealized Losses			Number of Securities
Agency RMBS	$	1,385,399	$	(11,544	)	49	$	211,251	$	(4,224	)	6
Agency IO	32,618		(1,559		)	11	1,630		(40		)	1
Agency Inverse IO	6,752		(112		)	3	—		—			—
Total Agency Securities	1,424,769		(13,215		)	63	212,881		(4,264		)	7
Non-Agency RMBS	601,507		(12,056		)	108	131,114		(5,373		)	38
Total RMBS	$	2,026,276	$	(25,271	)	171	$	343,995	$	(9,637	)	45

105

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(e) Interest Income on RMBS

The following table presents components of interest income on our Agency RMBS and non-Agency RMBS for the periods presented:



	For the Year Ended December 31,
	2015							2014							2013
	Coupon Interest		(Premium Amortization)/ Discount Accretion, Net^{( 1)}			Interest Income		Coupon Interest		(Premium Amortization)/ Discount Accretion, Net ⁽¹⁾			Interest Income		Coupon Interest		(Premium Amortization)/ Discount Accretion, Net ⁽¹⁾			Interest Income
Agency RMBS	$	84,283	$	(23,054	)	$	61,229	$	100,017	$	(32,987	)	$	67,030	$	133,900	$	(41,170	)	$	92,730
Non-Agency RMBS	22,462		53,547			76,009		19,559		57,940			77,499		12,822		40,711			53,533
Total	$	106,745	$	30,493		$	137,238	$	119,576	$	24,953		$	144,529	$	146,722	$	(459	)	$	146,263


⁽¹⁾	The amount of premium amortization on Agency RMBS reflects our estimates of prepayments for such securities, which estimates are adjusted to reflect actual prepayments to date. The amount of discount accretion on non-Agency RMBS reflects our estimates of future cash flows for such securities, which estimates are reviewed, and may be revised, on at least a quarterly basis.

(f) Realized and Unrealized Gains and Losses on RMBS

The following table presents components of realized gains/(losses), net and changes in unrealized gains and losses, net on our RMBS portfolio for the periods presented:



	For the Year Ended December 31,
	2015									2014									2013
RMBS Type	Realized Gains/(Losses), Net			Unrealized Gains/(Losses), Net			OTTI			Realized Gains/(Losses), Net			Unrealized Gains/(Losses), Net			OTTI			Realized Gains/(Losses), Net			Unrealized Gains/(Losses), Net			OTTI
Agency, fixed-rate	$	2,464		$	(16,561	)	$	—		$	(20,169	)	$	107,864		$	—		$	(80,904	)	$	(157,784	)	$	—
Agency ARM	15			(2,571		)	—			(59		)	(91		)	—			—			(62		)	—
Agency Inverse	43			(145		)	—			—			145			—			—			—			—
Agency IO	280			(416		)	(1,046		)	725			(2,911		)	(1,099		)	1,599			2,677			(738		)
Agency Inverse IO	(17		)	(166		)	(627		)	221			949			(548		)	(2,199		)	(599		)	(6,782		)
Non-Agency	14,213			(44,168		)	(9,001		)	10,461			(3,014		)	(10,005		)	14,654			21,766			(5,853		)
Total	$	16,998		$	(64,027	)	$	(10,674	)	$	(8,821	)	$	102,942		$	(11,652	)	$	(66,850	)	$	(134,002	)	$	(13,373	)

(g) Contractual Maturities of RMBS

The following table presents the maturities of our RMBS, based on the final contractual maturity of the underlying mortgages at the dates presented:



Contractual Maturities of RMBS ⁽¹⁾	December 31, 2015		December 31, 2014
10 years or less	$	112,087	$	—
> 10 years and < or equal to 20 years	667,595		628,787
> 20 years and < or equal to 30 years	2,155,087		2,977,089
> 30 years	126,813		149,756
Total	$	3,061,582	$	3,755,632


⁽¹⁾	Actual maturities of the securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal, and the payment priority structure of the security; therefore actual maturities are generally shorter than the stated contractual maturities of the underlying or referenced mortgages.

106

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(h) Non-Agency RMBS Discounts and OTTI

The following table presents the changes in the components of our purchase discount on non-Agency RMBS between purchase discount designated as credit reserve and OTTI versus accretable purchase discount for the periods presented:



	For the Year Ended December 31,
	2015						2014						2013
	Discount Designated as Credit Reserve and OTTI ⁽¹⁾			Accretable Discount			Discount Designated as Credit Reserve and OTTI ⁽¹⁾			Accretable Discount			Discount Designated as Credit Reserve and OTTI ⁽¹⁾			Accretable Discount
Balance at beginning of period	$	(95,504	)	$	(194,451	)	$	(109,299	)	$	(193,647	)	$	(123,026	)	$	(144,831	)
Accretion of discount	—			53,637			—			57,889			—			40,695
Realized credit losses	2,165			—			3,450			—			3,433			—
Purchases	(7,371		)	(20,369		)	(35,992		)	(23,145		)	(35,542		)	(89,601		)
Sales and other	8,796			32,893			17,188			3,606			42,836			8,943
OTTI recognized in earnings	(9,001		)	—			(10,005		)	—			(5,853		)	—
Transfers/release of credit reserve	19,699			(19,699		)	39,154			(39,154		)	8,853			(8,853		)
Balance at end of period	$	(81,216	)	$	(147,989	)	$	(95,504	)	$	(194,451	)	$	(109,299	)	$	(193,647	)

⁽¹⁾

At December 31, 2015, our non-Agency RMBS had gross discounts of $229,206, which included credit discounts of $57,920 and OTTI of $23,032. At December 31, 2014, our non-Agency RMBS had gross discounts of $289,955, which included credit discounts of $76,914 and OTTI of $18,590. At December 31, 2013, our non-Agency RMBS had gross discounts of $302,946, which included credit discounts of $100,080 and OTTI of $9,219.

The following table presents a roll-forward of the credit loss component of OTTI on our Agency IO and Inverse IO securities for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
OTTI at beginning of period	$	1,106		$	5,936		$	2,055
Additions to OTTI	1,674			1,647			7,520
Sale of securities with OTTI	(1,772		)	(6,477		)	(3,639		)
OTTI at end of period	$	1,008		$	1,106		$	5,936

Note 5 – Securitized Mortgage Loans

In connection with our securitization transactions, we report (at estimated fair value) the residential mortgage loans held in securitization trusts on our consolidated balance sheets, as we consolidate such trusts. (See Note 14.)

The following table presents certain information about mortgage loans underlying our securitized mortgage loans at the date presented:



Securitized Mortgage Loans	December 31, 2015
Performing⁽¹⁾	$	72,678
Re-performing⁽¹⁾	105,713
Non-performing⁽¹⁾	32,607
Purchase discount	(47,138		)
Allowance for loan losses (OTTI)	(3,130		)
Fair value adjustment	6,894
Total	$	167,624


⁽¹⁾	We consider loans that are no more than 60 days delinquent as “performing,” loans that have had their initial terms modified and are no more than 60 days delinquent as “re-performing” and loans that are more than 60 days past due as “non-performing.”

107

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

At December 31, 2015, $8,572 of our securitized mortgage loans were in the process of foreclosure, and we held four properties with an estimated fair value of $220 as REO. The following table presents the five largest state concentrations, in the aggregate, for our securitized mortgage loans based on principal balance at December 31, 2015:



Property Location	Concentration		Principal Balance
Florida	17.8	%	$	37,563
California	17.5		36,990
Maryland	8.2		17,317
Texas	6.4		13,525
New York	5.8		12,151
Other states and the District of Columbia	44.3		93,452
Total	100.0	%	$	210,998

Note 6 – Other Investment Securities and Other Investments

(a) Other Investment Securities

The following table presents certain information about our other investment securities portfolio at the dates presented:



	December 31, 2015
	Par or Reference Balance		Unamortized Premium/ (Discount) and OTTI, Net			Amortized Cost ⁽¹⁾		Estimated Fair Value		Gross Unrealized Gain		Gross Unrealized Losses ⁽²⁾			Weighted Average Coupon
Risk Sharing Securities - Freddie Mac	$	48,526	$	(212	)	$	48,314	$	47,232	$	189	$	(1,271	)	3.92	%
Risk Sharing Securities - Fannie Mae	55,287		(1,659		)	53,628		51,424		—		(2,204		)	3.99
SBA-IO⁽²⁾	—		—			2,918		2,927		9		—			0.95
SBC-MBS	76,276		(8,811		)	67,465		64,607		10		(2,868		)	2.40
Total	$	180,089	$	(10,682	)	$	172,325	$	166,190	$	208	$	(6,343	)	2.63	%

	December 31, 2014
	Par or Reference Balance		Unamortized Premium/ (Discount) and OTTI, Net			Amortized Cost ⁽¹⁾		Estimated Fair Value		Gross Unrealized Gain		Gross Unrealized Losses ⁽²⁾			Weighted Average Coupon
Risk Sharing Securities - Freddie Mac	$	10,082	$	38		$	10,120	$	10,395	$	288	$	(13	)	3.56	%
SBC-MBS	27,136		(3,268		)	23,868		23,833		—		(35		)	0.90
Total	$	37,218	$	(3,230	)	$	33,988	$	34,228	$	288	$	(48	)	1.62	%


⁽¹⁾	Amortized cost is net of OTTI of $1,523 and $109 at December 31, 2015 and 2014, respectively.


⁽²⁾	SBA-IO have no principal balance and bear interest based on a notional balance. At December 31, 2015 our SBA-IO had a notional balance of $27,546.

108

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(b) Income on Other Investment Securities

The following tables present components of interest income on our other investment securities for the periods presented:



	For the Year Ended December 31, 2015
	Coupon Interest		(Premium Amortization)/ Discount Accretion, net			Interest Income		Weighted Average Yield
Risk Sharing Securities - Freddie Mac	$	1,400	$	450		$	1,850	4.68	%
Risk Sharing Securities - Fannie Mae	1,332		516			1,848		5.23
SBA-IO	173		(82		)	91		12.08
SBC-MBS	418		2,116			2,534		5.08
Total	$	3,323	$	3,000		$	6,323	5.04	%

	For the Year Ended December 31, 2014
	Coupon Interest		(Premium Amortization)/ Discount Accretion, net			Interest Income		Weighted Average Yield
Risk Sharing Securities - Freddie Mac	$	399	$	1		$	400	5.17	%
SBC-MBS	66		276			342		3.60
Total	$	465	$	277		$	742	4.18	%

The following table presents the changes in the components of our purchase discount on other investment securities between purchase discount designated as credit reserve and OTTI versus accretable purchase discount for the period presented:



	For the Year Ended December 31, 2015						For the Year Ended December 31, 2014
	Discount Designated as Credit Reserve and OTTI			Accretable Discount			Discount Designated as Credit Reserve and OTTI			Accretable Discount
Balance at beginning of period	$	(364	)	$	(2,904	)	$	—		$	—
Accretion of discount	—			3,031			—			276
Realized credit losses	—			—			—			—
Purchases	(15		)	(9,558		)	(664		)	(2,771		)
Sales and other	6			30			—			—
OTTI recognized	(1,230		)	—			(109		)	—
Transfers/release of credit reserve	931			(931		)	409			(409		)
Balance at end of period	$	(672	)	$	(10,332	)	$	(364	)	$	(2,904	)

Our SBC-MBS generally include mortgage loans collateralized by a mix of residential multi-family (i.e., properties with five or more units), mixed use residential/commercial, small retail, office building, warehouse and other types of property. In some instances, certain mortgage loans underlying the SBC-MBS that we own may also be additionally secured by a personal guarantee from the primary principal(s) of the related business and/or borrowing entity. As part of underwriting small balance commercial loans, real estate appraisals of the underlying real estate are generally obtained at origination of the mortgage assets underlying the SBC-MBS.

109

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(d) Other Investment Securities Unrealized Losses

The following table presents information about our Other Investment Securities that were in an unrealized loss position at December 31, 2015:



	Unrealized Loss Position for Less than 12 Months						Unrealized Loss Position for 12 Months or More
	Fair Value		Unrealized Losses			Number of Securities	Fair Value		Unrealized Losses			Number of Securities
Risk Sharing Securities - Freddie Mac	$	39,700	$	(1,256	)	5	$	580	$	(15	)	1
Risk Sharing Securities - Fannie Mae	51,424		(2,204		)	3	—		—			—
SBC-MBS	24,257		(1,880		)	7	13,558		(988		)	1
Total Other Investment Securities	$	115,381	$	(5,340	)	15	$	14,138	$	(1,003	)	2

(e) Other Investments

Our other investments are comprised of real estate subject to BFT Contracts, mortgage loans and a warehouse line receivable, all of which are associated with our Seller Financing Program.

BFT Contracts are agreements to finance the purchase of real property in which the seller provides the buyer with financing to purchase the property for an agreed-upon purchase price, and the buyer repays the loan in installments over the ensuing 20 to 30 years, depending on the term of the financing agreement. Pursuant to a BFT Contract, unlike a mortgage loan, the seller retains the legal title to the property, granting the buyer complete use of the property and requiring the buyer to maintain the property and bear the cost of property taxes. Pursuant to a BFT Contract, the seller generally conveys legal title of the property to the buyer when the full purchase price set forth in the contract has been paid, including all interest incurred through the date of final payment. All BFT Contracts purchased by us through December 31, 2015 are designated as “real estate subject to BFT Contracts” which real estate is depreciated until such time that the criteria for sale have been met. With respect to payments we receive under BFT Contracts, we record the principal component of the buyer’s monthly payment as a deposit liability and record the interest payments we receive as interest income. In connection with our Seller Financing Program we had $230 and $28 of deposit liabilities included as a component of other liabilities on our consolidated balance sheet at December 31, 2015 and December 31, 2014, respectively.

Our warehouse line receivable is secured by a pledge of substantially all the assets of the third-party borrower that owns the homes, BFT Contracts and mortgage loans during the time they are pledged on the warehouse line.

The following table presents components of the carrying value of our other investments at the dates presented:



	December 31,
	2015		2014
Warehouse line receivable	$	10,239	$	28,639
Real estate subject to BFT Contracts, net of accumulated depreciation⁽¹⁾	26,525		9,616
Mortgage loans purchased through Seller Financing Program	8,469		2,306
Total Other Investments	$	45,233	$	40,561

⁽¹⁾

At December 31, 2015, BFT Contracts had an aggregate principal balance of $27,140 with a weighted average contractual interest rate of 8.20% and, at December 31, 2014, BFT Contracts had an aggregate principal balance of $9,655 with a weighted average stated interest rate of 8.88%. Amount presented is net of $545 and $48 of accumulated depreciation at December 31,2015 and December 31, 2014, respectively.

110

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(f) Income on Other Investments

The following table presents components of income on our other investments for the periods presented:



	December 31,
	2015		2014
Warehouse line interest	$	1,057	$	741
Real estate subject to BFT Contracts	1,526		192
Mortgage loans purchased through Seller Financing Program	512		35
Total	$	3,095	$	968

Note 7 – Receivables

(a) Interest Receivable

The following table presents our interest receivable by investment category at the dates presented:



	December 31,
Investment Category	2015		2014
Agency RMBS - Fannie Mae ⁽¹⁾	$	2,697	$	3,101
Agency RMBS - Freddie Mac ⁽¹⁾	3,834		4,798
Agency RMBS - Ginnie Mae ⁽¹⁾	110		30
Non-Agency RMBS	1,076		1,068
RMBS interest receivable	7,717		8,997
Securitized mortgage loans	936		719
Other investment securities	262		10
Other investments	934		609
Mortgage loans	—		120
Total	$	9,849	$	10,455


⁽¹⁾	Includes interest income receivable on pass-through, IO, Inverse IO and Inverse Floater securities issued by an Agency, as applicable.

(b) Investment Related Receivables

The following table presents the components of our investment related receivables at the dates presented:



	December 31,
Investment Related Receivables	2015		2014
Unsettled sales of Agency RMBS	$	—	$	188,527
Principal payments due from broker	2,692		2,928
Total investment related receivables	$	2,692	$	191,455

Note 8 – Borrowings Under Repurchase Agreements

As of December 31, 2015, we had master repurchase agreements with 25 counterparties and had outstanding borrowings of $2,898,347 with 18 counterparties.

Our repurchase agreements bear interest at a contractually agreed-upon rate and typically have initial terms of one to four months, but in some cases may have initial terms that are shorter or longer, up to 24 months.

111

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

The following table presents certain characteristics of our repurchase agreements at the periods presented:



	December 31, 2015					December 31, 2014
	Principal Balance of Borrowing		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (days)	Principal Balance of Borrowing		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (days)
Securities Financed:
Agency RMBS	$	1,719,479	0.49	%	15	$	2,205,082	0.34	%	16
Non-Agency RMBS ⁽¹⁾	1,052,231		1.94		101	1,159,698		1.95		160
Other investment securities	126,637		1.91		116	28,805		1.74		13
Mortgage Loans	—		—		0	8,742		2.79		120
Total	$	2,898,347	1.08	%	51	$	3,402,327	0.91	%	65


⁽¹⁾	Includes $90,281 and $33,153 of repurchase borrowings collateralized by non-Agency RMBS of $125,125 and $47,786 at December 31, 2015 and December 31, 2014, respectively, that were eliminated from our balance sheet in consolidation with the VIEs associated with securitization transactions.

The following table presents repricing information about our borrowings under repurchase agreements at the dates presented:



	December 31, 2015				December 31, 2014
Time Until Interest Rate Reset:	Balance		Weighted Average Interest Rate		Balance		Weighted Average Interest Rate
Within 30 days	$	2,422,224	1.00	%	$	2,658,515	0.73	%
Over 30 days to 60 days	403,226		1.38		501,291		1.34
Over 60 days to 90 days	32,552		2.05		116,196		1.92
Over 90 days to 120 days	38,956		1.89		35,668		1.94
Over 120 days to 360 days	1,389		2.00		90,657		2.01
Total	$	2,898,347	1.08	%	$	3,402,327	0.91	%

The following table presents the contractual maturity of our repurchase agreements at dates presented:



	December 31, 2015				December 31, 2014
Time Until Contractual Maturity:	Balance		Weighted Average Interest Rate		Balance		Weighted Average Interest Rate
Within 30 days	$	2,165,418	0.88	%	$	2,461,835	0.61	%
Over 30 days to 60 days	288,487		0.88		393,555		1.10
Over 60 days to 90 days	90,220		2.61		116,196		1.92
Over 90 days to 120 days	38,956		1.89		35,668		1.56
Over 120 days to 360 days	315,266		2.06		287,337		2.18
Over 360 days	—		—		107,736		2.23
Total	$	2,898,347	1.08	%	$	3,402,327	0.91	%

112

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Note 9 – Collateral Positions

(a) Collateral Pledged and Collateral Held

The following table presents the fair value of our collateral positions, reflecting assets pledged and collateral we held, with respect to our borrowings under repurchase agreements, derivatives and clearing margin account at the dates presented:



	December 31, 2015				December 31, 2014
	Assets Pledged as Collateral		Collateral Held		Assets Pledged as Collateral		Collateral Held
Derivatives:
Restricted cash/cash ⁽¹⁾	$	21,921	$	280	$	14,176	$	2,546
Repurchase agreement borrowings:
Agency RMBS ⁽²⁾	1,769,351		—		2,297,050		—
Non-Agency RMBS ⁽³⁾	1,333,337		—		1,499,296		—
Other investment securities	163,263		—		34,228		—
Mortgage loans	—		—		13,602		—
Restricted cash	61,772		—		54,830		—
	3,327,723		—		3,899,006		—
Clearing margin:
Agency RMBS	3,522		—		3,998		—
Total	$	3,353,166	$	280	$	3,917,180	$	2,546


⁽¹⁾	Cash pledged as collateral is reported as “Restricted cash” on our consolidated balance sheet. Cash held by us as collateral is unrestricted in use and therefore is included with “Cash and cash equivalents” with a corresponding liability, “Obligation to return cash held as collateral” on our consolidated balance sheet.


⁽²⁾	Amount as of December 31, 2014 includes Agency RMBS $168,705 that were sold but unsettled.


⁽³⁾	Includes non-Agency RMBS of $125,125 and $47,786 at December 31, 2015 and December 31, 2014, respectively, that were eliminated from our balance sheet in consolidation with the VIEs associated with our securitizations. Our securitized mortgage loans collateralize the securities pledged.

(b) Collateral Pledged Components

The following tables present our collateral positions, reflecting assets pledged with respect to our borrowings under repurchase agreements, derivatives and clearing margin account at the dates presented:



	December 31, 2015
	Assets Pledged at Fair Value		Amortized Cost		Accrued Interest		Fair Value of Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:
Agency RMBS	$	1,769,351	$	1,784,557	$	5,081	$	1,774,432
Non-Agency RMBS ⁽¹⁾	1,333,337		1,301,167		1,479		1,334,816
Other investment securities	163,263		169,409		251		163,514
Mortgage loans	—		—		—		—
Cash	61,772		—		—		61,772
	3,327,723		3,255,133		6,811		3,334,534
Cash pledged for derivative contracts	21,921		—		—		21,921
Agency RMBS pledged for clearing margin	3,522		3,657		12		3,534
Total	$	3,353,166	$	3,258,790	$	6,823	$	3,359,989

(Tables and notes continued on next page.)

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Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(Tables and notes continued.)



	December 31, 2014
	Assets Pledged at Fair Value		Amortized Cost		Accrued Interest		Fair Value of Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:
Agency RMBS ⁽²⁾	$	2,297,050	$	2,287,498	$	7,015	$	2,304,065
Non-Agency RMBS ⁽³⁾	1,499,296		1,423,853		1,144		1,500,440
Other investment securities	34,228		33,988		10		34,238
Mortgage loans	13,602		13,602		116		13,718
Cash	54,830		—		—		54,830
	3,899,006		3,758,941		8,285		3,907,291
Cash pledged for Swaps	14,176		—		—		14,176
Agency RMBS pledged for clearing margin	3,998		3,907		12		4,010
Total	$	3,917,180	$	3,762,848	$	8,297	$	3,925,477


⁽¹⁾	Includes non-Agency RMBS with a fair value of $125,125, an amortized cost of $123,552 and the associated interest receivable of $599, all of which were eliminated in consolidation with VIEs at December 31, 2015.


⁽²⁾	Includes Agency RMBS of $168,705 that were sold but unsettled at December 31, 2014.


⁽³⁾	Includes non-Agency RMBS with a fair value of $47,786, an amortized cost of $46,319 and the associated interest receivable of $110, all of which were eliminated in consolidation with a VIE at December 31, 2014.

We consolidate the securitization trusts associated with our securitizations, each of which is a VIE, that were created to facilitate our securitization transactions. As part of the February 2013 Securitization, the most senior security created was sold to a third-party investor and as such, when we consolidate this securitization trust, this senior security is presented on our consolidated balance sheet as “Non-recourse securitized debt, at fair value.” Our securitized mortgage loans are restricted in that they can only be used to fulfill the obligations of their associated securitization trust. (See Note 14.)

A reduction in the value of pledged assets may result in the repurchase agreement counterparty initiating a margin call. If a margin call is made, we are required to provide additional collateral or repay a portion of the borrowing. Certain repurchase agreements, Swaps and other financial instruments are subject to financial covenants, which if breached could cause an event of default or early termination event to occur under such agreements. If an event of default or trigger of an early termination event occurs pursuant to one of these agreements, the counterparty to such agreement may have the option to terminate all of its outstanding agreements with us and, if applicable, any close-out amount due to the counterparty upon termination of such agreements would be immediately payable by us. Through December 31, 2015, we remained in compliance with all of our financial covenants. (See Notes 8, 10 and 11.)

Note 10 – Offsetting Assets and Liabilities

All balances associated with the repurchase agreements and derivatives transactions are presented on a gross basis in our consolidated balance sheets. Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.

114

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

The following tables present information about certain assets and liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset on our consolidated balance sheet at the dates presented:

Offsetting of Financial Assets and Derivative Assets



							Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Financial Instruments ⁽¹⁾			Cash Collateral Received			Net Amount
December 31, 2015
Swaps and Swaptions, at fair value	$	4,347	$	—	$	4,347	$	(3,577	)	$	(280	)	$	490
Long TBA Contracts, at fair value	—		—		—		—			—			—
	$	4,347	$	—	$	4,347	$	(3,577	)	$	(280	)	$	490
December 31, 2014
Swaps and Swaptions, at fair value	$	11,098	$	—	$	11,098	$	(3,711	)	$	(2,516	)	$	4,871
Long TBA Contracts, at fair value	544		—		544		—			(30		)	514
	$	11,642	$	—	$	11,642	$	(3,711	)	$	(2,546	)	$	5,385

Offsetting of Financial Liabilities and Derivative Liabilities



							Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments ⁽²⁾⁽³⁾			Cash Collateral Pledged ⁽²⁾⁽⁴⁾			Net Amount
December 31, 2015
Swaps and Swaptions, at fair value	$	13,618	$	—	$	13,618	$	(3,577	)	$	(10,041	)	$	—
Long TBA Contracts, at fair value	195		—		195		—			74			269
Repurchase agreements	2,898,347		—		2,898,347		(2,898,347		)	—			—
	$	2,912,160	$	—	$	2,912,160	$	(2,901,924	)	$	(9,967	)	$	269
December 31, 2014
Swaps and Swaptions, at fair value	$	8,949	$	—	$	8,949	$	(3,711	)	$	(5,238	)	$	—
Repurchase agreements	3,402,327		—		3,402,327		(3,402,327		)	—			—
	$	3,411,276	$	—	$	3,411,276	$	(3,406,038	)	$	(5,238	)	$	—


⁽¹⁾	Amounts represent derivative instruments in an asset position which could potentially be offset against interest rate derivatives in a liability position at December 31, 2015 and December 31, 2014, subject to a netting arrangement.


⁽²⁾	Amounts represent collateral pledged that is available to be offset against liability balances associated with repurchase agreements and interest rate derivatives.

⁽³⁾

The fair value of securities pledged against our borrowings under repurchase agreements was $2,877,663 and $3,830,574 at December 31, 2015 and December 31, 2014, respectively. The amounts pledged include $125,125 and $47,786 of RMBS that are not included in our consolidated balance sheet at December 31, 2015 and December 31, 2014, respectively, as such securities were eliminated in consolidation with VIEs.


⁽⁴⁾	Total cash pledged against our derivative instruments was $21,921 and $14,176 at December 31, 2015 and December 31, 2014, respectively. Total cash collateral pledged against our borrowings under repurchase agreements was $61,772 and $54,830 at December 31, 2015 and December 31, 2014, respectively.

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Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Note 11 – Derivative Instruments

We enter into derivative contracts, which through December 31, 2015 have from time to time been comprised of Swaps, Swaptions, and TBA Contracts. We use derivative instruments to manage interest rate risk and, as such, view them as economic hedges. We have not elected hedge accounting for any of our derivative instruments and, as a result, the fair value adjustments on such instruments are recorded in earnings. The fair value adjustments for our derivatives, along with the related interest income, interest expense and gains/(losses) on termination of such instruments, are reported as “Realized and unrealized gain/(loss) on derivative instruments, net” on our consolidated statements of operations.

(a) Derivative Instruments Summary

Information with respect to our derivative instruments as presented on our consolidated balance sheets at the dates presented, was as follows:



	December 31, 2015					December 31, 2014
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Swaps - assets	$	693,000	$	3,103		$	957,000	$	9,543
Swaptions - assets	875,000		1,244			1,250,000		1,555
Swaps - (liabilities)	994,000		(10,237		)	730,000		(8,949		)
Swaptions - (liabilities)	300,000		(3,381		)	—		—
Long TBA Contracts - assets/(liabilities)	100,000		(195		)	100,000		544
Total	$	2,962,000	$	(9,466	)	$	3,037,000	$	2,693

(b) Swaps

The variable amount that we receive from our Swap counterparties is typically based on three-month LIBOR. The following table summarizes the average fixed pay rate and average maturity for our Swaps at the dates presented:



	December 31, 2015					December 31, 2014
Term to Maturity	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Maturity (Years)	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Maturity (Years)
Less than one year	$	110,000	1.38	%	0.8	$	—	—	%	0.0
More than one year up to and including three years	999,000		1.02		1.6	920,000		1.07		2.4
More than three years up to and including five years	64,000		2.28		4.5	189,000		1.02		3.2
More than five years	514,000		2.11		7.2	578,000		2.13		7.9
Total	$	1,687,000	1.43	%	3.4	$	1,687,000	1.43	%	4.4

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Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

We pay a premium to our counterparty to enter into Swaption Purchase Contracts and we receive a premium from our counterparty when we enter into a Swaption Sale Contract.

The following table presents information about our Swaptions at December 31, 2015:



						Underlying Swap
Purchase Contracts: Fixed Pay Rate for Underlying Swap	Premium Cost		Fair Value		Weighted Average Months Until Option Expiration	Notional Amount		Weighted Average Swap Term (Years)	Weighted Average Fixed-Pay Rate
2.34% - 2.50%	$	854	$	—	0.6	$	100,000	5.0	2.34	%
2.51% - 2.75%	552		87		6.9	75,000		5.0	2.72
2.76% - 3.00%	5,820		278		2.7	400,000		10.0	2.94
3.01% - 3.25%	4,019		879		7.4	300,000		10.0	3.15
	$	11,245	$	1,244	4.5	$	875,000	9.0	2.92	%



								Underlying Swap
Sale Contracts: Fixed-Pay Rate for Underlying Swap	Premium (Received)			Fair Value			Weighted Average Months Until Option Expiration	Notional Amount		Weighted Average Swap Term (Years)	Weighted Average Fixed-Pay Rate
1.72%	$	(500	)	$	(507	)	6.9	$	75,000	5.0	1.72	%
1.99%	(640		)	(539		)	8.7	50,000		10.0	1.99
2.03%	(1,200		)	(1,314		)	10.5	100,000		10.0	2.03
2.14%	(953		)	(1,021		)	6.9	75,000		10.0	2.14
Total	$	(3,293	)	$	(3,381	)	8.4	$	300,000	8.8	1.97	%

(d) Gains/(Losses) on Derivatives

The following table summarizes the amounts recognized on our consolidated statements of operations related to our derivative instruments for the periods presented:



	For the Year Ended December 31,
Character of Gain/(Loss) on Derivative Instruments	2015			2014			2013
Net interest payments/accruals on Swaps ⁽¹⁾	$	(19,404	)	$	(20,112	)	$	(22,034	)
Gain on the termination of Swaps, net ⁽¹⁾	—			—			24,119
Gain/(loss) on termination and expiration of Swaptions, net ⁽¹⁾	(15,636		)	(22,502		)	6,837
Gain/(loss) on settlement of TBA Contracts, net ⁽¹⁾	(6,356		)	(6,534		)	281
Change in fair value of Swaps, net ⁽²⁾	(7,727		)	(34,931		)	58,708
Change in fair value of Swaptions, net ⁽²⁾	3,451			(4,242		)	(9,085		)
Change in fair value of TBA Contracts, net ⁽²⁾	(739		)	(206		)	750
Total	$	(46,411	)	$	(88,527	)	$	59,576

Note: Each of the items presented is included as a component of “Realized and unrealized gain/(loss) on derivative instruments, net” on our consolidated statements of operations for the periods presented.


⁽¹⁾	Amounts are realized.


⁽²⁾	Amounts are unrealized and reflect the net change in fair value.

117

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

(e) Derivative Activity

The following table provides information with respect to our use of derivative instruments for the periods presented:



	Short TBA Contracts			Long TBA Contracts			Swaps			Swaption Purchase Contracts		Swaption Sale Contracts
Notional Balance at December 31, 2012	$	—		$	—		$	1,500,000		$	—	$	75,000
Notional amount of contracts entered	725,000			—			1,132,000			—		1,550,000
Notional amount of contracts terminated and expired	(325,000		)	—			(1,045,000		)	—		(250,000		)
Notional Balance at December 31, 2013	400,000			—			1,587,000			—		1,375,000
Notional amount of contracts entered	—			200,000			100,000			—		1,425,000
Notional amount of contracts terminated and expired	(400,000		)	(100,000		)	—			—		(1,550,000		)
Notional Balance at December 31, 2014	—			100,000			1,687,000			—		1,250,000
Notional amount of contracts entered	—			1,325,000			—			300,000		950,000
Notional amount of contracts terminated and expired	—			(1,325,000		)	—			—		(1,325,000		)
Notional Balance at December 31, 2015	$	—		$	100,000		$	1,687,000		$	300,000	$	875,000

(f) Financial Covenants

Our agreements with certain of our derivative counterparties contain financial covenants; through December 31, 2015, we were in compliance with the terms of all such covenants. We have minimum collateral posting thresholds with certain of our derivative counterparties, for which we typically pledge cash. (See Note 10.) If we breach any of these financial covenants we could be required to settle our obligations under our derivative contracts at their termination value. At December 31, 2015, the estimated termination value of our derivative contracts that were in a liability position was $16,463, which reflects the estimated fair value of such derivatives plus accrued interest payable.

Note 12 – Interest Payable

The following table presents the components of our interest payable at dates presented:



	December 31, 2015		December 31, 2014
Repurchase borrowings collateralized by Agency RMBS	$	1,687	$	1,569
Repurchase borrowings collateralized by non-Agency RMBS ⁽¹⁾	4,268		8,234
Repurchase borrowings collateralized by other investment securities	350		127
Repurchase borrowings collateralized by mortgage loans	—		9
Securitized debt	63		110
Swaps	2,770		2,977
Total	$	9,138	$	13,026


⁽¹⁾	Includes $125 and $103 of interest payable on repurchase borrowings collateralized by non-Agency RMBS issued by consolidated VIEs at December 31, 2015 and December 31, 2014, respectively, which securities were eliminated from our balance sheet in consolidation.

Note 13 – Commitments and Contingencies

(a) Management Agreement - Related Party Transactions

In connection with our initial public offering (or, IPO) in July 2011, we entered into a management agreement with our Manager (or, Management Agreement), which describes the services to be provided for us by our Manager and compensation for such services. Our Manager is responsible for managing our day-to-day operations, subject to the direction and oversight of our board of directors.

Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of adjusted stockholders’ equity (as defined in the Management Agreement), calculated and payable quarterly in arrears.

At December 31, 2015 the term of our Management Agreement ran through July 27, 2016. Absent certain action by the independent directors of our board of directors, as described below, the Management Agreement will automatically renew on each anniversary for a one year term. The Management Agreement may be terminated upon the affirmative vote of at least two-

118

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

thirds of our independent directors, based upon (1) unsatisfactory performance by our Manager that is materially detrimental to us; or (2) a determination that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. Our Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

Given that, the independent members of our board of directors did not provide notice of termination of the Management Agreement to our Manager within 180 days of the July 27, 2016 renewal date, the Management Agreement was renewed through July 27, 2017.

We incurred management fees of $11,069, $11,200 and $11,579 for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 respectively. In addition to the management fee, we are responsible for reimbursing our Manager for certain expenses paid by our Manager on behalf of us and for certain services provided by our Manager to us. Expenses incurred by our Manager and reimbursed by us are typically included in our general and administrative expense on our consolidated statement of operations, or may be reflected on the consolidated balance sheet and associated consolidated statement of changes in stockholders’ equity, based on the nature of the item. Included in “Payable to related party” on our consolidated balance sheet at December 31, 2015 and December 31, 2014, was $5,388 and $2,840, respectively, for management fees payable to our Manager, with the remainder of such payable reflecting reimbursements due to Apollo for our general and administrative expenses paid or incurred by them on our behalf.

(b) Representations and Warranties in Connection with Securitization

In connection with our February 2013 Securitization, we have the obligation under certain circumstances to repurchase assets from the VIE upon breach of certain representations and warranties. In February 2014, the substantial majority of these obligations expired, with only the representations and warranties surviving such obligations, which may expose us to losses, being that the loans transferred to the VIE are qualified mortgages under Section 860G(a)(3) of the Internal Revenue Code.

Through December 31, 2015, no repurchase claims had been made against us, and we do not believe that the amount of any future potential liability with respect to such item (the maximum of which would be the current unpaid principal balance of any such loan plus accrued interest, unreimbursed advances and any expenses) is material to us. At December 31, 2015, we had no reserve established for repurchases of loans and were not aware of any repurchase claims that would require the establishment of such a reserve. (See Note 14.)

Note 14 – Use of Special Purpose Entities and Variable Interest Entities

Special purpose entities (or, SPEs) are entities designed to fulfill a specific limited need of the entity that organizes it. SPEs are often used to facilitate transactions that involve securitizing financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on more favorable terms than available on such assets on an unsecuritized basis. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

(a) Securitization Transactions

Through December 31, 2015, we had completed two securitization transactions. We consolidate the associated trusts associated with these securitizations as VIEs. (See Note 2(h) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with securitization transactions.)

As of December 31, 2015 and December 31, 2014, the aggregate fair value of securitized mortgage loans underlying our securitizations was $167,624 and $104,438, respectively, and are included in “Securitized mortgage loans (transferred to consolidated variable interest entities), at fair value,” on our consolidated balance sheet.

The mortgage loans in our securitizations are comprised of performing, re-performing and non-performing mortgage loans with characteristics similar to the mortgage loans underlying our non-Agency RMBS.

119

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

The following table summarizes the key details of our securitization transactions as of December 31, 2015:



	March 2015 Securitization			February 2013 Securitization			Total
Name of securitization trust consolidated as a VIE	AMST 2015-1			AMST 2013-1
Principal value of mortgage loans sold into the securitization trust	$	90,802		$	155,001		$	245,803
Current principal value of mortgage loans in securitization trust	$	85,467		$	125,531		$	210,998
Face amount of senior security issued by the VIE and sold to a third-party investor	$	—		$	50,375		$	50,375
Outstanding balance of senior security at December 31, 2015 ⁽¹⁾	$	76,891		$	18,904		$	95,795
Year of final contractual maturity of senior debt	2054			2047
Face/Par value of certificates received by us ⁽²⁾	$	82,287		$	104,626		$	186,913
Cash received upon sale of the senior security sold to third-party investor	$	—		$	50,375		$	50,375
Gross securitization expenses incurred (net of amortization of $130 and $518, respectively, as of December 31, 2015) ⁽³⁾	$	174		$	829		$	1,003
Stated interest rate for senior security issued	5.75		%	4.00		%


⁽¹⁾	With respect to the March 2015 Securitization, amount reflects 100% of the single security issued, which we retained. The stated rate is presented for informational purposes only, as such certificate is eliminated in consolidation with the associated trust.

⁽²⁾

With respect to our February 2013 Securitization, the certificates we received are subordinate to and provide credit support for the sequential senior security sold to a third-party investor. While the RMBS that we retained in connection with February 2013 Securitization do not appear on our balance sheet, as they are eliminated in consolidation with the VIE/securitization trust, we legally own such securities and we, as legally permitted, pledge such securities as collateral in connection with associated borrowings under repurchase agreements.


⁽³⁾	Certain expenses incurred in connection with our securitizations were capitalized as deferred charges and are amortized to interest expense based upon the actual repayments of the associated senior security sold to a third party, or the initial term of the associated borrowing facility.

(b) Consolidation Assessment

On a quarterly basis, we complete an analysis to determine whether the VIEs associated with our securitizations should be consolidated by us. As part of this analysis, we consider our involvement in the creation of the VIE, including the design and purpose of the VIE and whether our involvement reflects a controlling financial interest that results in us being deemed the primary beneficiary of the VIE. In determining whether we would be considered the primary beneficiary, we consider: (i) whether we have both the power to direct the activities that most significantly impact the economic performance of the VIE; and (ii) whether we have a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. Based on our evaluation of these factors, including our involvement in the design of the VIE, we determined that we were required to consolidate the VIE created to facilitate the March 2015 Securitization and the February 2013 Securitization for each reporting period from inception through December 31, 2015.

The securitization trusts receive principal and interest on the underlying mortgage loans and distribute those payments to the certificate holders. The assets and other instruments held by the securitization trusts are restricted in that they can only be used to fulfill the obligations of their respective securitization trust. The risks associated with our involvement with the VIEs are limited to the risks and rights as a certificate holder of the securities we retained.

The activities of the securitization trusts are substantially set forth in the securitization transaction documents, primarily the mortgage loan trust agreements, the trust agreements, the indenture and the securitization servicing agreements (or collectively, the Securitization Agreements). Neither the trusts nor any other entity may sell or replace any assets of the trust except in connection with: (i) certain loan defects or breaches of certain representations and warranties which have a material adverse effect on the value of the related assets; (ii) loan defaults; (iii) certain trust events of default or (iv) an optional termination of the trust, each as specifically permitted under the Securitization Agreements.

(d) Securitized Debt

We consolidate the underlying trust associated with our February 2013 Securitization. As a result, the senior security that was sold to a third-party investor is presented on our consolidated balance sheet as “Non-recourse securitized debt, at fair value” and the residential mortgage loans held by the trust that collateralize the securities issued by the trust are included as a component of “Securitized mortgage loans (transferred to consolidated variable interest entities), at fair value” on our consolidated balance sheet. The third-party beneficial interest holders in the VIE have no recourse against us, except that we may have an obligation to repurchase assets from the VIE in the event that we breach certain representations and warranties in

120

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

relation to the mortgage loans sold to the VIE. Other than the foregoing, we have no obligation to provide, nor have we provided, any other explicit or implicit support to this or any other VIE that we consolidate.

Our securitized debt is carried at fair value, which is based on the fair value of the senior security held by third parties. The following table presents the estimated principal repayment schedule of the par value of the securitized debt at December 31, 2015, based on expected cash flows of the securitized residential mortgage loans, as adjusted for projected losses on such loans.



Estimated Maturity	December 31, 2015
One year or less	$	8,082
More than one year, up to and including three years	10,822
More than three years, up to and including five years	—
Total	$	18,904

Repayment of our securitized debt will be dependent upon the cash flows generated by the mortgage loans in the February 2013 Securitization trust that collateralize such debt. The actual cash flows from the securitized mortgage loans are comprised of coupon interest, scheduled principal payments, prepayments and liquidations of the underlying mortgage loans. The actual term of the securitized debt may differ significantly from our estimate given that actual interest collections, mortgage prepayments and/or losses on liquidation of mortgages may differ significantly from those expected. (See Note 5 for more information about the mortgage loans collateralizing our securitized debt.)

(e) VIEs - Impact on the Consolidated Financial Statements

The following table reflects the assets and liabilities recorded in our consolidated balance sheet related to our consolidated VIEs as of the dates presented:



	December 31, 2015		December 31, 2014
Assets:
Securitized mortgage loans, at fair value	$	167,624	$	104,438
Interest receivable	$	936	$	719
Other assets	$	220	$	335
Liabilities:
Non-recourse securitized debt, at fair value	$	18,951	$	34,176
Accrued interest payable	$	63	$	110

121

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

The following table reflects the income and expense amounts recorded in our consolidated statements of operations related to our consolidated VIEs for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
Interest income - securitized mortgage loans	$	13,260		$	7,900		$	8,267
Interest expense - securitized debt	(1,374		)	(1,640		)	(1,794		)
Unrealized gain/(loss) on securitized mortgage loans, net	(1,752		)	1,683			3,950
Unrealized gain/(loss) on securitized debt	1,031			(124		)	(954		)
Other, net	(932		)	(22		)	—
General and administrative	(251		)	—			—
Net income	$	9,982		$	7,797		$	9,469

The following table reflects the amounts included on our consolidated statements of cash flows related to our consolidated VIEs for the periods presented:



	For the Year Ended December 31,
	2015			2014			2013
Cash Flows from Operating Activities:
Net income	$	9,982		$	7,797		$	9,469
Premium amortization/(discount accretion), net	$	1,446		$	745		$	(68	)
Amortization of deferred financing costs	$	(280	)	$	153		$	131
Unrealized (gain)/loss on securitized mortgage loans, net	$	1,752		$	(1,683	)	$	(3,950	)
Unrealized (gain)/loss on securitized debt	$	(1,031	)	$	124		$	954
Realized loss on REO, net	$	208		$	22		$	—
Changes in operating assets and liabilities:
(Increase) in accrued interest receivable, less purchased interest	$	(217	)	$	(43	)	$	(676	)
(Decrease) in accrued interest payable	$	(47	)	$	(31	)	$	141
Cash Flows from Investing Activities:
Purchase of mortgage loans, simultaneously securitized	$	(67,357	)	$	—		$	(113,038	)
Proceeds from sales of REO	$	1,188		$	178		$	—
Other, net	$	—		$	1		$	33
Principal payments received on securitized mortgage loans	$	16,167		$	6,949		$	6,038
Cash Flows from Financing Activities:
Proceeds from issuance of securitized debt	$	—		$	—		$	50,375
Principal payments on securitized debt	$	(14,194	)	$	(9,302	)	$	(7,975	)

122

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Note 15 – Equity Award Plan

On July 21, 2011, our board of directors approved the Apollo Residential Mortgage, Inc. 2011 Equity Incentive Plan (or, LTIP). The LTIP provides for grants of restricted common stock, RSUs and other equity-based awards up to an aggregate of 5% of the issued and outstanding shares of our common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of our board of directors, which also must approve grants made under the LTIP. At December 31, 2015, 1,273,795 awards were available for grant under the LTIP.

The following table presents expenses related to our equity-based compensation awards for the periods presented:



	For the Year Ended December 31,
	2015		2014		2013
Restricted Common Stock	$	423	$	338	$	349
RSUs	766		927		698
Total	$	1,189	$	1,265	$	1,047

At December 31, 2015, we had estimated unrecognized compensation expense of $1,657 and $310 related to RSUs and restricted common stock, respectively. The unrecognized compensation expense at December 31, 2015 is expected to be recognized over a weighted average period of 1.3 years. As of December 31, 2015, we had an expected average forfeiture rate of 0% with respect to restricted common stock and 5% with respect to RSUs.

Through December 31, 2015, we had not settled any RSUs in cash. However, the LTIP provides that we may allow RSU recipients to elect to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs, which is referred to herein as “net share settlement.” Net share settlement results in us making a cash payment to an affiliate of our Manager as a reimbursement for this tax liability and a corresponding adjustment to additional paid-in-capital.

The following table presents information about our equity awards for the periods presented:



	For the Year Ended December 31,
	2015				2014				2013
	Number of Awards ⁽¹⁾		Weighted Average Grant Date Fair Value		Number of Awards ⁽¹⁾		Weighted Average Grant Date Fair Value		Number of Awards ⁽¹⁾		Weighted Average Grant Date Fair Value ⁽¹⁾
RSUs outstanding at beginning of period	292,088		$	18.05	183,922		$	19.47	166,682		$	20.14
RSUs granted	—		—		130,124		16.02		25,851		14.73
RSUs canceled upon delivery of common stock ⁽²⁾	(138,863	)	20.91		(17,104	)	16.92		(6,250	)	17.95
RSUs canceled or forfeited	(4,676	)	16.18		(4,854	)	21.22		(2,361	)	—
RSUs outstanding at end of period	148,549		$	15.88	292,088		$	18.05	183,922		$	19.47

Vested RSUs at the end of the period	57,955		$	15.82	102,250		$	20.14	56,681		$	19.93
Unvested RSUs at the end of the period	90,594		$	15.92	189,838		$	16.93	127,241		$	19.26

Unvested restricted common stock awards outstanding at beginning of period	43,992		$	17.39	28,040		$	20.37	38,468		$	19.69
Restricted common stock granted	9,332		16.07		34,112		16.12		6,748		22.22
Restricted common stock forfeited	—		—		—		—		—		—
Restricted common stock vested	(23,204	)	18.23		(18,160	)	19.60		(17,176	)	19.58
Unvested restricted common stock outstanding at end of period	30,120		$	16.31	43,992		$	17.39	28,040		$	20.37


⁽¹⁾	Amounts are not in thousands.


⁽²⁾	Includes amounts deemed issued in net settlements.

123

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Note 16 – Stockholders’ Equity

(a) Common Stock Dividends

The following table presents cash dividends declared by our board of directors on our common stock from January 1, 2013 through December 31, 2015:



Declaration Date	Record Date	Payment Date	Dividend Per Share
December 17, 2015	December 31, 2015	January 29, 2015	$	0.48
September 17, 2015	September 30, 2015	October 30, 2015	$	0.48
June 17, 2015	June 30, 2015	July 31, 2015	$	0.48
March 19, 2015	March 31, 2015	April 30, 2015	$	0.48
December 18, 2014	December 31, 2014	January 30, 2015	$	0.45
September 17, 2014	September 30, 2014	October 31, 2014	$	0.44
June 19, 2014	June 30, 2014	July 31, 2014	$	0.42
March 13, 2014	March 31, 2014	April 30, 2014	$	0.40
December 18, 2013	December 31, 2013	January 31, 2014	$	0.40
September 19, 2013	September 30, 2013	October 31, 2013	$	0.40
June 17, 2013	June 28, 2013	July 31, 2013	$	0.70
March 18, 2013	March 28, 2013	April 30, 2013	$	0.70

For 2015 and 2014, all of our common stock dividends were characterized as ordinary income to stockholders, as none were characterized as return of capital or capital gains.

(b) Common Stock

The following table presents information with respect to shares of our common stock issued through public offerings from January 1, 2013 through December 31, 2015:



Share Settlement Date	Shares Issued	Gross Proceeds Per Share		Gross Proceeds
March 25, 2013 ⁽¹⁾	1,020,000	$	22.00	$	22,440
March 13, 2013 ⁽¹⁾	6,800,000	$	22.00	$	149,600


⁽¹⁾	We raised net equity capital of 22,421 and $149,221 after offering costs of 19 and $379 for the shares issued on March 25, 2013 and March 13, 2013, respectively.

At December 31, 2015 and December 31, 2014, we had outstanding 6,900,000 shares of 8.00% Series A Cumulative Redeemable Perpetual Preferred Stock (or, Preferred Stock) with a liquidation preference of $25.00 per share and a par value $0.01 per share. Holders of our Preferred Stock are entitled to receive dividends at an annual rate of 8.0% of the liquidation preference of $25.00 per share, or $2.00 per share per annum. These dividends are cumulative and payable quarterly in arrears. Generally, we may not redeem the Preferred Stock until September 20, 2017, except under certain limited circumstances intended to preserve our qualification as a REIT and upon the occurrence of a change in control as defined in the final prospectus supplement related to the Preferred Stock filed with the SEC on September 17, 2012. After September 20, 2017, we may, at our option, redeem the shares at a redemption price of $25.00, plus any accrued unpaid distribution through the date of the redemption. Based upon the characteristics of the Preferred Stock, such instruments are characterized as equity instruments.

The Preferred Stock generally has no voting rights. However, if dividends on the Preferred Stock are in arrears for six quarterly dividend periods, whether or not consecutive, the holders of the Preferred Stock (voting together as a single class with the holders of any other class or series of parity preferred stock upon which like voting rights have been conferred and are exercisable) will have the right to elect two additional directors to our board until we pay (or declare and set aside for payment) all dividends that are then in arrears. In addition, the affirmative vote of at least two-thirds of the votes entitled to be cast by holders of outstanding shares of Preferred Stock (voting together as a single class with the holders of any other class or series of parity preferred stock upon which like voting rights have been conferred and are exercisable) is required for us to authorize, create or increase the number of any class or series of senior equity securities or to amend our charter (including the Articles

124

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Supplementary designating the Preferred Stock or the Articles Supplementary) in a manner that materially and adversely affects the rights of the Preferred Stock.

(d) Shelf Registration

On July 23, 2012, we filed a shelf registration statement on Form S-3 with the SEC under the Securities Act of 1933, as amended (or, the Securities Act), with respect to up to $750,000 of common stock, preferred stock, depositary shares, warrants and/or rights that may be sold by us from time to time pursuant to Rule 415 of the Securities Act. This registration statement was declared effective by the SEC on August 10, 2012 and expired on August 10, 2015.

(e) Direct Stock Purchase and Dividend Reinvestment Plan

On November 25, 2015, we filed a shelf registration statement on Form S-3 with the SEC under the Securities Act, for the purpose of registering additional common stock for sale through our Direct Stock Purchase and Dividend Reinvestment Plan (or, Stock Purchase Plan). This shelf registration statement, which was declared effective by the SEC on December 18, 2015, when combined with the unused portion of our previous Stock Purchase Plan shelf registration statement, registered an aggregate of 2,000,000 shares of common stock. At December 31, 2015, 2,000,000 shares of common stock remained available for issuance pursuant to the Stock Purchase Plan registration statement. Under the Stock Purchase Plan, stockholders who participate may purchase shares of our common stock directly from us. Stockholders may also automatically reinvest all or a portion of their dividends for additional shares of our stock. Through December 31, 2015, all shares issued pursuant to the Stock Purchase Plan were issued from shares purchased on the open market.

(f) Stock Repurchase Program

On November 6, 2013, our board of directors authorized a stock repurchase program (or, the Repurchase Program), to repurchase up to $50,000 of our outstanding common stock. Such authorization does not have an expiration date. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program may be made at times and in amounts as we deem appropriate, using available cash resources. Shares of common stock repurchased by us under the Repurchase Program, if any, will be canceled and, until reissued by us, will be deemed to be authorized but unissued shares of our common stock. The Repurchase Program may be suspended or discontinued by us at any time and without prior notice. Through December 31, 2015, we repurchased 360,800 shares of common stock at an average cost per share of $13.86. At December 31, 2015, $45,000 of common stock remained authorized for future share repurchase under the Repurchase Program.

The following table presents a summary of our common stock repurchases under the Repurchase Program during the year ended December 31, 2015:



Month Purchased ⁽¹⁾	Total Number of Shares Repurchased	Weighted Average Price Paid per Share⁽²⁾		Total Cost of Shares Repurchased
August 2015	202,655	$	13.86	$	2,808
September 2015	158,145	13.86		2,192
Total	360,800	$	13.86	$	5,000


⁽¹⁾	Based on trade date.


⁽²⁾	Includes brokerage commissions.

125

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Note 17 – Earnings per Common Share

The following table presents basic and diluted net EPS of common stock using the two-class method for the years ended December 31, 2015, December 31, 2014 and December 31, 2013:



	For the Year Ended December 31,
	2015			2014		2013
Numerator:
Net Income/(loss)	$	(11,595	)	$	96,055	$	(47,211	)
Less:
Dividends declared on Preferred Stock	13,800			13,800		13,800
Dividends, dividend equivalents and undistributed earnings allocated to participating securities	613			565		405
Net income/(loss) allocable to common stock - basic and diluted	$	(26,008	)	$	81,690	$	(61,416	)
Denominator:
Weighted average common shares - basic and diluted ⁽¹⁾	31,954			32,028		30,444
Earnings/(loss) per common share - basic and diluted	$	(0.81	)	$	2.55	$	(2.02	)


⁽¹⁾	For the year ended December 31, 2015, all RSUs and shares of restricted common stock were not included in the calculation of earnings per common share, as their inclusion would have been anti-dilutive. These instruments may have a dilutive impact on future EPS. (See Note 15 for information with respect to RSUs and restricted shares outstanding at December 31, 2015.)

Note 18 – Summarized Quarterly Results (Unaudited)



	For the 2015 Quarter Ended
	March 31			June 30			September 30			December 31
Interest income	$	39,295		$	41,618		$	41,014		$	38,173
Interest expense	(7,831		)	(8,234		)	(8,208		)	(8,085		)
Net interest income	31,464			33,384			32,806			30,088
Other income/(loss):
Realized gain/(loss) on sale of RMBS, net	8,539			(4,530		)	3,331			9,658
Realized gain/(loss) on other investment securities, net	—			102			—			—
Other than temporary impairment recognized	(2,575		)	(197		)	(7,088		)	(2,229		)
Unrealized gain/(loss) on RMBS, net	14,780			(41,266		)	161			(37,702		)
Unrealized gain/(loss) on securitized debt	13			1,001			172			(155		)
Unrealized gain/(loss) on securitized mortgage loans	2,362			(1,896		)	(576		)	(1,848		)
Unrealized gain/(loss) on other investment securities	(29		)	(2,540		)	(3,014		)	(793		)
Gain/(loss) on derivative instruments	(26,521		)	12,463			(41,145		)	8,792
Other, net	12			(3		)	(52		)	(80		)
Other income/(loss), net	(3,419		)	(36,866		)	(48,211		)	(24,357		)
Operating expenses:
General and administrative	(3,850		)	(3,655		)	(3,705		)	(4,205		)
Management fee - related party	(2,787		)	(2,895		)	(2,667		)	(2,720		)
Total operating expenses	(6,637		)	(6,550		)	(6,372		)	(6,925		)
Net income	$	21,408		$	(10,032	)	$	(21,777	)	$	(1,194	)
Preferred Stock dividends declared	(3,450		)	(3,450		)	(3,450		)	(3,450		)
Net income allocable to common stock and participating securities	$	17,958		$	(13,482	)	$	(25,227	)	$	(4,644	)
Earnings per common share - basic and diluted	$	0.55		$	(0.43	)	$	(0.79	)	$	(0.15	)
Dividends declared per share of common stock	$	0.48		$	0.48		$	0.48		$	0.48

126

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)



	For the 2014 Quarter Ended
	March 31			June 30			September 30			December 31
Interest income	$	38,180		$	38,141		$	38,542		$	39,314
Interest expense	(7,268		)	(7,510		)	(7,708		)	(7,900		)
Net interest income	30,912			30,631			30,834			31,414
Other income/(loss):
Realized gain/(loss) on sale of RMBS, net	(11,810		)	(7,072		)	2,581			7,480
Other than temporary impairment	(3,356		)	(3,001		)	(2,576		)	(5,958		)
Unrealized gain/(loss) on RMBS, net	51,818			53,809			(13,154		)	10,469
Unrealized gain/(loss) on securitized debt	10			(364		)	67			163
Unrealized gain/(loss) on securitized mortgage loans	3,239			2,824			(1,891		)	641
Unrealized (loss) on mortgage loans	—			—			—			(9		)
Unrealized gain/(loss) on other investment securities	122			54			(101		)	(171		)
Gain/(loss) on derivative instruments	(37,190		)	(27,133		)	801			(25,005		)
Other, net	18			(49		)	39			74
Other income/(loss), net	2,851			19,068			(14,234		)	(12,316		)
Operating expenses:
General and administrative	(3,095		)	(2,921		)	(2,925		)	(2,964		)
Management fee - related party	(2,786		)	(2,774		)	(2,800		)	(2,840		)
Total operating expenses	(5,881		)	(5,695		)	(5,725		)	(5,804		)
Net income	$	27,882		$	44,004		$	10,875		$	13,294
Preferred Stock dividends declared	$	(3,450	)	$	(3,450	)	$	(3,450	)	$	(3,450	)
Net income allocable to common stock and participating securities	$	24,432		$	40,554		$	7,425		$	9,844
Earnings per common share - basic	$	0.76		$	1.26		$	0.23		$	0.30
Earnings per common share - diluted	$	0.76		$	1.25		$	0.23		$	0.30
Dividends declared per share of common stock	$	0.40		$	0.42		$	0.44		$	0.45


⁽¹⁾	Losses are not allocable to participating securities.

Note 19 – Subsequent Events

(a) Merger Agreement

As previously disclosed in a Form 8-K filed with the SEC on February 26, 2016, we recently announced the signing of a definitive merger agreement (or, the Agreement) under which we will merge with Apollo Commercial Real Estate Finance, Inc. (or, ARI) for a price per share of our common stock equal to 89.25% of our book value per share as of the date that is three business days prior to the date on which the definitive proxy statement relating to the merger transaction is mailed to our stockholders, subject to adjustment under certain circumstances. Using our book value of common stock as of December 31, 2015 (or, December 31, 2015 Book Value) and based on the closing price of ARI’s shares of common stock on February 25, 2016, the value to be paid in the transaction for each share of our common stock would equal approximately $14.59 per share, a 44% premium to the closing price of our shares of common stock on February 25, 2016.

127

Apollo Residential Mortgage, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands - except per share data)

Consummation of the merger transaction is subject to the satisfaction of customary closing conditions, including the registration and listing of the shares of ARI stock that will be issued in the merger transaction and the approval and adoption of the Agreement by the holders of a majority of the shares of our common stock entitled to vote on the transaction, including a majority of the votes entitled to be cast by persons unaffiliated with Apollo.

(b) Letter Agreement with Manager

Concurrently with the execution of the Agreement, we entered into the Letter Agreement with our Manager, pursuant to which the Manager has agreed to perform such services and activities as may be necessary to enable us to consummate the merger and other transactions contemplated by the Agreement.

128

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


ITEM 9A.	Controls and Procedures

A review and evaluation was performed by the Company’s management, including the Company’s CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this annual report on Form 10-K. Based on that review and evaluation, the CEO and CFO have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Management Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the 1934 Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;


•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and


•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework (2013).”

Based on its assessment and those criteria, the Company’s management believes that, as of December 31, 2015, the Company’s internal control over financial reporting was effective.

There have been no changes in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Our independent auditors, Deloitte & Touche LLP audited our internal controls over financial reporting as of December 31, 2015. Their report dated March 4, 2016, which is included under Item 8, expressed an unqualified opinion on our internal control over financial reporting.

129


ITEM 9B.	Other Information

Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of December 31, 2015, we were not involved in any legal proceedings.

PART III


ITEM 10.	Directors, Executive Officers and Corporate Governance

The information regarding the Company’s directors, executive officers and certain other matters required by Item 401 of Regulation S-K is incorporated herein by reference to the Company’s proxy statement relating to its annual meeting of stockholders to be held on or about June 16, 2016 (or, Proxy Statement), to be filed with the SEC within 120 days after December 31, 2015.

The information regarding compliance with Section 16(a) of the Exchange Act required by Item 405 of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

The information regarding the Company’s Code of Business Conduct and Ethics required by Item 406 of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

The information regarding certain matters pertaining to the Company’s corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.


ITEM 11.	Executive Compensation

The information regarding executive compensation and other compensation related matters required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.


ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The tables on equity compensation plan information and beneficial ownership of the Company required by Items 201(d) and 403 of Regulation S-K are incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.


ITEM 13.	Certain Relationships and Related Transactions and Director Independence

The information regarding transactions with related persons, promoters and certain control persons and director independence required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.


ITEM 14.	Principal Accountant Fees and Services

The information concerning principal accounting fees and services and the Audit Committee’s pre-approval policies and procedures required by Item 9(e) of Schedule 14A is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

130

PART IV


ITEM 15.	Exhibits and Financial Statement Schedules

Documents filed as part of the report

The following documents are filed as part of this annual report on Form 10-K:

(1)Financial Statements:

The consolidated financial statements of the Company, together with the independent registered public accounting firm’s report thereon, are set forth in this annual report on Form 10-K and are incorporated herein by reference. See Item 8, filed herewith, for a list of financial statements.

(2)Financial Statement Schedules:

All financial statement schedules have been omitted because the required information is not applicable or deemed not material, or the required information is presented in the consolidated financial statements and/or in the notes to consolidated financial statements filed in response to Item 8 of this annual report on Form 10-K.

(3) Exhibits Files:



3.1	Articles of Amendment and Restatement of Apollo Residential Mortgage, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-8 (Registration No. 333-175824).

3.2	Articles Supplementary designating Apollo Residential Mortgage, Inc.’s 8.00% Series A Cumulative Redeemable Perpetual Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-A (File No.: 001-35246), filed on September 19, 2012.

3.3	Amended and Restated Bylaws of Apollo Residential Mortgage, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on February 26, 2016.

4.1	Specimen Common Stock Certificate of Apollo Residential Mortgage, Inc., incorporated by reference to Exhibit 4.1 of the Registrant’s Form S-11, as amended (Registration No. 333-172980).

4.2	Specimen Preferred Stock Certificate of Apollo Residential Mortgage, Inc., incorporated by reference to Exhibit 4.2 of the Registrant’s Form 10-Q for the period ended September 30, 2012.

10.1	Registration Rights Agreement, dated as of July 27, 2011, between Apollo Residential Mortgage, Inc. and the parties named therein, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q for the period ended September 30, 2011.

10.2	Management Agreement, dated as of July 21, 2011 and effective as of July 27, 2011, between Apollo Residential Mortgage, Inc., ARM Operating, LLC and ARM Manager, LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q for the period ended September 30, 2011.

10.3	License Agreement dated as of July 21, 2011, between Apollo Residential Mortgage, Inc. and Apollo Global Management, LLC, incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q for the period ended September 30, 2011.

10.4	Apollo Residential Mortgage, Inc. 2011 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Form S-8 (Registration No. 333- 175824).

10.5	Form of Restricted Stock Award Agreement, incorporated by reference to Exhibit 10.3 of the Registrant’s Form S-11, as amended (Registration No. 333-172980).

10.6	Form of Restricted Stock Unit Award Agreement, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on January 5, 2015.

10.7	Form of Restricted Stock Unit Award Agreement, incorporated by reference to Exhibit 10.4 of the Registrant’s Form S-11, as amended (Registration No. 333-172980).

21.1*	Subsidiaries of Registrant.

23.1*	Consent of Deloitte & Touche LLP.

31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*	Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

131



101.INS	101.INS

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.

132

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		Apollo Residential Mortgage, Inc.

Date:	March 4, 2016	By:	/s/ Michael A. Commaroto
			Name: Michael A. Commaroto
			Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Date:	March 4, 2016	By:	/s/ Michael A. Commaroto
			Michael A. Commaroto
			President, Chief Executive Officer and Director
			(principal executive officer)

Date:	March 4, 2016	By:	/s/ Teresa D. Covello
			Teresa D. Covello
			Chief Financial Officer, Treasurer and Secretary
			(principal financial officer and principal accounting officer)

Date:	March 4, 2016	By:	/s/ Frederick N. Khedouri
			Frederick N. Khedouri
			Director

Date:	March 4, 2016	By:	/s/ Mark C. Biderman
			Mark C. Biderman
			Director

Date:	March 4, 2016	By:	/s/ Thomas D. Christopoul
			Thomas D. Christopoul
			Director

Date:	March 4, 2016	By:	/s/ James E. Galowski
			James E. Galowski
			Director

Date:	March 4, 2016	By:	/s/ Frederick J. Kleisner
			Frederick J. Kleisner
			Director

Date:	March 4, 2016	By:	/s/ Hope S. Taitz
			Hope S. Taitz
			Director

133

Apollo Residential Mortgage, Inc. - FORM 10-K - March 4, 2016

Attached files

Apollo Residential Mortgage, Inc. Reports